chairs

Sheila Crummey, C.S. Miller Thomson LLP

Thomas Grozinger, C.S., TEP RBC Wealth Management

Estate & Trust Services

day two November 4, 2016

19TH ANNUAL Estates and Trusts Summit

*CLE16-0100801-A-PUB*

DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

© 2016 All Rights Reserved

This compilation of collective works is copyrighted by The Law Society of Upper Canada. The individual documents remain the property of the original authors or their assignees.

The Law Society of Upper Canada 130 Queen Street West, Toronto, ON M5H 2N6Phone: 416-947-3315 or 1-800-668-7380 Ext. 3315Fax: 416-947-3991 E-mail: cpd@lsuc.on.ca www.lsuc.on.ca

Library and Archives Canada Cataloguing in Publication

18th Annual Estates and Trusts Summit – Day Two

ISBN 978-1-77094-394-0 (Hardcopy)ISBN 978-1-77094-395-7 (PDF)

1

November 9, 2016

Chair: Sheila Crummey, C.S.

Miller Thomson LLP Thomas Grozinger, C.S., TEP RBC Wealth Management, Estate & Trust Services

November 4, 2016

9:00 a.m. to 4:30 p.m. Total CPD Hours = 5 h 30 m Substantive + 1 h Professionalism

Donald Lamont Learning Centre

The Law Society of Upper Canada 130 Queen Street West

Toronto, ON

CLE16-0100801

Agenda DAY TWO: 9:00 a.m. – 9:10 a.m. Welcome and Opening Remarks

Sheila Crummey, C.S., Miller Thomson LLP Thomas Grozinger, C.S., TEP RBC Wealth Management, Estate & Trust Services

19TH ANNUAL

ESTATES AND TRUSTS SUMMIT – DAY TWO

2

9:10 a.m. – 9:30 a.m. Update on Family Law Cases/Legislation

Heather Hansen, C.S., Martha McCarthy & Company

9:30 a.m. – 9:50 a.m. Update on Charity Law Terrance Carter, Carters Professional Corporation 9:50 a.m. – 10:10 a.m. Executor/Trustee de son tort:

Recognizing and Avoiding the Traps of Unintended Fiduciary Obligations

Eric Hoffstein, TEP, Minden Gross LLP

10:10 a.m. – 10:20 a.m. Question and Answer Session 10:20 a.m. – 10:40 a.m. Coffee and Networking Break 10:40 a.m. – 11:10 a.m. How to Characterize Corporate Distributions

For Trust Accounting Purposes Timothy Youdan, Davies Ward Phillips & Vineberg LLP 11:10 a.m. – 11:30 a.m. Bitten by Boilerplate: Reviewing Precedents for

Will and Trust Drafting

Mary-Alice Thompson, C.S., TEP Cunningham, Swan, Carty, Little & Bonham LLP

11:30 a.m. – 11:55 a.m. When Is a Gift a Gift – Joint Accounts

Amanda Stacey, Miller Thomson LLP

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11:55 a.m. – 12:15 p.m. Limitations on the Powers of

The Power of Attorney for Property – Re: Gifting and Estate Planning

Cate Grainger, Harrison Pensa LLP

12:15 p.m. – 12:25 p.m. Question and Answer Session 12:25 p.m. – 1:25 p.m. Lunch on Your Own 1:25 p.m. – 1:45 p.m. Tax Law Update

Sheila Crummey, C.S., Miller Thomson LLP 1:45 p.m. – 2:10 p.m. Estate and Trust Case Law Update

Thomas Grozinger, C.S., TEP RBC Wealth Management, Estate & Trust Services

2:10 p.m. – 2:30 p.m. Insurance Update

Robin Goodman, TEP, Vice President, Insurance, Trust and Estate Planning Services, RBC Wealth Management Financial Services Inc.

2:30 p.m. – 2:40 p.m. Question and Answer Session 2:40 p.m. – 3:00 p.m. Coffee and Networking Break 3:00 p.m.– 3:25 p.m. How to Change Trustee

Jordan Atin, C.S., Atin Professional Corporation

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3:25 p.m. – 3:30 p.m. Question and Answer Session 3:30 p.m. – 4:20 p.m. Estate & End of Life Planning – Legal, Medical, and

Ethical Considerations (50 Minutes )

Sally Bean, Director, Ethics Centre and Policy Advisor Sunnybrook Health Sciences Centre Jan Goddard, Goddard, Gamage, Stephenson LLP Dr. Michel Silberfeld, Geriatric Psychiatrist

4:20 p.m. – 4:30 p.m. Question and Answer Session (10 Minutes ) 4:30 p.m. End of Day Two

November 4, 2016

SKU CLE16-0100801

Table of Contents TAB 1 Windchill Warning: Rohani and the Estate Freeze ................................................ 1 - 1 to 1 - 5

Heather Hansen, C.S., Martha McCarthy & Company TAB 2 Update on Charity Law ....................................................... 2 - 1 to 2 - 45

Terrance Carter Theresa Man Carters Professional Corporation

TAB 3 de son tort: Recognizing and Avoiding the Traps of Unintended Fiduciary Obligations ......................................... 3 - 1 to 3 - 7 Eric Hoffstein, TEP, Minden Gross LLP

TAB 4 Corporate Distributions to Trusts ........................................ 4 - 1 to 4 - 18

Timothy Youdan, Davies Ward Phillips & Vineberg LLP

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

TAB 5 Bitten by Boilerplate: Reviewing Precedents for Will and Trust Drafting ........................................................ 5 - 1 to 5 - 34

Mary-Alice Thompson, C.S., TEP Cunningham, Swan, Carty, Little & Bonham LLP

TAB 6 When is a Gift a Gift? The Implications of Holding Accounts Jointly ..................................................... 6 - 1 to 6 - 21

Amanda Stacey, Miller Thomson LLP TAB 7 The Attorney for Property To What Extent Can They Gift and Estate Plan? ................... 7 - 1 to 7 - 17

Cate Grainger, Harrison Pensa LLP TAB 8 Tax Update for Estates Practitioners ................................... 8 - 1 to 8 - 16

Sheila Crummey, C.S., Miller Thomson LLP

TAB 9 Case Update 2015-2016 ...................................................... 9 - 1 to 9 - 86

Thomas Grozinger, C.S., TEP RBC Wealth Management, Estate & Trust Services

TAB 10 Life Insurance Update .................................................... 10 - 1 to 10 - 12

Robin Goodman, TEP, Vice President, Insurance, Trust and Estate Planning Services, RBC Wealth Management Financial Services Inc.

TAB 11 Changing Trustees .......................................................... 11 - 1 to 11 - 20

Jordan Atin, C.S. Lesley Donsky Elizabeth Legge Atin Professional Corporation

TAB 12 PANEL MATERIALS Estate & End of Life Planning – Legal, Medical, and Ethical Considerations

Case Studies ..................................................................... 12 - 1 to 12 - 2 Ontario’s Current Guide to Advance Care Planning ............ 12 - 3 to 12 - 4

Sally Bean, Director, Ethics Centre and Policy Advisor Sunnybrook Health Sciences Centre

Estate and End of Life Planning ......................................... 12 - 5 to 12 - 8

Dr. Michel Silberfeld, Geriatric Psychiatrist

TAB 1

Windchill Warning:

Rohani and the Estate Freeze

Heather Hansen, C.S.

Martha McCarthy & Company

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

Windchill Warning: Rohani and the Estate Freeze

Heather Hansen, C.S.†

Estates and family law overlap to such an extent that they have been evocatively described

as “kissing cousins.”1 One example of this overlap familiar to many family law lawyers—

particularly those whose practice focuses on higher net worth clients—is the estate freeze.

The estate freeze is a device that “allows future corporate growth to be devolved, with

minimal, if any, immediate income tax consequences, to the next generation of a family (or other

successors) while at the same time fixing (or ‘freezing’) the older generation’s wealth.”2 The

simplest case is that of a parent who owns all the common shares of a small business corporation.

Concerned about the tax liability on the capital gains that have and (hopefully) will continue to

accrue on her shares, the parent seeks to ‘freeze’ their present value. The corporation is reorganized

such that the parent’s common shares are exchanged for preference shares and new common shares

are issued to her children (or other successors), sometimes at a nominal cost. The preference shares

carry voting rights so the parent retains control of the corporation, but their value is fixed and they

are not entitled to share in any surplus assets if the corporation were wound up, nor are they entitled

to dividends. The new common shares do not carry voting rights but they absorb any increase in

the value of the corporation over time.3

An inter vivos trust is often settled as part of an estate freeze. A trust is usually required

where the object is to devolve the growth in value of a corporation to minors, to persons not yet

born (such as future grandchildren) or not yet ascertained (such as the spouses of children or

grandchildren not yet married), or where there is a desire to preserve some discretion as to who

receives income and how much.4 These trusts act as vehicles for the intergenerational transfer of

what can be, in some cases, very significant wealth. For matrimonial counsel, the question of

whether and how to assign a value to an interest in such a trust for family law purposes can be a

source of considerable confusion.

† Partner, Martha McCarthy& Company LLP, Toronto 1 “Kissing Cousins: Where Family Law and Trusts and Estates Law Meet” is the title of an Ontario Bar Association CPD program, co-chaired most recently by Karon Bales and Elizabeth Bozek in April, 2016. 2 Stephen Grant, “Estate Freezes in the Family Law Context - The Big Chill Revisited” (2004) 22 C.F.L.Q. 55 (WL). 3 CED 4th (online), Income Tax “Trusts: Tax Planning with Trusts: Estate Freeze” (XVII.9.(d)) at §1538-1539. 4 Ibid at §1537, 1541.

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These issues were addressed by Lorne Wolfson et al in a 2013 paper that remains extremely

helpful.5 As Wolfson notes, the question of how trusts are valued for family law purposes is not

an easy one:

Canadian courts have wrestled with the concept of valuing an interest in a trust in numerous circumstances, of which value for family law purposes is just one. How to value an interest in a trust generally can depend on the reason for which it is being valued. Depending on the terms of the trust, a beneficiary may be entitled to assign or to sell the interest. The beneficiary's creditors or trustee in bankruptcy may have access to the trust interest. The capital or income interest of a beneficiary in a trust can be disposed of or be deemed to have been disposed of for purposes of the Income Tax Act (“ITA”). Of course, a trust interest may also have value for family law purposes. Each of these situations may require a valuation. Valuing an interest in a trust for family law purposes may be significantly different than valuing it for other purposes.

This is of course equally true where the trust in issue has been settled as part of an estate freeze.

As Wolfson goes on the explain, in commercial transactions, property is generally valued

at “fair market value” defined as the highest price obtainable in an open market between informed

parties dealing at arms length. In the family context, by contrast, courts prefer the concept of “fair

value” rather than “fair market value.” Fair value is a notional concept that describes a value that

is just and equitable in the circumstances. It requires consideration of, inter alia, the purpose of

the valuation, the nature of the relationship and reasonable expectations of the shareholding or

indirectly investing parties, the reasonable expectations of the spouses during the marriage, diverse

values beyond fair market value—including value to the owner where a market is not broad or

competitive enough to render a fair price—and all other relevant surrounding circumstances.6

Courts have struggled with how these concepts of value should apply to an interest in a

discretionary trust such as those settled in the course of a freeze of a family corporation. There is

no fair market value of a discretionary interest and the fact that the interest is discretionary makes

it extremely difficult to determine value. The leading case in Ontario is still Sagl v. Sagl.7 In that

case, the court determined the fair market value of the husband’s contingent capital interest in a

family trust by dividing the total value of the trust at the valuation date equally amongst the

beneficiaries. In taking this approach, the court ignored the fact that the trustees had absolute

5 Lorne Wolfson, Adam Black and Emily Hubling, “Family Trusts Under Canadian Family Law” (2013) 32 C.F.L.Q. 275 (WL). 6 James G. McLeod and Alfred A. Mamo, Matrimonial Property Law in Canada (online), “Valuation Principles of Family Law: Fair Value” (VP-4). A helpful discussion of “fair value” can be found in L. (J.W.) v. M. (C.B.), 2008 NSSC 215, 168 A.C.W.S. (3d) 344 at paras 26-31. 7 [1997] O.J. No. 2837, 31 R.F.L. (4th) 405 (Ont. Gen. Div.).

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discretion to give some, all, or part of the trust assets to any one beneficiary to the exclusion of the

others. Sagl has attracted considerable criticism on this basis.

Although they do not relate directly to estate freezes, a series of decisions by the British

Columbia Court of Appeal and British Columbia Supreme Court in Rohani v. Rohani8 point to an

even more interesting issue: in what circumstances and to what extent can the value devolved as

part of a freeze be attributed back to the ‘freezor’?

Reflecting the husband’s complex business arrangements, the facts in Rohani are

somewhat convoluted. The parties married in 1987. They both had children from previous

relationships. The husband held investments through Rohani Holdings Ltd. (later renamed Sigma

Investments Ltd.), of which there were 100 Class ‘A’ voting shares divided equally between three

shareholders: the husband, his brother, and a business associate. Class ‘B’ non-voting shares were

issued to children of the three partners; the husband’s children were issued 1,750 such shares.

In 1991, the husband and his children exchanged their shares in Sigma for equal shares in

a corporation called Myfam (i.e. the husband received 33 Class ‘A’ voting shares, and the children

each received 1,750 Class ‘B’ non-voting shares). Their shares in Sigma were held in Myfam for

tax planning purposes in a manner not unlike a freeze. One of the key issues in the litigation was

how the husband’s Class ‘A’ shares should be valued for family law purposes. The wife argued

that they were worth substantially the entire value of Myfam; naturally, the husband disagreed.

Their experts produced by the parties agreed on a global value for the shareholders’ interest in

Myfam but did not agree on the allocation of value as between the Class ‘A’ and ‘B’ shares.

The clearest summary of the dispute is set out in the final decision in the series, by the B.C.

Court of Appeal:

3 The husband and wife were married in November 1987; they separated finally in November 1992. It was a second marriage for both of them and they had no children together. The husband had four adult children from his first marriage, three of whom are now parties to these proceedings. The wife's children from her first marriage are not involved in the litigation. The husband died after the trial of the actions but his estate has continued to be represented. […] 5 In the divorce action Lysyk J. concluded that the Class A shares of Myfam were a family asset but the evidence of the value of the shares was inadequate to effect a division.

8 Rohani v. Rohani, 2004 BCCA 605; Rohani v. Rohani, 2003 BCSC 1438; Rohani v. Rohani, 2002 BCCA 253; Rohani v. Rohani, 1999 CarswellBC 1981; Rohani v. Rohani 1999 Carswell BC 444; Rohani v. Rohani, 1998 CarswellBC 1855.

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The parties came back before him in February 1999. They agreed that the value of Myfam was $1,078,891 consisting of shareholder loans of $133,333 and attributed value to the Class A and Class B common shares of $945,518. Lysyk J. concluded that only nominal value should be attributed to the Class B shares held by the husband's children, and the value of Myfam's equity was properly attributable to the Class A shares held by the husband. After making a deduction for the equal division of proceeds of sale of the matrimonial home (not otherwise relevant to these reasons) Lysyk J. valued Myfam at $790,000 and he ordered that the wife be paid $230,000 compensation in lieu of her share of family assets, an amount which reflected a 30 percent interest in Myfam.9

This valuation was challenged by the husband’s estate on appeal. The B.C. Court of Appeal

upheld the trial judge’s approach:

81 During the trial proper, it was the appellants' position that the Class "B" shares ought to attract a much higher value. 82 When the matter came back before him, the parties put before him the limited agreement reached by the experts as to the break-up value of the company but the trial judge was still faced with making a determination as to the value of the two classes of shares. […] 84 The trial judge rejected the argument that the value to be ascribed to the shares should necessarily reflect the approach taken to valuation in taxation cases. Given the evidence in this case, it would be difficult to find fault with that conclusion. There were documents in evidence that contained representations of "ownership" made to and acted upon by the husband's bank. Those documents, along with other evidence, provided strong support for the judge's view that the husband treated Myfam as his alter ego. The value the judge decided to ascribe to the voting shares reflected the evidence of the husband's complete control of the company.10

A factor that attracted particular scrutiny by the Court of Appeal was the degree of control

Mr. Rohani continued to exercise over Myfam, the coffers of which he frequently raided for his

own purposes and projects:

He exercised complete control of Myfam's affairs, without consultation with other directors or shareholders. He funded substantial gifts to the wife from Myfam during the marriage and also used its funds and assets for living expenses before and after the separation. He had routinely used other companies in a similar manner and he treated interests nominally transferred to the children as his own for the purpose of arranging bank financing for his projects.

While Rohani does not concern an estate freeze, the case can be easily analogized. Estate

freezes are frequently structured with an eye toward reserving maximum control of the company

9 Rohani v. Rohani, 2004 BCCA 605 at paras 3-5. 10 Rohani v. Rohani, 2002 BCCA 253 pat paras 81-84.

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with the settlor, many of whom continue to regard the company as ‘theirs’ for all intents and

purposes, including to bankroll their other business ventures and lifestyle. The non-voting shares

in Myfam were given by Mr. Rohani to his children gratuitously. In a freeze, shares are transferred

to trust without (or with nominal) consideration, sometimes with little to no involvement of the

beneficiary. This suggests that the reasonable expectations of the parties are similar. Coupled with

the more liberal family law valuation concepts like “fair value,” the logic of Rohani would seem

to would seem to allow for the possibility that wealth devolved through an estate freeze could be

accessed by the spouse of the “freezor” in matrimonial proceedings.

In the 12 years since its release, it is somewhat surprising that Rohani has not been more

enthusiastically taken up by Ontario family law counsel.11 In some cases, virtually all a divorcing

spouse’s wealth is contained in a family company. Where the residual value of that company has

been devolved through a freeze for tax or estate planning purposes, family counsel on both sides

would be well advised to consult Rohani—to assess exposure, on the one hand, and to look for

opportunities to unlock that wealth on the other.

11 Rohani v. Rohani, 2004 BCCA 605 is cited in just three Ontario cases: Debora v. Debora, [2006] O.J. No. 4826 (Ont. C.A.); Wildman v. Wildman (2006), 273 D.L.R. (4th) 37 (Ont. C.A.); and McNamee v. McNamee, 2010 ONSC 674, rev’d on unrelated grounds 2011 ONCA 533.

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TAB 2

Update on Charity Law (REVISED)

Terrance Carter Theresa Man

Carters Professional Corporation

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

0

THE LAW SOCIETY OF UPPER CANADA 19th ANNUAL ESTATES AND TRUSTS SUMMIT

Toronto – November 4, 2016

UPDATE ON CHARITY LAW (Current as of October 12, 2016)

Theresa L.M. Man and Terrance S. Carter Carters Professional Corporation

tman@carters.ca tcarter@carters.ca

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UPDATE ON CHARITY LAW November 4, 2016

(Current as of October 12, 2016)

Theresa L.M. Man and Terrance S. Carter Carters Professional Corporation

Table of Contents

A. Introduction .............................................................................................................................. 3

B. 2016 Federal Budget Highlights ................................................................................................ 3

1. Donation of Sale Proceeds of Real Estate and Shares of Private Corporations ................. 4

2. Consultation with Sector on Political Activities .................................................................. 4

3. Acquisition of Interest in Limited Partnerships by Registered Charities ............................ 6

4. Amendments to Donation Tax Credits for Trusts ............................................................... 7

5. Sales and Excise Tax Measures ........................................................................................... 8

C. Income Tax Changes Regarding Estate Gifts ............................................................................. 8

1. Testamentary Trusts and the Graduated Rate Estate ........................................................ 8

2. Changes to Timing and Recognition of Charitable Gifts ................................................... 10

3. Charitable Remainder Trusts ............................................................................................ 12

4. Gifts of Private Company Shares/Non-Qualifying Security/Excepted Gift ....................... 12

5. New Life Interest Trust Rules (subsection 104(13.4))....................................................... 13

6. Spousal Sharing of Donation Tax Credits .......................................................................... 15

D. Recent CRA Publications and Website Updates ..................................................................... 16

1. GST/HST Info Sheets ......................................................................................................... 16

2. New Guidance on Becoming a Qualified Donee ............................................................... 17

3. Updated Charities Audit Statistics for 2015-2016 ............................................................ 18

4. Two New Information Webpages ..................................................................................... 19

5. New Guidance on Requirements for Foreign Charities to become Qualified Donees ..... 19

6. Length of Retention for Church Offering Envelopes Changes .......................................... 21

7. New Infographic to Assist Charities Calculate When Their T3010 is Due Each Year ........ 21

E. Recent Tax Decisions, Rulings, and Interpretations Involving Charities ................................. 22

1. FCA Revokes Charitable Status Based on Failure to Maintain Proper Books & Records . 22

2. FCA Dismisses Revocation Appeal .................................................................................... 23

3. CRA View on FMV of Receipts for Gifts of Property to a Municipality ............................. 24

4. Ontario Court Rules that CRA Does Not Owe Duty of Care for Disallowed Tax Shelters . 26

5. FCA Holds That Prevention of Poverty is Not a Charitable Purpose................................. 27

F. Corporate Law Update ............................................................................................................ 29

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1. Corporate Canada Postings Re: Canada Not-for-profit Act .............................................. 29

2. Technical Amendments to the Canada Not-for-profit Corporations Act ......................... 30

3. Update on Ontario Not-for-Profit Corporations Act ......................................................... 31

4. Unfair Proxy Form for Members’ Meeting Revised by Ontario Court .............................. 33

G. Provincial Legislation Update.................................................................................................. 35

1. Ontario Legislation on Forfeited Property to Come into Force in December 2016 ......... 35

2. Quebec Ends Duplicate Registration Process for Registered Charities ............................ 36

3. Amendments to the Ontario Lobbyists Registration Act Come into Effect ...................... 37

4. Proposed Ontario EHT Regulation Will Affect Registered Charities ................................. 38

H. Other Case Law of Interest ..................................................................................................... 39

1. Discriminatory Will Provision Ruled Invalid ...................................................................... 39

2. Affiliation Agreement Upheld by BC Court of Appeal ...................................................... 40

3. Alberta Court of Appeal Affirms Court’s Jurisdiction to Review Unfair Church Discipline ........................................................................................................................... 41

I. Conclusion ............................................................................................................................... 43

J. Case Law Appendix ................................................................................................................. 44

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A. INTRODUCTION

Over the last 12 months there have been a significant number of legislative and common

law developments at the federal and provincial level that impact how charities operate in Canada.

The intent of this paper is to provide a brief overview of some of the more important

developments in the last year, including changes introduced through the 2016 Federal Budget1,

changes to the Income Tax Act2 (“ITA”) involving estate gifts, new publications from the Charities

Directorate of the Canada Revenue Agency (“CRA”), corporate updates under the Canada Not-

for-Profit Corporations Act 3 (“CNCA”) and the Ontario Not-for-profit Corporations Act4 (“ONCA”),

other federal and provincial initiatives, as well as recent court decisions affecting charities.

B. 2016 FEDERAL BUDGET HIGHLIGHTS

On March 22, 2016, the new Liberal government tabled its first federal budget (“Budget

2016”).5 Subsequent legislation to implement certain portions of Budget 2016 was introduced on

April 20, 2016 by Bill C-15, Budget Implementation Act, 2016 No. 1, (“Budget Implementation

Act”), which received Royal Assent on June 22, 2016 .6

Although Budget 2016 did not dramatically alter the legal and regulatory landscape for

charities, there are, nonetheless, a number of important developments of note.

* Theresa L.M. Man, B.Sc., M.Mus., LL.B., LL.M., is a partner practicing in the area of charity and not-for-profit law at Carters Professional Corporation. Terrance S. Carter, B.A., LL.B., TEP, Trade-Mark Agent, is the managing partner of Carters Professional Corporation and counsel to Fasken Martineau DuMoulin LLP on charitable matters. The authors would like to acknowledge and thank other lawyers at Carters Professional Corporation for the use of materials that they have written for firm publications, specifically, Jacqueline M. Demczur, Esther S.J. Oh, Nancy E. Claridge, Jennifer M. Leddy, Linsey E.C. Rains, Sean S. Carter, Ryan M. Prendergast, as well as M. Elena Hoffstein at Martineau DuMoulin LLP who have all published various articles in Charity Law Bulletins and in Charity Law Updates (available at www.charitylaw.ca). The authors would also like to acknowledge and thank Jessica K. Foote and Tessa Woodland Students-at-Law for their assistance in preparing this paper. Any errors are solely those of the authors. 1 Department of Finance Canada, Budget 2016: Growing the Middle Class, (Ottawa: 22 March 2016), online: < http://www.budget.gc.ca/2016/docs/plan/toc-tdm-en.html>. 2 Income Tax Act, RSC, 1985, c 1 (5th Supp). 3 Canada Not-for-profit Corporations Act, SC 2009, c 23. 4 Ontario Not-for-profit Corporations Act, 2010, SO 2010, c 15. 5 Supra note 1. 6 Department of Finance Canada, Bill C-15, Budget Implementation Act 2016, No. 1, 1st Sess, 42nd Parl, 2015, (assented to 22 June 2016).

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1. Donation of Sale Proceeds of Real Estate and Shares of Private Corporations

One of the key provisions of Budget 2016 was the announcement that the federal

government does not intend to proceed with the proposal to provide an exemption, beginning

in 2017, from capital gains tax for dispositions involving private corporation shares or real estate

where cash proceeds are donated to a qualified donee within 30 days of disposition.7 This

proposal was originally contained in the previous federal government’s budget announced on

April 21, 2015 (“Budget 2015”)8, with draft legislative proposals to amend the ITA having been

released on July 31, 2015, by the Department of Finance for consultation.9 The decision of the

current federal government not to proceed with these exemptions from capital gains tax has

been disappointing for the charitable sector, although the proposed rules were complicated and

fraught with practical and implementation issues.

2. Consultation with Sector on Political Activities

Under the heading of “Improving Client Services at the Canada Revenue Agency”, Budget

2016 announced that the federal government proposed committing $185.8 million to do so over

5 years, with $14.6 million ongoing for CRA to address a number of initiatives.10 Of note to the

charitable sector, one of these initiatives includes CRA and the Department of Finance engaging

with charities through “stakeholder groups and an online consultation” in order to clarify the

rules concerning political activities.11

This announcement followed the wind-down of the audit program directed at the political

activities of charities announced by the Minister of National Revenue on January 20, 2016.12 The

announcement was also consistent with the mandate letter to the Minister of Finance released

on November 13, 2015, which asked the Minister to “[w]ork with the Minister of National

Revenue to allow charities to do their work on behalf of Canadians free from political harassment,

7 Supra note 1 at 221. 8 Department of Finance Canada, Budget 2015: Strong Leadership: A Balanced-Budget, Low-Tax Plan for Jobs, Growth and Security, (Ottawa: 21 April 2015), online: < http://www.budget.gc.ca/2015/docs/plan/toc-tdm-eng.html>. 9 Department of Finance Canada, Department of Finance Consults on Draft Legislative Proposals, (Ottawa: 31 July 2015), online: <http://www.fin.gc.ca/n15/15-073-eng.asp>. 10 Supra note 1 at 206. 11 Ibid. 12 Canada Revenue Agency, News Release, “Minister Lebouthillier announces winding down of the political activities audit program for charities” (20 January 2016), online: < http://news.gc.ca/web/article-en.do?nid=1028679>.

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and modernize the rules governing the charitable and non-for-profit sectors. This will include

clarifying the rules governing ‘political activity’.”13

As a follow-up, on September 27, 2016, the Minister of National Revenue announced the

launching of public consultations to “clarify the rules regarding the involvement of registered

charities in political activities.”14

CRA followed the Minister of National Revenue’s announcement with its own

announcement the same day detailing the online component of the consultation. The

consultation questions have been grouped into three categories related to carrying out political

activities, CRA’s policy guidance, and future policy development. Specific questions asked by CRA

include:

Are charities generally aware of what the rules are on political activities?

What issues or challenges do charities encounter with the existing policies on charities’

political activities?

Do these policies help or hinder charities in advocating for their causes or for the people

they serve?

Is CRA’s policy guidance on political activities clear, useful, and complete?

Which formats are the most useful and effective for offering policy guidance on the rules

for political activities?; and

Should changes be made to the rules governing political activities and, if so, what should

those changes be?

Comments concerning the online consultation will be received until November 25, 2016.15

In person consultations will follow at a later date in Halifax, Montréal, Toronto, Winnipeg, Calgary

and Vancouver.16 The Minister of National Revenue also announced the establishment of a

consultation panel consisting of five individuals experienced with the regulatory issues facing

charities, presumably in the context of political activities.

13 Letter from Rt. Hon. Justin Trudeau, P.C., M.P. Prime Minister of Canada, Minister of Finance Mandate Letter, (13 November 2015) online: < http://pm.gc.ca/eng/minister-finance-mandate-letter>. 14 Canada Revenue Agency, News Release, “Minister Lebouthillier announces consultations with charities to clarify the rules for their participation in political activities” (27 September 2016), online: <http://news.gc.ca/web/article-en.do?nid=1130449>. 15 Canada Revenue Agency's online consultation on charities' political activities (27 September 2016), online: <http://www.cra-arc.gc.ca/chrts-gvng/chrts/whtsnw/pacnslttns-eng.html>. 16 Ibid.

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3. Acquisition of Interest in Limited Partnerships by Registered Charities

Budget 2016 also confirmed the intention of the federal government to proceed with

implementing the acquisition or holding of limited partnerships interests by registered charities

announced in Budget 2015. Budget 2015 had contained amendments to the ITA to allow

registered charities, including private foundations and registered Canadian amateur athletic

associations (“RCAAA”), to passively invest in limited partnerships without being considered to

be carrying on the business of the partnership provided that certain conditions were met.

In this regard, Part 1 of the Budget Implementation Act adds a new subsection 253.1(2)

to the ITA to permit registered charities and RCAAA’s to hold limited partnership interests.17 The

new provision provides that where a registered charity or RCAAA holds an interest as a limited

partner in a limited partnership, it will not be considered (for purposes of sections 149.1 and

subsections 188.1(1) and (2)) of the ITA, solely because of its acquisition or holding of the limited

partnership interest), to be carrying on any business or other activity of the partnership if the

following conditions are met:

By operation of any law governing the arrangement in respect of the partnership, the

liability of the registered charity or RCAAA as a member of the partnership is limited;

The registered charity or RCAAA deals at arm’s length with each general partner of the

partnership; and

The registered charity or RCAAA together with persons and partnerships with which it

does not deal at arm’s length, does not hold interests in the partnership that have a fair

market value of more than 20% of the fair market value of the interests of all members

of the partnership.18

As well, a new subsection 149.1(11) will also be added so that limited partnerships of

which a private foundation is, directly or indirectly, a member, would not be included when

calculating the private foundation’s excess corporate holdings.19 These amendments apply in

respect of investments in limited partnerships that are made or acquired after April 20, 2015.

This is consistent with CRA’s policy to permit registered charities and RCAAAs to invest in limited

partnerships since 2015, after the proposal was contained in the 2015 Federal Budget,

notwithstanding that the proposal had not yet been enacted by Parliament.

17 Supra note 6 at Part 1. 18 Ibid. 19 Ibid.

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4. Amendments to Donation Tax Credits for Trusts

By way of background, on December 7, 2015 the Minister of Finance announced changes

to the federal personal income tax rates for individual taxpayers as of January 1, 2016.20 Bill C-2,

An Act to amend the Income Tax Act (“Bill C-2”) was subsequently tabled in the House of

Commons on December 9, 2015 to amend the formula used to calculate the donation tax credit

in subsection 118.1(3) of the ITA.21 Bill C-2 proposes to reduce the second personal income tax

rate to 20.5% from 22% and the introduction of a new 33% personal income tax rate on individual

taxable income in excess of $200,000 effective for the 2016 and subsequent taxation years. One

of the consequential proposals contained in Budget 2016 was to provide a 33% charitable

donation tax credit on donations above $200 to trusts that are subject to the 33% rate on all of

their taxable income. This measure was also intended to extend the 33% charitable donation tax

credit contained in Bill C-2 to donations made by a graduated rate estate during a taxation year

of the estate that straddles 2015 and 2016.22

In this regard, Part 1 of the Budget Implementation Act amends the ITA to include the

proposed amendments under Bill C-2 and the amendments contained in Budget 2016. As a result

subsection 118.1(3) of the ITA will be amended to apply a new tax credit rate equal to the highest

individual percentage to the extent that the total gifts for the year exceed $200, and to the extent

that the taxpayer has income that is subject to the top marginal tax rate. Specifically for trusts to

which subsection 122(1) applies to pay tax at a flat rate equal to the highest individual

percentage, the new tax credit rate (33% for the 2016 taxation year) will apply to total gifts in

excess of $200. For individuals, (including graduated rate estates and qualified disability trusts)

to which section 117 applies so that tax at the highest individual percentage only applies to

taxable income above a certain threshold ($200,000 for the 2016 taxation year), the new tax

credit rate (33% for the 2016 taxation year) will apply to total gifts in excess of $200, to the extent

the individual has taxable income above that threshold. These changes will apply to gifts made

after 2015.

20 Department of Finance Canada, Government of Canada Announces Tax Cut to Strengthen the Middle Class (Ottawa: 7 December 2015), online: < http://www.fin.gc.ca/n15/15-086-eng.asp>. 21 Canada Bill C-2, An Act to amend the Income Tax Act, 1st Sess, 42nd Parl, 2016, (second reading 7 October 2016). 22 Department of Finance Canada, Tax Measures: Supplementary Information: Top Marginal Income Tax Rate – Consequential Amendments, (Ottawa: 22 March 2016), online: <http://www.budget.gc.ca/2016/docs/tm-mf/si-rs-en.html>.

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5. Sales and Excise Tax Measures

Part 2 of the Budget Implementation Act enacted two charity-related Goods and Services

Tax/Harmonized Sales Tax (“GST/HST”) measures that were mentioned in Budget 2016. In the

first instance, the Budget Implementation Act amends Section 1 of Part V.1 of Schedule V to the

Excise Tax Act (“ETA”), by including a new paragraph (p) so that a supply of a service rendered to

an individual to enhance or otherwise alter the individual’s physical appearance, and not for

medical or reconstructive purposes or a supply of a right entitling a person to such service, would

be subject to GST/HST. This amendment applies to any supply made after March 22, 2016. 23

In the second instance, a new section 164 of the ETA has been included so that where a

charity or public institution receives a donation and provides a property or service to the donor

in return, the part of the donation that exceeds the value of the property or services supplied

would not be subject to GST/HST.24 This new rule requires that two conditions must be met: (a)

the services or property provided must be included in calculating the value of the advantage for

purposes of split-receipting, and (b) a donation receipt may be issued, or could be issued if the

donor were an individual.25 The new section applies to supplies made after March 22, 2016.

C. INCOME TAX CHANGES REGARDING ESTATE GIFTS26

1. Testamentary Trusts and the Graduated Rate Estate

Commencing in 2016, new rules were introduced regarding the manner in which

testamentary trusts are taxed which will significantly impact estate gifts. In the past, income and

capital gains retained in inter vivos trusts were taxed at a different rate than testamentary trusts.

Inter vivos trusts have always been taxed at the top marginal rates of tax, while testamentary

trusts and certain pre-1971 inter vivos trusts have enjoyed progressive rates of tax. An

amendment to section 122 of the ITA has eliminated the various differences between inter vivos

and testamentary trusts commencing in 201627. An exception, however, is that progressive tax

23 Supra note 6 at Part 2. 24 Ibid. 25 Ibid at 77. 26 This portion of the paper has been excerpted from Charities Legislation & Commentary by Terrance S. Carter, Maria Elena Hoffstein & Adam Parachin, , (Toronto: LexisNexis Canada Inc., 2017). The authors would like to thank Elena Hoffstein for her kind permission to allow the inclusion in this paper of said excerpt that she authored. 27 Supra note 1, s 122; Department of Finance Canada, Notice of Ways and Means Motion to amend the Income Tax Act, (Ottawa: Department of Finance Canada, 7 December 2015), online: <https://www.fin.gc.ca/drleg-

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rates will continue to apply to graduated rate estates (“GREs”). A GRE is defined in subsection

248(1) of the ITA as an estate that arose on and as a consequence of the death of an individual

if: (a) not more than thirty-six (36) months have passed since the date of death; (b) the estate is

at that time a testamentary trust (as defined in subsection 108(1) of the ITA); (c) the estate

designates itself as a GRE in its tax return for the first taxation year ending after 2015; (d) no

other estate has designated itself as a GRE of the deceased individual; and (e) the deceased’s

social insurance number is provided.28

The benefits that are available for a GRE and not for other testamentary trusts include

the following:

The graduated tax rates applicable to individuals will apply to income retained in the GRE

(subsection 117(2));

A GRE can continue to have an off-calendar year;

A GRE will be exempt from remitting tax instalments and will only be required to pay Part

I Tax within 90 days after the end of its taxation year (subsections 104(23)(e) and

156.1(2)(c);

A basic exemption from Alternative Minimum Tax of $40,000 will be available to the GRE

(section 127.51);

It will be able to access new flexible rules for donations by will or estate; and

Nil capital gains on donations of public securities;

The graduated tax rates apply to income retained in the GRE during the term of an estate

qualifying as a GRE. A GRE can only qualify as such for a maximum of thirty-six (36) months after

the death of an individual. At the end of the thirty-six (36) month period, the estate realizes a

taxation year end and the GRE status is lost (subsection 249(4.1))29.

Furthermore, there is no grandfathering for existing trusts which will have a deemed year-

end on December 31, 2015. Thus, for those testamentary trusts which had a fiscal period or off

calendar year end, this would have result in two year ends in 2015. An exception is provided in

apl/2015/nwmm-amvm-l-1215-eng.asp>; Canada, Minister of Finance, Explanatory Notes Relating to the Income Tax Act, (Ottawa: Department of Finance Canada, 7 December 2015) at clause 5, online: <http://www.fin.gc.ca/drleg-apl/2015/nwmm-amvm-1215-n-eng.asp>. 28 For further information on graduated rate estates, see M. Elena Hoffstein, “Problems Arising from the Estate Donation Rules and the 2015 Federal Budget” (Presentation to the 2015 National Charity Law Symposium, May 29, 2015, Toronto, Ontario). 29 Draft legislation tabled January 15, 2016 introduced a proposal to extend the thirty-six (36) month period to sixty (60) months after the death of an individual. See M. Elena Hoffstein, “Testamentary Charitable Giving: The New Regime (Revised)” (2016) at 8.

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subsection 249(4.1) if the particular trust is an estate which existed at the end of 2015 and is a

GRE of the individual for the 2016 taxation year. In this case and in the case where the particular

trust is an estate that arose on a death after 2015 and is a GRE for its first taxation year that

deemed taxation year-end is deferred until the last time at which the estate is a GRE.

One of the prerequisites for a GRE is that only one estate can qualify. In situations where

multiple wills are used to avoid probate tax, the question has arisen as to whether this creates

two estates. CRA has indicated that, in its view, there is only one estate and that, therefore, a

combined tax return should be filed and joint election made to designate the estates as a GRE.30

2. Changes to Timing and Recognition of Charitable Gifts

New legislation introduced significant changes to the testamentary charitable gift regime

for the 2016 and subsequent taxation years both as to timing and recognition of charitable gifts

for tax purposes. Donations made by will and designated donations (Registered Retirement

Savings Plan (“RRSP”), Registered Retirement Income Fund (“RRIF”), Tax-Free Savings Account

(“TFSA”) or life insurance policy) are deemed to be made by the estate at the time when the

property is transferred to a charity.31 As well, the fair market value (“FMV”) of the gift for tax

receipting purposes is to be determined at the time of the transfer of property rather than at the

date of death. For pre-2016 deaths, the ITA provided that a charitable gift made by will (often

referred to as a “Gift by Will”) was deemed to have been made by the donor immediately prior

to death. If the estate which makes the gift is a GRE, there is flexibility as to the allocation of the

donation tax credit. The value of the gift will be the value of the property at the time it is

transferred to the charity rather than the value on the date of death, as it had been under the

old rules.

This legislation builds new flexibility into the ability to use donation tax credits in respect

of estate gifts by will and designated donations by permitting the executors or trustees of a GRE

to allocate the tax credits among the terminal or last taxation year of the donor, the taxation year

preceding the taxation year of death, and the taxation year of the estate in which the donation

is made and up to two (2) prior years of the estate. It is only a GRE that has the flexibility to

allocate the donation tax credit among different tax years and, most importantly, to carry-back

30Canada Revenue Agency Views 2010-0358461-spousal trusts and see explanatory notes under definition of

Graduated Rate Estate in ss. 248(1) ITA. 31 Supra note 2, s 118.1(5).

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the donation tax credit to the year of death and one year prior, which in many cases is where the

largest tax liability arises (because of the deemed disposition on death rules). An additional

requirement is that the property to be transferred to the charity by the GRE must be property

held by the deceased at date of death or property substituted therefor.

It is important to note that a borrowing of funds by an estate to effect a charitable gift

within the thirty-six (36) months will not qualify for the flexible rules allowing use of the donation

tax credit in the year of death or the year before the year of death. Current annual charitable

donation limits of 100% of net income for the donor’s last taxation year or for the taxation year

preceding the taxation year of death will continue to apply. Note that generally, the maximum

amount of donations that may be claimed in a year is 75% of an individual’s net income.

Subsection 118.1(1) of the ITA provides that the 75% limit does not apply in the year of the

donor’s death and the immediately preceding year.

A qualifying donation will be a donation effected by a transfer of property, within the first

36 months after the individual’s death, to a qualified donee. Where an individual designated a

qualified donee (e.g., a registered charity) as the recipient of the proceeds under a RRSP, RRIF,

TFSA and life insurance, donation tax credits will also be available. In this regard, if the transfer

of the gift to the qualified donee occurs within thirty-six (36) months after death, then the gift

would be deemed to be made immediately before the individual’s death. In any other case, the

donated property will be required to have been acquired by the estate on and as a consequence

of the death (or to have been substituted for such property). An estate which does not qualify as

a GRE will continue to be able to claim a donation tax credit in respect of donations in the year

in which the donation is made or in any of the five following years. It is also noted that the rules

relating to the tax free transfer of publicly traded securities to charity are now limited to gifts of

publicly traded securities made by the GRE.

The new rules create more flexibility by apparently eliminating the need for testamentary

donations to qualify as “Gift by Wills” so long as the transfer of property to the charity takes place

within thirty-six (36) months of death. Because of the additional tax benefits of gifts made by will

that are available under subsection 118.1(5) of the ITA, determining whether a gift qualifies as a

gift by will has been a key consideration in estate planning and a complex area because there is

little case law dealing with what would constitute a gift by will.

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3. Charitable Remainder Trusts

The new regime does not appear to specifically deal with the treatment of gifts to a

charity on the death of an intervening life interest (commonly referred to as charitable remainder

trusts), which can qualify as a “Gift by Will” under the current regime so long as the trustees have

no right to encroach on the capital in favour of the life tenant. The new rules contemplate that

the property that is the subject of a testamentary charitable gift must be transferred to a qualified

donee within thirty-six (36) months of death. While a residual interest in a charitable remainder

trust is a property interest that can be transferred, it is only that property interest and not the

actual underlying property of the charitable remainder trust that can be transferred prior to the

death of the life tenant. As a result, there remain some questions as to the manner in which

testamentary charitable remainder trusts will be dealt with under the new rule.

4. Gifts of Private Company Shares/Non-Qualifying Security/Excepted Gift

In addition, it would appear that there are unintended consequences to a new rule that

it is not the deceased but rather the estate of the deceased (whether the estate generally or the

GRE) which is considered the donor of the gift. This relates to gifts of private company shares to

public foundations or charitable organizations.

Under the prior rules, a testamentary gift of private company shares to either a public

foundation or charitable organization (but not to a private foundation in order to avoid the excess

corporate holdings rules) and that qualified as a gift by will would give rise to an immediate

donation tax credit that could be applied to offset income in the year of death or the year prior

to death.

Under the new rules, such a gift would be treated as a non-qualifying security. A non-

qualifying security is defined in subsection 118.1(18) of the ITA as a share or debt of a private

company with which an individual or estate does not deal at arm's length immediately after the

relevant time (which in our case would be the time of the gift). Gifts of private company shares

by an individual who controls the company are caught by the definition as are gifts of debt by an

individual where the debt is in respect of a non-arm’s length corporation. If a donation of a non-

qualifying security is made, the donor will be denied a tax credit for the donation in the year in

which the gift is made. However, if the non-arm’s length connection between the donor and the

issuer of the security is broken within the first sixty (60) months or the recipient charity disposes

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of the security within sixty (60) months of the time the donation is made, the gift will be deemed

to have been made at the time the non-qualifying security is disposed of or ceases to be non-

qualifying. The charity can then issue a donation receipt for the gift.

There are certain gifts of shares that do not fall within the definition of a non-qualifying

security. These are called excepted gifts and tax relief will apply in the usual way. An excepted

gift is a gift of shares made to a charity that is not a private foundation (i.e., to a public foundation

or charitable organization) with the proviso that the donor deals at arm’s length with the donee

charity and with each director, trustee or officer of the donee charity. It is noted that this

exception applies only to shares not listed on a prescribed stock exchange and it does not apply

to gifts of debt. This is the rule with respect to inter vivos gifts of private company shares and was

also the rule with respect to gifts by will.

However, under the new rules, as noted above, a testamentary gift of private company

shares, even if made to a public foundation or charitable organization would not qualify as an

excepted gift and would therefore be a non-qualifying security.

The reason for this is that a testamentary trust is deemed not to deal at arm’s length with

a person that is beneficially interested in the trust including a public foundation or charitable

organization such that, as noted above, a testamentary gift to such charity would not qualify as

an excepted gift. No receipt could therefore be issued and no donation tax credit would be usable

until such time as the private company shares are liquidated and this has to occur within sixty

(60) months if the extension to the GRE becomes law, or thirty-six (36) months if it is desired to

have the donation tax credit available not only in the year of death and prior year but also during

the three (3) years of the GRE.

The natural question that arises is why there is a difference in tax treatment between

inter vivos gifts and testamentary gifts of private company shares. Submissions have been made

to the Department of Finance by the Canadian Association of Gift Planners that the simplest way

to resolve this difference in tax treatment is to make testamentary gifts of private company

shares to public foundations and charitable organizations an excepted gift.

5. New Life Interest Trust Rules (subsection 104(13.4))

Life interest trusts are trusts that are (i) spouse/common-law partner trusts that are

established inter vivos or on death (testamentary); (ii) alter-ego trusts; (iii) joint spouse/common-

law partner trusts; and (iv) self-benefit trusts. The common elements to these trusts are that the

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assets can be transferred to such trusts on a roll-over or tax deferred basis. On the death of the

life tenant beneficiary there is a deemed disposition and tax is exigible on any accrued gains. Until

2016, any tax arising on the death of the life tenant would be taxed in the trust.

The new rules, effective January 2016, provide that on the death of the life interest

beneficiary (or on the death of the survivor of the life tenants in the case of joint partner trusts)

there is a deemed year-end for the trust, the gain on the deemed disposition and all income for

that year is deemed payable to and included in the life interest beneficiary’s income. That is to

say, the estate of the life tenant becomes liable for the tax arising in the trust. There is no

grandfathering of existing trusts. While it was stated that there is a joint and several liability for

the trust and the life interest beneficiary estate, there were many issues identified by the estates

and trust and charitable sector. These included an unfair tax burden on the beneficiaries of the

estate or the life tenant who were shouldering the tax burden without the benefit of owning the

assets to which such tax burden anticipated to take place on the death of the life tenant to avoid

double tax situations was frustrated.

In response to such concerns, on November 16, 2015 a “Comfort Letter” was released

from the Department of Finance and on January 15 draft legislation followed.32 These responded

on two concerns:

Misplaced tax liability; the new provision caused the tax liability from the deemed

disposition of the trust assets and trust income in the year of the (life interest) beneficiary

to be taxed in the hands of the deceased life tenant’s estate, not the trust,

The stranding of donation tax credits with respect to charitable donations made by the

trust after the death of the (life interest) beneficiary.

The proposed new rules would return to the status quo prior to January 1, 2016.33 Thus,

it is proposed that gains on deemed dispositions occurring on the death of the life tenant will

continue to be taxed in the life interest trust and not in the life tenant’s estate. The proposed

new rule also provides that, in limited circumstances, there will be an opportunity to elect to tax

the gain in the life tenant’s estate, but this will only apply to post-1971 testamentary spouse or

32 Department of Finance Canada, “Comfort Letter”, by Brian Ernewein (General Director – Legislation, Tax Policy Branch) (Ottawa: Department of Finance Canada, 16 November 2015), online: <https://taxinterpretations.com/wp-content/uploads/2014/12/Russell-Sherman-Wark-Cross-GD-Let-16Nov2015.pdf>. 33 i.e., ss. 104(13.4)(b.1) – 104(13.4)(b) will no longer apply.

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common-law partner trusts created by the will of a taxpayer who died before 2017 with a

Canadian resident beneficiary.

With respect to charitable gifting, under the January 2016 draft legislation, if the life

interest trust makes a gift within ninety (90) days after the end of the calendar year in which the

beneficiary spouse dies (the filing due date), it can allocate the charitable tax credit to the short

taxation year of the trust that resulted from the beneficiary spouse’s death or alternatively in the

year of the gift or the following five (5) years. This will allow for the matching of tax liabilities and

charitable credits.

In order to achieve this result the property transferred to charity must be property owned

by the trust on the date of death of the life interest beneficiary or property substituted therefor.

Thus dividends paid on shares held by the trust on the death of the life tenant could not be used

to make the charitable gift as the dividends would not qualify as property held on the death of

the life tenant or property substituted therefor. If shares of a corporation are redeemed the cash

share qualify as property substituted therefor.

In addition, in order to qualify as a donation by the trust (as opposed to a distribution to

a charity as a beneficiary) the terms of the trust must give the trustees the ability to make or not

make the charitable donation (i.e., the charity must not be receiving the gift as a beneficiary of

the trust but as a charity recipient of a charitable gift). This is because to qualify as a gift it must

be voluntary, hence the need for the trustees to have the ability to make or not make the gift.34

These proposals, while welcome, only partly address the issue of stranded donation tax

credits after the death of a life tenant of a life interest trust. Firstly, the “gift” may not qualify as

such based on CRA’s interpretation of what constitutes a “gift”. There may also be timing issues

depending on when the life tenant dies. If the death occurs close to the end of the calendar year,

there will only be a short time before the tax return has to be filed (e.g., a December death allows

only a three (3) month window (to March 31 of the following year). A death earlier in the year

could provide more time to effect the charitable gift.

6. Spousal Sharing of Donation Tax Credits

Spousal sharing of charitable gifts is now addressed in the ITA as amended by Bill C-43,

Economic Action Plan 2014, No. 2 (“Bill C-43”) through amendments to the definition of “total

34 For charitable donation planning on the death of a life tenant see Tax Rulings - 2009-035049, 2009-0308611R3,

2008-029212, 2007-022136 and 2004-006027.

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charitable gifts” of an individual in subsection 118.1(1) for 2016 and subsequent taxation years.

In this regard, if an individual is not a trust, clause 118.1(1)(c)(i)(A) provides that the eligible

amount of “total charitable gifts” includes the amount of a gift made to a qualified donee by an

individual or the individual’s spouse or common-law partner in a taxation year or any of the five

preceding taxation years. However, clause 118.1(1)(c)(i)(C) provides that gifts made by a GRE can

be claimed on the deceased individual’s tax return for the year of death or the immediately

preceding year. In a technical interpretation released by CRA, CRA takes the view that this clause

is more limited in scope and does not include gifts made by the GRE of a spouse or common-law

partner.35 CRA therefore concluded that, given the new amendments, its current administrative

practice allowing gifts made by an individual’s will to be claimed by the deceased individual’s

spouse will no longer apply for deaths occurring after 2015

D. RECENT CRA PUBLICATIONS AND WEBSITE UPDATES

1. GST/HST Info Sheets

On April 6, 2016, CRA released a number of GST/HST Info Sheets regarding the Public

Service Bodies’ (“PSB”) Rebate that may be claimed by charities and qualifying NPOs, as defined

under s. 149.1(l) of the ITA.36 As a general overview, charities and qualifying NPOs may be able

to recover a percentage of the Goods and Services Tax (“GST”) and/or the federal part of the

Harmonized Sale Tax (“HST”) paid or payable on its eligible purchases and expenses by claiming

a PSB rebate. In addition, a charity or qualifying NPO resident in a participating province may also

be able to claim a PSB rebate to recover a percentage of the provincial part of the HST paid or

payable on its eligible purchases and expenses.

Through various Info Sheets, CRA has provided guidance on how a number of scenarios

are to be addressed based upon a charity’s or qualifying NPO’s province of residence. For those

charities and qualifying NPOs that are resident in only one participating province, they should

use the applicable Info Sheet for Prince Edward Island, Ontario, Nova Scotia, Newfoundland and

Labrador, New Brunswick or British Columbia (GI 172 to 177 for charities and GI 180 to 185 for

qualifying NPOs). (Note: British Columbia was a participating province from July 1, 2010 until

35 Canada Revenue Agency Document #2014-0555511 (January 27, 2015). Also see Canada Revenue Agency Document #2016-0624851 (27 April, 2016.). 36 Canada Revenue Agency, “Canada Revenue Agency: What’s New, New GST/HST Info Sheets”, (Ottawa: 4 April 2016) online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/whtsnw/menu-eng.html>.

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March 31, 2013, meaning charities and qualifying NPOs in British Columbia may only apply for a

PSB rebate for claim periods within these dates. Similarly, Prince Edward Island only became a

participating province on April 1, 2013, meaning that the PSB rebate in Prince Edward Island is

only available for claims that end on or after this date.)

Alternatively, where a charity or qualifying NPO is resident in one or more non-

participating provinces and is not resident in a participating province, it should use the applicable

Info Sheet GI 178 or GI 186. However, where a charity or qualifying NPO is resident in two or

more provinces, at least one of which is a participating province, it should use the applicable Info

Sheet GI 179 or GI 187.37 These Info Sheets are helpful to this type of charity and qualifying NPO

applying for the PSB rebate by breaking down the process into the various steps necessary to

determine whether the PSB rebate applies and, if so, how to do its calculation. The Info Sheets

also contain a number of illustrative examples regarding calculation of the PSB rebate at the

different stages in the process.

2. New Guidance on Becoming a Qualified Donee

On April 23, 2016, CRA released new Guidance CG-025, Qualified Donee: Low-Cost

Housing Corporations for the Aged.38 The new Guidance CG-025 replaces an Income Tax Rulings

Directorate letter which was dated March 18, 2013.

According to Guidance CG-025, a low-cost housing corporation for the aged (“LCHCA”)

that seeks qualified donee status must be resident in Canada and meet the criteria of paragraph

149(1)(i) of the ITA. Paragraph 149(1)(i) states that an LCHCA is “a corporation that was

constituted exclusively for the purpose of providing low-cost housing accommodation for the

aged, no part of the income of which was payable to, or was otherwise available for the personal

benefit of, any proprietor, member or shareholder thereof.” CRA interprets this to mean an

organization that is constituted exclusively for the purpose of providing low-cost housing

accommodation for the aged and operated only for that purpose.39 CRA has also interpreted

“aged” to mean 55 years of age and over.

Guidance CG-025 also explains that such accommodation “includes comfortable but

modest rental accommodation, at rents that are low relative to rents generally available for

37 Ibid. 38 Canada Revenue Agency, Qualified Donee: Low-cost housing corporation for the aged, (Ottawa: 23 April 2016) (CG-025) online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/cg-025-eng.html>. 39 Ibid.

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similar accommodations in the same community (other than subsidized or non-profit

accommodations).” An LCHCA may also provide housing related services such as “meals, laundry

services, home furnishings, medical/nursing care, house-keeping services, resident aides’

services, and general assistance with matters of daily living.” As well, an LCHCA must not

distribute income, either directly or indirectly, to, or for the personal benefit of, any member or

shareholder. It also should not have the power to declare and pay dividends out of income.

Guidance CG-025 further sets out how a corporation can seek qualified donee status, as well as

the documentation that the Charities Directorate will expect of an LCHCA when applying.40

3. Updated Charities Audit Statistics for 2015-2016

On May 12, 2016, CRA updated its webpage titled The Audit Process for Charities.41 The

webpage generally describes the reasons that CRA undertakes audits for charities on a yearly

basis and notes that it audits roughly 1% of the registered charities in Canada each year.42

CRA’s compliance approach is described as an “education-first” approach, and the

outcomes that a charity can receive as a result of an audit include education letters, compliance

agreements, sanctions, and revocation of registration.43 In addition, the webpage lists the types

of recourse available to charities during and after the audit.

The updated webpage reflects the following audit outcomes in 2015-2016:

No Change 40

Education 444

Compliance Agreement 111

Voluntary Revocation 22

Penalty/suspensions 4

Notice of intent to Revoke issued 21

Annulment 59

Other (includes other audit activities such as pre-registration and Part V audits)

25

Total 726

40 Ibid. 41 Canada Revenue Agency, The audit process for charities, (Ottawa: 12 June 2016), online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/dtng/dt-prcss-eng.html>. 42 Ibid 43 Ibid

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4. Two New Information Webpages

On June 10, 2016, CRA introduced two new webpages. The first, Charities Listing Request

Form, allows the public to request on-line an electronic version of data that is available to the

public on the Charities Listings webpage.44 The information will be sent to the applicant by email

or mail. While this data will be interesting to researchers, it will also be valuable to organizations

and their advisors who wish to know how many and the kind of organizations in a particular

category or subcategory have been registered as a charity or revoked as a charity for failure to

file, following an audit, voluntarily or for other reasons.

The second page, Request for Registered Charity Information, allows the public to make a

request on-line for information about a charity that is publically available but not in the Charities

Listings e.g. application for charitable registration, governing documents, notification of

registration, letters regarding grounds for revocation, and financial statements.45 Authorized

agents of a charity can also request electronically information about the charity’s file that is not

available to the public. CRA will send the information by email, mail, or fax.

5. New Guidance on Requirements for Foreign Charities to become Qualified Donees

On June 16, 2016, CRA issued Guidance CG-023, Qualified donee: Foreign charities that

have received a gift from Her Majesty in right of Canada46, which outlines the new process

whereby foreign charities that have received a gift from Her Majesty in right of Canada can, upon

application with Canada Revenue Agency, become a qualified donee that has the ability to issue

official donation receipts to donors (for Canadian income tax purposes) and can also receive gifts

from Canadian registered charities. In this regard, if an applicant meets the criteria outlined in

Guidance CG- 023 and the ITA and has been registered as a qualified donee by CRA (in

consultation with the Ministry of Finance), the foreign charity may become a qualified donee for

a period of 24 months as of the date on which it received the gift from Her Majesty. It should be

44 Canada Revenue Agency, Charities listing request form, (Ottawa: 30 June 2016 ), online: < http://www.cra-arc.gc.ca/chrts-gvng/lstngs/rqstfrm-eng.html>. 45 Canada Revenue Agency, Request for registered charity information, (Ottawa: 8 June 2016), online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/cntct/rqstfrm-eng.html>. 46 Canada Revenue Agency, Qualified Donee: Foreign charities that have received a gift from Her Majesty in right of Canada, (Ottawa: 16 June 2016) (CG-023), online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/cg-023-eng.html>.

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noted that the Guidance CG- 023 applies as of June 23, 2015 in accordance with the 2012 Federal

Budget.

To apply to become a qualified donee, an authorized representative or official of the

foreign charity that has received a gift from Her Majesty must send a letter to CRA indicating that

the foreign charity is applying for registration as a qualified donee and also explain how its

activities meet the applicable criteria listed in CG-023 and the ITA. Guidance CG- 023 says that

application must also include the following:

A copy of the charity’s governing document(s);

A description of all of the charity’s activities;

A description of, and the scope of, the specific activities that meet the requirements for

relief activities in response to a disaster, providing urgent humanitarian aid, or activities

in the national interest of Canada;

A list providing the full name of all the current officials (board members, directors,

trustees, officers, and like officials), their contact information, and their position within

the charity;

A copy of the letter or certificate granting charitable status to the charity from the

relevant authority in the country in which the charity is established;

A copy of the charity’s most recent financial statements;

A copy of correspondence, agreements, or other documents related to the gift from Her

Majesty in right of Canada; and

Proof that the gift was made (for example, a copy of the cashed cheque with the deposit

stamp, or the bank statement showing the deposit).47

Guidance CG- 023 states, in accordance with the ITA, that “[t]o be eligible for registration as a

qualified donee, a foreign charity must:

Be established or created outside Canada and not be resident in Canada;

Have exclusively charitable purposes and activities in accordance with applicable common

law;

Ensure that its income is not payable or otherwise available for the personal benefit of

any owner, member, shareholder, trustee, or settlor of the organization;

Be the recipient of a gift from Her Majesty in right of Canada; and

Be undertaking at least one of the following at the time of the application:

47 Ibid.

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o Relief activities in response to a disaster;

o Urgent humanitarian aid;

o Activities in the national interest of Canada.”48

6. Length of Retention for Church Offering Envelopes Changes

On July 22, 2016, CRA published a statement outlining their position on church offering

envelopes49. Effective as of 2016, church offering envelopes are now required to be kept for a

period of six years from the end of the tax year to which the envelope relates. The new six year

requirement also applies to church offering envelopes for the 2015 tax year. CRA’s previous

position was that church offering envelopes must be kept for two years after the year in which

the envelope relates. However, CRA states that the above change was made in order to reflect

consistency with the provisions of the ITA which relate to retention of source documents.

7. New Infographic to Assist Charities Calculate When Their T3010 is Due Each Year

A charity is required to file an annual Registered Charity Information Return T3010 within

six months of its fiscal year end. Late filing of the T3010 can result in the loss of charitable status.

To assist charities in determining their filing deadline, CRA has published an infographic on its

website50 (see below). The infographic outlines the filing deadline for T3010 based on the fiscal

year end of an organization.

48 Ibid. 49 Canada Revenue Agency, Books and records, (Ottawa: 21 July 2016), online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/bks-eng.html>. 50 Canada Revenue Agency, T3010 charity return – Filing information, (Ottawa: 20 July 2016), online: < http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/rtrn/t3010flng-eng.html>.

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CRA normally mails the T3010 return and related documents to each charity in the month

following the end of the charity’s fiscal period, however if a charity does not receive the package

of documents in the mail, charities may contact CRA by phone in order to request the same.

E. RECENT TAX DECISIONS, RULINGS, AND INTERPRETATIONS INVOLVING CHARITIES

1. FCA Revokes Charitable Status Based on Failure to Maintain Proper Books & Records

On February 10, 2016, the Federal Court of Appeal (“FCA”) delivered a summary decision

in Al Uloom Al Islamiyyah Ontario v The Queen, in which the FCA confirmed a decision of the

Minister of National Revenue, acting through CRA, to issue a Notice of Intent to Revoke (“NIR”)

the charitable status of Jaamiah Al Uloom Al Islamiyyah Ontario (“Charity”).

The NIR resulted from an audit by CRA of the Charity for its 2007 and 2008 taxation years.

The NIR was issued on the basis that the Charity failed to maintain adequate books and records

in accordance with the ITA issued receipts for gifts otherwise than in accordance with the ITA and

the Income Tax Regulations51 (“ ITA Regulations”), and failed to file information returns when

required. CRA Appeals Branch confirmed the decision by the Charities Directorate to issue the

NIR.

In its appeal to the FCA, the Charity did not deny that it had been non-compliant with the

requirements of the ITA and the ITA Regulations. Rather, the Charity asserted that it understood

51 Income Tax Regulations, CRC, c 945.

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why its actions were not in compliance, that they would not occur again, and that it had already

hired experienced accountants to address the deficiencies. The Charity asserted that the sanction

of revocation was too extreme under the circumstances and failed to address the remedial steps

that the Charity had taken.

In its analysis, the FCA stated that the privilege of issuing charitable donation receipts is

one that comes with important responsibilities, one of which is to maintain proper books and

records. The FCA went on to say that the absence of proper books and records prevented the

Minister of National Revenue from fulfilling her obligation to verify the accuracy and validity of

the charitable donation receipts that the Charity has issued. As a result, the failure by the Charity

to maintain adequate books and records was considered by the FCA to be serious and justified

the Minister of National Revenue’s conclusion that the penalty of revocation was warranted.

This decision of the FCA underscores the importance of a charity maintaining proper

books and records in accordance with CRA requirements under the ITA and ITA Regulations. It is

also important in demonstrating that even if remedial actions are taken, charitable status may

still be revoked if CRA is of the opinion that the incidents of non-compliance are either “serious”

or “aggravated” under the circumstances.

2. FCA Dismisses Revocation Appeal

On March 24, 2016, the FCA released its decision to dismiss an appeal of the proposed

revocation (“Revocation Proposal”) of the Minister of National Revenue (“Minister”) in the

matter of Opportunities for the Disabled Foundation v Minister of National Revenue.

In three audits (taxation years 1995 to 1997, 1998 and 2004), CRA raised concerns about

the Opportunities for the Disabled Foundation’s (“Appellant”) “books and records, failures to

devote all of its resources to charitable activities, incomplete/inaccurate information returns and

gifts made to non-qualified donees”. As a result of these concerns, in 2006, the Appellant and

CRA subsequently entered into an agreement that addressed these concerns and mandated

corrective actions by the Appellant (“Compliance Agreement”). The subsequent Revocation

Proposal resulted from an audit for the 2010 taxation year, which identified concerns similar to

those of the previous audits and in the Compliance Agreement. CRA then sent the Appellant the

Revocation Proposal, stating that their concerns had not been addressed and that it proposed to

revoke the Appellant’s charitable status.

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Although there were various jurisdictional issues raised by the Appellant, Justice Ryer

noted that “[t]he overarching issue in this appeal is whether the Minister erred in issuing the

Revocation Proposal”. Accordingly, it was incumbent upon the Appellant to demonstrate that the

Minister acted unreasonably in identifying the specific grounds for issuing the Revocation

Proposal. For each of the grounds, however, the FCA found the Appellant did not offer enough

evidence to discharge its onus and that each ground, on its own, provided a sufficient basis to

dismiss the appeal. The FCA therefore found that the Minister had acted reasonably in issuing

the Revocation Proposal.

Interestingly, one of the grounds for revocation relied upon by the Minister was that the

T3010 information return filed by the Appellant was inaccurate or incomplete and therefore the

Appellant had failed to file an information return as required by the ITA52 .

While the Appellant argued that any errors on its T3010 were minor, the FCA found that

the record demonstrated the inaccuracies were beyond minor and that simply filing an

information return by the required deadline is not sufficient to comply with the requirement in

the Act that the return meets the requirements of the “Act and applicable regulations”.

The decision provides a reminder for charities of the importance of ensuring compliance

with the ITA, and recognizing that a compliance agreement is also a binding obligation of the

charity, which can lead to revocation of charitable status if not followed.

3. CRA View on FMV of Receipts for Gifts of Property to a Municipality

On May 18, 2016, CRA released technical interpretation 2015-059392153 in response to

an email request for comments on “whether an official receipt for a gift of property to a

municipality can be made out for an amount other than the fair market value of the gifted

property.”54 For the purposes of their response, CRA made the following assumptions about the

gifting arrangement: “the donor is an individual, the gifted property is capital property, and the

municipality is a qualified donee.”55

CRA pointed out that the provision that allows a taxpayer to claim a tax credit is found in

section 118.1 of the ITA if the eligible amount is made to a qualified donee, and is supported by

52 Supra, note 2. 53 Canada Revenue Agency, “Donation of property and amount of tax receipt”, document # 2015-0593921, (Ottawa: 18 May 2016). 54 Ibid. 55 Ibid.

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an official receipt. According to subsection 118.1(2) of the ITA, this means that the official receipt

must be in the prescribed form which is found in section 3501 of the ITA Regulations.56 For a gift

which is a “gift of property other than cash,” the official receipt “must contain the fair market

value of the property at the time that the gift was made.”57 If the qualified donee cannot

reasonably determine the fair market value (“FMV”) at the time the gift is made, then the official

receipt for the donation may not be issued.

CRA also pointed out that generally, when subsections 118.1 (5.4) and (6) are considered

together, “if an individual donates capital property to a qualified donee, the individual may

designate an amount between the adjusted cost base and the fair market value of the donated

property to be treated both as the proceeds of disposition for the purpose of calculating the

individual’s capital gain and the fair market value of the donated property for the purpose of

determining the eligible amount of the gift in calculating the donation tax credit.”58 In addition,

CRA noted that if an individual designates an amount, that amount may not exceed the FMV of

the property. Likewise, the designated amount cannot be less than whichever of the following

three is greater: the amount of advantage, the adjusted cost base of the property, or (for

depreciable properties) the undepreciated capital cost. In any case, CRA notes that, for the

purpose of determining the eligible gift amount, a designation under subsection 118.1(6) still

requires that the FMV of the property at the time the gift was made is included on the official

receipt.

CRA also noted that there may be situations in which the deeming provision of subsection

248(35) may be relevant. The effect of this deeming provision when applicable is that, for the

purpose of the eligible amount of the gift, “the fair market value of the gifted property is deemed

to be the lesser of its fair market value otherwise determined and its cost, or in the case of capital

property, its adjusted cost base, or in the case of a life insurance policy in respect of which the

taxpayer is a policyholder, its adjusted cost basis, of the property immediately before the gift is

made.”59

56 Supra note 52 at 3501. 57 Ibid. 58 Supra note 54. 59 Ibid.

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4. Ontario Court Rules that CRA Does Not Owe Duty of Care for Disallowed Tax Shelters

On June 20, 2016, the Ontario Superior Court of Justice (“the Court”) allowed the Crown’s

motion to strike the plaintiff’s statement of claim for failing to disclose a reasonable cause of

action in the case of Deluca v The Queen. The plaintiff participated in a charitable tax shelter,

which involved the plaintiff taking a loan from a barter organization for which he received

“TradeBux” and then making donations to Liberty Wellness Initiate Foundation (“LWIF”), a

registered charity at the time. The plaintiff received “very substantial tax refunds” for donations

he made under the scheme in 2007, 2008, and 2009. In 2010, LWIF’s charitable registration was

revoked. While the decision does not specify a time frame, at some point the plaintiff was issued

notices of reassessment for his 2007 and 2008 taxation years. Although the plaintiff is disputing

these reassessments in the Tax Court of Canada, he also brought a claim against the Crown and

two individual CRA employees, asserting that they “failed to take prompt actions to warn the

public” about problems it was aware of with the tax shelter “and the risks in dealing with them

until April 2010.” This, the plaintiff alleged, constituted negligence on the part of CRA and was “a

breach of a public and private law duty of care” that resulted in the denial of the Plaintiff’s

charitable donations and the resulting credits for their respective tax years.

One of the issues central to the decision was whether CRA owed a duty of care to the

Plaintiff, since CRA was aware of problems with the tax shelter and LWIF failed to take steps to

warn the public. In its analysis, the Court rejected the claim that there was a duty of care for a

number of reasons. First, the Court held that the “loss of value of a tax deduction stemming from

a questioned (and questionable) in-kind donation” was not a “foreseeable consequence of failing

to police the registration of charitable organizations.” Second, the Court held that there was no

statutory duty under the ITA “from which the necessary degree of proximity might be inferred”

and would be required to establish the duty of care. In commenting on this point the Court clearly

stated that the purpose of issuing charitable registrations or tax shelter identification number is

“to protect the tax base administered by CRA” and that the “ITA cannot be construed to impose

a duty on the Minister or his or her officials to administer the registration and supervision of

registered charities in order to protect taxpayers from the risk of dealing with them.” As a result,

the Court found that the relationship between the plaintiff and CRA “lacks the elements of

foreseeability of harm and proximity necessary to sustain a claimed duty of care” and the Court

therefore struck the Plaintiff’s claim for this, and a number of other reasons including public

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policy. As the Court summarized “There is no duty to warn taxpayers away from participating in

tax shelter schemes that prove unsuccessful”. It is not yet known if the plaintiff plans to appeal,

but this decision will likely have a strong persuasive effect in similar types of actions.

5. FCA Holds That Prevention of Poverty is Not a Charitable Purpose

On June 24, 2016, the FCA released its decision in the Credit Counselling Services of

Atlantic Canada Inc. v Minister of National Revenue case. The issue in this decision was whether

the activities carried on by Credit Counselling Services of Atlantic Canada Inc. (“Appellant”)

“related to the ‘prevention of poverty’” could be classified as “charitable activities for the

purposes of the ITA”. Ultimately, the FCA found that the prevention of poverty object and related

activities carried on by the Appellant were not charitable at law and dismissed its appeal,

upholding the decision of the Minister to confirm the annulment of the Appellant’s charitable

registration. The FCA also confirmed that the Notice of Annulment of Registration (“Notice of

Annulment”) issued by the Minister would be assessed by the same standards of review as a

revocation of charitable registration – on a standard of correctness.

On April 21, 2015, the Minister confirmed the issuance of the Notice of Annulment, which

was originally issued in July 2013. This Notice of Annulment resulted from Canada Revenue

Agency’s finding that the purposes and activities being carried on by the Appellant were not

wholly charitable because “prevention of poverty was not a recognized charitable purpose”. Prior

to receiving the Notice of Annulment, the Appellant had been carrying on business and providing

services as a registered charity since their original establishment as a not-for-profit corporation

in 1993 under the Canada Corporations Act,60 and subsequent registration as a charity in October

1993 under the ITA. Their stated objects were as follows:

The prevention of poverty;

To provide professional financial and debt counselling to the community

To develop and promote educational program for the public on family money

management, budgeting and use of credit

To conduct and fund research on credit-related concerns; and

To collect and disseminate data and information on consumer credit issues to the public

60 Canada Corporations Act, RSC 1970, c- 32.

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In confirming the issuance of the Notice of Annulment to the Appellant, the Minister

largely focused on the object relating to the prevention of poverty. The Minister stated that

although the Appellant may “contribute to the charitable purpose of relieving poverty … the

services were not limited to individuals who were poor … and were more properly classified as

relating to the prevention of poverty rather than the relief of poverty”.

In terms of the appropriate standard of review to be applied in a case dealing with an

annulment, the FCA followed the standard of review articulated in Prescient Foundation v

Minister of National Revenue, i.e. that “extricable questions of law … are to be determined on a

standard of correctness” and “questions of fact or of mixed fact and law … are to be determined

on a standard of reasonableness.” The FCA found “no reason why different standards of review

would be applicable to a decision of the Minister to annul a registration” and noted that the

determination of “[w]hether activities related to the prevention of poverty are charitable

activities for the purposes of the Act is a question of law” subject to review on the standard of

correctness.

With regards to the analysis of relief of poverty vs. prevention of poverty, the FCA began

by outlining the definition of a charitable organization and stating that “at any particular time …

all the resources … are (to be) devoted to charitable activities carried on by the organization

itself”. In deciding what a charitable purpose is, the FCA outlined the following standard heads

of charity:

The relief of poverty;

The advancement of education;

The advancement of religion; and

Certain other purposes beneficial to the community.

In its reasons the FCA indicated that the Appellant provided services to “consumers who

are in serious financial difficulties but who are employed and have assets.” The FCA went on to

say that, in order to “satisfy the requirement that a purpose is for the relief of poverty, the person

receiving the assistance must be a person who is then in poverty,” although they noted the term

poverty is a “relative term.” As such, it would seem possible for charities to provide services to

individuals who are in serious financial trouble but not insolvent and, in so doing, relieve poverty.

However, because the Appellant in this case was providing services to individuals who were

employed and had assets, the FCA found that the consumers were not in poverty at the time of

receiving the assistance and, therefore, the services provided by the Appellant could not be

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classified as relief of poverty. Rather, according to the FCA, the services were better described as

being related to the prevention of poverty.

While the FCA did make reference to the fact that the prevention of poverty is a

recognized charitable purpose in the United Kingdom in response to the Appellant’s submissions,

it went on to confirm that, absent “an act of Parliament to add prevention of poverty as a

charitable purpose”, it was not possible for the FCA to take such a step on its own. Accordingly,

the FCA held that “the prevention of poverty is not a charitable purpose” and the Appellant’s

appeal could not succeed.

The Appellant also argued that the services they provided to their consumers could also

fall under the fourth head of charity - purposes beneficial to the community. Referencing the

Supreme Court of Canada decision in Vancouver Society of Immigrant and Visible Minority

Women v Minister of National Revenue, the FCA indicated that, in order for a charitable purpose

to fall under this fourth heading, “more is required than simple public benefit,” and that the

purposes need to be beneficial “in a way the law regards as charitable.”

Further guidance from case law suggests that courts may consider, amongst other things,

trends in objects known to be charitable and certain accepted anomalies. The FCA also added

that it “must also be for the benefit of the community or of an appreciably important class of the

community, rather than for private advantage”. As such, the FCA stated that the Appellant “had

not established that its services … would benefit the community in a way that is considered

charitable.” In the view of the FCA, this was a private benefit to individuals who secured the

appellant’s services, as opposed to a public benefit that the law regards as charitable.

Although this decision is not surprising, it does underscore the fact that if there is going

to be substantive progress made in expanding the parameters of what is considered to be

charitable, it will have to be at the initiative of Parliament in amending the ITA as opposed to the

courts.

F. CORPORATE LAW UPDATE

1. Corporate Canada Postings Re: Canada Not-for-profit Act

On January 16, 2016, Corporations Canada posted a notice titled Public disclosure of

corporate information on their website which indicates that information about federal

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corporations is public information.61 This includes a corporation’s registered office address and

the names and addresses of its directors. The notice explains that public disclosure applies even

after a corporation has been dissolved.62 For those directors who do not wish to have their

residential addresses posted on Corporations Canada’s website, they may use another address

(which is not a P.O. box) where legal documents must be accepted by the director or someone

on the director’s behalf.

On January 15, 2016, Corporations Canada posted another notice titled Extending the

time for calling an annual meeting of members,63 which explains its policy on how corporations

under the CNCA64 may apply to extend the time for calling an annual meeting of members. Under

the CNCA, a corporation has to call an annual general meeting of the members (“AGM”) within

18 months of incorporation and, thereafter, an AGM must be called no later than 15 months after

the previous AGM and no later than 6 months after the corporation’s preceding financial year-

end.65 Corporations Canada recognizes that there may be circumstances where it would be

detrimental to a corporation to call an AGM within the required time. These corporations may

apply to Corporations Canada extending the time for calling the AGM, as long as members will

not be prejudiced. However, Corporations Canada cannot exempt a corporation from calling an

AGM altogether.66 Usually, an extension is granted for one year, but there may be situations

where a multi-year exemption may be permitted. The policy explains when such an application

may be made, what information is to be contained in the application and the factors considered

by Corporations Canada in granting the extension.

2. Technical Amendments to the Canada Not-for-profit Corporations Act

On September 28, 2016, the Minister of Innovation, Science and Economic Development

tabled Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives

61 Canada, Innovation, Science and Economic Development Canada, Corporations Canada, Public disclosure of corporate information, (Ottawa: 16 January 2016), online: < https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06724.html>. 62 Ibid. 63 Canada, Innovation, Science and Economic Development Canada, Corporations Canada, Extending the time for calling an annual meeting of members, (Ottawa: 15 January 2016), online: < https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06828.html>. 64 Supra note 3. 65 Ibid at Part 10 at s 160. 66 Ibid.

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Act, the Canada Not-for-profits Corporations Act and the Competition Act (“Bill C-25”). 67 In

particular, Bill C-25 proposes to, amongst other amendments:

reform some aspects of the process for electing directors of public Canada Business

Corporations Act (“CBCA”)68 corporations;

replace paper-based communication between corporations and their shareholders with

electronic communication to provide notice of meetings to shareholders and online

access to relevant documents69;

require public CBCA corporations to place before the shareholders, at every annual

meeting, information respecting diversity among directors and the members of senior

management; and

amend the Competition Act70 to expand the concept of affiliation to a broader range of

business organizations.

Notwithstanding the breadth of the changes being introduced for public CBCA

corporations, Bill -25 includes only minor technical amendments for CNCA corporations. These

amendments, amongst others, include a definition of a person who has become “incapable” in

subsection 2(1) of the CNCA, and the addition of section 277.1 of the CNCA requiring the Director

to publish a notice of any decision made by the Director in respect of applications made under

various sections of the CNCA, including amongst others, when a corporation is deemed non-

soliciting (ss. 2(6), when a corporation is permitted to delay calling of annual meetings (ss. 160(2),

and when the Director relieves the corporation from certain parts of the CNCA (s.173).

3. Update on Ontario Not-for-Profit Corporations Act

Since the announcement was made by the Ministry of Government & Consumer Services

on September 17, 2015, there have been no subsequent updates concerning when the ONCA will

be proclaimed.71 For reference purposes, the Ministry of Government & Consumer Services’

(“Ministry”) announcement on September 17, 2015 indicated that the ONCA would not come

67 Canada Bill C-25, An Act to amend the Canada Business Corporations At, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act, 1st Sess, 42nd Parl, 2005, (first reading 29 September 2016). 68 Canada Business Corporations Act, RSC 1985, c C-44. 69 Supra note 3. 70 Competition Act, RSC 1985, c C-34. 71 Supra note 4.

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into effective for at least another 2 years72. Specifically, the Ministry’s announced that the ONCA

will not come into force until two things happen, “(a) the Legislative Assembly passes a number

of technical amendments to the legislation and related acts and (b) technology is upgraded to

support these changes and improve service delivery”.73 The Ministry further indicated that the

“government is fully committed to bringing ONCA into force at the earliest opportunity and will

provide the sector with at least 24 months’ notice before proclamation.”74 Once the ONCA is

proclaimed, existing Ontario not-for-profit corporations will have three years to transition under

the ONCA.

Considering that a new bill to replace Bill 8575 (which died on Order Paper in May 2014

when the provincial election was called) has not been introduced at this time and that it would

be difficult to expect the 24 months’ notice would start running before the amendments having

been passed, one would anticipate that the ONCA would not be proclaimed until perhaps late

2018 or into 2019, eight to nine years after the enactment of the ONCA. Factoring in the three

year transition period, it would be more than a decade before the ONCA would be fully

implemented by Ontario not-for-profit corporations. By then, one wonders whether the rules in

the ONCA made in light of the corporate landscape in 2010 would be out-of-date and thereby

requiring further changes to meet their needs.

By way of background, before the demise of Bill 85, the government had indicated that

the ONCA would not be proclaimed until at least 6 months after the enactment of Bill 85 in order

to allow corporations to prepare for the transition. The government then indicated that the ONCA

was not expected to come into force before 2016. With the Ontario Liberal Party, which originally

introduced the ONCA, winning the election in June 2014, many in the sector had hoped that there

might be an earlier proclamation date if Bill 85 was to be reintroduced into the Legislature shortly

after the election. The sector was further encouraged Premier Wynne’s September 25, 2014

“Mandate Letter” to Minister Orazietti, indicating that the implementation of the ONCA was a

priority.

With the implementation date being at least 2 years from now, many not-for-profit

corporations continue to be left in corporate limbo, having to make the difficult decision whether

72 Ontario Ministry of Government and Consumer Services, Not-for-Profit Corporations (ONCA) - Frequently Asked Questions, (Toronto: Ontario Ministry of Government and Consumer Services, 11 December 2015), online: <http://www.sse.gov.on.ca/mcs/en/Pages/onca3.aspx>. 73 Ibid. 74 Ibid. 75 Ontario Bill 85, Companies Statute Law Amendment Act, 2014, 2nd Sess, 40th Leg, Ontario, 2013.

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to update their objects and bylaws as required to further their mission, or to keep waiting for the

proclamation of the ONCA. In light of the announcement by the Ministry in September 2015,

corporations wanting to amend their by-laws or update their corporate objects should proceed

to do so under the Ontario Corporations Act (“OCA”), since there is no way of telling with

certainty when the ONCA will be proclaimed. Having the ONCA proclaimed as early as possible is

certainly a priority for the sector. It is hoped that the government will move forward with tabling

a new bill to amend the ONCA and then proclaim the ONCA as soon as possible. If upgrading

Ministry technology to support electronic filing of documents under the ONCA is an issue, the

sector would be better served by proclaiming the ONCA sooner rather than later and continuing

to use paper filings after proclamation, followed by gradually phasing in the implementation of

electronic filing once the system is ready.

4. Unfair Proxy Form for Members’ Meeting Revised by Ontario Court

On August 4, 2016, the Ontario Superior Court of Justice (“Court”) released it decision

with respect to the Jacobs v Ontario Medical Association case. This case is an interesting reminder

to not-for-profit corporations of the Court’s willingness to intervene on procedural or substantive

issues involving members’ meetings to enable governance process to proceed in a proper and

timely fashion. The case also shows the importance that proxy forms must be carefully drafted

in a clear, balanced and fair manner, so that it is helpful to members and proxyholders in their

consideration of how to cast their votes at the meeting. The Court is also willing to intervene if a

proxy would likely compromise the fair conduct of a meeting.

This case involved a governance dispute between the Ontario Medical Association

(“OMA”) and some of its members. The matters in dispute were in relation to the conduct of a

general members’ meeting of approximately 42,000 OMA members to ratify or reject a Physician

Services Agreement (“PSA”) with the Ministry of Health and Long Term Care. The PSA sets out

physicians’ fees to be paid by the Ontario Government. The meeting was schedule to be held on

August 14, 2016.

The Court disagreed with the Applicant members’ submission that notice of the members’

meeting contravened OMA’ by-laws. The Court also refused the Applicant members’ request to

obtain a membership list that would include information about members’ phone numbers

including cellular phone numbers because the OMA has no obligation to provide such

information. A membership list containing appropriate membership information (names,

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addresses and email addresses) had already been provided by the OMA. The Court also refused

to appoint a neutral chair to preside over the meeting because a strong case for court

intervention had not been made. However, the Court did order that the proxy form circulated

for the meeting be revised because it was “unhelpful, unclear, unbalanced, and unfair” and “is a

catalyst for a governance meltdown at the upcoming general meeting.” The proxy would likely

compromise the fair conduct of the meeting.

The proxy was problematic because it contained one restriction that would compel the

proxyholder to vote for or against one of three resolutions (being the resolution to ratify the PSA)

that members were asked to vote on at the meeting, and the proxy form contained a highlighted

recommendation to vote “For” this resolution. There was no restriction or recommendation for

the other two resolutions. The Court found that it was “unfair and confusing if not somewhat

sneaky … to make no recommendation about the other matters and to leave it to the member to

make instructions about these matters” in light of the following facts:

The proxyholder has been empowered by the proxy “to vote in accordance with the

following direction (or if no directions have been given, as the proxyholder sees fit)”;

The notes to the proxy indicate that: “if such a direction is not made in respect of any

matter and you have not appointed a person other than the persons whose names are

printed herein, this proxy will be voted as recommended by OMA Management”; and

“this proxy confers discretionary authority in respect of … amendments to matters

identified in the Notice of Meeting or other matters that may properly come before the

meeting.”

As such, the Court held that it would have been “far fairer” for the proxy to either (a)

provide no instructions and no recommendations for the three resolutions to be debated at the

meeting; or (b) to provide instructions but no recommendations for the three resolutions to be

debated at the meeting.

The Court therefore ordered the proxy be revised by deleting the highlighted

recommendation on how to vote on the PSA resolution, providing “for” and “against” options for

all three resolutions, adding two directions to make it clear that a vote on one resolution does

not preclude a vote on any of the other resolutions; and revising the language so that the

proxyholders “are voting on matters of policy and not purporting to make findings of fact,

findings of law, or findings of mixed fact and law, which are matters better addressed by a court.”

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The Court also held that it has jurisdiction to vitiate a proxy (that does not allow a meeting

to be fairly conducted) and ordered it be revised pursuant to section 297 the Ontario

Corporations Act, which empowers the court to order a members’ meeting and/or section 332 of

the Act which provides a process by which members can force a corporation and/or its directors

or officers to comply with their obligations under the Act.

The Court further explained that “the proxy system is a fundamental instrument of

shareholder or member participation in the affairs of a corporation, be it a business corporation

a not-for-profit organization, a non-governmental organization, or an association like the OMA

that plays an extremely important role in civil society.” The Court stated that “the proxy system

is particularly important in the immediate case where the exercise of the members...will affect

the entire population of Ontario.”

The Court also acknowledged that its jurisdiction to intervene to supervise the

governance of an association is governed by the Corporations Act. However, the jurisdiction is to

be exercised cautiously and that courts are highly reluctant to intervene unless a strong case for

intervention is demonstrated. Quoting from an earlier case, the Court stated that the “court’s

role is to decide issues of a procedural or substantive nature which need to be determined to

enable the process to proceed in a proper and timely fashion, but otherwise to remain apart from

the battle.”

G. PROVINCIAL LEGISLATION UPDATE

1. Ontario Legislation on Forfeited Property to Come into Force in December 2016

The Ontario government has passed new legislation to address situations wherein

corporations, including charities and not-for-profits, dissolve without having properly disposed

of all of their assets. On December 10, 2015, Bill 144, the Budget Measures Act, 201576 (“Bill

144”), received Royal Assent and enacted five new statutes, including the Forfeited Corporate

Property Act, 2015 (“FCPA”)77 and the Escheats Act, 2015 (“EA”).78

The FCPA and EA both come into force on December 10, 2016, and will address how

forfeited property is dealt with in Ontario, along with implementing changes to the role of the

Public Guardian and Trustee (“PGT”) in dealing with forfeited property. The FCPA will give the

76 Budget Measures Act, 2015, SO 2015, c 38 - Bill 144. 77 Forfeited Corporate Property Act, 2015, SO 2015, c 38, Schedule 7. 78 Escheats Act, 2015, SO 2015, c 38, Schedule 4.

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Minister of Economic Development, Employment and Infrastructure sole jurisdiction over

forfeited corporate real property.79 The PGT under the EA, on the other hand, will retain

discretionary authority to take possession, and dispose of, forfeited corporate personal property,

as well as the property of heirless deceased persons.80 In addition, the new legislation will

introduce changes in the processes by which claimants will be able to recover forfeited corporate

property.81 As the FCPA and the EA may have application to incorporated charities and not-for-

profits in Ontario facing either intentional or unintentional dissolution of their corporate status,

including involuntary dissolution under the CNCA for failure to continue, it will be important for

these corporations to consult with their legal counsel to determine the impact of these new acts.

2. Quebec Ends Duplicate Registration Process for Registered Charities

The March 17, 2016, Québec Budget provided good news for charities that receive

donations from Québec residents and are registered as charities by CRA under the ITA.82

Previously, the Province of Quebec required that charitable registration also be obtained in

Quebec if donations were received from Québec residents. Otherwise, the tax receipts given by

the charity for donations from Québec residents could be denied by Revenu Québec, the

provincial tax authority.

Recognizing that Québec was the only province to require this double registration and in

order to “ensure equivalent treatment”, the 2016 budget provides that, effective January 1,

2016, charities that have been registered by CRA under the ITA will no longer be required to file

a separate application for charitable registration in Québec, but will be deemed to have also been

registered in Québec.83 Donations made prior to January 1, 2016, to a charity registered by CRA

will also be deemed to have been made to a charity in Québec.84 Notwithstanding this

simplification of the registration process, Québec has retained its power to “refuse, cancel or

revoke a registration or to modify a designation.”85

79 Supra note 80. 80 Supra note 81. 81 Supra note 79. 82 Finances Québec, The Québec Economic Plan: Additional Information 2016-2017, (Québec: Finances Québec, 17 March 2016), online: <http://www.budget.finances.gouv.qc.ca/budget/2016-2017/en/documents/AdditionalInfo.pdf>. 83 Ibid at 106. 84 Ibid. 85 Ibid at 106.

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3. Amendments to the Ontario Lobbyists Registration Act Come into Effect

On July 1, 2016, amendments to the Ontario Lobbyists Registration Act, 1998 (“Lobbyist

Registration Act”) 86 took effect, pursuant to the Public Sector and MPP Transparency and

Accountability Act, 201487, which received Royal Assent on December 11, 2014. These

amendments also have application to charities and not-for-profits. In the Lobbyist Registration

Act, lobbying is defined as a paid individual communicating with a public office holder in order to

influence a decision with regards to legislation, policy, programs, decisions of the Executive

Council, or financial benefits from the Crown. A “consultant lobbyist” is an individual who, for

payment, undertakes to lobby on behalf of a client, whereas “In-house lobbyist” is redefined in

the Lobbyist Registration Act to include any employee who spends at least 50 hours a year

lobbying as part of their employment or whose job involves lobbying and whose time spent

lobbying in addition to the other employees hours lobbing equal at least 50 hours. The new

threshold for in-house lobbyist is significantly lower than the previous threshold, and

corporations who employ someone who meets the threshold must register and file prescribed

returns. This replaces the previous regime that required registration only when individual

lobbying activities comprised a “significant” part of employee duties, defined as 20% of overall

work hours. Additionally, registration itself will now be renewed every 6 months, as opposed to

annually.

A section on Investigations and Penalties is now added to the Lobbyist Registration Act

granting the Integrity Commissioner of Ontario investigative powers for matters of suspected

non-compliance, penalties for which include: prohibition from lobbying for up to two years and

public statements about the violation. Punishment for committing an offence under the Act has

changed from a maximum fine of $25,000 for each offence to a fine of not more than $25,000

for the first offence and not more than $100,000 for subsequent offences. A section on prohibited

activities has also been added, which includes knowingly placing public office holders in a position

of conflict of interest, which is defined in the Lobbyist Registration Act, and receiving payment

contingent on the degree of success in lobbying.

The timelines and contents of filing a return under the Lobbyist Registration Act have also

changed for lobbyists. Whereas in-house lobbyists working for a person or partnerships used to

86 Lobbyists Registration Act, 1998, SO 1998, c 27, Schedule. 87 Public Sector and MPP Accountability and Transparency Act, 2014, SO 2014, c 13.

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be required to file returns themselves, the duty is now placed on the senior officer of the in-

house lobbyist’s employer. The timeline for filing returns has also changed, and now must be

filed within two months of starting as an in-house lobbyist and within 30 days before or after the

six-month period after the last return. Additionally, the list of information required for the return

has also changed for both consultant and in-house lobbyists.

4. Proposed Ontario EHT Regulation Will Affect Registered Charities

On July 18, 2016, the Ministry of Finance released a notice of intention to bring forward

a regulation under the Employer Health Tax Act regarding special rules for registered charities88.

The notice indicates that the regulation being considered would “provide additional certainty for

registered charities by codifying a preferential administrative practice.” While the notice provides

little detail of what will be contained in the regulation, the notice does indicate that the

regulation would:

provide one exemption for each qualifying location of a registered charity;

clarify that registered charities are exempt from the association rules for claiming the

exemption; and

waive the requirement for registered charities to enter into and file an Associated

Employers Exemption Allocation Agreement.

The notice further indicates that the regulation would “end the preferential

administrative practices that allow multiple exemptions at a single qualifying location.”89 As well,

registered charities would be required to file an annual return for each of its qualifying locations,

and in some situations may be required to make monthly instalments of EHT, although this would

not affect the amount of tax that a registered charity would pay. The regulation, if it comes into

force would be effective as of January 1, 2017

88 Ontario’s Regulatory Registry, “Notice of intention to bring forward an Ontario Regulation under the Employer Health Tax Act Regarding Special Rules for Registered Charities” (Ottawa: Ontario Ministry of Finance, (18 July 2016), online: <http://www.ontariocanada.com/registry/view.do?language=en&postingId=22242>. 89 Ibid.

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H. OTHER CASE LAW OF INTEREST

1. Discriminatory Will Provision Ruled Invalid

The Ontario’s Superior Court of Justice (“Court”) has reaffirmed the common law

prohibition against enforcing testamentary trusts that are contrary to public policy by striking

down a fund that was discriminatory on the basis of race, gender and sexual orientation. In its

February 16, 2016 decision in Royal Trust Corporation of Canada v The University of Western, the

estate trustee for the testator, Dr. Victor Hugh Priebe (“Dr. Priebe”), applied for direction from

the Court concerning certain provisions contained in the will providing for the establishment of

a fund for “awards and bursaries” which were to be restricted to certain male and female

candidates on the basis of race, gender and sexual orientation. The estate trustee applied for

direction from the court concerning these provisions pursuant to section 60 of the Trustee Act,

section 10 of the Charities Accounting Act90 and Rules 14.05(3)(a), (b) and (d) of the Rules of Civil

Procedure.91

Paragraph 3(d)(ii)(E) of Dr. Priebe’s will provided for a fund for “awards or bursaries” to

be awarded to “Caucasian (white) male, single, heterosexual students in scientific studies…”.

Further requirements stated that candidates must “not be afraid of manual labour” or “anyone

who plays intercollegiate sports”. A separate award, to be named the Ellen O’Donnel Priebe

Memorial Award, was to be awarded to “a hard-working, single, Caucasian white girl who is not

a feminist or a lesbian, with special consideration, if she is an immigrant, but not necessarily a

recent one.” Justice Mitchell concluded that she had “no hesitation in declaring the qualifications

relating to race, marital status and, in the case of female candidates, philosophical ideology, in

paragraph 3(d)(ii)(E) of the will void as being contrary to public policy.”

Paragraph 3(d)(ii)(G) of the will also provided that if any of the provisions of Dr. Priebe’s

will were found to be of a non-charitable nature or were declared void for public policy by the

courts, that the gift “shall be deleted without prejudice to the remaining provisions of this

paragraph 3(d)(ii)”. The Court found that this provision precluded it from applying the doctrine

of cy-pres, which meant that the Court was unable to exercise its inherent jurisdiction to alter

the offending paragraph in a manner that was not discriminatory. As a result, the Court was

bound to delete the discriminatory provision of paragraph 3(d)(ii)(E) from the will.

90 Charities Accounting Act, RSO 1990, c C.10, s 10. 91 Ontario RRO 1990, Reg 194.

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The Court cited Canada Trust Co. v Ontario Human Rights Commission as the leading

authority on this matter, as well as authority for the principle that each trust must be evaluated

on a case-by-case basis and that not all restrictions amount to discrimination that are contrary to

public policy. However, testamentary provisions that are blatantly contrary to applicable human

rights legislation will almost certainly be found to be void as being contrary to public policy.

Whether such provisions can be saved based upon the Court’s inherent cy-pres jurisdiction will

depend upon the specific wording of each will, as was evident in this case.

2. Affiliation Agreement Upheld by BC Court of Appeal

On May 20, 2016, the B.C. Court of Appeal (“BCCA”) upheld a claim for specific

performance by Habitat for Humanity Canada (“Habitat”) pursuant to an affiliation agreement in

an appeal of the decision of the B.C. Supreme Court by Hearts and Hands for Homes Society

(“HHHS”).

Habitat for Humanity Canada v Hearts and Hands for Homes Society involved a dispute

between Habitat as a national umbrella organization and HHHS as one of Habitat’s affiliate

members. As a Habitat affiliate, HHHS was required to enter into an affiliation agreement with

Habitat. The agreement gives affiliates a non-exclusive sublicense to use the intellectual property

associated with the “Habitat for Humanity” marks, to solicit donations, and to carry out the

charitable activities to provide affordable housing to individuals in need in Canada.

The dispute arose as a result of HHHS’s non-compliance with the requirements under the

affiliation agreement, which led to Habitat invoking the disaffiliation process set out in Habitat’s

disaffiliation policies. Upon completion of all six stages of the disaffiliation process, Habitat

determined that HHHS had not brought itself into compliance with the affiliation requirements,

disaffiliated HHHS, and proceeded to enforce the provision of the affiliation agreement to require

the net assets of HHHS be transferred to Habitat. On appeal, the BCCA dismissed all grounds of

the appeal and upheld the specific performance as granted by the trial judge, declaring that the

net assets of HHHS were assets of Habitat.

Many umbrella organizations utilize a similar structure whereby affiliates or chapters are

required to comply with certain requirements or standards, non-compliance with which would

lead to disaffiliation. For these organizations, a few lessons can be learned from this case in

structuring such a relationship:

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First, this case shows the willingness of the courts to uphold reasonable provisions set out

in an affiliation agreement entered into between charities.

Second, it is important for parties to comply with the process set out in their policies and

agreements. Both the BCCA and the lower court in this case agreed that their role was not to

conduct a judicial review of the reasonableness of Habitat’s decision to disaffiliate HHHS, but to

determine whether Habitat complied with the process in its own disaffiliation policy.

Third, when structuring the mechanism for the disaffiliation process, it is important to

consider the purpose of such a process and the fairness of the process. It is interesting to note

that the Court of Appeal “agree[d] with the judge’s comments … that the disaffiliation policy is

designed to benefit affiliates experiencing difficulty as it offers a defined path to remain in or

return to good standing. The aim is to keep the affiliate in the Habitat family. The policy should

be interpreted with this goal in mind.”

Fourth, before entering into an affiliation agreement, affiliates should be given an

opportunity to provide input or feedback to the terms of the agreement. In this case, the court

found that HHHS did not provide any input although an opportunity was given by Habitat.

Fifth, it is helpful for parties to confirm in the affiliation agreement and constating

documents their respective purposes and how they align with each other. In this case, the court

held that HHHS did not have a “distinct charitable purpose from that of Habitat.” Instead, HHHS’s

charitable purpose was substantially the same as that of Habitat and the affiliation agreement

states that the affiliate’s purpose was consistent with the purpose of Habitat.

3. Alberta Court of Appeal Affirms Court’s Jurisdiction to Review Unfair Church Discipline

On September 8, 2016 the decision in Wall v Judicial Committee for the Highwood

Congregation of Jehovah’s Witnesses (“Wall” case) was released whereby a majority on the

Alberta Court of Appeal (“ABCA”) followed a line of case law affirming that courts have the legal

jurisdiction to review decisions made by a religious organization where discipline or expulsion

was carried out in a manner that does not reflect principles of natural justice. The Wall case

involved the expulsion of an individual from the membership of the Highwood Congregation of

Jehovah’s Witnesses in Alberta (“Congregation”), using procedures that the court found did not

reflect principles of natural justice.

On March 2014, Mr. Wall was provided with a brief letter from the Congregation

requesting that he attend a meeting with the Judicial Committee of the Congregation. The letter

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only stated that his “alleged wrongdoing involves drunkenness” and the letter also stated “[w]e

look forward to providing you whatever spiritual assistance we can”, together with the logistical

details for the meeting. At the meeting with the Judicial Committee, Mr. Wall admitted to having

engaged in two incidents of drunkenness. After the meeting Mr. Wall was advised that he was

“disfellowshipped” from the Congregation because the committee determined that he was not

sufficiently repentant of his alleged wrongdoing. Mr. Wall appealed the decision and an appeal

committee formed by the Congregation upheld the disfellowshipping of Mr. Wall for the same

reasons provided by the judicial committee (i.e. that he was not sufficiently repentant). The

decisions of the judicial committee and the appeal committee were brief and were

communicated orally. Mr. Wall then sent a further letter of appeal to the Watch Tower and Bible

Tract Society of Canada and was later advised by phone that the “Canadian Branch” of the church

would not be overturning the decision of the Appeal Committee.

Mr. Wall had been a Jehovah’s Witness from 1980 until his expulsion in April 2014. He

was also a realtor. Since Jehovah’s Witnesses are required to shun disfellowshipped members,

Mr. Wall’s family and other Jehovah’s Witnesses were compelled to shun him. This resulted in

alienation from his family and significant loss of clientele from his real estate business, many of

whom were Jehovah’s Witnesses.

After receiving the response from the national Jehovah’s Witness organization, Mr. Wall

commenced an application for judicial review over the decision to disfellowship him. A chambers

judge concluded that the Alberta Court of Queen’s Bench had jurisdiction to hear the application.

This decision was then appealed by the Congregation. A majority of the ABCA affirmed that the

Court of Queen’s Bench has the jurisdiction to carry out the judicial review. However, ABCA

decision was confined only to the issue of jurisdiction and no comments were made on the merits

of Mr. Wall’s allegations of the breach of the rules of natural justice, which were to be addressed

in a separate hearing.

In finding that Mr. Wall’s expulsion did not reflect principles of natural justice and thereby

invoking the court’s jurisdiction to review the decision, the ABCA noted that prior to Mr. Wall’s

expulsion, he was not provided with the details of the allegations against him or an explanation

of the discipline process that he would face. Mr. Wall was not advised whether he could retain

counsel for purposes of the meeting with the judicial committee or whether there would be a

record of the proceedings, nor did he receive a written reasons of both the judicial committee

and the appeal committee. The ABCA also noted that Mr. Wall appeared to have exhausted all

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avenues of appeal within the church prior to commencing legal action, so court jurisdiction to

review the expulsion could also be found on that basis in accordance with applicable case law.

I. CONCLUSION

The breadth and number of developments that have occurred in the area of charity law

during the last 12 months underscore how complicated the law involving charities has become

in Canada. As such, it is increasingly important for practitioners who are interested in working

with the charitable sector to keep abreast of developments in the law with regard to charities as

they occur. Hopefully this paper has been of some help in this regard.

UPDATE ON CHARITY LAW Current as of October 12, 2016

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Theresa L.M. Man and Terrance S. Carter Carters Professional Corporation

J. CASE LAW APPENDIX

Jaamiah Al Uloom Al Islamiyyah Ontario v. Canada (National Revenue), 2016 FCA 49.

Opportunities for the Disabled Foundation v Minister of National Revenue, 2016 FCA 94.

Deluca v. Canada, 2016 ONSC 3865.

Credit Counselling Services of Atlantic Canada Inc v Canada (National Revenue), 2016 FCA

193.

Vancouver Society of Immigrant and Visible Minority Women v Minister of National

Revenue, [1999] 1 SCR 10.

Jacobs v Ontario Medical Association, 2016 ONSC 4977.

Royal Trust Corporation of Canada v The University of Western Ontario, 2016 ONSC 1143.

Canada Trust Co. v Ontario Human Rights Commission, 74 OR (2d) 481, 69 DLR (4th) 321.

Habitat for Humanity Canada v. Hearts and Hands for Homes Society, 2016 BCCA 217.

Wall v Judicial Committee for the Highwood Congregation of Jehovah’s Witnesses, 2016

ABCA 255.

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TAB 3

de son tort: Recognizing and Avoiding the Traps of

Unintended Fiduciary Obligations

Eric Hoffstein, TEP Minden Gross LLP

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

de son tort: Recognizing and Avoiding the Traps of Unintended Fiduciary Obligations

Eric N. Hoffstein, TEP*

From time to time, a person will take it upon themselves to hold and administer property for the

benefit of another, without having been formally appointed as a trustee. This might occur with

full knowledge that the person has no legal authority to deal with the property; or the person might

unintentionally deal with property that is impressed with a trust. This person is known as a trustee

de son tort, a term derived from executor de son tort, in which a person exercises the powers of an

executor without having been properly appointed.1

A person who takes on the responsibilities of an executor or trustee without proper authority may

be held personally liable as a trustee for any loss or damage to the trust property. This makes it

critically important to understand when a person’s actions might attract fiduciary obligations,

particularly when have not knowingly or deliberately taken on a fiduciary role.

This paper will consider the circumstances under which a person may be held to be an executor or

trustee de son tort. It will then review the validity of transactions undertaken by a person in that

role, and finally explore the extent to which personal liability is imposed on these people. It is the

goal of this paper to highlight some ways in which a person might unintentionally assume fiduciary

obligations. And thereby avoid falling into that unwanted role or at least enable the person to meet

his or her fiduciary duties.

Circumstances Giving Rise to the Role

* Partner, Minden Gross LLP. The author gratefully acknowledges the research assistance of Carrington Hickey,

Student-at-Law. This paper was presented at the 19th Annual LSUC Estates & Trusts Summit on November 4,

2016. 1 See Re O’Reilly (No. 2) (1981), 28 O.R. (2d) 481 (H.C.) at 485-86, aff’d 33 O.R. (2d) 352 (C.A.) (“O’Reilly”).

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Constructive trusts have been used for centuries by the English courts of equity to describe various

situations and relationships. More recently, the common law provinces of Canada have used

constructive trusts as a remedy to address unjust enrichment.2 Imposing a constructive trust can

give rise to personal liability on the part of the “constructive trustee”. This can be confusing since

there is not necessarily any property actually held in the trust.3 Nonetheless, a person may be liable

to account as a constructive trustee, just as any other trustee. This personal liability can arise in

any one or more of three situations: acting as a trustee de son tort; knowing assistance in the

breach of trust by another person; or knowing receipt of trust property transferred in breach.4 This

paper will consider the first of these situations.

The Supreme Court of Canada clarified that personal liability will only arise where there has been

some misconduct on the part of the trustee which would normally expose him to liability for breach

of trust. As Iacobucci JA said in Air Canada v. M & L Travel Ltd.,5

…a trustee de son tort will not be personally liable simply for the

assumption of the duties of a trustee, but only if he or she commits a breach

of trust while acting as a trustee.

The trustee or executor de son tort will therefore be personally liable if he acts in a way which

would constitute a breach of trust in a properly appointed trustee or executor.

A person who takes possession of trust property and administers it for the beneficiaries will be

treated as though he is a trustee, even if he has not been properly appointed to that role. He

2 See e.g. the landmark decision in Becker v. Pettkus, [1980] 2 S.C.R. 834, 117 D.L.R. (3d) 257 (S.C.C.). 3 See e.g. Paragon Finance plc v. D.B. Thakerar & Co., [1999] 1 All E.R. 400 (C.A.). 4 For additional detail and discussion, see Waters, DWM, Gillen, M and Smith, L, Waters' Law of Trusts in Canada,

4th Ed., (Scarborough, Ont.: Carswell, 2012) at sec. 11.II (A) (“Waters”). 5 [1993] 3 S.C.R. 787 at 809 (“Air Canada”), as cited in Waters, ibid.

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becomes liable as a trustee by operation of law although he does not necessarily have to acquire

ownership of the trust property. It is important to note that the person’s liability does not arise

simply from taking up the role of a trustee, but rather because he has taken possession of and

administered trust property contrary to the terms of the trust, of which he is or should be aware.6

The trustee de son tort is treated as a properly appointed trustee from the moment she takes

possession of the trust property and starts to administer it, knowing or constructively knowing that

it is trust property. As the English House of Lords recent said,

…we would do better today to describe such persons as de facto trustees.

In their relations with the beneficiaries they are treated in every respect as

if they had been duly appointed. They are true trustees and are fully subject

to fiduciary obligations. Their liability is strict; it does not depend on

dishonesty.7

Although the hallmark of the trustee de son tort is that he has no proper authority as trustee, the

trustee need not be acting dishonestly. In actual fact, most trustees who find themselves in this

position are well-intentioned.8

The recent Ontario case of Chambers v. Chambers9 ties together the principles of renunciation and

intermeddling in the context of estate administration, and presents a novel situation in which an

executor de son tort can found. The Estates Act10 includes provisions by which a named executor

can be required, by court order, to take probate where she has not done so. Section 25 provides

6 See Nova Scotia (Attorney General) v. Axford (1885), 13 S.C.R. 294 at 300, as cited in Waters, ibid. 7 Dubai Aluminium Company Ltd. v. Salaam (2002), [2003] 2 A.C. 366 at para. 138 (Eng. H.L.). 8 See e.g. Selangor United rubber Estates Ltd. v. Cradock, [1968] 2 All E.R. 1073 at 1095 (Eng. Ch. Div.). 9 [2013] O.J. No. 3659, (2013), D.L.R. (4th) 151, 90 E.T.R. (3d) 161 (C.A.) (“Chambers”). 10 R.S.O. 1990, c. E.21.

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that if a named executor fails to either apply for probate or renounce, and fails to respond to a

summons to appear in court to apply, her right of appointment ceases:

25. When an executor survives the testator, but dies without having

taken probate, and when an executor is summoned to take probate, and does

not appear, the executor’s right in respect of the executorship wholly ceases,

and the representation to the testator, and the administration of the testator’s

property, without any further renunciation, goes, devolves, and is

committed in like manner as if such person had not been appointed executor.

It is well established, and repeated in the Chambers decision, that renunciation is generally not

available once an executor has taken even slight steps to administer the estate. Similarly, an

executor de son tort will not be allowed to renounce her executorship after even a slight act of

intermeddling in the Estate. Such was the case in Chambers.

The deceased had primary and secondary wills, both of which appointed is wife and daughter as

estate trustees. The daughter renounced her right to serve and the wife began acting as trustee

under both wills, administering the estate. An order was made requiring the wife to apply for a

Certificate of Appointment of Estate Trustee or be deemed to have renounced her appointment.

She failed to respond to that order and, by the operation of s. 25, her right to serve as executor

ceased. She nonetheless continued to deal with the business which was owned by the estate. On

an application to appoint a new executor, the court held that although the wife’s right to act as

executor ceased, the role nonetheless devolved to her as an executor de son tort due to her

intermeddling in the Estate assets. The court held that the wife could only be removed through the

appropriate process for executor removal or resignations.

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In contrast to the Chambers decision, the courts will not necessarily find that any intermeddling at

all will constitute the person as an executor de son tort. In O’Reilly, for example, one beneficiary

carried on the deceased’s farming business, maintained the property and paid property taxes and

insurance premiums. The court concluded that the question of whether a person is an executor de

son tort is a question of law. The court held that where a person acts in the bona fide belief that

they are entitled to receive the particular asset (as was the case here), that person is not an executor

de son tort. The person’s conduct must be indicative of an intention to take over the executor’s

role, and not just consistent with an independent claim to ownership of the trust property.

Liability of the Executor/Trustee de son tort

The overarching principle, which serves as a rationale for imposing liability on an executor de son

tort, is that third parties should be able to rely on his authority. An executor de son tort is treated

as an executor for the purpose of fixing liability. As such, the executor de son tort is liable to the

rightful personal representatives to the extent of any assets received in the estate, less any proper

payments made on the estate’s behalf.11

In this context, there are distinctions to be drawn between an executor de son tort and a trustee de

son tort. Whereas an executor de son tort is treated as an executor, duly appointed to that office,

a trustee de son tort is not considered to be appointed to that office. Rather, the law imposes

liability on the trustee de son tort for interfering with trust property in a way that prejudices the

beneficiaries. The trustee de son tort incurs personal liability only where they perpetrate or

participate in a breach of trust while acting as trustee. A trustee de son tort is not liable for simply

11 See Tsang v. Chen, 2005 Carswell Alta 1678 (ABQB) (“Tsang”) and Cook v. Dodds, 1903 CarswellOnt 1603 at

para. 13 (Ont. Div. Ct.) (“Cook”).

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taking up the office of trustee, but rather for administering the trust property contrary to the terms

of the trust, of which they are or should be aware.

The actions of both executors and trustees de son tort are good and valid as against third parties,

and binding on the rightful representatives of the estate or trust.12 Additionally, where the executor

de son tort is subsequently appointed as the proper executor, any acts performed prior to that

appointment for the benefit of the trust beneficiaries are ratified.13

In an interesting twist, in the Tsang case, the executor of the deceased’s estate discovered that a

friend of the deceased had removed all of his furniture and appliances from the deceased’s

condominium. This made it impossible for the executor to value the estate assets. The executor

made a claim against the friend and the friend claimed back against the estate for reimbursement

for various funeral expenses. The court concluded that the friend had become an executor de son

tort and was therefore liable to the estate for any funds received in respect of those items. As well,

the court held that the executor de son tort was liable for damages for failing to keep adequate

records of the assets which he disposed of. The judge decided that the only fair way to resolve the

dispute was to set-off the estate’s damages claim against the friend’s reimbursement claim such

that the two would cancel each other out.

Attorney de son tort?

Although the issue has not yet been addressed in Ontario jurisprudence, there has been some

consideration in academic circles about whether these principles can be applied to attorneys. It

has been suggested that a would-be attorney who continues to act for an incapable person is not a

12 Cook, ibid. 13 See e.g. Murray v. munroe, 1916 CarswellNS 12 (NSSC).

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substitute decision maker as contemplated by the Ontario Substitute Decisions Act.14 Instead, a

person who exercises dominion or control over another person’s property may be treated as a

trustee de son tort, subject to the same principles as were discussed above.

The circumstances which might give rise to an executor or trustee de son tort are still developing

in our case law. New areas of liability are almost certain to arise. It is therefore important to

understand the principles underlying the court’s decision to impose fiduciary obligations and

liability on a person with no actual authority to deal with trust property. In so doing one might

avoid being labelled an executor or trustee de son tort, or at least meet the fiduciary obligations

which would be imposed.

14 See Freedman, “Misfeasance, Nonfeasance, and the Self-Interested Attorney”, 48 Osgoode Hall L.J. at para. 470.

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TAB 4

Corporate Distributions to Trusts

Timothy Youdan Davies Ward Phillips & Vineberg LLP

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

CORPORATE DISTRIBUTIONS TO TRUSTS*

Timothy Youdan**

Form Rule

Whenever the terms of a trust distinguish between "income" and "capital" it is necessary to

determine whether particular amounts or property received by the trust will be characterized as

income or capital. This characterization may be particularly problematic in the case of

distributions received from a corporation in which the trust holds shares, since the corporation may

be able to make distributions in the form of either income or capital. It has become established in

Canadian law that that characterization is to be made in accordance with the form of the

distribution made by the corporation.

As stated by Fry L.J. in Bouch v. Sproule1:

"When a testator or settlor directs or permits the subject of his disposition to remain

as shares or stock in a company which has the power either of distributing its profits

as dividends or of converting them into capital, and the company validly exercises

this power, such exercise of its power is binding on all persons interested under

him, the testator or settlor, in the shares, and consequently what is paid by the

company as dividend goes to the tenant for life, and what is paid by the company

to the shareholder as capital, or appropriated as an increase in the capital stock in

the concern, enures to the benefit of all who are interested in the capital. In a word,

what the company says is income shall be income, and what it says is capital, shall

be capital."

* This paper was presented to the Law Society of Upper Canada, 19th Annual Estates and Trusts Summit,

November 4, 2016.

** Partner, Davies Ward Phillips & Vineberg LLP.

1 (1885) 29 Ch D 635 at 653, quoted with approval by Lord Herschell (1885) 12 App Cas 385 at 397 – 378

(HL)).

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Bouch v. Sproule was interpreted in some cases as making the characterization turn on what the

corporation intended rather than on simply what it in fact did.

The position was clarified by the leading case of Hill v. Permanent Trustee Co. of New South

Wales Ltd2. In this case, a company with an Australian sheep and cattle rearing business sold

substantially the whole of its land, livestock and other assets, and ceased to carry on its business.

It distributed the proceeds as dividend, described as a distribution of capital assets in advance of

the winding-up of the company. Shares of the company were owned by a trust on terms that

required it to be determined whether the dividend received by the trust was to be treated as income

or capital. The Privy Council stated that Bouch v. Sproule was not,

"an authority for the position that the company's statement of intention determines

as between tenant for life and remainderman whether a sum paid away by the

company to a shareholder who is a trustee is income or corpus of his trust estate."

Rather, the decision in Bouch v. Sproule was stated to have been based on the action in fact taken

by the company, not by its statements. In the Hill case, it was held that the cash dividend was

income for the purposes of the trust.

In the cases of Re Waters3 and Re Hardy4, the Supreme Court of Canada approved and applied

Hill. Both cases involved corporations that had undistributed surplus that was then distributed to

existing shareholders by a stock dividend under which redeemable preference shares were issued

and then redeemed by the company. The distribution in both cases was held to be a capital

distribution for the purposes of trust shareholders. The rationale for the decision was explained as

follows by Rand J. in the Waters case:

"When earnings are "de-capitalized", they cease at that moment to be "earnings";

they become part of the capital assets; and if the transaction has not the element of

2 [1930] AC 720 (PC). Lord Russell, in the Hill case, stated five rules that were considered to govern the

characterization of corporate distributions. In an interesting paper presented at the STEP 18th National

Conference (June, 2016), Joan Jung discussed the extent to which changes in corporate law and practice may

have undermined the reasoning in Hill's case.

3 [1956] SCR 889.

4 [1956] SCR 906.

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dividend and purchase, they prima facie, are not income. Mr. Henderson urged

very plausibly that the company's intention was to release those earnings and pass

them to the shareholders as such in a single act consisting of several parts. The

fallacy lies in overlooking what has taken place. The company undoubtedly intends

by its total act to pass money to the shareholders; but if what the company does

converts the earnings into capital, the "intention" of the company must take account

of the fact; it "intends" the fact; and to carry the intention to a conclusion its intent

to distribute capital assets by means of an authorized reduction in capital stock.

Here form is substance; and the moment form has changed the character of the

earnings as assets, the intention follows that change". (Emphasis ended).

The effect of the form rule on particular corporate distribution is, generally, as follows:

A dividend, paid in cash, in specie (e.g. shares of another corporation) or satisfied by a

promissory note is income.5 This includes a dividend that is a capital dividend for the purposes

of the Income Tax Act ("ITA").

A "stock dividend" (i.e. an issue of the corporation's own shares), proceeds of redemption or

purchase for cancellation of the corporation's own shares (even if a deemed dividend for

purposes of the ITA) and assets distributed on a winding-up are all capital.6

Provision of Trust Instrument

The corporation's choice of method of distribution (which may be caused by income tax

considerations) determines the respective entitlement of income and capital beneficiaries. The

effect of this may be quite capricious. This was apparently recognized by Lord Russell in the Hill

case when he referred, as follows, to the possibility that provision of the trust instrument may alter

these consequences:

5 See, eg, Re Zacks (1984) 17 ETR 206 (HC).

6 See, Jung, supra note 2; C. Brown, "Allocating Distributions from Mutual Fund Investments to the Income

and Capital Beneficiaries of a Personal Trust: The Perplexing World of Who Gets What and Who Gets

Taxed" (2008), 27 ET & PJ 158.

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"In truth the only method by which the rights of the respective cestuis que trust can

be safeguarded and made incapable of being varied or affected by the conduct of

the company, is by the insertion of special provisions in the trust instrument clearly

defining the respective rights of income and corpus in regard to moneys received

by the trustee from limited companies, in respect of shares therein held by him as

part of the trust estate."

Water's Law of Trust in Canada7 commented as follows on what are stated to be shortcomings to

the position that the problem can be dealt with by such express provisions:

"There are, it seems, only two shortcomings to this advice. First, the testator or

settlor must foresee the various ways in which companies, in which at present he

has or his portfolio may in future have shares, are likely to handle distributions.

This is no mean task. Second, it exposes the trustee to the same difficulty as that

experienced with Howe v. Lord Dartmouth, namely, that the intended scope of the

testator's or settlor's language must be determined. And the more novel the mode

of distribution, the less likely it is that the language used in the will or settlement

will readily cover that mode of distribution."

I suggest that the problem can be dealt with reasonably easily by provisions of the trust. I should

first mention that the form rule is not particularly significant in the case of the typical discretionary

trust, where trustees have discretion to distribute income or capital to the discretionary

beneficiaries. Second, even where the trust does create successive income and capital interests,

the consequences of the form rule may be alleviated if there is a power to encroach on capital in

favour of the income beneficiary. Third, as suggested by Waters, particular kinds of distributions

may be characterized as income or capital, as the case may be. Fourth, the trustees can be given

overriding discretion (perhaps with relevant guidelines) to determine how distributions should be

characterized for the purposes of the trust.

Two comments should be made on such a discretionary trustee power. First, as I shall discuss

below, the meaning of "income" for the purposes of certain provisions of the ITA cannot be

7 4th ed (2012) at 1083.

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changed or made subject to such an overriding discretionary power. Second, unless drafted with

care, there may be an argument that the provision is void because it purports to oust the jurisdiction

of the courts. The issue arose in Re Bronson.8 The will created a trust with successive interests

for a life tenant and remainderman. Paragraph 11 of the will provided as follows:

"In the event in any question arising at or after the time of my death, or at or after

the falling in of any life estate created by this my last will and testament or by any

codicil hereto, or on the happening of any other event, as to whether any dividend

or bonus or other money or income arising from any shares or bonds of joint stock

or other corporations or from any other investment of capital money belonging to

me or to my estate does or does not form part of the capital of my estate, or is not

apportionable between any person or persons entitled to an annuity or a life interest

and those entitled in remainder or between successive life tenants or annuitants or

if any question arises as to the time of payment of any bequests, legacies, life

interests, annuities or residual gifts herein contained, my trustees are hereby

empowered in their absolute discretion to determine any such question and their

judgment and decision thereon shall be final and binding upon the persons

interested therein."

Relying on this clause, the executors had come to the conclusion that a rebate received by the

executors in respect of prepayment of succession duties should be made to the life tenant. After

quoting paragraph 11, Wells J. stated as follows:

"Dealing with para. 11 first, in my view the executors have not the power arbitrarily

to declare whether certain sums of the estate are capital or income or how it may

be apportioned. They cannot take unto themselves the jurisdiction which is vested

only in the Court.".

After discussing the English case of Re Raven9, Wells J. went on to state as follows:

8 [1958] OR 367 (HC).

9 [1915] 1 CH 673. See also Re Wynn Will Trusts [1952] 1 Ch 27.

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"Accordingly, it would seem to me to be quite beyond the power of the trustees of

the testator arbitrarily to decide whether these moneys, which are in effect no matter

how they are calculated, a rebate, become capital or income".

I have two comments on this. First, on any view, the trustees cannot properly exercise an

overriding discretionary power in an "arbitrary" manner. Like other discretionary trustee powers,

it must be exercised in good faith having regard to relevant factors and ignoring irrelevant factors.

The second comment is that there is no reason why the testator or settlor should not be able to

confer a discretion to determine whether particularly receipt should be treated for the purposes of

the trust as income or capital, as the case may be. As stated in Waters:

"What the settlor or testator may do is to provide in his instrument that corporate

distribution received by his trustees may be allocated to the income or capital

accounts, regardless of whether any such distribution is characterized as income or

capital by the form test. The creator of the trust does not thereby seek to empower

the trustees to define what is income and what is capital; he gives the trustees the

power to allocate receipts, what their character, to either account. The trustees are

now entirely unhampered in their efforts to secure even hand."10

Cases Avoiding Application of Form Rule

Ironically, the final decision in the litigation relating to the Hill case illustrates the willingness of

courts, on occasion, to prevent the form rule causing obviously unjust results. As explained by

Nicholls V-C in Re Lee; Sinclair v. Lee11:

"The decision in Hill's case had an interesting sequel. The distribution of the sale

proceeds as a dividend was only possible because the trustees had voted in favour

of a resolution altering the company's articles of association so as to permit such a

10 Supra note 7 at 1087. See also Kessler & Hunter, Drafting Trusts & Will Trusts in Canada, 4th ed (2016) at

291 – 293. As noted there, the Trustee Act, SNB 2015, c. 21, s.40(2) and the Trustee Act SS. 2009, T-23.01,

s. 35 explicitly permit trustees to allocate receipts to income and capital as the trustees "consider just and

equitable".

11 [1993] 3 All ER 926. See the discussion of the case by Allen, "Reflections on Trusts and the Allocation of

Corporate Distributions" (1994) 13 E&TJ 209.

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distribution. The Board left open the question whether this affected the position.

In subsequent proceedings12 Harvey C.J. in Eq held that notwithstanding the

decision of the Privy Council, the distribution was capital in the trustees' hands.

The trustees had voted for the alteration to the articles in the mistaken belief that

the distribution would remain capital. So the court ought to rectify the trustees'

mistake. At the end of the day, therefore, what might be thought to be an evident

unfairness to the remainderman was avoided."

In Re Welsh13 the testator gave the residue of his estate on trust for his second wife for life with

remainder to his children by his first marriage. The trustees also had a power of encroachment

exercisable for the benefit of the wife "for her maintenance or in the case of illness or sudden

adversity or in any other emergency." The testator had owned approximately a 1/5th interest in a

closely-held family corporation, which comprised substantially all of his estate. After the testator's

death and during his wife's lifetime, the business carried on by the corporation was sold and,

pursuant to elections under the ITA relating to "pre-1971 capital surplus on hand" (that enabled

dividends to be paid tax free to shareholders), the directors declared and the corporation paid cash

dividends paying out such surplus to the shareholders. Holland J. held that the dividends were

capital receipts of the trust and were therefore not payable to the estate of the wife (who had died

before the proceedings were commenced) as income.

Holland J. treated the question as one involving the interpretation of the testator's will in order to

determine the meaning of "income" in the will. On the basis of the interpretation of the will in the

surrounding circumstances, he held that the cash paid pursuant to the dividends was capital, not

income:

"It is to be noted that the testator conferred upon his trustees a limited power to

encroach upon capital for the benefit of the testator's wife for maintenance or in the

case of illness or such adversity or other emergency. Further, the testator conferred

power upon his trustees to sell, call in and convert into moneys the whole or any

part of the estate in their absolute discretion, and to retain any investments

12 (1933) 33 SR (NSW) 527.

13 (1980) 28 OR (2d) 403 (HC).

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notwithstanding that such may not be trustee-authorized investments. This testator

clearly intended that the assets of his estate at the time of death would be the capital

from which the income would be derived.

I find that the intention of the testator as expressed in this will taken as a whole and

in the circumstances which existed at the time when it was executed is quite clear.

This testator intended that the value of his interest in [the corporation] as

represented by his shareholdings (to include the breakup value which such shares

would attract) to be the capital of his estate, and to be held as part of the residue of

his estate after payment of specific bequests. It was this on which income was to

be derived which income he intended to be paid to his wife. Capital and income in

this will have that special meaning to the testator. The source of the income to be

paid to the widow was the interest earned from this capital sum and the limited

power to encroach upon this sum for the benefit of the wife supports this

interpretation. Indeed, that is what was done during the lifetime of [the wife] and

she received the sum of $200,000 without it being necessary to encroach upon

capital in any way. There is no suggestion that during her lifetime [the wife]

asserted a claim to the moneys paid out as dividends.

I do not find cases such Re Waters and Re Hardy … of assistance in the present

problem. Those cases clearly involve distribution of undistributed surplus income

in a company. What we are concerned with in the present estate problem is

distribution of surplus capital, really the entire capital of the company, and at a time

when there was no undistributed income on hand. In fact there was a negative

income balance according to the books of the company as of December 31, 1971

…

While cases have spoken about questions of "form" and questions of "substance"

as being determinative as to whether dividends are "income" or "capital",

previously-decided cases do not really assist me here. It is clear that the court may

look at the form of the transaction or at the substance, that in any event the

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overriding consideration must be the intention of the testator as expressed by the

words of his will and in the circumstances in which that will was executed …

This testator intended that his children would share per stirpes in the distribution of

his residuary estate, this being impaired only to the extent which his trustees

considered necessary to encroach thereon to supplement income derived from the

capital for his wife plus the maintenance."14

Nicholls V-C, in the English case of Re Lee15, similarly avoided the form rule by placing emphasis

on the testator's intention. This case concerned a proposed spin-off (referred to as a "demerger")

by the large British corporation, Imperial Chemical Industry plc (ICI) under which various of its

business operations would be carried on as a separate undertaking by a separate company. The

mechanism for doing this was described as follows:

"In anticipation of the proposed 'demerger', ICI's bioscience activities have already

been consolidated into a group of companies headed by a new wholly-owned

subsidiary called Zeneca Ltd. Subject to shareholder approval there will be a

demerger whereby, first, the shares in Zeneca Ltd., and hence the whole of the

Zeneca group of companies, will be transferred to a newly created company called

Zeneca Group plc ("Zeneca Group") and, second, the shareholders of ICI will be

issued paid-up shares in Zeneca Group in addition to their present holdings of ICI

shares. Zeneca Group will belong to the persons who are the shareholders of ICI

on 1 June 1993, and in the same proportions. A shareholder who owns 1,000 ICI

shares will end up with those shares together with 1,000 Zeneca Group shares.

Zeneca Group will be a publicly listed company".

14 The position that income should be interpreted differently than its normal meaning raises the question

whether such an interpretation would have tainted the trust as a qualifying spousal trust for the purposes of

the ITA.

15 Supra note 12.

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The case was a test case dealing with the potential effect of the proposed demerger on a trust under

which the testator's husband was life tenant and her son the remainderman. Nicholls V-C described

the problem as follows:

"I venture to think that no one, unversed in the arcane mysteries I shall be

mentioning shortly, would have any doubt over the answer to [the question whether

after the demerger the new Zeneca Group shares will form part of the capital of the

trust fund or will belong to the life tenant as income of the trust fund]. The ICI

shares form part of the capital of the fund. So the future ICI undertaking will be

divided up, with one part belonging to ICI and the other to Zeneca Group. To

compensate for this loss of part of the ICI undertaking, the ICI shareholders will be

receiving a corresponding number of shares in Zeneca Group. No one would

imagine that the Zeneca Group shares could sensibly be regarded as income.

Nobody would think that the Zeneca Group shares could pass to the life tenant as

"income" of the ICI shares… .

However, there is a problem. As already mentioned, the company mechanism by

which the ICI shareholders will acquire their Zeneca Group shares is that the new

shares will be allotted to the shareholders in satisfaction of a dividend being

declared by ICI."

Nicholls V-C emphasized that the relevant principle was that of giving effect to the "presumed

intention of the testator or settlor". He concluded that the shares in Zeneca Group which the

trustees would receive pursuant to the demerger would be held as capital of the trust. His rationale,

which like the reasoning in Re Welsh appears to be inconsistent with the form rule16, was as

follows:

"Having regard to these considerations, in my view to regard the ICI transaction as

a distribution of profits, akin to payment of a dividend in specie and hence income,

would be to exalt company form over commercial substance to an unacceptable

extent. In the last analysis the rationale underlying the general principles

16 See Lewin on Trusts, 19th ed (2015) at 25 – 049.

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annunciated in Hill's case, is an endeavour by the law to give effect to the assumed

intention of the testator or settlor in respect to a particular distribution to

shareholders. When the inflexible application of these principles would produce a

result manifestly inconsistent with the presumed intention of the testator or settlor,

the court should not be required to apply them slavishly. In origin they were

guidelines. They should not be applied in circumstances, or in a manner, which

would defeat the very purpose they are designed to achieve. Unless constrained by

binding authority to the contrary, I consider the ICI transaction is to be

characterized as a company reconstruction, with two capital assets (shares in ICI

and Zeneca Group) in the trustee's hands replacing one existing capital asset (shares

in ICI)."

Income for the Purposes of the ITA

Although the meaning of "income" for various purposes of the ITA has a different meaning than

income for trust law purposes (so that, for example, taxable capital gains are considered to be

income for the purposes of the ITA), subsection 108(3) of the ITA provides that for certain

purposes "income" means income computed without reference to other provisions of the ITA. The

relevant provisions referred to in subsection 108(3) include those dealing with the requirements

for a spousal or common-law partner trust, alter ego trust or self-benefit trust (a "Life Interest

Trust"), under which a particular person or persons (the "Income Beneficiary") are required to be

entitled to receive all of the "income" of the trust. This is usually taken to mean that, subject to

certain specified exceptions, the references to income mean income for trust law purposes. Income

for trust law purposes appears to mean the normal meaning in the absence of any provision of the

trust modifying that normal meaning. It appears, therefore, that, for example, a trust that would

otherwise qualify as a Life Interest Trust will be tainted if the normal meaning of income is

modified such that the Income Beneficiary is entitled to receive less income than she or he would

be entitled to in the absence of such a provision. For example, boiler plate drafting of the meaning

of "net income" may taint the trust. As stated by Chow and Pryor, Taxation of Trusts and Estates:

A Practitioner's Guide 2015:

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"An express definition of "net income" in the terms of the trust may withhold

amounts from the income due to the spouse that offends the requirement that the

spouse be entitled to all of the income of the trust. Where that is the case it will

taint the trust as spousal. It is not uncommon to find a definition of "net income"

in the boiler plate of the trust document. Where that definition applies to the spousal

trust, it has to be carefully examined. If it withholds an amount from the spouse's

income and entitlement that would otherwise be due to the spouse if the simple

word "income" were applied, then the trust will not qualify as a spousal trust. The

spouse must be entitled to income as defined under trust law, not as defined by

language internal to the document or by reference to accounting practices."17

The issue arose in Terrill v. MNR18, where the question was whether a testamentary trust was

tainted as a spousal trust because of the inclusion in the will of a power of the executors and

trustees,

"(g) To determine and distinguish capital from revenue and to credit or charge

receipts and disbursements to capital or revenue of my Estate in such proportions

and amounts as they make think proper."

It was argued, on behalf of the Minister, that the provision tainted the trust since the trustees could

determine that an amount otherwise regarded as income would be credited as capital which might

not be paid to the spouse. The court rejected this argument by reading down the clause so that it

did not give the trustees power to change the normal meaning of capital and revenue:

"In conclusion, clause 9(g) of the will cannot in substance be regarded as giving the

executors the powers to change an amount received as income into an amount

received as capital or vice versa at their whim. They are only entitled to apply the

appropriate accounting principles to determine the nature of an amount received

and to administer it accordingly. Such a clause … cannot taint the trust".

17 At 111 – 112.

18 87 DTC 504 (TC).

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Corporations Controlled by Trusts

Where the trust has a controlling interest in a corporation, it can ordinarily elect the board of

directors, and the board will then be able to determine both what distributions should be made and

in what form they should be made. This gives rise to difficult questions about which there is

surprisingly little authority.

In Re Fleming19, the executors and trustees sought the opinion, advice or direction of the court

regarding actual and proposed distributions from each of two corporations in which the estate of

the testator held shares. It appears from the judgment of Osler J. that the will created a trust of

residue under which the testator's widow was a life tenant, although it does not appear who was

entitled to capital. The testator's wife was one of the trustees. The will included a power of

encroachment exercisable by the trustees in favour of the widow. Although the widow had

renounced her entitlements under the power of encroachment, Osler J. stated that,

"The interpretation to be given the will and the desirability of and consequences

flowing from the various courses of action the executors are now in a position to

take, cannot be affected by that irrevocable action."

The testator died in 1964.

The questions for the court arose from the following sets of circumstances:

(1) The estate had one-half of the common shares of a corporation called Metropolitan Realties

Limited ("Metropolitan"). This corporation owned a number of gasoline service stations. One of

these stations was sold in 1970 and, as a result, the corporation had about $48,000 in liquid assets

not required for any corporate purposes. The directors elected to pay tax at the rate of 15% on that

sum under subsection 196(1) of the ITA and paid out the remaining $40,000 to the shareholders

as a dividend on the common shares held by them. The executors sought the court's advice, opinion

or direction whether the $20,000 should be treated as income or capital.

19 [1973] 3 OR 588 (HC).

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(2) The estate also owned all of the issued shares of Lincoln Capital Properties Limited

("Lincoln"), consisting of preference shares and common shares. The assets of Lincoln had

consisted of three buildings, one of which was sold in 1971. After payment of a bank loan, the

proceeds of sale were approximately $125,000, which was not required for any corporate purpose.

The $125,000 could be paid out of Lincoln either as a dividend on the common shares under

subsection 196(1) of the ITA or $118,000 of the money could be used to redeem the outstanding

preference shares.

Commentary on Re Fleming often focuses on the question relating to Lincoln20. However,

Osler J.'s treatment of the question relating to Metropolitan is interesting also. Considerations

about the unfairness of the distribution, as a cash dividend that would be treated as income in the

hands of the trust, and therefore going to the life tenant, appeared to be as relevant to this

distribution as to the potential distribution of a cash dividend from Lincoln. However, in this case,

Osler J. simply applied the form rule without, apparently, any second thought:

"As stated by McRuer, C.J.H.C., in Re McIntyre21 … . 'The form of a company's

resolutions and instruments is their substance.' In the case before him, the form and

substance was that the trustee was made the holder of fully paid-up shares as soon

as they were issued by the company. In the present case, the executors were paid

a dividend on the common shares of the company and … the sum of $20,000 so

received constituted income in the hands of the executors and trustees."

Regarding the Lincoln proposed distribution, Osler J. stated that, although the court would

ordinarily not relieve trustees from the responsibility of exercising their discretion, it would do in

the circumstances of the case:

"Where, as in the present case, one of the executors is the life tenant, entitled to all

income, and the executors are in a position to distribute a sum of money in

alternative ways, its character as capital or income depending upon their decision,

the Court may more readily respond to an application for its advice and direction."

20 But see Scane (1974) 1 ETQ 105.

21 [1953] OR 910.

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Osler J. again expressed the position that the form rule was determinative as to the characterization

of whatever form of distribution was decided upon at the corporate level and, for the following

reasons, concluded that the executors and trustees in their capacities as directors of Lincoln should

cause the corporation to redeem the preference shares out of the undistributed income on hand at

the end of 1971, so that the funds would be received as capital:

"It is trite law that the executors have a duty to maintain an even hand between the

life tenant and the remainderman … .

It was pointed out that the life tenant was received [sic.] on the average an income

of approximately $31,493 per annum on assets which were valued at the last

passing of accounts at $800,000. This represents a return of just under 4%, meagre

enough. However, by virtue of the discharge of a mortgage and the elimination or

reduction of other indebtedness, it is anticipated that revenue will be increased

substantially and the income of the life tenant, Mrs. Fleming, might increase by as

much as $10,000 per annum.

To permit the present surplus in [Lincoln] to be distributed in the form of a dividend

would be to require a tax of 15% to be paid upon it, which, from the point of view

of the estate, would be a diminution of assets, and would be to reduce by the amount

so paid out, the corpus of the estate and it would, of course, substantially reduce

future income, even though creating large and presumably heavily taxable income

for the year in which it was paid.

In addition, it is common ground that virtually the whole of the amount now shown

as undistributed surplus in the hands of the corporation was so shown at the time of

death for probate and succession duty purposes and was part of the value

represented by the shares shown as capital assets of the estate at that time. It seems

to me inequitable that the executors and trustees should not be permitted, as

directors of the corporation, to act in such a way as to transform that which was

capital at the date of death into income at the present time."

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Where trustees control a corporation, ordinarily they should be represented on the board of

directors and, typically, will be directors.22 As directors, they owe fiduciary obligations to the

corporation whereas, as such trustees, they owe obligations to the beneficiaries. Their obligations,

as directors and trustees, will often be aligned, since ordinarily "what is best for the company is

best for the trust"23. However, where there are potentially conflicting obligations, the

trustee/director is in a difficult position. As shareholder, the trustee owes obligations to the

beneficiaries of the trust and does not ordinarily owe fiduciary obligations to anyone else.

However, as director, the trustee/director owes obligations to the company. Surprisingly, we do

not have any useful body of case law to provide guidance. In appropriate cases, it is suggested

that courts should be willing to provide direction at the request of trustees even where there is no

conflict between a position as trustee and a position as beneficiary.

Trustees often own all of the shares of a corporation. In such circumstances, there will ordinarily

be no conflict between a trustee's position as director and his position as trustee of the trust. Of

course, the decisions taken in respect of the administration of the corporation, including whether

to make distributions and in what form, may have an impact on the position of different

beneficiaries. As stated in Lewin:

"The questions arise whether the trustees can retain profits within the company by

declining to declare dividends, so reducing the income going to the income

beneficiary of the trust and, conversely, if the income beneficiary is entitled to call

for any distribution by way of dividend, whether his entitlement extends to capital

profits. If the assets of the company had been held by the trustees directly, an

income beneficiary would by definition have been entitled to the whole income

without retention and equally certainly would not have been entitled to capital

profits."24

I would make the following comments on this:

22 See Re Lucking [1967] 3 All E.R. 726; Bartlett v. Barclays Bank Trust Co. Ltd. [1980] Ch 515. See also

Lewin, supra note 16 at 34 – 056.

23 Waters, supra, note 7 at 1088, footnote 412.

24 Supra note 16 at 25 – 055.

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(1) The requirements under the ITA that certain life beneficiaries are required to be entitled to

receive all of the income of the trust does not, in my view, mean that they must be entitled to

receive all of the income of a corporation owned by the trust, even when the trust owns all of the

shares of the corporation.

(2) The terms of the trust instrument, in my view, can provide directions to the trustees

regarding distributions from the corporation to the trust that will be binding on them. As stated by

Patillo J. in Canada Trust v. Browne25:

" the fact that the Trust's assets are held in a separate corporation, apart from the

Trust has no impact … on the duties of the Trustee as set forth in the Trust Deed

As Varied or upon the application of a duty to maintain an even hand. The Trust is

the sole shareholder of the Holding Company. The directors of the Holding

Company are nominees of the Trustee. In such circumstances, the directors are

bound by the terms of the Trust and any duties imposed upon them by the Trust

Deed As Varied or trust law … ."

(3) Where there are no specific directions in the trust instrument, and the corporation was

incorporated by the trustees after the creation of the trust, ordinarily the rights of the beneficiaries

should not be affected by the interposition of the corporation so that they should, to the extent

practically possible, receive the same income or capital that they would have received if the

corporation had not been created.26

(4) Where the corporation was created before the trust and its shares settled on the trust, in the

absence of particular provisions of the trust instrument, the trustees/directors should have

discretion to determine the distributions from the corporation to the trust, including the form of the

distributions. 27 In exercising this discretion (even if technically done as directors of the

corporation) the trustee should have regard to the interests of the beneficiaries including potentially

conflicting positions of successive beneficiaries, for example, the position of an income

25 [2011] ONSC 731, affirmed [2012] ONCA 862.

26 Cf. Lewin, supra note 16 at 25 – 056.

27 Cf. Lewin, supra note 16 at 25 – 057.

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beneficiary, on the one hand, and capital beneficiaries, on the other hand. They must, therefore,

act in accordance with the general principles applying to trustees exercising dispositive powers,

such as the even hand principle and the requirement to exercise discretion in good faith having

regard to relevant factors and ignoring irrelevant factors.

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TAB 5

Bitten by Boilerplate:

Reviewing Precedents for

Will and Trust Drafting

Mary-Alice Thompson, C.S., TEP Cunningham, Swan, Carty, Little & Bonham LLP

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

1

19TH ANNUAL

ESTATES AND TRUSTS SUMMIT – DAY TWO

November 4, 2016

Bitten by Boilerplate: Reviewing Precedents for

Will and Trust Drafting

Mary-Alice Thompson, C.S., TEP

Cunningham, Swan, Carty, Little & Bonham LLP

As lawyers, we love precedents, and with good reason. They are a very efficient way of drafting

and provide a kind of security that certain issues that many if not all of our clients will have in

common are dealt with in a recognizable way. If you remember back to the basic law of wills,

you will recall that one of the functions of formality in the preparation of will is “channeling,”

which by encouraging uniformity in the organization, language and content of wills, allows

those familiar with the form to recognize the document as a will and to find standard provisions

with ease.

But, like any love, the love of precedents can be a dangerous thing. That familiar package of

clauses may contain many well-worn clauses, but some of those may not be responsive to

changes in the law or the lives of our clients and social norms. If you used them before the norms

and law changed, their obsolescence may not be your fault, but if you continue to use them after

the law has changed, the case is different. Instead of the old dog who used to be your best friend,

your package of precedents may now be more like a demented old stray, liable to bite you at any

time!

What follows is a list of what I might call the “Dirty Dozen” – twelve places where precedent

clauses that may be in your file can cause problems if you use them without modification.

1. Survivorship Conditions

It is very common for a precedent to contain a condition that the named beneficiary must survive

the will-maker by a certain number of days - five or 10 - the commonest number being thirty.

The original reason for inserting this waiting period appears to have been to prevent “double

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probate” – that is, if the beneficiary and the will-maker (typically spouses) were in an accident

and died within a few days of each other, the property would be subject to probate (and probate

fees), first in the estate of the will-maker, and then again almost immediately, in the estate of his

beneficiary. Delaying the vesting of interests for a short period of time, during which the

surviving beneficiary would either die or recover, made sense. Given that very aged couples who

have lived together for a long time quite frequently do die within a short period of each other,1

the 30-day survivorship was sometimes lengthened to 90 days. Recent legislation in British

Columbia has created a statutory 5-day survival rule.2

Although there may be more sophisticated forms of planning to reduce Estate Administration

Tax, a 30-day survivorship clause still makes sense, and is especially useful in single or primary

wills for a couple who travel together. Its utility in cases where the beneficiary is not frequently

in the company of the will-maker is less certain. There are two places where a survivorship

condition not only is of questionable utility, but actually creates a problem: in the appointment of

an executor, and in a designation of beneficiary.

Consider the following clause:

I designate my wife, X, if she survives me by 30 days, as beneficiary of any Registered

Retirement Savings Plan I own on my death or of which I am the plan-holder, as defined

in the Income Tax Act, to receive all proceeds payable under the plan or fund upon my

death.

Since X is not entitled to the proceeds until the expiry of the survivorship period after the death

of the plan-holder, the proceeds cannot be transferred to her RRSP on a tax-deferred basis. If the

deceased is to ensure that RRSP proceeds do not form part of income in the year of death, the

designation should ensure that the proceeds will vest in the surviving spouse immediately on

death.

1 That this is not a new phenomenon is evidenced by an Epigram by Sir Henry Wotton (1568–1639):

“HE first deceased; she for a little tried

To live without him, liked it not, and died.” 2 Wills, Estates and Succession Act, SBC 2009, c 13, s. 10 (1): “A person who does not survive a

deceased person by 5 days, or a longer period provided in an instrument, is conclusively deemed to have

died before the deceased person for all purposes affecting the estate of the deceased person or property of

which the deceased person was competent to give by will to another.”

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Including a survivorship condition in a beneficiary designation – whether for life insurance or a

registered plan – is unnecessary. Where there is a named beneficiary, the assets are not included

in probate,3 so there is no need to be concerned about double probate.

Where a beneficiary is designated directly to receive proceeds of a registered plan – as opposed

to receiving them through the estate - a survivorship condition may divert proceeds to the estate.

If the beneficiary can only receive the proceeds if he survives for 30 days past the death of the

plan-holder, who owns the proceeds (or who is the owner in equity of the beneficial interest) in

the interim? It would seem that they have vested in the estate, which not only subjects them to

creditors but also makes them liable to EAT.

There may also be shift in the income tax burden. RRSPs (and RRIFs) are tax-sheltered funds.

When they are paid out on the death of a plan-holder, they are usually treated as income of the

deceased in the year of death.4 If, however, they end up in the hands of a spouse5 they may

qualify as a “refund of premiums” under section 146(1) of the Income Tax Act.6 The funds can

pass to the spouse either through a direct designation or by a joint election by the spouse and the

executor. If the funds become a “refund of premiums,” the estate is not principally liable for the

tax. Instead, the beneficiary spouse, who may be able to claim a rollover into another registered

plan, will assume the tax liability, and the funds are said to have “rolled over” into the new plan,

with no tax payable immediately by either the estate or the beneficiary at that time. The

beneficiary is, of course, taxable on any amounts paid to her out of the registered plan.

Section 148(8.1) of the Income Tax Act allows for funds from a registered plan falling into the

executor’s hands to be treated as a payment to a beneficiary on the joint election of the executor

and the beneficiary if the payment would have been a “refund of premiums” had it been made

3 This is so by statute for life insurance, and by custom for registered plans. See FAQs on the Estate

Information Return: “However, RPPs, RRSPs, RRIFs and TFSAs with a beneficiary designation or

beneficiary declaration which pass directly to that beneficiary and not through the estate are not subject to

estate administration tax.” http://www.fin.gov.on.ca/en/tax/eat/faq.html#Q25. 4 For a more detailed review of the income tax implications with respect to RRSPs and RRIFs, see

RC4177 and RC4178. Also see “RRSPs and RRIFS on Death: Fact and Folklore about ‘Rollovers’,” Ann

Elise Alexander, STEP Canada 17th National Conference, Toronto, Canada, June 18-19, 2015. 5 The terms “spouse” as used here includes a common law partner. Similar provisions exist for a

financially dependent child or grandchild of the deceased, and a slightly different problem may arise

where the disabled beneficiary is unable to elect for a rollover. 6 See Information Sheet RC4177 Death of an RRSP Annuitant.

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directly to the beneficiary.7 If registered plan funds are paid through the estate, the executor and

the beneficiary must make a joint election to have funds taxed in the hands of the beneficiary,

who can influence the tax burden. The inclusion of a survivorship condition which result may

vest registered plans in the hands of the executor, may thus affect the tax liability.

The appointment of the executor, moreover, should speak from the date of death. If a

survivorship condition is included, third parties may quite reasonably not accept the authority of

an executor to act until the condition has been fulfilled. If action needs to be taken within the

specified period — for example, if a particularly volatile investment needs to be liquidated — the

executor’s lack of authority for any period of time could be critical.

Notably, in B.C., the new provision creating a statutory survivorship condition specifically

exempts the appointment of a “personal representative” from its operation.

2. Double Legacies

The difficulties set out above arise because the vesting of an interest is delayed for a period

following the death of the will-maker. Survivorship clauses can create an additional problem

when they are used in mirror wills prepared for a couple and those wills contain legacies.

Suppose a couple has agreed that, when they are both gone, they will leave $1,000 to charity out

of their joint estate, before dividing the residue among their three children. In their mirror wills,

they each have the following clause:

If my spouse, X, does not survive me for 30 days, my Trustee shall pay to The Home for

Cats and Dogs, the sum of $1,000.

If this clause appeared in both spouses’ wills and the spouses died within 30 days of each other,

then $2,000.00 would be paid to The Home for Cats and Dogs:

If you are using a survivorship condition with a legacy like this, it should not require the spouse

to survive for any period of time; otherwise the legacy should be made only in one of the wills,

7 Banting v Saunders Estate, 2000 CanLII 22834 (Ont Sup Ct). The beneficiary may also be liable

for any taxes owing by the deceased on death. See Kutchka v. R., 2015 TCC 289 (CanLII). Fekete Estate

v Simon (2000), 32 ETR (2d) 202 (Ont Sup Ct).

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or both wills should contain a clause adverting to the spouse’s will and directing payment from

one or both estates of the total amount.

When multiple wills are used for probate planning, they can raise similar problems with regard to

payment of legacies. Putting the legacies in both wills means that they will be paid twice, unless

– as with mirror wills – you determine which estate will pay them. If the assets passing in the

probateable will are kept minimal (as is usually desirable), there may be insufficient assets to pay

for the legacies in the probateable will.

A primary will is signed first, however, so the primary will can be incorporated into the

secondary will, but not the other way around. Legacies should, therefore, go in the primary will,

but then the secondary will can contain a clause to incorporated them into the secondary will by

reference in case there is any shortfall in the primary estate. The same clause can also be used to

incorporate any debts for which the assets of the primary estate are insufficient.

3. Gift of Real Estate to Two or More People

If real property is devised to two or more people, the beneficiaries may receive it as tenants-in-

common or as joint tenants. If your precedent uses the phrase, “share and share alike,” it refers to

ownership as tenants-in-common. If your precedent does not specify how real property is to be

held, the property will be presumed to be held as tenants-in-common.8 Consider the following

clause:

My Trustees shall transfer my residence municipally known as 113 Hurst Street, Toronto,

Ontario, equally to my sister, X, and my brother, Y.

If either X or Y dies before the will-maker, the gift to that individual will fail and either be

distributed in accordance with the anti-lapse provisions or devolve with the residue. The problem

is not solved, however, by simply tacking on a gift to X and Y as joint tenants, thus:

My Trustees shall transfer my residence municipally known as 113 Hurst Street, Toronto,

Ontario equally to my sister, X, and my brother, Y, as joint tenants.

8 This is a principle of the common law, but has been incorporated into statute. See the Ontario

Conveyancing and Law of Property Act, RSO 1990, c C.34, s 13.

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6

If one of X or Y dies before the will-maker, the whole property will not pass to the surviving

beneficiary. The share of the predeceased beneficiary will fail and it will still either be

distributed in accordance with the anti-lapse provisions or devolve with the residue. A gift of real

property to two or more people jointly with right of survivorship signifies that if one beneficiary

dies after the will-maker but before the interest has been conveyed, it will pass to the surviving

named beneficiaries. If the intention is that the survivor of X and Y will take the whole of the

property if the other one has pre-deceased, the gift could read:

My Trustees shall transfer my residence municipally known as 113 Hurst Street, Toronto,

Ontario, to those of my siblings, namely my sister, X, and my brother, Y, who survive

me equally as tenants-in-common, but if only one of my siblings survives me, to my sole

surviving sibling.

4. Spousal Trusts of Real Estate

There are a number of older precedents that direct executors to hold a house in trust for a

surviving spouse, but without much guidance about how expenses are to be paid, how long the

trust is to last, what is to be done if the spouse wishes to moves, etc. People are living longer, and

so a life tenant may well outlive her own ability or willingness to reside in a house held for her.

If your precedent fails to consider this contingency, a life tenant may be trapped, unable to afford

to move out of the house that she can no longer enjoy. Or the executor may be trapped, holding a

house, and perhaps having to continue to rent and pay upkeep on it, long after anyone in the

family wants it.

When should the house be sold? Some events that might trigger the sale are: remarriage or

cohabitation of the life tenant, a failure to pay for any expenses that have been assigned to her, or

her desire to move to a smaller home or a facility with nursing care. Consider giving the trustees

a power to sell the property at their absolute discretion, just in case the house trust is creating

unworkable problems. If the spouse is to be responsible for general upkeep, the will must

provide what will happen if the spouse fails to pay the upkeep expenses. The trustees have a duty

to maintain the value of trust property, so they cannot simply let the property get rundown. If the

spouse is going to be made responsible for payments on capital — which might otherwise be the

responsibility of the estate — be aware that this provision may prevent the estate from claiming

graduated rate estate status during the first 36 months.

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It is also important, when real property is held for a spouse, that the trust designate someone to

make decisions for the spouse if he becomes incapable. If this is not acceptable to the will-

maker, any place where the spouse was to consent to decisions, the decision will need to be

purely within the discretion of the trustees, or any change may require a court application. And

the spouse's power of attorney should allow the attorney to release the life estate without

consideration if she is of the opinion that the donor should not be in the house.

A house trust could define a disposition date as the earliest of several events, depending on the

particular nature and purpose of the house trust. For example:

(i) the date of the death of the spouse,

(ii) the date the spouse remarries,9

(iii) the date the spouse (or his or her attorney for property or guardian for property if he or

she does not have capacity) notifies the executor that he or she no longer requires the

house;

(iv) the date the spouse fails to pay expenses (possible with some discretion in the executor

to determine when this is the case); and

(v) a date determined at the discretion of the trustee. If the trustees are children who have a

conflict (legal or personal) with the surviving spouse, there may be problems with

giving them such a wide discretion. Either choose a neutral trustee, or find another

method such as the appointment of a mediator.

Under the Rule in Saunders v. Vautier, a house trust can be terminated at an earlier time, if all

the beneficiaries of the trust are ascertainable and competent.10 The will-maker may be content to

have the trust terminated at an earlier time if everyone is in agreement, but if an earlier

termination is undesirable, there should be a gift over to unascertainable beneficiaries.

5. Lapse and Anti-Lapse

9 Provided that will does not make the gift conditional on the spouse remaining single, it will not be

considered contrary to public policy. 10 See the discussion on the rule in Saunders v Vautier below.

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A gift to an individual who has died before the will-maker will usually fail, or lapse, unless:

1) it is a residual gift (when it may pass to other residual beneficiaries or according to

intestacy rules),

2) a contrary intention appears in the will;11or

3) it is saved by the anti-lapse provision contained in the relevant legislation.

Consider the following provision:

My Trustees shall pay the following cash legacies as soon as possible after my death:

(a) to my sister A, the sum of $10,000.00; and

(b) to my friend B, the sum of $10,000.00.

The gifts to B will fail if the intended beneficiary dies before the will-maker. If A dies before the

will-maker, however, the gift to her will be saved by the anti-lapse provision contained in s. 31

of the Succession Law Reform Act, which reads: 12

31. Except when a contrary intention appears by the will, where a devise or bequest is

made to a child, grandchild, brother or sister of the testator who dies before the testator,

either before or after the testator makes his or her will, and leaves a spouse or issue

surviving the testator, the devise or bequest does not lapse but takes effect as if it had

been made directly to the persons among whom and in the shares in which the estate of

that person would have been divisible,

(a) if that person had died immediately after the death of the testator;

(b) if that person had died intestate;

(c) if that person had died without debts; and

(d) if section 45 [dealing with the preferential share for a spouse] had not been passed.

S. 31 will save a legacy to a pre-deceased beneficiary who stands in a close family relation to the

deceased by passing it to statutory substitutes - those persons who would be heirs of the

predeceased beneficiary on an intestacy. The following gift might have unintended consequences

if the sister predeceased the will-maker.

11 Although a common-law exception to the doctrine of lapse holds that a will-maker who leaves a

legacy to someone to whom she owed a moral obligation does not intend it to lapse, so the gift will pass

to the estate of the predeceased legatee. See Re Mackie (1986), 54 OR (2d) 784, 28 DLR (4th) 571, 22

ETR 66 (HC). See also TG Youdan, annotation, “The Doctrine of Lapse: The Ambit and Applicability of

Common Law Exceptions” (1980) 6 ETR 95. 12 RSO 1990, c S.26, s 31. See the commentary in Suzana Popovic-Montag, “Revisiting Section 31

of the Succession Law Reform Act — The Anti-Lapse Provision” (2004) 23 ETPJ 266.

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My Trustees shall pay the sum of $150,000.00 to my sister A in recognition of the many

years she has stood by me, and to compensate her for the hardship she has endured at the

hands of her despicable husband.

By operation of the anti-lapse provisions, the gift in the clause above would actually go to the

husband in question, if A died before the will-maker. The common way to indicate a contrary

intention and defeat the operation of the anti-lapse provision is to include the phrase “if she is

alive on the date of my death” or provide for a gift in favour of an alternate beneficiary if the first

beneficiary has predeceased, a so-called “gift over.” You may have a precedent that contains a

general anti-lapse clause intended to oust the operation of s. 31, something like this:

I intend that any gift in this will to a person who has died before me shall fail and shall

not be paid to any other person or persons in substitution for that predeceased

beneficiary. This paragraph shall constitute a statement of my contrary intention for the

purposes of section 31 of the Succession Law Reform Act.

The clauses are fine, as long as the effect – a complete failure of all gifts in the event of a

predeceasing beneficiary – is acceptable. The alternative – inserting “if he or she survives me”

after each gift is tedious, and may result in the anti-lapse provision being “ousted” even where it

is redundant, such as in gifts to friends.

6. Children per Stirpes

There are many precedents that use the terms “per stirpes.” Per stirpes means “by the root.” “To

my issue in equal shares per stirpes” means that the gift is to go to the will-maker’s children, but

if any child has predeceased, the deceased child’s children are to take the child’s share, and if

any grandchild is also not then alive, the deceased grandchild’s children are to take the share and

so on. Per stirpes, therefore, implies that a gift will not necessarily be restricted to descendants

of the first degree. “Children,” however, means only descendants of the first degree. Therefore,

the term “children per stirpes” is inherently contradictory, but the problem is easily solved by

recognizing that a stirpital division implies more than one generation — in short, “issue.” Judges

have struggled to find meaning in an assortment of pairings, such as children per stirpes,

brothers per stirpes, Darby and Joan per stirpes, grandchildren per stirpes, nieces and nephews

per stirpes, etc. These phrases show up in wills either because drafters have altered the original

“issue per stirpes” or because they began with bad precedents.

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A good example is Dice v. Dice Estate.13 Mr. Dice left a spousal trust for his wife, and directed

his trustees, on her death, “…to divide the rest, residue and remainder of my estate, if any,…

equally between my son, [Eddie], and my daughter, [Marlene], per stirpes.” Eddie died before

his mother, leaving three children, and a will that left his estate to his new wife, Suzanne. There

were three possible readings of the residue clause in the will: (1) Eddie’s share vested in him on

Mr Dice’s death and so formed part of his estate (favoured by Suzanne); (2) Eddie’s share

disappeared, because the words “per stirpes” had no meaning in the context (favoured by

Marlene and supported by Lau v. Mak Estate);14 and (3) Eddie’s share was to be divided between

his children because the words “per stirpes” indicated an intention to pass his share on to his

issue.

The court accepted the last interpretation as the intention of the deceased, but commented:

“terms such as ‘per stirpes’, if used at all, are best used in their traditional sense — otherwise, the

testator runs the risk of having his or her words ignored.” Clarity is maintained only when “per

stirpes” is restricted to use with the word “issue.” “Issue,” which means all descendants, must

however be qualified. If it is not modified with “per stirpes,” a gift to “my issue” will mean that

all the descendants — children, grandchildren, great-grandchildren, etc. — are to share in the

gift.15

Your precedent may say “to my issue in equal shares per stirpes”. Although experienced estate

practitioners generally know what it means, and clients will immediately grasp the concept as

soon as it is drawn out for them in a chart, there are cases where “issue per stirpes” has been read

as though it means “issue per capita.”16 In 1992, Kenneth J. Webb’s gave sound advice for

13 [2012] OJ No. 3158, 2012 ONCA 468 (Ont CA). 14 [2004] O.J. No. 3354, 10 E.T.R. (3d) 152 (S.C.J.). 15 As this error is common, case law has interpreted “issue” to mean “children” in certain instances.

See Sibley v Perry, (1802) 7 Ves Jun 522, 32 ER 211. 16 Re Harrington, [1985] OJ No 1046 (HC), initiated the confusion but it was overturned on appeal (21

February 1986, Ont CA). A later case, Re Alves, [1992] OJ No 3207 (Ont CA), however, reintroduced the

problem in Ontario. In Re Hamel, [1995] BCJ No 2359, 9 ETR (2d) 315 (BCSC) for example, the

deceased died at age 93, leaving 5 children, 13 grand-children, 33 great-grandchildren, and the residue of

her estate “for my issue alive at my death in equal shares per stirpes”. The court concluded, on the

particular facts, that “per stirpes” should be construed to include all the issue, and divided the estate of

$23,107.22, equally among the 51 descendants of the will-maker. Unsurprisingly, the case has not been

cited elsewhere!

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solicitors using the term “per stirpes” and his suggested clause has become of part of many

solicitors’ precedent files: 17

“(1) It should not ordinarily be used at all where the primary beneficiaries are to be issue

of the first degree. Children should be called children.

(2) It should be confined to gifts over in the event of the death of a child or other

beneficiary — in order to cover the possibility, real but not worth long-winded

explication, that a child of a deceased beneficiary might have died survived by

children. A reference to “issue per stirpes” is a convenient way of briefly

incorporating all these possibilities.

(3) If it is necessary to use the phrase, then it should be defined in the will itself so as not

to put either the testator or his draftsman at the mercy of a court of construction. I

suggest a clause such as the following:

Whenever in this will I have directed a division “per stirpes” among the issue of

any person, including myself, I intend to designate the children of that person and

not his or her remoter issue unless a child of that person is then deceased, in

which case I intend that the share to which such deceased child would have been

entitled, if alive, shall in turn be divided equally among his or her children and so

on with each representation by a deceased individual at each level by his or her

children.”

If you are not comfortable using “issue per stirpes” – and some writers discourage the use of

these terms altogether18 - you should probably restrict any gifts for descendants to children and

grandchildren unless you have more complex trust structures requiring gifts to unascertainable

beneficiaries to prevent the operation of Saunders v. Vautier (more on that later).

If you do have a precedent with a gift to issue per stirpes, resist the temptation to qualify issue

with terms such as “alive at my death,” “who are alive,” or “then living”. It is a natural tendency

for a careful drafter to close the class of beneficiaries by including such a phrase. In an ordinary

distribution to issue per stirpes, however, predeceased issue automatically drop out of the

distribution and are replaced or represented by their descendants, if any. While you may hope

17Estates and Trusts for the General Practitioner: New Developments (Law Society of Upper Canada,

1992). 18 C.S. Thériault, “Hamel Estate v. Hamel: Should Will Drafters Abandon the Use of ‘Issue Per Stirpes’?”

(1998) 18 Est. and Tr. Journ. 127; Law Society of British Columbia Practice Checklists Manual, Will

Drafting, says: “Avoid (or use carefully) the terms “survive” and “survivors”, and “in equal shares per

stirpes”, since they may give rise to problems of construction.”

https://www.lawsociety.bc.ca/page.cfm?cid=359&t=Checklist-Manual. See also Peter W. Bogardus,

Mary B. Hamilton and Sadie L. Wetzel, Wills and Personal Planning Precedents (The Continuing Legal

Education Society of British Columbia, 2016) @ 14.5.

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that you have added greater certainty, the result is rather confusion. Consider the effect of the

bolded words below:

to divide the residue of my estate in equal shares among my children alive at my death;

but if any child of mine dies before me leaving issue alive at my death, the share to which

my deceased child would have been entitled had he or she survive me shall be divided

among his or her issue who survive me in equal shares per stirpes.

The words “who survive me” are redundant. In clauses such as the one above, the redundant

phrase may have led the judges in the cases to include all of the will-maker’s living issue in an

attempt to give meaning to phrases such as “then living” or “alive at the Distribution Date.” You

should (1) state the point in time when the division of the share is to be made; and (2) state the

condition that the deceased child must in fact have left issue alive at that point, but then in the

remaining part of the sentence do not further qualify “issue” except with “in equal shares per

stirpes”.

7. Fixed Shares of Residue

There are many precedents in which the residue of the estate is divided into a fixed number of

shares, described either as a fraction or, more commonly, as a percentage. If a beneficiary dies

before the will-maker, the share will create a partial intestacy or will pass to family members of

the deceased in accordance with the anti-lapse rules, as applicable, unless there is a specific

disposition in the event of the beneficiary predeceasing. Where the beneficiaries are all

individuals, making sure that each share of residue will have a living beneficiary there to take the

gift, and prevent either intestacy or lapse. For example:

My Trustee is to divide the residue of my estate as follows:

(i) 27% shall be paid or transferred to my son, Joe, if he is alive on the date of my death;

(ii) 53% shall be paid or transferred to my daughter, Emma, if she is alive on the date of

my death; and

(iii) 10% shall be paid or transferred to my sister, Carole Cheeseming, if she is alive

on the date of my death.

Apart from the fact that the numbers do not add up – which is a remarkably common problem -

if any of the beneficiaries dies before the will-maker, that share remains undistributed under the

terms of the will. The rules of intestacy would have to be applied to determine who inherits.

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In Penner v. Brandon,19 where the wording in the will was:

c) To pay or transfer one-half of the rest and residue of my estate to ALICE

KASDORF, for her own use absolutely.

d) To divide one-sixth of the rest and residue of my estate equally between JONNY

BRANDON and LILY FORREST, for their own use absolutely.

e) To divide the rest and residue of my estate equally between STEPHEN FORREST

and JENNIFER FORREST, for their own use absolutely.

Since Alice died before the will-maker, Stephen and Jennifer argued that they were entitled to

her share, since the unassigned residue was given to them, and the failure of the gift to Alice

meant that her share fell into residue. The court disagreed, finding that the gift to Alice was of a

specific share of residue. Since residue cannot lapse, when Alice’s gift failed, it went to the heirs

on intestacy.20

Fortunately, the problems created by a predeceasing beneficiary of a fixed share of residue are

easily prevents by the use of floating shares. The residual beneficiaries are not given a

percentage, but one or more shares, which are determined according to the number of eligible

beneficiaries. The phrasing used to create floating shares some form of “my Trustee shall divide

the residue of my estate into the number of equal parts required to carry out the following

provisions and (i) pay and transfer one (1) equal part to my brother, A, if he survives me; and (ii)

pay and transfer one (1) equal part to my sister, B, if she survives me, etc.”. If A dies before the

will-maker leaving no issue, all of the residue will be paid or transferred to B.

8. Saunders v Vautier

The rule in Saunders v Vautier states that the beneficiary of a trust who is legally competent and

whose interest (1) is fully vested, and (2) represents the whole of the beneficial interest, can

19 [2016] MJ No 92, 2016 MBQB 64 (Man QB). 20 See also Re McKenzie, 1968 CanLII 241 (ON SC), where percentages of residue rather than

fractional shares were set aside for beneficiaries who had predeceased. In that case, the court found

instead that the failed percentage did not pass by intestacy, but fell into residue, which fortuitously passed

to the son of the pre-deceased beneficiaries, thereby accomplishing what the court believed to be the

intention of the will-maker.

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require the trustee to distribute the trust assets immediately. 21 While the principle is not hard to

grasp, it has a nasty way of cropping up in trusts anywhere property is to be held for someone

past the age of majority, which can result in the trust being unenforceable. For example:

… to hold and keep invested the residue of my estate for the benefit of my daughter Y,

and until she attains the age of 35 years, to pay to or apply for her benefit the whole or

that part of the income and such part or parts of the capital of the residue as my Trustees

in their absolute discretion deem advisable. Any portion of the income not paid to or

applied for the benefit Y shall be accumulated by my Trustees and added to the capital of

the residue of my estate; but after 21 years have passed from my death, my Trustees shall

pay to or apply for the benefit of Y the whole of the income. When Y attains the age of

35 years, the remainder of the residue of my estate shall be paid or transferred to her.

In this clause, Y has all of the interest in the trust, both in the income and the capital. There is no

possibility that she will lose it, since it is not conditional and it is not subject to any divestment.

Thus, her interest is vested, and only the enjoyment or possession of it is delayed. As a result,

once she attains the age of majority, she can demand that the trustees turn the property over to

her, as hers by right. This is not a matter of making an application to court to ask the court to

exercise discretion, but a rule of law — the rule in Saunders v Vautier.

The simplest way to prevent the operation of the rule, and to ensure that the trustees can hold the

funds until Y is 35, is to make the gift conditional on her attaining that age and to provide for an

alternative gift to unascertainable beneficiaries in the event she survives the will-maker but dies

before 35. It is not sufficient to make a gift over to another known individual, because even if the

trust is vested in several individuals, if they are all of age and agree, they can “bust the trust.”

The principle of Saunders v Vautier can apply to any situation where all of the beneficial

interests are identifiable and vested. Watch for a place where the contingent gift is to the issue

alive at the will-maker’s death; since the contingent beneficiaries can be identified with certainty

from the time of the will-maker’s death, they can collectively invoke the rule in Saunders v

Vautier to terminate the trust.

21 (1841), 4 Beav 115, 49 ER 282, affd (1841), 1 Cr &Ph 240, 41 ER 482, [1935-42] All ER Rep 58.

The will-maker in the case left £2500 in stock for his great-nephew when he attained the age of 25. At age

21, the nephew applied to court to have the stock turned over to him and succeeded.

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In amending precedents to simplify them, it is tempting to omit the gift over. If you prefer to

draft without using “issue per stirpes,” you may find that you have no unascertainable

beneficiaries.

9. Henson Trusts

Precedents for trusts for a beneficiary (usually a child) who is or may be entitled to benefits

under the Ontario Disability Support Plan Act, 199722 have become easily available since the

original Henson case where the Divisional Court confirmed that such a purely discretionary trust

could not be used by the Ministry as a reason to terminate benefits.23 You cannot use a standard

trust of residue for these beneficiaries since merely holding the funds in trust is not sufficient. A

Henson trust must ensure that no part of the income or capital vests in the beneficiary. It must be

purely discretionary. Any clause that directs that income is to be paid to the beneficiary, even

though the trustees can determine the manner and proportion, may disentitle the beneficiary to

ODSP benefits.

Income After 21 Years

In Ontario, under the Accumulations Act24 which continues the so-called “Thellusson Rule” —

income cannot be accumulated in a trust after 21 years. If there is no specific provision for the

disposition of income from a trust after the accumulation period, there will be a partial intestacy

22 SO 1997, c 25. 23 Ontario (Min of Community and Social Services) v Henson (1989), 36 ETR 192 (Ont CA). See

also Mary Louise Dickson, Rod Walsh & Orville Endicott, The Wills Book: Benefits, Wills, Trusts and

Personal Decisions Involving People with Disabilities in Ontario (North York, Ont.: Ontario Association

for Community Living, 1999); Mary Louise Dickson, “Trust Blitz: Persons with Disabilities” in A

Practitioner’s Guide to Using Trusts Effectively (Law Society of Upper Canada, Dept of Continuing

Education, 1999); Mary Louise Dickson, “Special Issues Surrounding Trusts for Persons with a

Disability” in Creative Uses of Trusts in Estate Planning (Toronto: Insight Press, 1997); Mary Louise

Dickson & Hilary Laidlaw, “Henson-type Trusts: To Use, or Not to Use” in Advising People with

Disabilities and Their Families (Law Society of Upper Canada, Dept of Education, 2001); Mary Louise

Dickson, QC, “Registered Disability Savings Plans and Related Planning”, Beyond Will and Estate

Planning Essentials, Ontario Bar Association, Tuesday, May 10, 2011; Nimali D Gamage, “Planning for

Disabled Beneficiaries: How Recent Legislative Amendments have Changed Estate Planning”, OBA

Institute 2011; Afia Donkor, “The Henson Trust –A Second Look,” (Deadbeat: OBA, October 2012). 24 RSO 1990, c A.5. The rule arose from Thellusson v Woodford (1798), 4 Ves Jun 227 at 235. The

resulting legislation has been much criticized as outdated. See, for example, H Barry, “Mr. Thellusson’s

Will” (1935-1936) 22 Va L Rev 416; Patrick Polden, “Panic or Prudence? The Thellusson Act 1800 and

Trusts for Accumulation” (1994) 45 N Ir Legal Q 13.

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if the trust is a trust of residue. In Henson trusts, this is especially problematic, since the heir on

intestacy may well be the child who is in receipt of benefits, in whom the income will vest after

21 years, with the same effect as if the trust directed that it be paid to him. Your Henson trust

should specifically direct unpaid income to be paid to someone other than the principal

beneficiary after 21 years.

Even Hand

The “even hand” rule requires a trustee to treat all beneficiaries equally, in the absence of a

direction otherwise. It applies not only to actual distributions from the trust, or to even-

handedness between two or more beneficiaries of the same class (e.g. “children”), but also to

investment policy, since the balance between a very safe policy that preserves capital but

produces little income and a more aggressive policy that produces income but may put capital at

risk is also required for even-handedness between income and remainder beneficiaries. Many

discretionary trusts allow a trustee the power to favour one beneficiary over another, but if your

precedent does not include it in the Henson trust, you will need to add it. By its very nature, the

Henson trust will want the principal beneficiary to be treated better than other beneficiaries, who

are merely there to ensure that the trust does not vest in interest. Excluding the even-hand rule

not only allows the trustee to favour the principal beneficiary without any fear that doing so is a

breach of trust, but ensures that it cannot be argued that he is obliged to pay a certain portion of

the trust income to the favoured beneficiary, with consequent risk of a loss of benefits.

10. Income-Splitting Testamentary Trusts

Sometimes, the children of a will-maker already have their income taxed at the top marginal rate

and will invest rather than use their inheritance. There are many precedents for income splitting

trusts that allowed a will-maker to take advantage of the graduated rate of taxation on

testamentary trusts. Typically, they would set up a trust with discretion in the trustee to pay

income and perhaps capital as well to a pool of beneficiaries including the will-maker’s child,

and his or her own children and grandchildren, and perhaps also spouses as well. Unpaid income

could be accumulated in the trust, subject to the strictures of the Accumulations Act. The result

was that income could be split between the child and the trust, to take advantage of two sets of

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graduated rates. Where the child had a high income, these trusts could be very effective at

reducing the tax on income earned from an invested inheritance.

Of course, such income splitting is no longer possible, since the 2014 federal budget made all

testamentary trusts (with the exception of graduated rate estates and qualified disability trusts)

subject to top marginal rates of income tax. If you are using a precedent for children’s trusts from

before 2014, you need to review it. There is no longer any reason to retain income, and very

good reason not to. Make sure your trust precedent does not compel the accumulation of income.

While it is no longer possible to have income taxed in a testamentary trust at a lower rate, it may

still be beneficial to wealthier children who have spouses or children of their own with lower

incomes to be able to “sprinkle” the income amongst a pool of potential beneficiaries. In these

cases, precedents that set up trusts for the children to allow them to distribute income among

family members remain viable. When one purpose of a family trust is income splitting, the trust

will generally last for life, but check to see whether your precedent has a clause that allows the

trustees to collapse it. Such clauses were very helpful for existing trusts t prevent having capital

gains trapped in the trust when the tax rule changed.

11. Multiple Will Problems

Multiple wills for probate planning have become common, and precedents – good and bad –

abound. Despite concerns that this device was imperiled – first by changes in the Estate

Administration Tax Act and regulations, and then by the introduction of graduated rate estates –

multiple wills now seem to be well entrenched as legitimate means of planning. Lawyers in

Ontario who prepare wills should have a good set of precedents for multiple wills. Generally, the

most unreliable precedents will be those that have simply taken a precedent for a single will and

printed it twice, with the addition of language that says something like “this will covers my

corporate assets” in one will and “this will cover my non-corporate assets” in the other.

Since multiple wills are really symbiotic and complementary, it is important to use precedents

that deal with possible contradictions and ensure they mesh properly. A number of problems

have arisen in the last few years as multiple will-makers have died and their wills have come

under scrutiny. Here are some particular places to review your precedents to make sure they are

not going to bite:

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Revocation

If a will-maker executes two or more wills, the introductory clauses must not revoke the other

will or wills, but to ensure that both or all of the wills continue to be valid. An unadapted

precedent may have each of two or more wills revoke all prior wills, with a resulting confusion

about which will is valid. If you are not careful in using your old precedents, you will produce

two wills where each revokes all prior wills.

This exact situation arose in Lipson v Lipson, 25 as a result of errors in the preparation of the will.

In that case, the Court was able to rectify the will. Similarly, unamended precedents led to court

in McLaughlin Estate v McLaughlin,26 where the first paragraph is each of the deceased’s two

wills read:

I hereby revoke all Wills made before this Will, but not the Will made the 16th day of

June 2010 to dispose of real property located at 78 Wellington Street East, Brampton,

Ontario.

As a result, the primary will, being the first will signed, was revoked by the secondary will. On

application to the court, it was argued, based on Lipson, that the revocation clause in the

secondary will could be excised by way of rectification. The court, however, declined to do so,

declaring the secondary will invalid and requiring proof in solemn form of the validity of the

primary will.

There are a few ways to prevent inadvertent revocation:

a) Omit the revocation clause in the second will that is signed.27 The preparation of codicils

for multiple wills may be problematic (or more problematic than it is already) if one of

25 [2009] OJ No 5124, 52 E.T.R. (3d) 44 (ONSC). 26 McLaughlin Estate v McLaughlin, 2015 ONSC 4230 (CanLII), 10 ETR (4th) 10. 27 See, s. 15: “A will or part of a will is revoked only by,

(a) marriage, subject to section 16;

(b) another will made in accordance with the provisions of this Part;

(c) a writing,

(i) declaring an intention to revoke, and

(ii) made in accordance with the provisions of this Part governing making of a will; or

(d) burning, tearing or otherwise destroying it by the testator or by some person in his or her presence and

by his or her direction with the intention of revoking it.

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the wills does not clearly revoke all prior ones.28 You will need to be specific about what

is and is not revoked. If one will revokes all prior wills, and the other revokes only those

wills dealing with the special property, the order in which the wills are executed is

critical. Not only must the precedents be amended, but your regular practice for

execution of wills needs to ensure that they are signed in the right order; you may also

need to revise your affidavit of execution to record the order of signing.

b) Use a revocation clause only in the first will, with no revocation clause in the second.

This may be a distinction without a difference, in any case, since legislation clearly

states that the making of a will according to the statute revokes prior wills to the extent

of any inconsistency.29

c) Include a revocation in second will limited to all wills except the primary will.

Definition of Assets

An unadapted precedent for multiple wills may not define clearly which assets pass under which

will. In defining assets, you will want to keep the assets dealt with in the probated will to a

minimum. Early precedents for multiple wills often referred just to the shares in a private

corporation, and many clients may have been told by their financial planner that they should

have a “corporate will”. This is certainly the most significant asset and the trigger for making

multiple wills for many clients, but personal effects, trust interests, and a significant amount of

real estate can also be passed through a secondary will. Overly broad precedents, however, risk

“tainting” the unprobated will by including assets that cannot be transferred without probate, so

that the executor is compelled to probate the secondary will, thus defeating the purpose of the

double wills. If your precedents use a very broad definition, you should allow the trustees of the

28 For further information, see Barry S Corbin, “Practice Note: Amending Multiple Wills” (2001) 21

ETPJ 156. 29 “A will or part of a will is revoked only by, (a) marriage, subject to section 16; (b) another will

made in accordance with the provisions of this Part; (c) a writing, (i) declaring an intention to revoke, and

(ii) made in accordance with the provisions of this Part governing making of a will; or (d) burning, tearing

or otherwise destroying it by the testator or by some person in his or her presence and by his or her

direction with the intention of revoking it” (Succession Law Reform Act, RSO 1990, c S.26, s 15).

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secondary will to disclaim any property that might compel an application for probate, and direct

where disclaimed property is to pass.

Commingling

At common law, a trustee is unable to commingle trust funds.30 This means that, although the

intention with multiple wills is frequently that the two estates be administered together, if the

executors put assets from one estate into a bank account with assets from the other, they are in

breach of trust. Since the general intention is to have the two estates administered as one,

consider adding a “commingling” clause to your bag of tricks. The clause may also be useful if

the trustee is holding several trusts for beneficiaries on similar terms, and the will-maker wants

to allow the trustee to invest them together. And a commingling clause is essential in double

wills, so that primary and secondary estate assets can be combined.

12. Standard Powers

The most common place for boilerplate to be used is in the package of standard powers given to

an executor and trustee. Some practitioners have regarded these as so little worthy of scrutiny

and amendment that they are simply a “Schedule A” incorporated into every will by reference.

But many of these packages are well past their “use by date”; if you open them up to have a look

at what is in them, you may find that they contain problematic clauses.

Power To Invest

The practice of estate law has been changing rapidly over the last twenty or years, including the

changes to the Trustee Act made in 1999. Under earlier versions of the Act, investments were

restricted to those listed in the statute — the so-called “legal list” — comprising blue chip

investments. Under the legal list, investments were examined piecemeal; and investments like

mutual funds ran afoul of the rule against sub-delegation, so trustees were also not able to invest

30 Re Smullen Estate (1995), 6 ETR (2d) 299 (Ont Gen Div).

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in mutual funds.31 In response to these concerns, the list was eliminated in Ontario, and replaced

by the prudent investor rule.32

Trustees are now required to exercise the care a prudent investor would exercise in making

investments, subject to the terms of the will.33 The trustee is required to diversify the investments

as appropriate and consider a range of criteria. As a result, a trustee may consult with an

investment advisor and obtain an investment plan to protect himself from liability.

A precedent clause that refers to the legal list is clearly outdated. Either leave the investments to

be governed by the terms of the Act, or understand and be able to explain to clients the effect of

broadening those provisions. Especially where the executor is a family member, the will-maker

may not want to have the full panoply of investment criteria and diversification required of her

executor.

It is still not clear whether a will-maker can lower the statutory standard, although if your client

wants to do that you should seriously question the choice of executor. It would, however, be

surprising if the trustee could be relieved from prudence altogether, and the case law on

exculpatory clauses suggests that there are limits to the latitude a court will give to an erring

trustee, even when the will clearly states that their conduct is to be excused.34

If the will-maker intends a large asset or investment or an operating company to be held by the

estate, the will should explicitly release the trustees from any liability for so doing. Otherwise,

the trustees could be challenged for failing to diversify and perhaps for acting imprudently.

Rule Against Delegation

The common-law principle is delegatus non potest delegare — a person with delegated authority

cannot delegate that authority to someone else. This principle has been applied to disallow

31 Haslam v Haslam, 1994 CanLII 7503, 114 DLR (4th) 562 (Ont Ct (Gen Div)). 32 Trustee Act, R.S.O. 1990, c. T.23, s. 27. (1) “In investing trust property, a trustee must exercise the

care, skill, diligence and judgment that a prudent investor would exercise in making investments.” 33 See the Trustee Act: “This section and section 27.1 do not authorize or require a trustee to act in a

manner that is inconsistent with the terms of the trust” (RSO 1990, c T.23, s 27(9)). 34 In a recent B.C. case, Miles v. Vince, [2014] BCJ No 1827, 2014 BCCA 289 (BCCA) the court held

that even when the terms of a trust grant trustees wide discretionary powers, there remains a fundamental

duty to preserve the trust assets.

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mutual funds (where a fund manager actually picks the investments) as a lawful trustee

investment, on the theory that by purchasing a mutual fund a trustee is sub-delegating investment

powers.35 The Trustee Act allows trust assets to be invested in mutual funds, but there may be

other forms of investment where the principle might be thought to apply, and so if the executor is

to be allowed to invest in similar instruments, the investment clause should specifically allow

that.

If the executors may be hiring investment advice, it is helpful to allow investment decisions to be

delegated and sub-delegated. Although there is case law to support the payment of an investment

advisor, even when the trustee is a corporate trustee,36 the better option is to include in the will

powers for the trustees to seek and pay for professional investment advice. These may not form

part of a standard package of clauses from a few years ago.

Power To Hold Funds for Minor

Many if not all will precedents contain a power to hold funds for minors, and include

authorization for the trustee to pay funds to a parent or guardian. The power, however, is not a

power to transfer the whole trust fund to a parent or guardian of the minor beneficiary. If the

intention is to allow for such a transfer, the trustee must be explicitly allowed to transfer the

funds.

In Hedley Estate v. Grant,37 the executor was the aunt of several nieces and nephews for whom

she was holding funds in trusts. She sought to pass the trust funds to the parents of each child,

and made it clear that she no longer wished to be responsible for these funds. She argued that the

35 Haslam v Haslam, [1994] OJ No 677, 114 DLR (4th) 562 (Ont Gen Div). 36 In Estate of Alaine Jackson Young, [2012] OJ No 206, 2012 ONSC 343 (Ont SCJ), on a passing of

accounts, the Court disagreed with the Children’s Lawyer, who had argued that the management of assets

is a core function of a corporate trustee, and by retaining private investment counsel, the trust company

had incurred an unnecessary expense that should not be borne by the estate. The Court held that “in

today’s complex and sophisticated investment market, executors should be entitled to hire investment

counsel to assist them in making investment decisions and the fees for doing so should not be deducted

from their compensation.” 37 Hedley Estate v. Grant, [1998] O.J. No. 5270 (Ont Gen Div), 1998 CarswellOnt 4876, 74 O.T.C. 234.

.

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following clause allowing her to pay money to a parent of the child sufficed. She proposed to use

it to take all of the capital from the trust and pay it to the parent:

To make any payment of income or capital on behalf of any person under the age of

eighteen (18) years to a parent or guardian of such person or to any person to whom my

Trustees deem it advisable to make such payment and the receipt of such parent, guardian

or other person shall be a sufficient discharge to my Trustees.

The court, however, disagreed, and refused to discharge her from her trust responsibilities.

Most precedents for wills contain some provision for holding funds for minors. If the age of

majority in your precedent is 21, you have a problem, since this has not been the age of majority

for many years. The clause will be, quite simply, ineffective to allow the trustee to hold funds

past the age of 18 in the face of a request from an adult and capable beneficiary. If you use the

phrase “age of majority” you should state which jurisdiction’s rules as to the age of majority will

apply, since the age of majority may be 18 or 19 in other parts of Canada, and anywhere from 16

to 21 around the world.38

Another problem that can arise from boilerplate clauses amended without proper care arises

when funds are to be held for young beneficiaries past the age of majority, and the drafter has

simply changed the age as follows:

If any person becomes entitled to receive any share of my estate while under the age of

25 years, I direct my Trustee to keep that share invested until such person attains the age

of 25 years. In the meantime, my Trustee shall pay or apply such amounts out of the

income and capital as my Trustee in the exercise of an absolute discretion considers

advisable for the benefit of such person.

If the will-maker wants the funds to be held until a young beneficiary attains an older age, trust

provisions should be set out elsewhere in the will. If an older age is simply specified in these

provisions with no gift over, the minor will be able to demand the funds when he reaches the age

of majority. This provision will be ineffective to hold the assets past the age of majority because

of the rule in Saunders v Vautier, discussed above.

38 If there are beneficiaries outside of Canada, there may be initial questions about which law of

majority is to apply: see the comprehensive article by K Thomas Grozinger, “Determination of

Applicable Law to Resolve ‘Age of Majority’ reference for Testamentary Trust in Will” (2013) 32 ETPJ

180.

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The standard minority clause is sometimes adapted to cover other eventualities, such as that

funds may have to be held for beneficiaries who are not sui juris for reasons of mental

incompetence rather than age. Since the spouse of a married person is frequently the beneficiary,

and longer lives mean that a greater number of our clients will be incapable for some part of their

last years, this seems a prudent adaptation to make to the standard clause.

Spouse Trust

If a will contains a spousal trust, you will need to ensure that the powers in your standard

package do not “taint” the trust so as to lose the tax benefits of the trust. If the trust is structured

properly, capital gains will not be triggered when the will-maker dies and the payment of capital

gains tax may be deferred until the second death; the trust, however, must qualify by meeting the

strictures in Section 70(6)(b) of the Income Tax Act,39 under which:

the trust is created by will by a Canadian resident

the spouse or common-law partner40 is entitled to receive all of the income of

the trust that arises before the spouse’s or common-law partner’s death, and

no person except the spouse or common-law partner may, before the spouse’s

or common-law partner’s death, receive or otherwise obtain the use of any of the

income or capital of the trust.

If your package of executor’s power allows someone other than the spouse to “receive income or

otherwise obtain the use of any of the income or capital of” the trust, the trust will not qualify

under the Income Tax Act as a qualifying spousal trust. This is what happened in See Balaz v

Balaz,41 where clauses in the will could have resulted in tainting the spousal trust. Three

standard clauses created problems: There was a clause allowing loans to be made to any

beneficiary on favourable terms, a clause allowing real property to be leased and options given at

39 RSC 1985, c 1 (5th Supp). 40 A common-law spouse is recognized as a spouse for tax purposes after one year of cohabitation,

and as such would benefit from the spousal rollover of property on death. 41 2009 CanLII 17973 (Ont Sup Ct.

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the trustee’s discretion, and a clause allowing corporations to be created and dealt with for the

benefit of any beneficiary. Any one of these clauses, it was argued, could give rise to a benefit to

someone other than the spouse during her lifetime. Clauses other than those considered in Balaz

may also require amendment where the status of a spouse trust may need to be preserved: if the

estate makes payments towards life insurance premiums, for example, with respect to a joint and

last-to-die policy.42

The judge in Balaz helpfully concluded that the testatrix could not have intended the offending

clauses to be included, and rectified the will. You can review and modify every power in your

standard package for the possibility that someone other than the spouse may benefit as a result of

the exercise of that power, and add restrictions where appropriate, or you can use a general

clause disallowing any action by the executor or trustee that would result in a benefit to anyone

other than he spouse during his or her lifetime. To prevent tainting of a spousal trust, however, it

is not sufficient merely to exclude direct payments to anyone other than the spouse. Consider this

example:

Notwithstanding anything contained in this will, no one other than my spouse shall

receive all income and no other person shall receive capital from the qualifying spousal

trust set out in Paragraph 3(b) of this will.

Even with this clause, the administrative clause might allow the executor to provide an indirect

benefit to someone other than the spouse, and the CRA has been known to interpret section 70(6)

of the Income Tax Act in a very broad manner.

Cy-près Clause

Charities change, and it is prudent to include a cy-près clause in your package of precedents for

will-makers making charitable gifts, so that if the named charity has dissolved or been

misnamed, the gift will not fail. Here is a common version of such a clause:

For the purposes of this my Will:

a) If at the date of my death any of the above-mentioned charitable institutions is non-

existent, or has ceased to carry out its objects or the charitable work it is now doing,

42 The Canada Revenue Agency has taken the position that the payment of insurance premiums from a

spousal trust could result in a denial of status as a qualifying spousal trust. TI 2006-0174041C6.

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my Trustees may designate another beneficiary carrying on similar charitable work

to receive the benefit, as they in their absolute discretion shall determine.

b) The receipt or receipts of any person purporting to be the Secretary or Treasurer or

other officer of the charities hereinbefore named shall be a full and sufficient

discharge to my Trustees.

c) My Trustees may make any payments to a charitable institution under the Income

Tax Act in cash or the equivalent value in marketable securities or both cash and

marketable securities in such proportions as my Trustees in their absolute discretion

decide.

There are many reasons that a gift to a named charity cannot be made; it could have changed its

name, amalgamated, wound up, or simply have been misnamed originally. Many older versions

of sub- clause (a) do not cover the possibility that a charity has actually ceased to exist. If that is

the case, the executor may have to find a successor institution and determine if it is, in fact, the

intended recipient. This may require an application to the court. An insufficiently broad clause

may be of limited help. You may also want to consider whether the power should be expanded to

cover gifts to institutional beneficiaries that are not actually charitable. A court reviewing the

will could not apply the doctrine of cy-pres unless the beneficiary was charitable, but there is no

reason that if the will-maker supports a cause that is not strictly charitable,43 he or she could not

empower to executor to find a replacement institution if the named one were unavailable.

Similarly, the receipts provision in sub-clause (b) should cover any institutional beneficiary, but

the gift-in-kind provision in sub-clause (c) can be restricted to charities, since only they will be

eligible for the tax rollover on a gift of appreciated securities.

Born Outside Marriage Clause

Your precedent file may have a form of this familiar clause:

Any reference in this will or in any Codicil to it to a person in terms of a relationship to

another person determined by blood or marriage shall not include a person born outside

marriage or a person who comes within the description traced through another person

who was born outside marriage, except that any person who has been legally adopted

shall be regarded as having been born in lawful wedlock to his or her adopting parent and

43 Such as the prevention of poverty. See Credit Counselling Services of Atlantic Canada Inc. v. Canada

(National Revenue), 2016 FCA 193 (CanLII).

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any person who is born outside marriage and whose natural parents subsequently marry

shall be regarded as having been born in lawful wedlock.

The reason for including such a clause was that it relieved the executor of (probably

unnecessary) searches where the will referred to “children” or “issue,” after the Children’s Law

Reform Act44 in 1978 declared that children were the children of their “natural parents” whether

they were born inside or outside of marriage. But times have changed. It is not at all unusual for

clients or their children to have common-law relationships and children of those relationships

that would be excluded by the old clause. Blended families mean that there may be children who

may or may not be included in the pool of potential beneficiaries, depending on the will-maker’s

sense of family. And reproductive technology means that even the concept of “natural parents” is

fuzzy around the edges. Clearly, any solicitor drafting wills needs to ask about the family

structure, but you will also want a good workable standard clause. It is possible to relieve the

trustees of fruitless searches without excluding children of a stable common-law relationship.

There is no need for your clause to include adopted or posthumous children, since the statute

already does that.45 It should, however, include children of a stable common-law relationship –

unless your client objects – and give the executor some discretion about children who should or

should not be included from blended families or surrogate or other parents.

New Clauses For New Times

Keeping your precedents in good trim is an important part of practicing in this area. In addition

to some of the boilerplate that you may need to amend, you may also need to add some new

clauses to your pack:

A GRE clause to allow executors to postpone distribution for up to three years, and thus

maintain the estate’s status as a graduated rate estate;

A clause allowing the payment of executor’s insurance from the assets of the estate;

A clause indemnifying the executor from any personal liability arising as a result of

penalties under the Estate Administration Tax Act; and

44 Children's Law Reform Act, RSO 1980, c 68, s. 1(1). 45 In section 1(2) of the CLRA, and s. 1(1) of the SLRA, respectively.

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An environmental clause allowing trustees to take steps to remediate any environmental

problem and protecting them from personal liability.

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Bitten by Boilerplate

Appendix - Some Alternate Clauses

Appointment of Executor – No Survivorship Term

I appoint my spouse, A, to be the Estate Trustee, Executor, and Trustee of this will, but if my

spouse, A, dies before me or is or becomes unwilling or unable to act as my Estate Trustee,

Executor, and Trustee before the trusts set out in this will have been fully performed, I appoint

my brother B and my sister C to be the Estate Trustees, Executors, and Trustees of this will in

her place.

Legacy on Second Death of Two Spouses

I wish to advise my Trustee that the will of my husband, X, makes provision for a similar legacy

to the one above in this will. If my husband, X, and I die within 30 days of each other or in

circumstances such that the order of our deaths cannot be determined, we intend that the legacy

is to be paid once only, either out of my husband’s estate or out of mine. Accordingly, the

amount of this legacy may be reduced by an amount equal to the similar legacy paid or to be paid

to the same person under the will of my husband, X, as necessary to give effect to that intention.

Residue – Simple Gift to Issue of the Will-Maker Naming the Children

…to divide the residue of my estate in equal shares among those of my children, namely X, Y,

and Z, who survive me; but if any of them dies before me leaving issue alive at my death, the

share to which my deceased child would have been entitled had he or she survived me shall be

divided among his or her issue in equal shares per stirpes.

Floating Shares

… to divide the residue of my estate into the number of equal parts required to carry out the

following provisions:

(i) to pay and transfer one (1) equal part to my brother, A, if he survives me; but if A dies

before me leaving issue alive on the date of my death, to divide that part among A’s issue in

equal shares per stirpes; and

(ii) to pay and transfer one (1) equal part to my niece, B, if she survives me; but if B dies

before me but leaves issue alive on the date of my death, to divide that part among B’s issue in

equal shares per stirpes.

Gift Over to Unascertainable Beneficiaries to Defeat Saunders v. Vautier

If a child of mine dies before attaining the age of 35 years leaving issue alive at his or her death,

my Trustees shall divide that child’s share or the amount of it not yet received by that child,

among that child’s issue in equal parts per stirpes, or if that child leaves no issue alive at his or

her death, among my issue in equal parts per stirpes.

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Simple “Henson” Trust

If my son, A, survives me, my Trustees shall set aside one half of the residue of my estate upon

trust (the “Special Trust”), and during the lifetime of A:

1. my Trustees shall pay to or for the benefit of A as much of the income and capital of the

Special Trust as my Trustees in their absolute discretion deem appropriate.

2. Any income not paid to or for the benefit of A shall be accumulated and added to the

capital of the Special Trust, but after 21 years from my death, any income not paid to or

for the benefit of A shall be divided among (charities or other beneficiaries) in the

proportion that my Trustees in their absolute discretion deem appropriate.

3. It is my wish that my Trustees in exercising their discretion consider primarily the

comfort and welfare of A. I expressly declare that my Trustees shall not be required to

maintain an even hand when investing and administering the Special Trust, but may in

their discretion favour one beneficiary over another or one class of beneficiary over the

other. No interest in the Special Trust shall vest in A unless actually paid to or for him.

4. [Optional Guidance]

5. Upon the death of A, my Trustees shall divide the Special Trust or the amount of it then

remaining among A’s issue in equal shares per stirpes, but if he leaves no issue alive on

the date of his death, among my issue in equal shares per stirpes.

A “Sprinkling Clause” for a Family Trust for Child – Very Broad

Until A’s Division Day (defined below), my Trustees may pay to or for the benefit of any one or

more of my daughter A, her Spouse, her children and their Spouses, and A’s other issue, and to

the exclusion of any one or more of them, such amounts out of the income and capital including,

for greater certainty, the whole of the capital of the trust, as my Trustees in their absolute

discretion consider appropriate from time to time. Any undistributed income shall be added to

the capital of A’s Trust. After 21 years from my death, my Trustees shall divide the income

derived from A’s Trust among any one or more of my daughter A, her Spouse, her children and

their Spouses, and A’s other issue, and to the exclusion of anyone or more of them, as my

Trustees in their absolute discretion consider appropriate from time to time.

Definition of Estates

(a) “Primary Estate” means all my worldwide real and personal property other than my

Secondary Estate, including any assets disclaimed by the executors of my Secondary Will.

(b) “Secondary Estate” means all my worldwide real and personal property that is in fact

disposed of by my Secondary Will. My Secondary Estate shall include the following:

(i) any shares or indebtedness of Active Corporation Limited, or any successor

corporation to it, or any shares, securities, or indebtedness received in exchange or

substitution for such shares or indebtedness;

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(ii) any interest I have in a partnership, or joint venture, any asset held in trust for me

by a partnership or joint venture, and all amounts owing to me from a partnership or joint

venture;

(iii) any shares, debts, or other interest which I may own on the date of my death in

any corporation or other entity, other than securities or corporations listed for trading on a

stock exchange;

(iv) any property over which I have a general power of appointment;

(v) any beneficial interest I have in any trust, including a resulting or bare trust;

(vi) all articles of personal, household, or garden use or ornament which I shall own at

my death;

(vii) any interest I may have in the real property municipally known as 123 River

Street, Queensville, Ontario; and

(viii) [any other asset belonging to me on my death which can be effectively transferred

or distributed without a grant of authority by a court of competent jurisdiction;]

but excluding any assets disclaimed by the executors of my Secondary Will.

Disclaimer for Property from Secondary Estate

I authorize my Trustees to disclaim entitlement to receive any property listed in the definition of

my Secondary Estate, and any property so disclaimed by my Trustees shall not form part of my

Secondary Estate, but shall be part of my Primary Estate to be dealt with under my Primary Will.

My Trustees may disclaim property for any reason that they in their absolute discretion consider

appropriate, including, without derogating from the scope of that discretion, securing the result

that my Secondary Will does not have to be submitted to the Court for a Certificate of

Appointment as Estate Trustee.

Power To Commingle Assets

My Trustees may in their absolute discretion commingle assets of my [Primary/Secondary]

Estate with other moneys or assets held by my Trustees in trust for any one or more of the

beneficiaries of my [Primary/Secondary] Estate.

Liberal Investment Clause

Trustees when making investments shall not be limited to investments authorized by law for

trustees but may make any investments which they consider to be in the best interests of my

estate.

Power To Delegate and Subdelegate

My Trustees may engage from time to time such person or persons as they consider advisable as

investment counsel or investment advisors (the “Advisor”).

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(1) My Trustees may rely and act upon the advice of the Advisor.

(2) My Trustees may delegate to the Advisor the direct management of the whole or any part

of my estate to the same extent that a prudent investor acting in accordance with ordinary

investment practice would, provided that:

(a) my Trustees have prepared a written plan or strategy, for the investment of the

trust property, including reasonable assessments of risk and return, intended to ensure

that the functions will be exercised in the best interests of the beneficiaries of my estate,

and

(b) a written agreement between my Trustees and the Advisor is in effect and

includes a requirement that the Advisor comply with the plan or strategy in place from

time to time and a requirement that the Advisor report to my Trustees at regular, stated

intervals.

(3) My Trustees shall exercise prudence in selecting the Advisor, in establishing the terms of

his or her authority, and in monitoring his or her performance to ensure compliance with those

terms by:

(a) reviewing reports,

(b) regularly reviewing the agreement between my Trustees and the Advisor and how

it is being put into effect, including considering whether the plan or strategy of

investment should be revised or replaced, replacing the plan or strategy if the Trustees

consider it appropriate to do so, and assessing whether the plan or strategy is being

complied with,

(c) considering whether directions should be provided to the Advisor or whether his

or her appointment should be revoked, and

(d) providing directions to the Advisor or revoking the appointment if my Trustees

consider it appropriate to do so.

(4) My Trustees may pay the proper fees and disbursements of the Advisor out of my estate,

charged to either income or capital or both in such proportions as my Trustees in their absolute

discretion determine.

(5) In addition, my Trustees may also engage an Advisor, including any Advisor affiliated

with or related to my Trustees, to do discretionary management and to advise my Trustees about

investing the assets of my estate or any trust created by this will. My Trustees may delegate to

the Advisor the discretion to manage assets, subject to supervision and upon terms and

conditions, including the ability of such investment counsel to:

(a) subdelegate such discretionary powers, and

(b) invest the assets in any form of investments that my Trustees are permitted to

invest in under the terms of this will, including mutual and pooled funds, as my Trustees,

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acting reasonably and in good faith as persons of ordinary prudence in managing their

own affairs, deem advisable.

Power To Hold Funds for Minor and Incapable Beneficiaries

(a) Subject to any specific provisions above, if any person (a “Beneficiary”) becomes entitled

to receive a share of my estate while under the age of majority or while mentally incapable of

managing property, my Trustees shall keep that share invested and, until the Beneficiary attains

the age of majority or is no longer mentally incapable of managing property, my Trustees shall

[may] pay or apply for the benefit of the Beneficiary as much of the income and capital as my

Trustees in the exercise of an absolute discretion consider advisable.

(b) Unless otherwise provided, my Trustees may make any payment or deliver any bequest

for a Beneficiary under the age of majority or who is otherwise mentally incapable of managing

property to a parent, guardian, committee, attorney for property, or person standing in place of a

parent, or to any other person my Trustees in their absolute discretion consider to be a proper

recipient, including the Beneficiary. Any reasonable evidence that my Trustees have made a

payment shall be a sufficient discharge to my Trustees.

Power to pay funds to parent of a minor beneficiary

(c) I authorize my Trustees to transfer any funds held for a person under the age of majority

or who is mentally incapable of managing property to a parent, guardian, committee, attorney for

property, or person standing in place of a parent, or to any other person my Trustees in their

absolute discretion consider to be a proper recipient who shall hold the funds in trust on the same

terms. My Trustees may accept the receipt of the recipient as a full release and shall not be

required to see to the administration of the funds. I declare that the recipient as Trustee under this

paragraph of this will shall have, with the necessary modifications, all the same powers,

authority, discretion and privileges as are granted to the Trustees of my general estate under the

provisions of this will.

Restriction to Avoid Tainting Spousal Trust

Notwithstanding anything contained in this will, my Trustees have no power, during the lifetime

of my Spouse, to pay income or capital to anyone other than my Spouse or to allow anyone other

than my Spouse to obtain a benefit, direct or indirect, or generally do anything that might

disqualify the spousal trust provided in [Paragraph X of] this will from being a “spouse trust”

within the meaning of the Income Tax Act.

Cy-Pres Clause

For the purposes of this my Will:

1. If, at the time of distribution, any institutional beneficiary never existed or has ceased to

exist or has amalgamated with another institution or has changed its name or objects, then

any provision for it in this will shall not fail and I declare that, notwithstanding the

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particular form of the bequest, my paramount intention is to benefit a general charitable

purpose and my Trustees may in their absolute discretion pay the bequest to the

[charitable] organization that my Trustees consider most closely fulfills the objects I

intend to benefit.

2. The receipt(s) of any person purporting to be a proper officer of an institution named as a

beneficiary shall be a full discharge to my Trustees.

3. My Trustees may make any payments to a charitable institution under the Income Tax

Act in cash or the equivalent value in marketable securities or both cash and marketable

securities in such proportions as my Trustees in their absolute discretion determine.

Exclusion of Children Born Outside of Marriage

Any reference in this will to a person in terms of a relationship to me or to another person

determined by blood shall not include a person whose parents are not married to each other or a

person who comes within the description traced through another person whose parents are not

married to each other, except that:

1. any person who has been legally adopted shall be included as the child of his or her

adopting parent,

2. any person who is born to parents who were not married to each other but who

subsequently marry shall be included as the child of his or her parent,

3. any person with whom I have or a relation of mine has, in my Trustees’ opinion, had a

normal child and parent relationship shall be included as a child of mine or of that relation of

mine, and

4. any person to whom I have or a relation of mine has, in my Trustees’ opinion, shown a

settled intention to treat as a child, shall be included as a child of mine or of that relation of mine.

GRE Clause

I authorize my Trustees in their absolute discretion to postpone distribution of my estate to any

beneficiary or to any trust under this Will and to retain any asset of my estate for up to thirty-six

months following my death (“the Settlement Period”) and:

a. During the Settlement Period, the net income from my estate may, in the discretion of my

Trustees, either be paid to my residual beneficiaries in the proportions determined by my

Will or added to the capital of my estate;

b. Any assets of my estate not specifically designated or distributed before the end of the

Settlement Period shall vest absolutely and proportionately in my residual beneficiaries

one day before the expiry of the Settlement Period;

c. During the Settlement Period, any gift or interest may be paid or transferred to a

beneficiary or trust named in my Will or used for his, her, or its benefit, as my Trustees

deem appropriate; and

d. Neither my Trustees nor my estate shall be liable to any beneficiary under this Will, for any

interest, cost, or loss arising from delayed distribution during the Settlement Period.

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TAB 6

When is a Gift a Gift? The Implications of

Holding Accounts Jointly

Amanda Stacey Miller Thomson LLP

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

When is a Gift a Gift?

The Implications of Holding Accounts Jointly

Amanda Stacey1

Partner, Miller Thomson LLP

1 The author would like to thank Hilary Van de Kamer, Associate, Miller Thomson LLP, for her assistance

with this paper.

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Introduction

There has been a significant increase in the number of estate litigation cases seeking to

address questions relating to joint accounts with right of survivorship2 and how these joint

accounts are treated on the death of an accountholder. Where a parent (Transferor) puts

money into held a joint account with their adult child (Transferee), does the joint account pass

to the child t by right of survivorship or does it belong to the parent’s estate? Can the child

withdraw funds from the joint account prior to or following a parent’s death and who bears the

tax obligations associated with the joint account? How does the child effectively prevent a

family member from challenging the right of survivorship of the joint account and vice versa?

Transferring assets into joint accounts without receiving proper advice can defeat the original

intention of placing the funds in joint accounts in the first place. This paper explores the law

relating to joint accounts including the presumption of resulting trust and the ownership

outcomes of the application of that law. It also explores the issues that arise for a Transferee

accountholder receiving assets in joint accounts from a practical perspective. It concludes with

a discussion of the nuance relating to the intention of the Transferor and how parents can

properly evidence their intentions relating to joint accounts. For the purposes of this paper, the

analysis is limited to joint financial accounts and excludes other forms of jointly held property.

Part I: Joint Accounts and Resulting Trusts

A. Joint Accounts

The usual structure of a joint account with right of survivorship is an account in which

there are two or more owners and all owners of a joint account are presumed to have legal and

beneficial ownership of the account. The right of survivorship means that on the death of one

accountholder, the surviving accountholder becomes the sole owner of the account. The right

of survivorship on a joint account means the interest of the deceased holder has ended, leaving

the whole account owned by the survivor. There is nothing that passes to the estate of the

deceased under the joint account structure because there is no asset existing for the deceased 2 In this paper I only deal with joint accounts with right of survivorship, not joint accounts as tenants in

common,

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accountholder at the moment of death.3 In determining the treatment of a joint account on

the death of an accountholder, a financial institution will rely on the account agreement

between the financial institution and the joint accountholders. Usually the agreement states

the financial institution will pay to/or continue to deal with the survivor solely.

B. Resulting Trusts

i. Definition of Resulting Trust

The term “resulting trust” refers to circumstances in which property legally (and

sometimes equitably) owned by one person “results”, or goes back to, the person who is

beneficially entitled to the property.4 The presumption of resulting trust arises in connection

with joint accounts between Transferor and Transferee, because the law of equity presumes

that transfers of property between parties are bargains and not gifts.5 Therefore, in certain

scenarios where property is transferred without consideration, the presumption of resulting

trust applies, e.g. the Transferor provided all the funds that are in the joint account, yet the

Transferee is on the account as a holder as well. In the case Pecore v. Pecore6, the Supreme

Court of Canada (the “SCC”) states as follows:

A resulting trust arises when title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner. While the trustee almost always has the legal title, in exceptional circumstances it is also possible that the trustee has equitable title.

[Emphasis added; citations omitted.]

This presumption can be rebutted by the party receiving the property if that party provides

evidence that a gift was intended by the party transferring the property.

3 Zeligs v. Janes, 2016 BCCA 280, par 41. 4 Waters’ Law of Trusts in Canada (4th ed.) at 394-395. 5 Waters at 395. 6 [2007] 1 SCR 795 (CanLII) [Pecore].

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ii. Pecore v. Pecore -

The facts of Pecore are as follows:

1. A father placed funds into financial accounts held jointly with his adult daughter.

2. The father stated in writing to the Canada Revenue Agency (the”CRA”) that he retained one hundred percent ownership of the funds and the deposits were not gifts.

3. During his lifetime the father maintained control of the accounts.

4. The daughter did make some withdrawals from the accounts but could not access the funds without her father’s permission.

5. When the father died he left a Will which included specific bequests to both his daughter and her husband without reference to the joint accounts and split the residue equally between his daughter and her husband.

6. After her father’s death, the daughter treated the joint accounts as her own.

The question before the SCC was whether the joint accounts held by the father and

daughter were part of the residue of the father’s estate or whether the daughter owned them

through right of survivorship. As previously stated, this case established the rules regarding the

application of the presumption of resulting trust to gratuitous transfers between parent and

child. It was up to the daughter to prove that her father had intended to gift her the accounts

on a balance of probabilities. The daughter introduced evidence of her financial dependence on

her father as well evidence from her father’s lawyer that the father understood his joint

accounts had already been dealt with. It was on this basis that the Court concluded that the

daughter had rebutted the presumption and that she was the owner of the accounts on her

father’s death.

In their reasons the SCC came out with a definitive statement that the presumption of

resulting trust should apply to all transfers between a parent to an adult child. 7 Pecore is the

leading case regarding the application of the presumption of resulting trust to joint accounts.

7 Ibid. at para. 20.

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Pursuant to that application of the presumption of resulting trust to joint accounts,

where an adult Transferee is added to a joint account by a Transferor, but gives no

consideration or value for that interest in the joint account, even where the Transferee is a

child of the Transferor, it is up to the Transferee to prove that the joint account was a gift on a

balance of probabilities, otherwise the Transferor is deemed to be equitably entitled to that

property and the joint account is held on resulting trust by the Transferee for Transferor during

their lifetime and the Transferor’s estate on the death of the Transferor. The Court will weigh

all the evidence relating to the intention of the Transferor at the time of the transfer into the

joint account in order to determine if the presumption of resulting trust has been rebutted.8

The gift that the Transferee has to prove the Transferor intended to make is the gift of the right

of survivorship that is made at the time that the Transferee is added to the account.9 The right

of survivorship vests when the account is opened and therefore the gift is inter vivos in

nature.10

C. Case Law Following Pecore

There have been many cases since Pecore that have dealt with the question of whether the

presumption of resulting trust has been rebutted. The following cases will be directly addressed

later in this paper, and while they all involve joint accounts, the differentiation in the fact

scenarios leads to very different outcomes.

In Sawdon Estate v. Sawdon, a father put accounts in joint names with two of his five

children. It was the understanding of the children holding the account that on their father’s

death they were to transfer the account proceeds equally between the five children. The

father’s estate entitled each of his children to a lump sum, but the residue was left to an

organization. The organization challenged the joint ownership of the accounts and argued that

the accounts should be held in trust for the father’s estate on resulting trust. Around the time

the father placed the funds into the joint accounts with his sons, he was advised by his lawyer

8 Ibid. at para 55. 9 Ibid. at para 49. 10 Ibid. at para 48

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that if he did not want the accounts to transfer to the sons alone on his death he would have to

execute a declaration of trust. It is clear from the testimony of his lawyer, his account

representative and his children that the father understood that his two sons would distribute

the accounts evenly between his children and “they knew what to do”.11 The Court found that

the father had full knowledge that the accounts would pass to his sons by right of survivorship

and believed that they would distribute them in accordance with his wishes independent from

his Will. In this case the Transferees were found to hold the survivorship rights in the joint

accounts on an express trust for the benefit of themselves and their siblings.

In Lowe Estate v. Lowe12, a testator placed an account into joint names with his nephew,

in order for the nephew to make two gifts, one to the Canadian University College and one to

the testator’s granddaughter, who was estranged from her father, the testator’s executor. The

nephew claimed the account was transferred because the testator did not trust his son, the

executor, to carry out the gifts as he had instructed and that he did not want to change his Will.

Prior to the testator’s death the nephew made some payments from the account for bills and

utilities. Shortly after the testator’s death the nephew made the gifts as specified by the

testator. The testator left notes and documentation showing that the account was intended to

go to his nephew to make the gifts as he had specified. The nephew also acknowledged that the

remainder of the account was to be paid to the estate after the gifts were made. Reid J. found

there was enough evidence to rebut the presumption of resulting trust for a number of

reasons, including the banking documents, the written instructions provided by the testator,

the lack of prior use of joint banking for estate planning purposes, and that the nephew had

nothing to gain from acting the way he did.13 Because he had no financial stake, his evidence

was more credible. Reid J. compared the situation to that in Sawdon Estate and found that

there was reasonable evidence to support that the testator had intended to create a trust,

separate and apart from the instructions in his Will, whereby the nephew was the Trustee.14

11 2014 ONCA 101, para 24 (CanlII) [Sawdon Estate]. 12 2014 ONSC 2436 (CanLII) [Lowe Estate]. 13 Ibid. at para 36. 14 Ibid. at para 37.

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In Unger Estate (Re)15, the testator had placed his bank accounts and investments into

joint names with one of his daughters, the Respondent, who had acted as his attorney for

property for approximately eleven years. The testator’s joint assets comprised nearly all of his

estate. Shortly before his death the testator changed his Will, appointing four of his children as

his estate trustees instead of the Respondent alone. The testator also directed that his estate

was to be divided between his five living children and one grandchild (presumably as a

substitute for that grandchild’s deceased parent). The Respondent was replaced as attorney for

property and personal care by one of the Applicant daughters, shortly before the death of the

testator. The Applicants (three of the testator’s other children) requested that the joint

accounts be paid to the estate on the death of the testator and the Respondent refused stating

that the funds passed to her by right of survivorship. Reid J. noted that the Respondent did not

contribute financially to the bank accounts or investments and that the testator had controlled

the accounts until his death.16 The Respondent claimed the gift was made because of the

assistance she provided to her parents as well as her financial need as a single mother. There

were some aspects of the Respondent’s testimony that seemed to contradict the actions of the

testator. For example, the Respondent claimed that the testator told her that her siblings would

get nothing if they did not treat the testator better, but then subsequently changed his Will and

left all of his children remaining as beneficiaries.17 The Respondent failed to prove that the

presumption of resulting trust was rebutted and the judge ordered that the funds were held by

the Respondent on resulting trust for the benefit of the Estate of the testator and ordered the

funds to be surrendered to the estate trustees.18 We note that at paragraph 22 of the decision,

Justice Lee states that the bank accounts and investments are held on resulting trust by the

Respondent in favour of the Application, but later in paragraph 24 makes a declaration that the

assets are “…held …under a resulting trust for the benefit of the Estate of the Testator”.

15 2014 ABQB 230 (CanLII) [Unger Estate]. 16 Ibid. at para 9. 17 Ibid. at para 20. 18 Ibid. at para 24.

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In Johnson v. The Estate of Verna Hazel Johnson, Robert Wayne Johnson,19 the testatrix

had two sons, one of whom had predeceased her leaving a grandson. The surviving son of the

testatrix had been added jointly as an account holder on his mother’s accounts and later acted

as her estate trustee. In determining the value of his mother’s estate, the son did not include

the joint accounts in the estate assets and claimed that the accounts passed to him by right of

survivorship. His nephew claimed half of the proceeds of the accounts as he was entitled to his

father’s portion of the estate. The son supported his argument that the accounts were to be

gifted to him with affidavit evidence. Therefore his case was built on facts attested to by him.

He claimed that his mother clearly indicated that everything was to go to him on her death.

However, he also claimed he “forgot” about his nephew, and was very resistant to providing

information regarding the nature and size of the joint accounts. The testatrix had left her house

in her name alone. While the bank did provide a letter stating that the accounts were joint,

they were silent on the right of survivorship, even though the bank had proceeded as though

there was a right of survivorship attached. Because of the son’s behaviour and the lack of

persuasive evidence, the Court found that the son could not rebut the presumption and

therefore the joint account proceeds were deemed to be part of the testatrix’s estate.

19 2015 ONSC 3765 (CanLII) [Johnson Estate].

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D. Ownership Outcomes

Pecore and the cases following can be seen to demonstrate what are currently the four

ownership outcomes on the death of a Transferor, as summarized in Johnson Estate20:

The case law in Pecore v. Pecore, 2007 SCC 17 (CanLII), Sawdon Estate v. Sawdon, 2014 ONCA 101 (CanLII), and Mroz (Litigation guardian of) v. Mroz21, has identified four potential options concerning the status of funds in a joint financial account held between a parent and an adult child:

(a) The funds in the accounts result back to the estate as a consequence of the death of the parent by way of a resulting trust (Mroz at para. 72, Pecore at para. 36, Sawdon Estate at paras. 67-71).

(b) The funds were placed into a joint account by the transferor parent with the transferee adult child with the intention that the adult parent retain exclusive control of the account until her death and thereby gift the right of survivorship to the adult child (Pecore at paras. 46 and 70.

(c) An outright gift was made to the adult child when the joint account was created (Pecore at para. 70).

(d) An express trust [of the beneficial right of survivorship] was created when the adult parent created a joint account (Sawdon Estate, para. 67).

In order to advise clients appropriately, it is important to have an understanding of the possible

outcomes of joint account ownership and how those outcomes are arrived at from a legal

perspective. As previously stated, the starting point for a gratuitous transfer from a parent to

an adult child is that the account is presumed to result back to the parent unless proof is

provided that a gift was intended.

i. Resulting Trust

The legal result of scenario (a) is that the legal and beneficial ownership of the joint

account splits when the Transferee is added to the joint account. The Transferee only ever

legally owns the account and is never entitled to use the proceeds of the account for his or her

own use. The Transferor is beneficially entitled to the account and therefore when the

Transferor dies, the account is held on resulting trust for the Transferor’s estate. 20 Ibid. at para 25. 21 2015 ONCA 171 (CanLII) [Mroz].

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ii. Gift of Right of Survivorship

The legal result of scenario (b) is a little different. Again, the legal and beneficial ownership of

the joint account splits when the Transferee is added to the joint account, and the Transferee is

not entitled to use the account proceeds for the benefit of the Transferee during the lifetime of

the Transferor. However, on the death of the Transferor, legal ownership of the account and

beneficial ownership of the right of survivorship merge and the Transferee is entitled to treat

the proceeds of the account as their own.

iii. Outright Gift of Joint Account

Scenario (c), where an outright gift of the account is made at the time the joint account

is created, was indirectly mentioned in Pecore.22 The analysis by the Court of scenario (c) starts

with the presumption of resulting trust as in scenarios (a) and (b). If the Transferee can show

that the Transferee had access to the use of the account during the Transferor’s lifetime for the

Transferee’s own benefit, the presumption can be rebutted without examining the Transferor’s

intention on the use of the account at the Transferor’s death. This is because the Transferee

has a beneficial entitlement to the proceeds of the joint account during the Transferor’s

lifetime and that beneficial entitlement does not end at the Transferor’s death. The Transferor

would have no unilateral right to remove the beneficial right of survivorship from the

Transferee and therefore the Transferor would have no right to direct the proceeds on the

Transferor’s death. If the Transferee cannot demonstrate that the Transferee had an

entitlement during the Transferor’s lifetime to the account, the Transferee has to prove the

Transferor intended a gift of the proceeds of the joint account on the death of the Transferor as

is required in Scenarios (a) and (b).

22 Supra note 6 at para 70.

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iv. Express Trust

The legal analysis in scenario (d) is quite different than scenarios (a) through (c), as

demonstrated in Sawdon Estate and Lowe Estate. There cannot be both an express trust and a

gift of the survivorship associated with the account and therefore if it can be proven that an

express trust is created by the Transferor on a balance of probabilities, the Court doesn’t need

to enter into a discussion regarding the presumption of resulting trust with respect to the

survivorship. 23 Similar to scenario (a), the legal interest in the account transfers to and is shared

with the Transferee when the Transferee is added to the account and beneficial interest

remains with the Transferor. In contrast to scenario (a), on the Transferor’s death the beneficial

interest vests in the residual beneficiaries of the trust in accordance with the trust agreement

instead of the Transferor’s estate. The account is dealt with by the Transferee in accordance

with the terms of the trust and the account never results back to the Transferor. Therefore, the

estate of the Transferor does not dictate the distribution of the funds to the transferee. Only

when a Transferee fails to prove that an express trust is established will the Court begin to

examine whether the presumption of resulting trust has been rebutted as in scenario (a) and

(b).

I have summarized the outcomes in the chart below.

Outcome Status of Parent while alive

Status of Child while Parent alive

Trust Yes/No

Trust Terms

1. Resulting trust Legal and beneficial owner

Trustee of the whole account; legal title only

Yes Trustee holds for parent while alive and then for estate of parent on parent’s death

2. Gift of right of survivorship to child

Legal and beneficial owner

Trustee of the whole account; legal title only while parent alive

Yes Trustee holds for parent while alive and then takes beneficial interest for themselves on parent’s death

3. Outright Gift to Child

Legal and beneficial owner of half the account

Legal and beneficial owner of half the account

No N/A

23 Supra note 11 at para 70.

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4. Express trust of beneficial right of survivorship

Legal and beneficial ownership

Trustee of the whole account; legal title only

Yes Trustee holds for parent while alive and then for beneficiaries of the right of survivorship

As can be seen above, there are a variety of ways that the ownership of joint accounts

can be interpreted. The determining factor in what legal analysis and principles to apply is the

intention of the Transferor. For advisors, this analysis is important to determine what the

clients’ needs are and to advise them to document their intentions in an appropriate manner to

avoid the unintended consequences of not so doing.

PART II - Implications for Transferees and Estates

A. Responsibilities of Joint Accountholders

In the event that the presumption of resulting trust applies, there can be ramifications

at law for a Transferee. The most obvious result is that the Transferee may be required to pay

back proceeds of the account, spent before or after the death of the Transferor, if the

Transferee cannot rebut the presumption of resulting trust. This is the case even if the

Transferee had a genuine belief that they had a right to spend the proceeds of the account. But

even where the presumption of resulting trust can be rebutted, a Transferee may have further

obligations to the Transferor or the Transferor’s estate.

In Estate of Annie MacKay v. Dawn MacKay (Evans)24 an elderly mother had a very close

relationship with her daughter-in-law and named her daughter-in-law as a joint owner on her

account to assist her in managing her financial affairs. After four or five years of assistance, the

mother requested that her daughter-in-law take over full management of her finances and

certain personal care tasks. The daughter-in-law agreed to fully manage the mother’s finances

for a small amount of compensation. The daughter-in-law would transfer the compensation as

agreed from time-to-time from the mother’s account and continued to review the accounts

24 2015 ONSC 7429 (CanLII) [MacKay].

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with the mother until the mother was no longer capable, which was about two years after the

daughter-in-law began managing the mother’s accounts and receiving periodic compensation.

After the daughter-in-law separated from the mother’s son, the son began an action

challenging the payments made by the daughter-in-law to herself, for her services, from the

mother’s account. Throughout the duration of the account management, the son was named as

attorney for his mother under her powers of attorney. The daughter-in-law had provided an

accounting of the mother’s finances to the mother’s sons when the daughter-in-law became

concerned that the mother did not have sufficient funds to support herself. The question

before the Court in this case had to do with the inter vivos management of the joint account,

and whether the daughter-in-law had breached a fiduciary duty in paying herself from the

account. There was no question in this case that the joint account was part of the mother-in-

law’s estate. The Court found that the compensation that the daughter-in-law received was

reasonable and more than fair for her services and she was not obligated to pay any money

back to the estate as she did not breach her fiduciary duty. While MacKay is not a resulting

trust case, it does establish the fiduciary obligations of joint accountholders. In MacKay it was

crucial that the Court found that the daughter-in-law had a fiduciary duty to her mother-in-law

in the management of the account and was in essence a trustee de son tort.25

A fiduciary relationship is one in which a person has a relationship of trust with another

person, typically where one party holds a position of power in comparison to the other. In

MacKay, Woodley J. summarized when a fiduciary relationship will be found as follows:

i. The fiduciary has scope for the exercise of some discretion or power;

ii. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests;

iii. The beneficiary is vulnerable to or at the mercy of the fiduciary holding the discretion or power.26

25 Ibid. at para 38. 26 Ibid. at para 34.

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A trustee de son tort is someone who acts in such a way that it is deemed that they are acting

as a trustee of the property of someone else, even if no formal trustee relationship is

established.

Based on these descriptions, most children would have a fiduciary relationship with a

parent when managing joint accounts, especially when the parent is infirm or vulnerable.

Similarly, they may be deemed to be a trustee of that parent’s assets. This is important because

a fiduciary has a responsibility to act in the best interest of the person they are to protect and

also has a duty to avoid conflicts of interest with that person. In order to avoid any such

conflicts, a Transferee has a duty not to spend the funds of the Transferor for the Transferee’s

benefit. In Unger Estate, the judge ordered a full accounting of the management of the joint

account for the period one year prior to the death of the Transferor after finding the

presumption of resulting trust was not rebutted. The Court often wants to confirm that the

joint account has been managed responsibly in any scenario in which the account is managed

for the benefit of another person. If a Transferee cannot show how the account was managed

or what the funds were used for, this may negatively impact their case, or at the very least

cause them significant hardship in trying to trace expenditures. This could be a problem if a

parent assigns a child as a joint accountholder if the child has no idea what the account is used

for.

In order to ensure that the Transferee is meeting the standard of care required (the

responsible management of funds for the benefit of the Transferor) the Transferee should track

the use of any accounts on which they are listed as joint accountholders. One of the factors that

assisted the Transferee in MacKay in demonstrating she had met her fiduciary responsibility

and her responsible management of the Transferor’s funds was the Transferee’s detailed

records and accounting of the Transferor’s account. She could demonstrate that she was

administering the accounts in a responsible manner and had only taken money to which she

was entitled by way of the agreement. If there is even a slight possibility a Transferee has a

fiduciary responsibility to a Transferor, they should be very cautious in using joint account funds

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for their own benefit and should keep detailed records showing responsible management of

the account.

B. Entitlement to Joint Account Proceeds

When a financial institution finds out that a joint accountholder has died, they rely on

the applicable account agreement in order to determine to whom to release the proceeds of

the joint account. In a non-scientific review of the “Big 5” deposit account agreements, all state

that the bank pays the proceeds of the account to the survivor. Doing so would be their

contractual discharge. It will be the responsibility of the survivor to carry out any trust terms, if

a trust applies. However, if the financial institution receives notice that there is a claim or

dispute as to the ownership of the joint account, the financial institution may freeze the asset

pending (1) an order as to how to pay the proceeds, or (2) the consent of the authorized estate

representative and any applicable beneficiaries, and the Transferee.

The financial institution may have already released the joint account to the surviving

Transferee accountholder prior to any trust claim. How should a Transferee treat the joint

account assets in this scenario? The surviving Transferee accountholder may have an obligation

to surrender the account to the estate of the Transferee or to the beneficiaries of the express

trust of the beneficial right of survivorship.

In Pecore at para 40, Rothstein J. stated:

…whether the father intended to make a gift of the beneficial interest in the accounts upon his death to his daughter alone or whether he intended that his daughter hold the assets in the accounts in trust for the benefit of his estate to be distributed according to his will.

Multiple cases following Pecore make reference to joint account funds to which the

presumption of resulting trust applies “belonging” to the estate of the Transferor as in Sawdon

Estate27 or “becoming part of the estate” as in Mroz28. In Sawdon Estate the ultimate finding

27 Supra note 11 at para 2. 28 Supra note 21 at para 2.

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was the beneficiaries of the express right of survivorship were “entitled” to the funds in the

joint accounts.29

If a Transferee holds the proceeds of a joint account in trust pursuant to the

presumption of resulting trust or an express trust, the Transferee will have to produce the

proceeds they have control over or have received. Transferees should be especially mindful of

the possibility that someone may challenge a right of survivorship associated with a joint

account even after the account has been released to the Transferee and ensure they retain any

documentation demonstrating the Transferor’s intentions that the Transferee is gifted the right

of survivorship. If the Transferee does not have such documentation they should not access the

funds for their own use unless they are certain that no one will claim through the presumption

of resulting trust or an express trust of the right of survivorship.

C. Tax Implications

Like the determination of who is entitled to the proceeds of a joint account on the death

of a joint accountholder, the tax obligations resulting on the death of the Transferor are

dependent on the determination of the intention of the Transferor. CRA interpretation “2015-

0580531E5 – Joint account and estate returns,” provides some insight into the Canada Revenue

Agency’s treatment of joint accountholders for taxation purposes. The interpretation arose as a

result of an inquiry regarding the taxation of a joint account on the death of the Transferor. The

CRA stated that the income tax owing on an account could not be calculated until a

determination regarding the ownership of an account had been first established.

The CRA provided two scenarios regarding the taxation of the account which were also

summarized in Pecore. The two scenarios made a distinction between a “nominee”

accountholder, someone with legal and not beneficial ownership, and a true owner who is

entitled to both legal and beneficial ownership of the account. If the surviving Transferee held

bare legal title to the joint account for the benefit of the Transferor and had no beneficial

entitlement to the proceeds of the joint account until the death of the Transferor, then any

29 Supra note 11 at paras 67 & 72.

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capital gains or losses should be reported on the deceased Transferor’s terminal T3 tax return.

If, however, the Transferee was beneficially entitled to a portion of the joint account while the

Transferor was alive, the deceased Transferor’s estate would only claim the capital gain or loss

on the deceased Transferor’s terminal T3 tax return on the portion to which the Transferor was

beneficially entitled. The Transferee, upon subsequent actual disposition of the entire property,

would have to report on their T1 return any gain or loss on the portion of the property that

they were legal and beneficial owner of .

Given that many Transferors do not formally establish the nature of their legal

ownership of joint accounts, it is also unlikely that they discuss the potential taxation

implications with Transferees. Transferees may end up having a large tax liability they were not

expecting. It is yet to be determined if the CRA will look at evidence regarding the intention of

the Transferor if a Transferor’s estate is audited, however Transferees should be made aware of

the potential income tax consequences of being named as owners on joint accounts.

It should also be of considerable note to those seeking to avoid estate administration

tax (“Probate Tax”) by using joint account ownership with children, that in the event that it is

determined that the a joint account is subject to the presumption of resulting trust and is held

by the Transferee in trust for the estate, the Transferor would have been equitably entitled to

the proceeds of the account. The Estate Information Return Guide issued by the Ontario

Ministry of Finance states that joint accounts with a right of survivorship do not have to be

included on the estate return, however it also states that any beneficial interest to which the

testator is entitled does have to be included30. Therefore the value of the joint account held in

the trust for the benefit of an estate will need to be documented in the Estate Information

Return and will result in the joint account being included in the estate value for the purposes of

establishing Probate Tax.

30 http://www.forms.ssb.gov.on.ca/mbs/ssb/forms/ssbforms.nsf/GetFileAttach/9955E~2/$File/9955E_Guide.pdf , p. 6

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PART III : Deciphering the Intention of a Transferor

A. The Demonstration of Intention in Case Law

There are many different ways that the intention of a Transferor can be interpreted and

the funds from a joint account can be distributed in vastly different ways depending on that

determination. In trying to determine how to demonstrate intention regarding joint accounts,

we can look to the case law to provide clues regarding how intention can be established and

documented.

There are any number of factors that can support a case against the presumption of

resulting trust. The Court in Pecore specifically addressed a number of factors that had been

treated in divergent ways in previous cases. The list of factors that can assist in determining the

intention of a Transferor, as established in Pecore, includes financial institution documents,

control and use of the funds, granting of a power of attorney and the tax treatment of the

accounts.31 Unger Estate also introduces the idea that an understanding of the operation of

joint accounts with a right of survivorship may be evidence of intention. However while most of

the factors may contribute to the support of an intention to gift funds, the Court in Pecore

declared that no one factor is determinative of intention on its own. This means that depending

on the facts of each case, a factor may become more of less important or instructive in

determining intention of the Transferor.

Pecore also indicated that the place in time from which a piece of evidence is derived is

important in determining the weight it should be given. As previously mentioned, this is

because the gift of the right of survivorship vests at the time the Transferee is added to the

joint account. As much as possible, evidence that the gift was intended by the Transferor

should be contemporaneous with that gift. Evidence subsequent to the transfer can be

admitted, but the evidence must be relevant to the Transferor’s intention at the time of the

transfer.32 Transferors may change their minds in the interim regarding their intention so the

31 Supra note 6 at paras 60 to 70. 32 Ibid. at paras 56 to 59.

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Court has to decide how much weight to assign post-transfer evidence. For example, in Unger

Estate the Court took into account changes to the Will subsequent to the transfer. The

Transferor’s Wills both before and after the changes were made would have been defeated if

the presumption had been successfully rebutted so both the original Will and the amended Will

were evidence that the Transferor had not intended the transfer to be a gift.33

In certain cases it is clear that a Transferor intends the Transferee to have a beneficial

ownership in the account at the time the Transferee is added. It can be easier to prove a gift

and rebut the presumption of resulting trust in circumstances where the Transferor is capable

because usually the Transferor has knowledge that the Transferee is accessing the funds for the

Transferee’s benefit and it can be conjectured that the Transferor would object in the event

that the Transferee was not beneficially entitled to take funds from the account. It becomes

more difficult to demonstrate a gift in this scenario where the joint account holder is also acting

as an attorney under a power of attorney for the Transferor or is held to have a fiduciary

obligation to the Transferor.

Self-serving statements of the parties can be granted weight, however it is again up to

the Court to decide how much. In Unger Estate, it is clear from the judgment that Justice Lee

rejected the self-serving statements of both parties as they could not “be verified or

contradicted either way”.34 There was “no conclusive or independent evidence that would

rebut the presumption of resulting trust and indicate the testator’s intention was to give all of

the funds to the Respondent.”35 In Johnson Estate a majority of the Respondent’s evidence to

rebut the presumption of resulting trust was provided through affidavit. Woollcombe J. did not

accept the evidence of the Respondent because there was little documentation regarding his

statements and he had not been forthcoming during proceedings.36 The Respondent was

extremely resistant to providing information regarding the joint accounts to the Applicant and

his lack of transparency regarding the estate value and the joint accounts was viewed poorly.

33 Supra note 13 at para 23. 34 Ibid. at para 21. 35 Ibid. at para 22. 36 Supra note 19 at paras 34 to 35.

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The Respondent’s behaviour in administering the estate and during litigation proceedings had

damaged his credibility in the eyes of the Court and his affidavit evidence without substantive

support was discounted. Given that most matters involving joint accounts proceed to Court due

to a lack of evidence of a clear intention on the part of the testator, it is not surprising that

parties resort to personal evidence to prove the testator’s intention. One way to combat this

outcome is if the testator sets out a clear intention.

B. Best Practices to Demonstrate Intention

If a Transferor wants to effect a gift to an adult child by way of joint account, they

should make a clear statement regarding their intention in their Will or a stand-alone document

executed at the time the joint title is bestowed, which they should then store with their Will .

Likewise, if a Transferor wants a joint account to be held in trust for their estate and the

account is in joint names for ease of administration, a statement to that effect in the

Transferor’s Will would be strong proof that the presumption of resulting trust was not

rebutted. The more clear the independent evidence is that can be used to either support the

presumption of resulting trust or rebut it, the less chance that the matter will escalate to

litigation. In order to avoid all confusion, the documentation should address the intention both

during the Transferor’s lifetime and after their death. Of course it should be noted that even

clearly documented intention cannot prevent a disgruntled beneficiary or family member from

challenging the transfer of a joint account on the basis of lack of capacity of the Transferor or

undue influence. Likewise, if a document expressing one intention of the testator is executed, a

document, such as a will, executed later expressing a different intention may confuse the

matter.

Conclusion

As demonstrated in this paper, assigning Transferees to joint accounts has resulted in a

myriad of cases trying to decipher Transferor intention. What may seem like an obvious

intention to a Transferor may not be so obvious to others. The risk of litigation from an attempt

to make the administration of the account “easier” or to avoid the inclusion of the account for

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the purposes of valuing an estate for probate, may not be worth placing their assets in joint

accounts for many Transferors. The presumption of resulting trust may defeat the purpose for

which many people place their accounts in joint names with their children. Other options

available for managing accounts, such as powers of attorney or formalized trusts, should always

be discussed with clients as an alternative to joint accounts. Client Transferors should be

informed of and understand the risks involved in holding joint accounts and the need to

document their intention, or the consequences of not doing so.

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TAB 7

The Attorney for Property

To What Extent Can They Gift and

Estate Plan?

Cate Grainger Harrison Pensa LLP

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

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THE ATTORNEY FOR PROPERTY

To What Extent Can They Gift and Estate Plan?

A continuing power of attorney for property grants the authority to a person to act on behalf of the

grantor. The continuing power of attorney is a widely-used planning tool: while the grantor is capable,

the attorney may act as his agent; if the grantor becomes temporarily or permanently incapable, the

attorney is obligated to ensure that his financial affairs are managed. The responsibility of being an

attorney is a weighty one, and it is imperative that the attorney understands the powers and duties that

the position brings. This paper explores the narrow questions of 1) whether an attorney may make gifts

on the incapable grantor's behalf, to others and to himself and, 2) whether an attorney is authorized to

engage in estate planning on behalf of the incapable grantor. The powers and duties of an attorney for

property are set out in the Substitute Decisions Act, 1992 (“SDA”)1 and the regulations under it. As

such, in order to frame this focused discussion, it is appropriate to first review the relevant provisions

of the SDA.

Legislative Review

Subsection 7(2) provides that the continuing power of attorney may authorize the person named as

attorney to “do on the grantor’s behalf anything in respect of property that the grantor could do if

capable, except make a will.”2 The term “will” is not defined in the SDA other than to say that it has

the same meaning as in the Succession Law Reform Act (“SLRA”). 3 Section 1(1) of the SLRA defines

“will” to include a testament, a codicil, an appointment by will or by writing in the nature of a will in

exercise of a power, and any other testamentary disposition.4 The effect of this definition of “will” on

the attorney’s powers is discussed below.

Subsection 32(1) of the SDA provides that the attorney is a fiduciary whose powers and duties shall be

exercised and performed diligently, with honesty and integrity and in good faith, for the incapable

person’s benefit.

Subsection 32(1.1) of the SDA states that if an attorney’s decision will have an effect on the incapable

person’s personal comfort or well-being, the guardian shall consider that effect in determining whether

the decision is for the incapable person’s benefit.

Subsection 32(1.2) of the SDA requires that the attorney for property manage a person’s property in a

manner consistent with decisions concerning the person’s personal care that are made by the person

who has authority to make those decisions. However, as set out in subsection 32(1.3) provides that

32(1.2) does not apply if the decision’s adverse consequences in respect of the person’s property

significantly outweigh the decision’s benefits in respect of the person’s personal care.5

1 S.O. 1992, c. 30 [SDA]. 2 SDA, s 7(2). 3 R.S.O. 1990, c. S.26 [SLRA]. 4 SLRA, s. 1(1), definition “will”. 5 SDA, s 32(1.3).

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Section 33.2 of the SDA provides that property or information about that property belonging to an

incapable person that is in another’s control shall be delivered to the attorney when required.6 Property

in another person’s control also includes the incapable person’s will.7 A person who has custody of

any documents relating to an incapable person’s property is required to make copies of those

documents for the attorney if requested.8

Section 34 provides the attorney with the power to complete a transaction that the incapable person

entered into before becoming incapable.9

Subsection 35.1(1) of the SDA bars the disposition of property that the attorney knows is subject to a

specific testamentary gift. Subsection 35.1(2) states that subsection 35.1(1) does not apply to a specific

gift of money. Subsection 35.1(3)(a) permits the attorney to dispose of property if that disposition is

necessary to comply with the attorney’s duties; subsection 35.1(3)(b) permits the attorney to make a

gift of the property to the person who would be entitled under the will, if the gift is authorized by

section 37.

Subsection 37(1) provides that the attorney shall make the following expenditures from the incapable

person’s property:

1. Expenditures that are reasonably necessary for the person’s support, education and care.

2. Expenditures that are reasonably necessary for the support, education and care of the

person’s dependents.

3. Expenditures that are necessary to satisfy the person’s other legal obligations.

Subsection 37(2) of the SDA provides a series of guiding principles to the attorney when making these

expenditures which can be construed as restrictions:

1. The value of the property, the accustomed standard of living of the incapable person and

his or her dependents and the nature of other legal obligations shall be taken into account.

2. Expenditures under paragraph 2 may be made only if the property is and will remain

sufficient to provide for expenditures under paragraph 1.

3. Expenditures under paragraph 3 may be made only if the property is and will remain

sufficient to provide for expenditures under paragraphs 1 and 2.

Subsection 37(3) permits the attorney to make certain optional expenditures as follows:

1. Gifts or loans to the person’s friends and relatives.

2. Charitable gifts.

Subsection 37(4) provides the attorney with guiding principles to follow when making the optional

expenditures in 37(3):

6 SDA, s 33.2(1). 7 SDA, s 33.2(2). 8 SDA, s 33.2(3). 9 SDA, s 34.

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1. They may be made only if the property is and will remain sufficient to satisfy the

requirements of subsection (1).

2. Gifts or loans to the incapable person’s friends or relatives may be made only if there is

reason to believe, based on intentions the person expressed before becoming incapable, that

he or she would make them if capable.

3. Charitable gifts may be made only if,

i. the incapable person authorized the making of charitable gifts in a power of attorney

executed before becoming incapable, or

ii. there is evidence that the person made similar expenditures when capable.

4. If a power of attorney executed by the incapable person before becoming incapable

contained instructions with respect to the making of gifts or loans to friends or relatives or

the making of charitable gifts, the instructions shall be followed, subject to paragraphs 1, 5

and 6.

5. A gift or loan to a friend or relative or a charitable gift shall not be made if the incapable

person expresses a wish to the contrary.

6. The total amount or value of charitable gifts shall not exceed the lesser of,

i. 20 per cent of the income of the property in the year in which the gifts are made, and

ii. the maximum amount or value of charitable gifts provided for in a power of attorney

executed by the incapable person before becoming incapable.

Subsection 37(5) of the SDA provides that the court may authorize a charitable gift that does not comply

with number 6, above.

Subsections 32(7) and (8) set out the standard of care to which the attorney must adhere when

exercising their powers or carrying out their duties. There are two standards in the SDA depending on

whether the attorney is compensated or not:

1. An attorney who does not receive compensation for managing the property shall exercise

the degree of care, diligence and skill that a person of ordinary prudence would exercise in

the conduct of his or her own affairs;10

2. An attorney who receives compensation for managing the property shall exercise the

degree of care, diligence and skill that a person in the business of managing the property

of others is required to exercise.11

May the attorney for property make gifts on the grantor’s behalf, to himself and others?

On its face, a gift is not an expenditure that is in the grantor’s best interest, as it depletes his or her

property. However, a cautious response to the question above is, “Yes, in some circumstances.” The

attorney contemplating making a gift of the donor’s property should review the proposed gift in light

of section 37 of the SDA, which contemplates gifting in limited situations. The attorney may only make

gifts or loans to friends or family if there is reason to believe, based on intentions the person expressed

before becoming incapable, that he or she would make them if capable.12 Next, a careful review of the

10 SDA, s 32(7). 11 SDA, s 32(8). 12 SDA, s 37(4) para 2.

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power of attorney itself is required; there may be provisions in the document that specifically address

gifting. Subject to paragraphs 1, 5 and 6 of the guiding principles in subsection 37(4),13 these

instructions are to be followed. With respect to charitable gifts, the attorney for property is permitted

to make charitable gifts if the continuing power of attorney authorizes the attorney to do so, or if there

is evidence that charitable gifts were made when the grantor was capable,14 and so long as the quantum

of the gift falls within the restrictions set out in the SDA.15 A review of prior tax returns would provide

evidence of past charitable giving.16 However, if the incapable person expresses a present wish to the

contrary, the attorney must abide by that wish.17 All optional expenditures under subsection 37(3) are,

of course, subject to the stipulation that they may only be made if there will remain sufficient property

to make the subsection 37(1) expenditures that are required to properly care for the grantor, his/her

dependants, and his/her other obligations.

Gifting

In Coughlan v Sullivan,18 a series of gifts made by the attorney for property prior to the incapable

person’s death was challenged. On the evidence that was provided, the court was satisfied that the

deceased always wished and intended to be very generous, especially towards his children; often more

generous than his means allowed.19 The applicant attorney provided reasonable explanations for all of

the impugned gifts: gifts were for either special occasions, such as birthdays, or to help a child when

that child was in dire need of money. Prior to his death, the deceased’s behaviour and stated intentions

were to be as generous as possible towards his loved ones. The court concluded that these were the sort

of gifts the deceased would have made if he had remained capable.20

Gifts to the Attorney

In Jacobs v. Hershorn21 the mother appointed one of her four children as her attorney for property. The

attorney was the daughter who spent the most time caring for her parent. The mother died leaving a

Will which gifted her condominium to the attorney and the residue in an unequal distribution amongst

her four children. In an action for the recovery of estate assets from the attorney, the three siblings

questioned two transactions: the transfer of $24,000 to the attorney and a $34,000 transfer from the

mother’s account to the attorney’s GIC, made one month prior to the mother’s death. The siblings took

the position that the first transfer was a loan and that the second was a breach of the attorney’s fiduciary

duties.

The court determined that the $24,000 transfer was, in fact, a graduation gift to the attorney/daughter:

it was made out in the mother’s handwriting; there was a notation made in the mother’s handwriting

13 SDA, s 37(4) para 4. 14 SDA, s 37(4) para 3. 15 SDA, s 37(4) para 6. 16 Sweatman, M. Jasmine. Powers of Attorney and Capacity: Practice and Procedure. (Toronto: Thomson Reuters Canada, 2014)

at 105 [Sweatman]. 17 SDA, s 37(4) para 6. 18 2007 CarswellOnt 9705 (Ont SCJ). 19 Ibid at para 17. 20 Ibid at para 18. 21 2006 CarswellOnt 2199 (Ont.S.C.J.).

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in the cheque record book noting it as a graduation gift; and, although the word “loan” was inserted

after the notation, it was not clear that that particular word was written by the mother.

With respect to the $34,000 transfer, the attorney argued that her mother had intended to set up and

fund RESPs for each of the attorney’s children, but had not done so prior to becoming ill. The court

found that, contrary to the attorney’s evidence as to the mother’s alleged intentions, the deceased never

took any steps whatsoever to implement the plans despite the fact that, prior to her admission to

hospital, she was actively meeting with her solicitor to put her affairs in order. The court held that the

transfer was a clear breach of the attorney’s fiduciary duty. It found that her acts benefitted herself to

the detriment of the estate.

In Elford v Elford.22 the Supreme Court of Canada considered the issue of self-dealing by an attorney.

The husband was his wife’s attorney for property. He transferred properties into her name in order to

defeat the claims of creditors. When the wife began seeing another man, the husband, acting pursuant

to her power of attorney for property which appointed him, transferred the properties back into his own

name. The majority of the Court held that, where an attorney uses the authority given to him to execute

a transfer of the property of the grantor to himself, the transfer is prima facie void absent an express

provision in the power of attorney authorizing the attorney to transfer property to himself.

In Westfall v Kovacec Estate,23 the Ontario Superior Court of Justice heard an application for the

approval of the personal use of trust funds by a trustee. The court’s decision was guided by subsection

37(4)2 of the SDA. In denying the request, Klowak J. stated: “a Court cannot sanction a trustee to

depart from his fiduciary obligations and responsibilities on the basis he seeks a relatively small

amount, he really needs the money, the incapable person doesn’t need it, and the trustee is likely to

eventually inherit it anyway, any more than a Court could sanction theft of the money.”24

In Laird v Mulholland,25 the attorney was a long-time friend of the incapable person. The attorney

made a gift of $10,000 to himself and his wife from the incapable person’s funds. The court scrutinized

the circumstances of the transaction and concluded that the gift had been made on the fully informed

direction of the incapable person, and was therefore valid. The court reviewed the incapable person’s

actions before becoming incapable. It was determined that she was a person of generosity and would

be in keeping with her character to make a gift like this.26 There was evidence provided that she had

made a loan to her superintendent; she gave annual birthday and Christmas gifts to the attorney’s family

and provided his children generous wedding gifts; she made annual charitable donations.27

May the attorney for property “estate plan” on behalf of the incapable?

The SDA does not specifically address estate planning by the attorney on behalf of the incapable.

However, if the continuing power of attorney contains a broad power to an attorney to do anything that

a donor can lawfully do, this “literally means anything” – as long as that act is not making a will or

22 1922 CarswellSask 162 (SCC). 23 2001 CarswellOnt 9872 (Ont. SCJ). 24 Ibid at para 2. 25 1998 CarswellOnt 910 (OCJ, Gen Div). 26 Ibid at para 40. 27 Ibid.

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considered to be “testamentary in nature”.28 As such, the attorney must first look to the continuing

power of attorney to consider the nature of their power, and next, consider whether the contemplated

act is “testamentary in nature.”

The term “will” is not defined in the SDA other than to direct the reader to the definition found in the

SLRA. “Will” is defined in the SLRA as follows:

“will” includes,

(a) a testament,

(b) a codicil,

(c) an appointment by will or by writing in the nature of a will in exercise of a power, and

(d) any other testamentary disposition. 29

Canadian courts have stated clearly that an attorney may not exercise any action that would constitute

a testamentary disposition.30 However, while the prohibition on making a will for a grantor is fairly

clear, the difficulty arises in determining what qualifies as “any other testamentary disposition”.

Generally speaking, courts have adopted the view that:

It is undoubted law that whatever may be the form of a duly executed instrument, if the

person executing it intends that it shall not take effect until after his death, and it is

dependent upon his death for its vigour and effect, it is testamentary.31

This statement, which has been applied consistently since 1866, has the effect of bringing certain

transactions within the scope of the definition of “will”. Some of the most common quasi-testamentary

acts include the following probate and tax planning transactions and can run afoul of this rule:

1. inter vivos Trusts;

2. estate Freezes;

3. beneficiary designations; and,

4. joint tenancy.

In O’Hagan v O’Hagan,32 the British Columbia Court of Appeal considered the circumstances

within which an attorney could rearrange an incapable person’s estate by inter vivos estate

planning without acting contrary to the prohibition on making a will in subsection 7(2) of the

SDA. Jasmine Sweatman suggests that this case could be an example to follow in Ontario,33

however it has not yet been applied in this province. The O’Hagan decision provides that, f

28 Sweatman, supra note 16 at 87; SDA, s 7(2). 29 SLRA, s 1(1), definition of “will”. 30 Bank of Nova Scotia Trust Co. v Lawson (2005), 144 ACWS (3d) 577 (Ont SCJ) [Lawson]; Easingwood v Easingwood Estate

(2013), 361 DLR (4th) 304 (BCCA) [Easingwood]. 31 Cock v Cooke (1866), LR 1 PD 241 (Eng Prob Ct). Cited in MacInnes v MacInnes (1934), [1935] SCR 200 (SCC); Norman

Estate v Watch Tower Bible and Tract Society of Canada, 2014 BCCA 277 at para 18; Allen (Committee of) v Bennett (1994), 6

ETR (2d) 176 (BCSC); Mott v Morrison, 1993 CarswellOnt 4110 at para 57 (OCJ Gen Div). 32 (1999), 25 ETR (2d) 214 (BCSC), additional reasons (1999), 87 ACWS (3d) 1226 (BCSC), reversed 2000 CarswellBC 132

(BCCA), additional reasons (2000), 31 ETR (2d) 3 (BCCA) [O’Hagan]. 33 Sweatman, supra note 16 at 76.

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these conditions are met, the attorney should not be considered to be acting outside the scope

of their power:

1. The rearrangement of the estate is neutral as far as the incapable person is

concerned;

2. There are no restrictions on the authority of the power;

3. Provision is made to ensure the estate is sufficient to meet the testamentary debts

or legacies of the incapable person;

4. The provisions with respect to the distribution of capital parallel the incapable

person’s will, or on an intestacy if there is no will; and

5. The incapable person is not capable of revoking the power of attorney, replacing

attorneys, making a will or marrying.34

Settling an Inter Vivos Trust

Banton v Banton35 is a case that reads like a novel. It involves marriage, findings of incapacity and

reversals of those findings, a predatory relationship, a secret marriage, castration and death. Of

particular relevance to this paper is that the incapable’s sons transferred his assets into an inter vivos

trust in an attempt to protect him from the predatory relationship. The trust was drafted such that the

income and capital would be applied at the trustees’ discretion for George’s benefit during his lifetime

and, on his death, the capital and any accumulated income remaining was distributable among his

children with a gift over to their issue. Justice Cullity concluded that the standard language in the power

of attorney document which gave to the attorneys the power to “do on my behalf anything that I can

lawfully do by an attorney”36 was sufficient to authorize the creation of the trust. He then considered

whether the trust’s effect would deprive Mr. Banton of his property rights “ to a greater extent than

was reasonably required to protect his interests.”37 The court concluded that the attorney’s fiduciary

duty to the grantor was breached when they made irrevocable inter vivos gifts of remainder interests

to persons other than to the grantor, stating:

the gift of the remainder interests to George Banton’s issue went beyond what was required

for that purpose. A trust under which the trust funds would be payable on his death to his

personal representatives in trust for his heirs, testate or intestate, would have done far less

violence to his rights while still having the practical effect—that the 1994 Trust did achieve—

of freezing his powers of disposition until an application to Court to determine his mental

capacity and for the appointment of a committee under the Mental Incompetency Act, or

statutory guardian under the Substitute Decisions Act, 1992, could be heard.38

In Testa v Testa,39 a 2015 decision of the Ontario Superior Court of Justice, the attorneys for their

incapable mother transferred title of her home to a brother, in trust, so that the home could be mortgaged

34 Ibid. 35 (1998), 164 DLR (4th) 176, (Ont Gen Div), additional reasons (1998), 164 DLR (4th) 176 at 244 (Ont Gen Div). 36 Ibid at para 156. 37 Ibid at para 190. 38 Ibid at para 192. 39 2015 ONSC 2381 at para 67 [Testa].

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to provide liquidity for her care. The court considered Banton and stated that, when analyzing whether

a breach of fiduciary duty occurred by the creation of an inter vivos trust, one must examine:

Whether the effect of the trust deprived the grantor of her property rights to a greater

extent than is reasonably required to protect her interests, and

Whether the creation of the trust would improve the grantor’s material situation.40

The court did not question whether the attorney had the power to create an inter vivos trust,41 but its

analysis suggests that the inter vivos trust must improve the grantor’s situation to be valid,42 rather than

being neutral as towards the grantor as suggested in O’Hagan. The court concluded that a continuing

attorney for property can create an inter vivos trust that takes immediate effect as it is not dependent

on the death of the settlor for its vigor and effect.43

Variation of Trusts

In Bank of Nova Scotia Trust Co v Lawson,44 the court examined the efficacy of a variation of trust

signed by the surviving settlor’s attorney for property. The court reviewed the provisions, under the

SDA, which restrict an attorney from making a will. It then examined whether an inter vivos trust falls

within the definition of “will” in the SLRA, concluding that the trust was a testamentary document

because it was “part of a general plan of the settlors to control the disposition of their estate both before

and after death” and “clearly deals with the disposition of the settlors’ estates after their death.” The

court held that, as such, the variation of the trust by the attorney was invalid as it fell within the

restriction in subsection 7(2) of the SDA.45

The Lawson decision has been criticized as being an overly broad interpretation of what constitutes a

testamentary disposition, in light of the cases that state an attorney has the power to create an inter

vivos trust.46 Specifically in Testa, the court stated that it preferred the reasoning in Easingwood v

Easingwood Estate47 to that in Lawson with regard to an attorney’s power to create an inter vivos trust

pursuant to a continuing power of attorney. The court in Easingwood used the more restrictive

interpretation of what constitutes a testamentary disposition, “one that is dependent on death for its

vigour and effect.”48 The B.C. Court of Appeal in Easingwood went on to quote Waters’ Law of Trusts

in Canada49 for the proposition that “if the document creates a trust which takes immediate effect,

though to be performed after the death of the donor, it is not dependent upon his death for its vigour

and effect.”50

40 Ibid at para 67 41 Ibid at para 93. 42 Ibid at para 70. 43 Ibid at para 92. 44 Lawson, supra note 30. 45 Ibid at para 39. 46 Elizabeth Musyj and Jennifer McKim, “Can An Ontario Attorney For Property Engage in Estate Planning?”(2014) 34 ETPJ 79

at 82-83 [Musyj]. 47 Easingwood, supra note 30. 48 Ibid para 51. 49 Donovan W.M. Waters, Waters’ Law of Trusts in Canada 4th ed (Toronto: Carswell, 2012). 50 Ibid.

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Prior to the Testa decision, an article on this point drew the conclusion from a combined reading of

Easingwood and the commentary from Waters’ Law of Trusts that “if a trust is immediately effective

and is not dependent on the death of the settlor for its efficacy, then it is not testamentary and therefore

within the scope of an attorney’s authority to create.”51 This appears to be the reasoning adopted by

the court in Testa. Unfortunately, Testa did not go further than this comment to shed light on whether

a different test will be applied for the varying of an inter vivos trust.

Estate Freeze

An attorney for property’s authority to implement an estate freeze on behalf of the grantor has not been

considered in Ontario. As mentioned earlier in this memo, the O’Hagan decision out of British

Columbia considered the attorney’s power to implement such a transaction and is informative as it

ultimately approved the estate freeze.

In O’Hagan, the estate freeze was implemented in order to save the father’s estate income taxes and

maximize the amount that would be passed to his heirs. The grantor would be the sole beneficiary of

the trust during his lifetime.52 The institutional trustee would be authorized to encroach on capital for

the grantor’s care, maintenance and benefit, even if the encroachments might deplete the entire trust.53

If the grantor were to regain his faculties, all of the trust property would be transferred back to him.54

The British Columbia Court of Appeal concluded that the plan posed “no real disadvantage to [the

grantor] during his lifetime.”55 The estate freeze also respected the grantor’s intentions and autonomy

by not disturbing or deviating from his original plan.56 The court stated that in most cases where a gift

or other diminution of the grantor’s estate is being proposed, an attorney should be very reluctant to

agree in the absence of some compelling reason, such as necessity.57 With the estate freeze however,

there was no gift or diminution of the estate; the grantor’s common shares were simply being

exchanged for preferred shares and the future growth in the common shares would accrue in the trust

to which the grantor was the sole beneficiary during his lifetime.58 The court noted that the transaction

was not “necessary” but was of “clear benefit to the patient’s family and is something that a reasonable

businessperson of advanced years would consider prudent.” 59

In their article, Elizabeth Musyj and Jennifer McKim suggest that, when considering an estate freeze

in Ontario, an attorney can first seek approval of the court pursuant to subsection 39(1) of the SDA.60

Either when seeking approval, or if acting without prior approval, to improve the proposed plan’s

chances of success, commentary has suggested adhering to the following nine factors:

51 Musyj, supra note 46 at 83. 52 O’Hagan, supra note 32 at para 8. 53 Ibid. 54 Ibid. 55 Ibid at para 10. 56 Ibid. 57 Ibid at para 23. 58 Ibid. 59 Ibid. 60 Musyj, supra note 46 at 87.

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1. The power of attorney either expressly permits the attorney to carry out estate planning

upon incapacity of the grantor, or does not expressly prohibit estate planning;

2. The grantor will be adequately provided for after the freeze is implemented;

3. The advantages of proceeding with the estate freeze are meaningful;

4. The estate freeze benefits the grantor (or at least is neutral), and does not only benefit the

beneficiaries of his estate;

5. The grantor could resume control of the property if he recovers his capacity;

6. The plan is either consistent with or not contrary to the grantor’s will;

7. The grantor expressed an intention or wish to implement the estate freeze while he was

capable, or he typically engaged in tax planning strategies;

8. The proposed freeze interferes with the grantor’s property to the least extent possible; and

9. A reasonable and prudent business person would undertake an estate freeze in respect of

his property if capable.61

Make/Change Beneficiary Designations

Then there is the question of whether an attorney can make or change beneficiary designations. The

general consensus in Canada seems to be that a beneficiary designation on life insurance policies,

pensions, RRSPs and TFSAs is a testamentary disposition as it is more closely aligned with a will than

an inter vivos gift.62

The attorney for property may wish to consider the following factors to determine whether a

beneficiary designation is a testamentary disposition:

1. If a beneficiary designation disposes of real or personal property, such disposition not

taking effect until after the death of the principal;

2. If the designation is revocable during the principal’s lifetime;

3. If the designation itself (not the instrument as a whole) is operative only upon the death of

the principal.63

In Richardson v Mew,64 the grantor divorced and remarried, appointing his second wife as his attorney

for property. Pursuant to a separation agreement, he had been required to designate his first spouse as

beneficiary of an insurance policy for a number of years. During his life, when the grantor had

insufficient funds to pay the policy premiums, the second wife paid them from her own account,

believing that she was the beneficiary. After his death, it was discovered that, although the designated

time period had expired, he had neglected to revoke the beneficiary designation, thus his first wife was

beneficiary of the insurance policy proceeds. The second wife brought a motion claiming entitlement

to the policy proceeds. She claimed that had she known that the first wife was still the named

61 Musyj, supra note 46 at 88, quoting Melanie Yach, “Troublesome Issues Relating to Powers of Attorney for Property” Aird &

Berlis (12 November 2007), online: <airdberlis.com>. 62 Richardson Estate v Mew (2009), 96 OR (3d) 65 (ONCA) [Richardson]; Fontana v Fontana (1987), 28 CCLI 232 (BCSC);

Desharnais v Toronto Dominion Bank, 2001 BCSC 1695, reversed in part 2002 BCCA 640 [Desharnais]. 63 Dawn Dudley Oosterhoof, “Alice’s Wonderland: Authority of an Attorney for Property to Amend a Beneficiary Designation”

(2002) 22 ETPJ 16 at 29. 64 Richardson, supra note 67.

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beneficiary, she would have used her authority under the power of attorney to change the designation

or stop making the premium payments. She asked that a constructive trust be imposed on the death

benefit to prevent the first wife from receiving a windfall.

The motions judge declined to rectify the beneficiary designation on the insurance policy. On appeal,

the Ontario Court of Appeal upheld the lower court decision, holding that, while the grantor was

capable, the attorney acted as his agent and was required to follow his instructions.65 Had the attorney

changed the beneficiary designation, she would have been in breach of her fiduciary duty as she is

bound to act only for the benefit of the grantor, setting her own interests aside.66 The Court goes on to

discuss the attorney’s duty once the grantor became incapable, and seems to suggest that, had the

change in beneficiary designation been for the incapable’s benefit, it would have been authorized:

After Mr. Richardson became incapable, as has been noted, Ms. Ferguson owed him an even

higher duty of loyalty when exercising the Power. As a fiduciary in a role rising to that of a

trustee, she was bound to use the Power only for Mr. Richardson's benefit and any exercise of

the Power had to be done with honesty, integrity and in good faith. There is nothing in the

record to suggest that a change in the beneficiary designation, cancellation of the Policy or a

cessation of the premium payments would have been for Mr. Richardson's benefit. 67

In Desharnais v Toronto Dominion Bank,68 the attorney transferred a registered plan to a new financial

institution. The British Columbia Court of Appeal affirmed the lower court’s decision that an attorney

is permitted to transfer an RRSP to a new institution so long as the former beneficiary designation is

maintained. However, when the attorney transferred the registered plan, the beneficiary designation

was left blank. In the result, the estate was the beneficiary. The failure to carry over the beneficiary

designation was a testamentary disposition and thus outside the power of the attorney to alter.69

In Tamblyn v Leach,70 the court considered a beneficiary designation in a public service pension

benefit. The court concluded that a designation of beneficiary on a pension benefit can best be

compared to a testamentary disposition.71 This decision has been applied in Ontario in Gagnon v

Sussey.72 Although this case was not considering an attorney for property’s powers, the court held that

a designation of beneficiary form under a pension plan was a testamentary instrument.73

Transferring Assets into Joint Names/Severing Joint Tenancy

Is an attorney authorized to transfer accounts into joint names? The Supreme Court of Canada, in

Pecore v Pecore stated that for joint accounts, the rights of survivorship, both legal and equitable, vest

when the joint account is opened. It follows that any gift of those rights is inter vivos in nature, and not

65 Ibid at para 50. 66 Ibid. 67 Ibid at para 51. 68 Desharnais, supra note 58. 69 Ibid at para 17. 70 1981 CarswellMan 53 (Man. QB.). 71 Ibid at para 19. 72 1992 CarswellOnt 531 (OCJ Gen Div). 73 Ibid at para 21.

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testamentary.74 As such, it would seem that the attorney is not barred by subsection 7(2) of the SDA

from opening a joint account. However, when deciding whether to transfer property of a grantor into

joint tenancy with a right of survivorship, the attorney must consider whether opening the account is

in keeping with the grantor’s wishes and whether the grantor’s best interests have been met.75 Also,

the attorney must consider subsections 35.1(3) and 37(3) of the SDA before gifting rights to a joint

tenancy:

1. Subsection 35.1(3) permits the attorney to dispose of property that is subject to a specific

testamentary gift if the disposition of that property is necessary to comply with the

attorney’s duties. Or, the attorney may make a gift of the property to the person so entitled

if the gift is authorized by section 37;

2. Subsection 37(3) permits the attorney to make gifts to the grantor’s friends and family

subject to the guiding principles described in section 2 of this memo.

The Ontario Court of Appeal addressed the severing of a joint tenancy in Champion v Guibord.76

Although the statement was obiter, the court stated that it is inclined to accept the view that the

severance of a joint tenancy is not a testamentary disposition.77 This comment has yet to be picked up

in subsequent case law.

OBA Recommendations

In light of Ontario’s significant, aging population, the Ontario Bar Association submitted a report to

the Ministry of the Attorney General in July of 2013,78 which, amongst other things, provided guidance

to the government on ways to remedy the short falls in the SDA with respect to the ability of attorneys

to manage beneficiary designations.

The OBA addresses two over-arching issues with respect to beneficiary designations by substitute

decision makers. First, a lack of clarity and certainty: because there is no meaningful guidance in the

legislative scheme with respect to the authority to manage beneficiary designations, and policies vary

amongst financial institutions, as to whether an attorney can make a valid beneficiary designation.

Second, the common law is insufficiently tailored to address variables. Courts have, to date taken a

fairly restrictive approach to the validity of designations made by the attorney. This fails to recognize

the exceptional circumstances where the designation is clearly necessary to protect the interest of the

incapable person.79

The OBA recognizes that, while it may be necessary to have a general prohibition against making or

changing beneficiary designations in order to protect the incapable person, the current statutory regime

74 Pecore v Pecore, [2007] 1 SCR 795 at para 48 (SCC). 75 SDA, s 32. 76 2007 ONCA 161. 77 Ibid at para 2. 78 Ontario Bar Association – Trusts and Estates Section, “Managing the Beneficiary Designations of Incapable Persons” (July

2013), online: <https://www.oba.org/CMSPages/GetFile.aspx?guid=a268116c-a20f-4d7b-99b6-9b3c0a4af9ab>. 79 Ibid at 3.

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does not allow for exceptions.80 In its report, the OBA outlined circumstances in which attorneys would

have an obligation to manage beneficiary designations:

1. Divorce – while gifts are revoked automatically, beneficiary designations in RRSPs and

pension plans may not be. The former spouse continues as beneficiary despite the fact they

only do so as a result of the grantor’s incapacity.

a. Proposed Solution: allow attorney to get a court order to change beneficiary where

appropriate.

2. RRSP proceeds are required to be transferred into a RRIF at age 71, which requires a new

instrument to be created, requiring a beneficiary designation.

a. Proposed Solution: allow attorney to name beneficiary on a new instrument as long as

identical to former instrument.

3. Investment choices may require investments to be transferred to another institution resulting

in replacement instruments, requiring a beneficiary designation.

a. Proposed Solution: allow attorney to name beneficiary on a new instrument as long as

on identical terms to former designation.

4. Where attorney cannot name identical beneficiary in the circumstances outlined above

a. Proposed Solution: allow attorney to get a court order to change beneficiary where

appropriate.81

The OBA also recommended amendments to sections 7 and 31 of the SDA to provide clarity and

certainty surrounding beneficiary designations as follows:

7(2.1) Subject to subsection 2.2, the continuing power of attorney may authorize a person

named as attorney to do on the grantor’s behalf anything in respect of property that the grantor

could do if capable, except make, change or revoke a will.

(2.2) An attorney for property may make, change or revoke a beneficiary designation:

(a) where an instrument containing a plan (within the meaning of that term as set out in the

Succession Law Reform Act) that is the subject of a beneficiary designation is converted,

renewed, transferred or replaced, an attorney for property has the power to designate

beneficiaries identical to the former designation on the instrument that results from the

conversion, renewal, transfer or replacement; or

(b) with the approval of the Court, on the attorney’s application for directions.

80 Ibid at 4. 81 Ibid at 8.

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31(1) Subject to subsection 2, a guardian of property has power to do on the incapable person’s

behalf anything in respect of property that the person could do if capable, except make, change

or revoke a will.

(2) A guardian of property may make, change or revoke a beneficiary designation:

(a) where a plan (within the meaning of that term as set out in the Succession Law Reform

Act) that is the subject of a beneficiary designation (the “former designation”) is

converted, renewed, transferred or replaced, a guardian has the power to designate

beneficiaries identical to the former designation on the instrument that results from the

conversion, renewal, transfer or replacement; or

(b) by order of the Court, on the guardian’s application for directions.

Concluding Comments

Despite the OBA’s recommendations to address the shortfalls of the SDA, it has not been amended

since 2009. For the time being, attorneys must rely on the SDA and case law to guide them. The case

law review above shows that, in certain situations, and subject to the restrictions set out in the SDA,

the attorney may make gifts to himself and to others. However, it seems that the attorney’s ability to

estate plan is fairly restricted. An attorney is not permitted to alter a beneficiary designation, defeat a

beneficiary’s entitlement under the incapable grantor’s will, or take any step which would hinder a

family law claim. It is interesting to note that July 2015 marked the first time in our country’s history

that there were more Canadians over the age of 65 than there were Canadians aged 0 - 14 years.82 In

light of this, and absent amendments to the SDA, one wonders whether our courts may see more

requests for directions on questions arising in the management of property.

82 “Canada’s Population Estimates: Age and Sex” July 2015, online: http://www.statcan.gc.ca/daily-quotidien/150929/dq150929b-

eng.htm

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Appendix A

1. Sample Power of Attorney for Property Clauses

i. From Lindsay Ann Histrop, Estate Planning Precedents, 5.1 – Powers of Attorney (online):

a). Addressing gifting:

My attorney shall be authorized, without limitation, to make the following

expenditures on my behalf:

(i) those expenditures that are reasonably necessary for my support,

education and care;

(ii) those expenditures that are reasonably necessary for the support,

education and care of my dependants; and

(iii) those expenditures that are necessary to satisfy any other legal

obligations I may have.

My attorney shall also be authorized to make expenditures on my behalf for the purpose

of making gifts or loans to my friends and relatives and for the purpose of making

charitable gifts if, in the absolute discretion of my attorney, [attorney] has reason to

believe that I would have made such gifts or loans if I were capable of doing so

personally.

(OR)

My attorney shall not be authorized to make expenditures on my behalf for the

purpose of making gifts or loans to my friends and relatives, nor for the purpose of

making charitable gifts.

b). Addressing estate planning:

My attorneys shall be authorized in the administration of my property hereunder, to

take such steps as they consider prudent to minimize tax payable on my death,

including, without limitation, a reorganization or reorganizations of my property to

effect, inter alia, an estate freeze.

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My attorneys shall be authorized in the administration of my property hereunder, to

exercise their discretion to settle a trust or trusts on my behalf, the terms of which trust

or trusts shall be determined by my attorneys in their absolute discretion as if I was

personally settling the said trust or trusts, provided that the terms of any such trust shall

in no way affect or alter the beneficiaries under my Will or Wills or the benefits

provided for such beneficiaries under my last Will or Wills.

With respect to any Registered Retirement Savings Plans ("RRSP"), Registered

Retirement Income Funds ("RRIF"), and Tax Free Savings Accounts ("TFSA")

(collectively such "Plans"), which I may own, should it become advisable or necessary

to convert an RRSP to an RRIF, or to change the institution at which any such Plans

are held, I authorize and direct my attorneys to maintain all beneficiary designations

made by me in respect of all such Plans, such that my Trustees shall be specifically

authorized to designate the same beneficiary or beneficiaries of such Plans that I may

have previously made, notwithstanding that in making such designation, my attorneys

may be considered to be exercising a power which may be seen to be akin to making a

Will on my behalf.

ii. From QuickLaw – Canadian Legal Forms & Precedents (online):

a). Addressing estate planning:

I authorize my attorney to make any beneficiary designation that I would be entitled to

make in any registered retirement saving plan or registered retirement income fund

owned by me.

b). Addressing gifting:

I authorize my attorney to make gifts or loans to my friends and relatives in accordance

with the following directions [insert specific directions if any] or in accordance with

the principles set out in subsection 37(4) of the Substitute Decisions Act, 1992.

I authorize my attorney to make charitable gifts in accordance with the principles set

out in subsection 37(4) of the Substitute Decisions Act, 1992 [or to charities as

specifically listed].

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iii. From O’Brien’s Forms (online):

a). Addressing general power:

I authorize my attorney for property to do, on my behalf, any acts which I can do by an

attorney, and specifically anything in respect of property that I could do if capable of

managing property, subject to any conditions or restrictions contained in this

Continuing Power of Attorney for Property.

iv. From Mary L. MacGregor, Preparation of Wills and Powers of Attorney, Fourth Edition

a). Addressing general power:

I appoint [ ] to be my attorney for property. I authorize my attorney to do, on my

behalf, any acts which I can do by an attorney and specifically anything in respect of

property that I could do if capable of managing property, subject to any conditions or

restrictions contained in this Continuing Power of Attorney for Property.

This document is a Continuing Power of Attorney for Property under the Substitute

Decisions Act, 1992, SO 1992, c 30, as amended, and may be used during my

incapacity to manage property.

b). Addressing estate planning

I authorize my attorneys to make any beneficiary designation that I would be entitled

to make in any registered retirement savings plan or registered retirement income fund

owned by me.

2833753_1.docx

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TAB 8

Tax Update for Estates Practitioners

Sheila Crummey, C.S. Miller Thomson LLP

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

The author would like to thank Ben Mann, Carla Figliomeni and Jane Loyer for their help in preparing the discussion concerning the changes to the principal residence exemption.

19th ANNUAL ESTATES AND TRUSTS SUMMIT – DAY TWO November 4, 2016

Tax Update for Estates Practitioners

Sheila M. Crummey Miller Thomson LLP

Changes to the Principal Residence Exemption

On October 3rd 2016, the Department of Finance unveiled a Notice of Ways and Means Motion to amend the Income Tax Act (the “Motion”) with the stated purpose of “improv[ing] tax fairness by closing loopholes surrounding the capital gains exemption on the sale of a principal residence.” If passed, the Motion will limit or eliminate the ability of certain trusts and non-resident individuals to use the so-called principal residence exemption.

With the concern around foreigners purchasing homes in the Vancouver and Toronto areas, and flipping them at a profit, which is widely viewed as contributing to the rise in housing prices, it is not surprising to see the federal government tighten the rules around claiming the principal residence exemption. What was not anticipated was the change to the rules that permit a personal trust to claim the principal residence exemption.

The formula for calculating the principal residence exemption is set out in paragraph 40(2)(b), and generally allows individuals, including personal trusts, to dispose of a principal residence at a reduced or nil capital gain. An individual, or that individual’s family unit (e.g. the individual’s spouse and minor children) may only designate one property as a principal residence in respect of each taxation year. If, in the year of its disposition, a residence can be designated a principal residence for all of the years during which it was owned by the taxpayer, the principal residence exemption will reduce any capital gain to nil. The Income Tax Act (the “Act”) sets out detailed rules for how and when the principal residence exemption is applied.

In connection with the formulas set out in paragraph 40(2)(b), section 54 includes three primary requirements for a property to be designated as a principal residence:

1. the property, including the surrounding land, must be a housing unit that is owned by the taxpayer.

2. the property must have been ordinarily inhabited in the taxation year for which the principal residence exemption is being claimed by either the taxpayer or his or her spouse, common law partner or child (this may be a second home or cottage if one or more of these individuals ordinarily inhabited the property); and

3. the taxpayer must designate the property as the taxpayer’s principal residence for the taxation year.

Currently, for a personal trust to qualify for the principal residence exemption, the requirements under paragraph 54(c.1) must be met. Accordingly, there must be an individual who is beneficially interested in the trust who ordinarily inhabits the property in the taxation year for which the principal residence exemption is being claimed. That individual’s spouse, common-law partner, former spouse or former common law partner or child may also have inhabited the residence for the purpose of claiming the principal residence exemption. When filing its returns

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for the year, a trust must also designate, in prescribed form, each individual who is beneficially interested in the trust for the calendar year who inhabits the residence for that taxation year.

Limiting the Types of Trusts Able to Claim the Principal Residence Exemption

This proposed amendment severely restricts the types of trusts which are able to claim the principal residence exemption for any taxation years after the 2016 taxation year. By operation of a proposed new subparagraph 54(c.1)(iii.1), trusts will only be able to claim the principal residence exemption if they meet one or more of the following criteria:

1. the trust is a spousal or common law partner trust, joint spousal or common law partner trust, alter ego trust or trust for the exclusive benefit of the settlor during the settlor’s lifetime (as those trusts are described in subsection 104(4)) and; the beneficiary of the trust in respect of which the principal residence exemption is claimed must be, depending on the type of trust, the settlor or the spouse or common law partner of the settlor;

2. the trust is a testamentary trust that is also a qualified disability trust, for which the beneficiary is a spouse, common law partner, former spouse or common law partner or child of the settlor; or

3. the settlor of the trust died before the start of the year for which the principal residence exemption is being claimed, and the beneficiary of the trust is a minor child of the settlor whose parents are deceased before the start of the year for which the principal residence exemption is being claimed.

In all cases, the beneficiary in respect of which the principal residence exemption is being claimed must be a resident of Canada during the year for which the exemption is claimed. That beneficiary must also have a right under the terms of the trust to the use and enjoyment of the property as a residence.

Proposed new subsection 40(6.1) establishes a calculation for a trust which does not meet the above criteria and which intends to claim the principal residence exemption in respect of a taxation year after the 2016 taxation year. Under this formula, there will be two capital gains calculated: one for those years prior to 2017, for which such a trust could claim the principal residence exemption, and one for those years after 2016, for which it could not.

For example, if a trust disposes of property in 2020, and this disposition qualified for the principal residence exemption for some or all of the taxation years prior to 2017, the trust may claim the principal residence exemption in respect of any taxation years up to and including 2016, during which it owned the residence. It may not do so for the 2017, 2018, 2019 and 2020 taxation years, regardless of whether it would have qualified for the principal residence exemption but for the Motion’s proposed amendments. This is the case regardless of when the trust was settled or when the trust acquired the property at issue.

Limiting the “One-Plus” Factor to Canadian Residents

Generally, and provided all the aforementioned criteria are met, a taxpayer may claim the principal residence exemption for all years in which the taxpayer owned a property, including the year of the disposition, plus one extra year. The purpose of this extra year is to allow the taxpayer to claim the principal residence exemption in respect of the year in which the taxpayer purchased the residence, but did not inhabit it for the entire year.

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The Motion proposes to amend this formula so that this “one plus” factor will only apply when the taxpayer claiming the exemption was resident in Canada throughout the year in which the principal residence was purchased.

Limiting the Application of Subsection 107(4.1)

Subsection 107(2) allows personal trusts to distribute assets to capital beneficiaries in satisfaction of all or part of their capital interest in the trust on a tax-deferred basis. Whereas pursuant to subsection 107(2.1), if subsection 107(2) (and certain other provisions not relevant here) does not apply, the distribution is deemed to occur at fair market value.

Currently, subsection 107(4.1) requires that subsection 107(2.1), and not subsection 107(2), apply to a distribution from a trust to a beneficiary in satisfaction of that beneficiary’s capital interest when, at any time during the trust’s existence, the attribution rule in subsection 75(2) has applied to that trust.

While the language in proposed paragraph 107(4.1)(a.1) is highly technical, its effect appears to be to allow the tax-deferred distribution of a principal residence to a beneficiary or beneficiaries under subsection 107(2) notwithstanding the potential application of subsection 75(2) to the trust, in certain circumstances.

Under the terms of the new paragraph, subsection 107(4.1) will not apply to a distribution from a trust when:

the trust owned the property distributed at the end of 2016;

in the trust’s first taxation year beginning after 2016, the trust is not a trust described in new subparagraph 54(c.1)(iii.1) (e.g. an alter ego trust, joint spousal trust, testamentary qualifying disability trust, etc.); and

the trust would have been able to designate the property distributed as its personal residence but for the introduction of subparagraph 54(c.1)(iii.1).

The stated purpose of this new paragraph is to ensure the application of subsection 40(7) to a principal residence distributed from a trust. Subsection 40(7) provides that when a trust distributes property to a beneficiary pursuant to subsection 107(2), that beneficiary is deemed to have owned that property since the trust last acquired it, for the purpose of the definition of a principal residence in section 54.

Eliminating the Normal Reassessment Period for Distributions of Real Property

Subject to certain exceptions, the Minister of National Revenue (the “Minister”) is only permitted to reassess a taxpayer within the “normal reassessment period.” Generally, the normal reassessment period is three years for individuals and four years for corporations.

The proposed Motion introduced proposed paragraph 152(4)(b.3) to allow the Minister to reassess taxpayers beyond the normal reassessment period when the taxpayer disposes of real or immovable property in the year and that disposition is not reported. This provision will also apply when an individual owned property indirectly through a partnership, and the partnership failed to report the disposition of real or immovable property. If the disposition is by a corporation, that corporation may only be reassessed outside the normal reassessment period when the property is capital property to the corporation.

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If the taxpayer does file a return, but does not report the disposition, the taxpayer may amend the return to report the disposition. A proposed amendment to subsection 220(3.21) specifically permits the Minister to accept this amendment. The normal reassessment period then begins from the time the amendment is filed.

Additional Reporting Requirements for Individuals

While the Canada Revenue Agency (the “CRA”) has not previously required individuals other than personal trusts to report the disposition of a principal residence in prescribed form (notwithstanding that this is a requirement under section 54) it appears based on the proposed amendments to section 152 and subsection 220(3.21) that this will be a requirement going forward. Personal trusts have always been required to report the disposition in prescribed form, and those still able to claim the principal residence exemption will continue to be required to do so.

Changes to the taxation of trusts and estates and the use of charitable donation tax credits by Estates

The most significant tax changes to affect our area of practice in many years came into effect January 1, 2016. They were introduced by Bill C 39 which received Royal assent on December 16, 2014. Pamela Cross and Angela Ross presented an excellent paper at last year’s Summit that detailed these changes and highlighted the problems posed by them. This paper will summarize amendments to these provisions which have been proposed by Finance to address some of the problems. While Finance had warned estates practitioners of the government’s plan to eliminate the ability of testamentary trusts to utilize marginal tax rates, everyone was surprised by the provision which shifted the tax liability in respect of any capital gains triggered on the deemed disposition on the death of a life interest beneficiary in respect of assets held in the life interest trust to the estate of that deceased life interest beneficiary.

The types of trusts that are impacted by this new rule are referred to in this paper as life interest trusts and include alter ego trusts, joint spousal and common-law partner trusts, spousal and common-law partner trusts, and a trust to which property has been transferred by the beneficiary in circumstances described in subparagraph 73(1.02)(b)(ii). All of these trusts permit a tax deferral in respect of assets that are transferred to these trusts. Consequently on the death of a life interest beneficiary, a deemed disposition occurs and any accrued gains are subject to tax at that time. Prior to the introduction of Bill C 39, the deemed capital gain was taxable in the trust itself and the rules did not permit any allocation of that deemed gain to any beneficiary.

Subsection 104(13.4) modified this tax treatment by deeming the trust’s taxation year in which the lifetime beneficiary’s death occurs to end at the end of the day on which that death occurs. It further deemed the trust’s income for the year to have become payable to the life interest beneficiary immediately prior to the end of the year. This shifted the tax liability into the estate of the deceased life interest beneficiary.

This was clearly inequitable as the assets that generated the tax liability remained in the estate that created the life interest trust and were not available to the estate of the deceased life interest beneficiary to fund the payment of the tax. Spousal trusts are often used in blended family situations where the deceased spouse intends to provide for a surviving spouse and for children from a prior relationship. The spousal trust ensures the flow of income to the surviving spouse but also ensures that the assets, after the payment of the capital gains tax, are distributed to the children of the deceased spouse. By shifting the capital gains tax liability out of the estate that created the spouse trust into the estate of the deceased life interest beneficiary,

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the heirs of the deceased life interest beneficiary are paying a tax liability on assets they do not receive.

There was a great deal of lobbying by Canadian Bar Association, Chartered Professional Accountants of Canada, Conference for Advanced Life Underwriting and STEP Canada which finally paid off with the Department of Finance releasing draft legislative proposals on January 15, 2016. These legislative proposals addressed the inequity much to the relief of the estate planning bar.

January 15, 2016 draft legislative proposals

The draft legislative proposals will amend subsection 104(6)(b) B (i) so that the capital gain which is triggered by the death of the life interest beneficiary is not allocated to the life interest beneficiary and must instead be taxed in the life interest trust. This reverses the tax treatment that had been introduced in 2014 and was the subject of intense lobbying. It ensures that the capital gains tax arising on the death of a life interest beneficiary is paid from the assets giving rise to the tax which is the only fair result.

Acknowledging that Estates may have done some tax planning based on the rules that came into effect January 1, 2016, the draft legislation permits the estate that created the life interest trust and the estate of the deceased life interest beneficiary to jointly elect to have the capital gain triggered by the death of the life interest beneficiary allocated to the estate of the deceased life interest beneficiary. This election can only be made if the deceased life interest beneficiary died before 2017. This may be beneficial where there are losses in the estate of the deceased life interest beneficiary which can shelter the capital gain, and the beneficiaries of the estate of the life interest beneficiary are the same as the beneficiaries of the estate that created the life interest trust.

Assuming the January 15, 2016 proposals are enacted, it will also address other problems that had been created by shifting the tax liability for the deemed gain on the death of the life interest beneficiary into his or her estate. A common tax planning technique that was utilized to minimize tax arising from the deemed gain on the death of life interest beneficiary was to dispose of assets in the trust to trigger capital losses which could then be carried back to shelter some or all of the gain triggered by the death of the life interest beneficiary. However, if the gain is shifted into the estate of the deceased life interest beneficiary, capital losses incurred by the estate that created the life interest trust could not be utilized to shelter the gain on the death of the life interest beneficiary. There would be a complete mismatch with the gain in one estate and loss in the other estate.

In addition, some estates that had created life interest trusts acquired life insurance on the life of the life interest beneficiary which could be utilized to pay the taxes triggered by the death of the life interest beneficiary. This planning technique would not work if the tax liability was shifted into the estate of the deceased life interest beneficiary. The life insurance would not be available to the estate of the deceased life interest beneficiary to fund the payment of tax liability.

Another technique that was relied upon to deal with the capital gain triggered by the death of life interest beneficiary was a direction in the Will that created the life interest trust to pay a charitable donation at the death of the life interest beneficiary. The charitable tax credit would then be available to shelter the tax on the gain. However, if the capital gains tax liability was shifted into the estate of the deceased life interest beneficiary, the charitable donation tax credit could not be utilized. It was in effect stranded in the estate that created the life interest trust.

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These techniques to deal with the capital gain triggered by the death of the deceased life interest beneficiary will continue to be useful in sheltering the gain and/or funding the tax on the gain if the January 15, 2016 draft legislative proposals are enacted.

GRE and multiple wills

As we know, the new rules enacted by Bill C 39 introduced the new concept of graduated rate estate (“GRE”).

A GRE is an estate that arose on and as a consequence of an individual’s death if:

it arose no more than 36 months after the death

the estate is at that time a testamentary trust

the individual’s social insurance number is provided in the estate’s return of income

the estate designates itself as a GRE of the individual in its return of income for its first taxation year that ends after 2015

no other estate designates itself as the GRE of that individual in a return of income for a taxation year that ends after 2015

The final requirement may be problematic where there are multiple wills, particularly if different executors are appointed under the different wills. This was highlighted in a question asked of the CRA at the 2016 national STEP conference1. The CRA was asked whether the status of an estate as a GRE would be invalidated if the domestic executors elected for the estate to be a GRE, but the deceased had a second will pertaining to foreign assets, and the domestic executors did not know about the foreign will and therefore were not able to confirm that no other designation as GRE had been filed. The CRA confirmed their view that an individual can only have one estate which includes all worldwide assets owned by the deceased at death. The CRA noted in its answer that it is critical for the testator to give clear authority to a specific executor or executors to file the GRE designation where there are multiple wills. This is an important drafting point for us to keep in mind when drafting multiple wills. The wills should clearly authorize the executor who can make the GRE designation where there are different executors appointed under the multiple wills.

104(13.1) and (13.2) designations

The new tax rules introduced by Bill C 39 made significant changes to the ability to elect to tax income in an estate or trust pursuant to subsections 104(13.1) and (13.2). Under the new rules, these types of elections are invalid if they result in any taxable income remaining in the trust. Questions had arisen with respect to whether an election could be late filed when a capital loss was incurred which could be carried back to eliminate income in a previously filed return. The CRA has confirmed that a trust can make a late subsection 104 (13.1) or (13.2) designation as long as it results in no income being taxable in the trust. In such a case, the trust would file for the loss carry back and file a T3 adjustment request. An amended T3 supplementary would be issued to each beneficiary to enable the beneficiary to file his or her own T-1 adjustment request to delete the trust income which had been previously reported. The CRA confirms, however, that a late filed election can only be made if the taxation year is not statute barred.

1 CRA Views in Focus:2016 STEP – Q2 – GRE and Multiple wills

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Changes to the use of charitable donation tax credits by Estates

One of the positive changes introduced by Bill C 39 were the changes made to the way in which estates could utilize charitable donation tax credits for donations directed to be made by the will or by way of direct beneficiary designation. If an estate qualified as a “graduated rate estate”, referred to in this paper as a “GRE”, the estate was able to use charitable donation tax credits in any of the following taxation years:

1. the taxation year of the estate in which the donation was made;

2. an earlier taxation year of the estate; or

3. the last two taxation years of the individual before the individual’s death.

In order to qualify as a GRE the estate must meet each of the following conditions:

1. death occurred no more than 36 months prior to the date on which the estate claims the status of a GRE

2. the estate is a “testamentary trust” (also a defined term in the Income Tax Act)

3. the deceased individual’s social insurance number is provided in the estate’s return of income

4. the estate designates itself as a GRE of the individual in its return of income for its first taxation year that ends after 2015.

In order to qualify as a “testamentary trust” it is essential that all assets in the estate were acquired as a result of the death of the individual. If assets were acquired from some other source, e.g. from an inter vivos trust, the estate would lose its status as a testamentary trust and would not qualify as a GRE. 2

The January 15, 2016 legislative proposals extend the period during which donations can be made from 36 months to 60 months after death in order to be claimed by the estate as charitable tax credits in any of the tax returns for the years which include the return for the year the donation is made, any prior estate return and the two years prior to death. This will be very helpful where estate was unable to make the donation within the 36 months after death. This could be the case where an estate is involved in litigation due to a will challenge, or a claim for support or a family law claim. There may also be a delay in liquidating a key asset to free up cash to fund the donation. The additional two-year period for making the donation will enable more estates to take advantage of the charitable tax credits in years where income needs to be sheltered.

As mentioned above, one of the techniques used to shelter the capital gain triggered by the death of a life interest beneficiary is the use of a charitable donation directed to be made at the death of the life interest beneficiary from the assets remaining in the life interest trust. The

2 CRA Views in Focus:2016 STEP – Q2 – GRE and Multiple wills

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timing of the making of this donation is critical to utilizing the charitable tax credit to shelter the gain triggered by the death of the life interest beneficiary. The death of the life interest beneficiary triggers an immediate year end of the trust. A donation made subsequent to that year-end would not be available to shelter the gain in the life interest trust where the donation occurs more than 60 months after the death of the individual whose estate created the life interest trust, but for the introduction of new subparagraph 118.11(1)(c)(ii)C. This new provision allows the charitable donation tax credit to be used in the taxation year in which the life interest beneficiary died, provided the donation is made on or before the trust’s filing due date for that year. The filing due date will be 90 days after the end of the calendar year in which death occurs. If death occurs late in the calendar year, the estate will have at least three months in which to make the donation. If this timeframe is missed, the charitable tax credit can only be claimed in the taxation year in which the donation is made or the five following taxation years.

With these changes to the charitable donation rules, it was unclear whether the long-standing CRA administrative policy to permit spousal sharing of charitable gifts made by will would continue to be applied. The CRA has now confirmed3 that they will no longer permit the surviving spouse to claim charitable tax credits arising from gifts in a deceased spouse’s will, where those credits could not be utilized in the estate or in the deceased’s terminal return. They expressed the view that the new rules do not permit such sharing of charitable tax credits.

The 2016 Federal Budget

It is worth noting that the Federal Budget presented on March 22, 2016 stated that the government has decided not to proceed with the 2015 Federal Budget measure that proposed to provide an exemption from capital gains tax for certain dispositions of private corporation shares or real estate where those types of assets have been sold and the proceeds of sale were donated to a registered charity within 30 days of the sale.

In addition, the new liberal government has decided not to proceed with the income splitting proposal that had been included in the 2015 Federal Budget which had proposed allowing couples with children under the age of 18 to transfer up to $50,000 of taxable income to the lower income spouse or common-law partner. There had been a limit proposed on this measure so that the transfer of income could not reduce the couple’s total income tax liability by more than $2000. This provision will not be enacted.

Tax cases of note

Kuchta v. The Queen - does subsection 160 (1) apply to an RRSP beneficiary designation in favor of a spouse?

It is commonly assumed that a designated beneficiary of an RRSP receives the funds at the death of the annuitant free of claims of the creditors of the deceased annuitant, even where the beneficiary is the spouse of the deceased annuitant as a result of the 2002 Ontario Court of Appeal decision in Amherst Crane Rentals Limited v. Perring.4 However, the case of Kuchta v. the Queen involved an interpretation of the term “spouse” pursuant to subsection 160(1) of the Income Tax Act (the “Act”) . This subsection imposes joint and several liability for the tax debt of an individual where the individual has transferred property to someone with whom he was not at arms length for no consideration or consideration that was less than fair market value. 3 CRA Views, Conference, 2016 -0624851C 4 46 E.T.R. (2d) 1, 37 C.B.R. (4th) 31, 35 C.C.P.B. 169, [2002] O.J. No. 2792 (S.C.J.) aff’d [2004] O.J. No.

2558 (C.A.), 11 E.T.R. (3d) 112, 50 C.B.R. (4th) 1, 42 C.C.P.B.1, leave to appeal to SCC refused, [2004] S.C.C.A. No. 430

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In Kuchta, the deceased RRSP owner designated his wife as the beneficiary of his RRSP. The husband died in 2007. After his death, his 2006 tax return was assessed and his estate owed $55,592 in taxes. The estate failed to pay this tax liability and the CRA assessed his widow under subsection 160(1) for the tax owing because she had received his RRSP with a value of $305,657.

There are 4 tests that must be met before 160(1) can apply. They are:

1. The transferor must be liable to pay tax under the Act at the time of transfer;

2. There must be a transfer of property;

3. The transferee must be:

a. The transferor’s spouse or common-law partner at the time of the transfer or a person who has since become the person’s spouse or common-law partner;

b. Person who is under 18 years of age at the time of transfer; or

c. A person with whom the transferor was not dealing at arms’ length.

4. The fair market value of the property transferred must exceed the fair market value of the consideration given by the transferee. It was agreed by the widow that she met all of the tests except the 3rd test. She argued that she was not a spouse at the time of the transfer. She based her argument on the fact that the transfer occurred on the death of her husband and that death ended the marriage so that when the transfer occurred she was no longer a spouse.

The Court was asked to interpret whether the term “spouse” in subsection 160(1) included a person who is the spouse immediately before the tax debtor’s death and they were also asked to determine whether the relationship between the tax debtor and his wife should be determined at the date of the beneficiary designation or at the date of death. In other words, whether the transfer occurred when the beneficiary designation was made or when the RRSP annuitant died. The court had little difficulty concluding that the beneficiary designation did not effect the transfer of the property and the relationship is not to be determined at the date of the beneficiary designation, but at the time of the RRSP annuitant’s death.

The Court spent quite a bit of time considering whether “spouse” in subsection160(1) includes a person who was immediately before a tax debtor’s death his spouse. Justice Jorre engaged in a detailed analysis of the textual, contextual and purposive meaning of the word “spouse” in subsection160(1).

It was noted that the word “spouse” appears in many provisions of the Act and that there is no consistency in how it is used. For example, in subsection146(8.91) which deals with the transfer of payments from a matured RRSP after death, the term spouse is used in a way where it clearly means the widow or widower. The phrase used in this subsection is “the spouse or common-law partner of the deceased”. The judge also noted that subsection 70(6) uses the term spouse in a way that clearly means the widow or widower of the deceased taxpayer. This subsection describes an acquisition of property as “being made as a consequence of the tax payer’s death by the taxpayer’s spouse” Justice Jorre notes that “this entire subsection would be rendered meaningless if one did not accept that the word “spouse” could include a widow or widower. Other similar examples include the way in which “spouse” is used can be found in subsections 72(2) and 146(8.2)

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In contrast, subsection 146(8.8) refers to “spouse” in a way that clearly excludes widows and widowers. In this provision, the legislative draftsman refers to “a person who was the annuitant’s spouse or common-law partner immediately before death” Justice Jorre acknowledges that if Parliament had intended the word “spouse” to include a widow or widower it would have been unnecessary to describe the status of spouses being a status that was in place immediately before death. Similar usage of the word spouse is found at 146(5.1) and 248(23.1).

Having found inconsistent usage in the word “spouse” throughout the Income Tax Act (the “Act”) the judge turned to a purposive analysis and found great support for concluding that “spouse” includes a widow and widower.

Justice Jorre noted that 160(1) clearly captures any transfer of property by a tax debtor to his spouse during lifetime and queried why Parliament would exempt a transfer on death. He pointed to the policy behind160(1) which is to prevent the tax debtor from putting assets beyond the reach of the CRA through a non-arm’s length transfer. The fact that 160(1) would clearly catch a transfer of an RRSP by a tax debtor to his children is even more support for the conclusion that it should apply to a beneficiary designation in favor of a spouse

Therefore while a textual and contextual analysis of the term “spouse” in the act was inconclusive, the purposive analysis of 160(1) lead the court to conclude that the term “spouse” in 160(1) does include a widow and widower. It is therefore quite clear now that if the deceased RRSP annuitant owes taxes at the date of death, the beneficiary who receives those proceeds will be jointly and severally liable to pay the tax debt, even if the beneficiary is the spouse.

Pellerin v. The Queen - 24 month holding period for claiming QSBC capital gains exemption

This case raised a novel question about a claim for the capital gains exemption in respect of a sale of shares of a qualified small business corporation. It is common tax planning to use a family trust to hold shares of a small business corporation in order to multiply access to the lifetime capital gains exemption.

A trust cannot claim the exemption itself and, in this case, the family trust distributed the shares that otherwise met all of the qualifications as QSBC shares to a beneficiary who was an infant, whose name was Mika Pellerin. Mika was born March 8, 2007 and sold the shares on October 2, 2008. A second tranche of shares were sold by Mika on November 27, 2008. Mika had not been alive for a full 24 month period when the shares were sold.

Mika’s claim for the capital gains exemption was denied by the CRA on the basis of the 24 month holding period requirement had not been met because Mika had not been alive for the full 24 month period.

The trust was a Québec resident trust and the judge reviewed various provisions in the Civil Code regarding the rights of a child conceived but not yet born. The focus was on whether the 9 months prior to birth could be counted for purposes of the 24 month requirement. The judge reviewed the relevant provisions of the Civil Code which held that, provided a child is born alive, the child can be considered a beneficiary of a trust while in utero. Several cases were relied upon which held that an unborn child should be considered to have been born assuming it is ultimately born as a viable child for all purposes that are to the benefit of the child but not to its detriment. The judge cited the case of Montréal Tramways5 where it was noted “… This Court recognized the existence of the civil law principle that when a child is born alive and viable, it’s

5 Montreal Tramways Co. v. Leveille, [1933] S.C.R. 456

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legal personality is retroactive to the date of conception, through a legal fiction that operates only for the benefit of the child.”

The judge concluded that “under Québec law applicable to Mika and the trust, as presented and argued by the parties, once Mika was born viable he was retroactively considered a beneficiary, indeed a person, as of his conception for the purposes of all generally applicable public laws, if that was beneficial for Mika.”6

The Crown raised one further argument against the taxpayers position. The trust deed contained a provision indicating that the trust was established for the benefit of Mathio Pellerin , his children and his grandchildren from their birth…(Emphasis added). The Crown argued that despite Québec law which confers rights retroactive to conception, the provisions of the trust deed prevailed and only acknowledged the child could be a beneficiary from the date of birth and forward. The judge rejected the Crown’s position for two reasons. He believed that the trust deed should be read to conform with applicable Québec law. Secondly, the Civil Code contains provisions that do not permit laws of public order to be departed from by private acts of parties. The trustee could not oust the public law that confers rights on unborn children who are born viable.

Although this finding was sufficient to dispose of the issues in the case, the judge looked at whether the related person status had to exist throughout the 24 month period or just at the determination time. In other words, if Mika had been one month old when he acquired the shares from the trust and subsequently sold them, but the trust had held the shares for 24 months prior to distributing them, would the 24 month holding period requirement be met? Under those facts, Mika would only have been related to the trust for 10 months. The judge clearly held that the ownership requirement is the full 24 months but the taxpayer need only be related to the owner at the time of disposition. See paragraph 22 of the judgment where Justice Boyle states:

“I conclude it is sufficient if, at the time of the taxable event, the taxpayer was related to any other person who owned the property during the 24 month ownership requirement period. (subject of course to abusive tax avoidance considerations, which are not applicable or involved in this case).”

This is helpful obiter for family trusts that hold QSBC shares and which have the opportunity to take advantage of beneficiaries who have not been alive (including the 9 months prior to birth) for 24 months at the time of the sale of shares.

6Mika Pellerin v. The Queen 2015 TCC 130, paragraph 13

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Recent cases on the residency of a trust

Under our Canadian income tax rules, the residency of a trust determines the jurisdiction where the trust will be subject to tax. In past years when Alberta tax rates were significantly lower than the tax rates in other provinces in Canada there was significant planning to ensure that the residency of a trust was located in Alberta. Similarly, tax can be minimized by ensuring that a trust is resident in an offshore jurisdiction with a lower tax rate in Canada. For many years it was assumed that if the trustees were resident in a particular jurisdiction, that would determine the jurisdiction where the trust was resident and where it was subject to tax. This assumption was challenged in Fundy Settlement v. Canada7. This was a case where offshore tax planning was implemented involving a trust whose trustee was a trust company located in Barbados. The Barbados trust held shares in a Canadian company which were sold triggering a very large capital gain. If the trust had been resident in Canada it would have paid a significant capital gains tax. The trust was reassessed on the basis that it was resident in Canada and the case was appealed all the way to the Supreme Court of Canada making this case the leading case on what constitutes residency of a trust for Canadian income tax purposes.

In Fundy, the trustee was a licensed trust company but the Canada Revenue Agency took the position that the beneficiaries who resided in Canada directed all of the significant decisions to be made by the trustee and that the trustee simply followed the lead of the beneficiaries. The evidence indicated that the trustee carried out basic administrative tasks but that the investment adviser to the trust was located in Canada and had been chosen by the Canadian resident beneficiaries. Unfortunately the trust officers responsible for the trust administration were not called to give evidence and the court drew a negative inference from this.

There were numerous emails put in evidence between the beneficiaries and the trustee in which the beneficiaries made demands and appeared to be giving direction to the trustee on significant matters. The Crown argued that the principles applicable to determining the residency of a corporation should be applied in determining the residency of a trust. A corporation has been considered resident where its central management and control actually resides. Until Fundy was decided, the corporate concept of central management and control was not relied on in determining the residence of a trust. The Supreme Court noted that when determining the residence of a corporation one would look to where the Board of Directors exercises their responsibilities. An analysis would focus on whether a shareholder made decisions that were significant and, if so, one would look to where the shareholder was resident. And while a trust is not a person like a corporation, the Supreme Court pointed out that there are many similarities between a corporation and a trust. Those similarities include the fact that both hold assets that are required to be managed; both involve the acquisition and disposition of assets; both may require the management of a business; both require banking and financial arrangements and both may distribute income, corporations by way of dividends and trusts by distributions. Given these many similarities in how a corporation and a trust function, the central management and control test that has been applicable to determine the residence of a corporation would be very helpful in determining the residence of a trust.

In Fundy, since the evidence indicated the beneficiaries had significant control over the way in which the trust was administered, the trust was held to be resident in Canada for tax purposes.

We have now had two recent cases involving the residency of a trust where the courts relied on Fundy in making their decisions. In both cases trusts were structured so that the trustee was 7 2012 SCC 14

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resident in Alberta with a view to establishing that the residence of the trust was in Alberta in order to take advantage of the lower Alberta tax rates. These cases came to opposite conclusions and the facts of the cases are quite instructive.

In Discovery Trust v. Canada (National Revenue)8, the trust had initially appointed beneficiaries resident in Newfoundland as the trustees. Several years later on the recommendation of tax accountants, the Newfoundland resident trustees resigned and Royal Trust Corporation of Canada was appointed the trustee. The assets of the trust were moved to Alberta and the governing law of the trust was changed from the province of Newfoundland and Labrador to the laws of the province of Alberta. The trust officer assigned to administer the trust was located in Alberta.

Like Fundy, the trust held shares that were ultimately sold for a large capital gain. The trust filed its trust return on the basis that it was resident in Alberta and claimed the Alberta rate of tax on the capital gain. Unlike Fundy, the trust officer was available to give evidence and it was clear that there were a number of corporate transactions requiring trustee approval. There were several corporate reorganizations that required the trustee to review planning memos and corporate documents. In one case the trustee’s review resulted in requests for revisions to the documents. The trust return was prepared by the beneficiaries’ accountant but it was reviewed internally by Royal Trust’s tax group. In each case Royal Trust requested detailed explanations of why transactions were being proposed and reviewed their own trust document to determine whether the transactions were in the best interest of the beneficiaries and to make sure they had the authority to approve what was being proposed.

At one point a beneficiary began negotiations for a private business loan and asked Royal Trust if the trust would guarantee the loan. Royal Trust refused this request. There was also evidence of requests for capital encroachments by beneficiaries which were granted. The Court determined that overall the trustee had exercised independent oversight and was not unduly influenced by the beneficiaries.

It was ultimately held that the trust was resident in Alberta because the central management and control of the trust was exercised by the trust officer at Royal Trust in Alberta.

Contrast the Discovery Trust case with another case, Boettger v. Revenue Quebec 9which came to the opposite conclusion, holding that the trust was in fact resident in Québec where the beneficiaries resided. In Boettger the tax plan was prepared by tax accountants which contemplated the appointment of a trustee resident in Alberta to administer a spousal trust which held redeemable preferred shares in a Québec company. The Québec lawyers who worked with the tax accountant in developing the plan recommended that the trustee be a lawyer in Calgary, Roy D. Boettger. The Court noted that the beneficiary and her husband, the settlor, did not meet Mr. Boettger until several months after the trust had been settled. They drew a negative inference from the fact that the trustee was a total stranger. In Discovery Trust, presumably the trust officer was also as total stranger to the beneficiaries but this did not draw any negative inference from of the Court in that case.

The key difference in the facts of Boettger was the simplicity of the tasks required of the trustee to administer the trust. The settlor gifted redeemable/retractable preference shares to the trust that had significant value. The trust also purchased from the settlor other similar shares in exchange for a promissory note. The company redeemed shares held by the trust in two

8 2015 NLTD(G)86 9 2015 QCCQ 7517

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different tranches and the deemed dividend triggered by those share redemptions was taxed at the low Alberta tax rate.

The steps were all set out in a planning memo and were followed by the trustee without any deviation from the plan. The after-tax proceeds were distributed to the beneficiary, as the plan required. The Court was clearly of the view that the trustee exercised no independent oversight but simply followed a preordained set of steps pursuant to a tax plan prepared by a tax accountant. What the Court found even more telling was the fact that the documents to implement the plan were signed but held in escrow until a tax opinion had been obtained indicating that the plan would work as intended. There was no investment activity required of the trustee. Funds were deposited to a bank account and ultimately paid out to the beneficiary.

It is not surprising based on these facts that the court held that the trust was not resident in Alberta but rather in Québec where the beneficiaries and their professional advisors resided. The Court in Boettger relied heavily on the Fundy decision. It noted that, as in Fundy, the trustee had a very limited role and undertook only purely clerical and administrative tasks. The Court was of the view that the trust was created only to benefit from Alberta tax rates and that the trustee was chosen for that reason alone. The trust carried on no economic activity in Alberta.

These cases are instructive. Where the activities engaged in by the trustee consist solely of steps set out in a formal tax plan prepared by a tax professional it is unlikely that the court would view the trustee as exercising any independent oversight. It may have made a difference if in Boettger, the funds were actually invested by the trustee in Alberta for a number of years with distributions occurring from time to time. In Discovery Trust, Royal Trust was first appointed in 2006 and during their trust administration which spanned a period of two years there were six major transactions which required their approval. These transactions were not planned out in advance of their appointment. The trust held shares in a holding company which itself owned shares in an operating company. The decision to sell the operating company was not made when Royal Trust was first appointed trustee. This occurred at least a year or more later. There was evidence that a request was made by a beneficiary to Royal Trust which was refused. There was also evidence that Royal Trust’s internal tax group reviewed the corporate reorganizations very carefully and in fact noted errors in the documents they reviewed and requested revisions. The degree to which Royal Trust was required to make decisions was significantly greater than in Boettger. In fact, in Boettger, there appeared to be no decisions required of the trustee at all.

One cannot assume that the appointment of a licensed trust company will necessarily lead a court to assume the trustee is exercising independent oversight. In Fundy , the trustee was a licensed trust company in Barbados but the court believed it exercised only a very limited administrative role and made no truly independent decisions, following the clear direction of the beneficiaries who were resident in Canada.

It is clear that if one wants a trust to take advantage of the tax rates in a particular jurisdiction, the trustee must take an active role in the administration of the trust. It would be prudent to demonstrate that the beneficiary meets with the trustee on a regular basis. The trust should carry on some significant economic activity in the jurisdiction where it is sought to be held resident. Where the trust has assets under investment, it would be prudent for the trustee to be able to demonstrate due diligence in the selection of the investment advisor and a careful monitoring of the performance of the investment portfolio. Where the trust holds shares in a holding company which is essentially a passive activity, it is important for the trustee to take all of the steps that a diligent shareholder would take in overseeing its ownership of shares including, regular review of the Company’s financial statements and requesting reports from the

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directors on the activities of the company. If corporate reorganizations are undertaken, the trustee must carefully review the transactions in advance and perhaps obtain independent advice concerning the impact of the reorganizations on the trusts ownership of shares.

In the Discovery Trust case, the appellant alleged that the Canada Revenue Agency investigation was biased and that the individual who conducted the investigation which resulted in the reassessment viewed all of the evidence through the lens of improper tax motivation. Interestingly, the Court agreed with the appellant. The Court noted that in the position paper written by the investigator, it was clear that the investigator viewed the appointment of Royal Trust in Alberta as an improper attempt to migrate the situs of the trust Alberta for tax benefits. In other words, the CRA auditor assumed that intentionally structuring a trust to be resident in Alberta to take advantage of its lower tax rates was improper tax planning. The court clearly concluded that a taxpayer is entitled to structure their affairs to minimize tax. There was nothing improper in attempting to arrange for the residence of the trust to be Alberta in order to take advantage of its lower tax rates. The court’s only concern was whether the trustee in fact exercised independent oversight and whether the control and management of the trust was in fact conducted by the trustee in Alberta. It is comforting that the court has once again affirmed the principle that taxpayers are entitled to structure their affairs to minimize tax.

Postmortem planning – the pipeline technique – update on CRA views

When an individual dies owning shares of private corporation there is generally a deemed disposition of the shares at fair market value immediately before death. If the shares had a lower cost base this will trigger a capital gain in the estate. Assume the private corporation had an investment portfolio in many of the stocks and bonds in the portfolio were acquired many years prior to the shareholder’s death and had accrued significant growth over that period of time. The corporate assets if sold by the corporation would trigger a capital gain essentially representing the same gain that was triggered at the shareholder’s death. It is therefore important to do post-mortem planning to eliminate the potential for double tax on this value.

One of the common techniques is known as the “pipeline”. It takes advantage of the high cost base of the shares held by the estate which is equal to the fair market value of the shares at deceased death and transfers them to a new company usually in exchange for shares in a promissory note. The promissory note can reflect the full fair market value of the shares at death.

This creates a “pipeline” which allows the estate to access the value of the corporate assets without paying tax a 2nd time. However, if the promissory note is paid out within the first year after death and the new company is immediately wound up, CRA has taken the position that subsection 84(2) applies to deem the repayment of the note to be a taxable dividend. This provision applies where there has been a distribution to shareholders on a winding up. While many tax practitioners view the repayment of the note as an entirely different transaction from a distribution to a shareholder and thus in the circumstances 84(2) should not apply, the CRA has been consistently of the view that it could apply depending on the timing of the repayment of the promissory note and the wind up of the new company.

A number of ruling requests a been made in an effort to determine what kind of timing CRA would view as reasonable before extracting full repayment of the promissory note and winding up the new company. Rulings given over the last two years indicate that the company should continue to invest its funds in the same manner that it was doing at the time of the deceased’s death for at least one year following death before repayments of the promissory note should begin to be made. If the pipeline involves an amalgamation of the new company (which now holds the shares of the original company) with that original company, no repayment of the

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promissory note should be made until at least one year after the amalgamation. In some rulings, where the new company is amalgamated with the original company, the ruling request was based on no repayment of the promissory note for a period of up to 2 years. The facts would indicate that after the shares of the original company are transferred to the new company one should wait for a period of a year before amalgamating the companies and wait for further one year before beginning to repay the promissory note. The rulings indicate that the repayment of the promissory note would be made on a gradual basis. This suggests that the estate must be patient in accessing the value of the corporation in order to avoid the application of 84 (2). It would appear to be very risky to implement a pipeline, repay the promissory note in full and wind up the new company all within one year.

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Case Update 2015-2016

Thomas Grozinger, C.S., TEP RBC Wealth Management, Estate & Trust Services

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

1

CASE UPDATE – 2015-2016

By K. Thomas Grozinger, C.S. (Estates and Trusts Law), LL.B., TEP

Principal Trust Specialist, RBC Wealth Management, Estate & Trust Services, Professional Practice Group, Royal Trust Corporation of Canada. The views and opinions expressed in this paper do not necessarily reflect those of Royal Trust Corporation of Canada, its affiliates or related entities, or any of their employees, officers and directors. This article is intended to provide general information on recent cases and not intended, nor to be construed, as legal, tax or other advice. No one should act on the information provided herein without first obtaining their own independent legal advice.

INDEX:

1. Don’t Change it! – Trustee Investing: Dunn v. TD Canada Trust, 2016 BCSC 270

(CanLII)

2. When Foreign Situs Real Property May Be “Affected” by an Order of a Canadian

Court – Schwartz v Fuss et al. 2015 ONSC 8143 (CanLII)

3. Mutual Wills – when a verbal agreement is binding: Rammage v. Estate of

Roussel, 2016 ONSC 1857 (CanLII)

4. Financial Institutions Can Insist on Probate Before Releasing Assets of Deceased

- Collins Estate (Re), [2016] B.C.J. No. 840 (QL)

5. Beneficiary Designations and Tax Liability - how equity can intervene: Morrison

Estate (Re), 2015 ABQB 769 (CanLII)

6. Unrestricted Trust Discretionary Powers to Draw on Income and Encroach on Capital Allow Life Interest Beneficiary to Accumulate Wealth- Holgate v. Sheehan Estate, 2015 ONCA 717 (CanLII)

7. Does “net value” of estate include mortgage insurance proceeds for purpose of determining whether estate value exceeds spouse’s preferential share on an intestacy (Ontario)? Re Estate of Richard Lewis Crane, 2016 ONSC 291 (CanLII)

8. Intended Charitable Gift Void as Being Contrary to Public Policy – Royal Trust Corporation of Canada v. The University of Western Ontario et al., 2016 ONSC 1143 (CanLII)

9. More Public Policy – Ontario Court of Appeal Overturns Decision of Superior Court of Justice That Voided Will on Grounds of Public Policy: Spence v. BMO Trust Company, 2016 ONCA 196 (CanLII), leave to appeal dismissed: 2016 CanLII 34005 (SCC)

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2

10. Purchase Money Resulting Trust – Andrade v. Andrade, 2016 ONCA 368 (CanLII)

11. Estate Trustee Indemnification for Legal Costs – Brown v. Rigsby, 2016 ONCA 521

(CanLII)

12. How much influence is required to constitute “undue Influence”? Driscoll v.

Driscoll, et al, 2016 ONSC 4628 (CanLII)

13. Automatic right to proof of Will in solemn form? Can estoppel preclude a Will

challenge? – Neuberger v. York, 2016 ONCA 191 (CanLII)

---------------------------------

1. Don’t Change it! – Trustee Investing: Dunn v. TD Canada Trust, 2016 BCSC 270

(CanLII)

Testators or settlors may think of themselves as savvy investors, believing their investment

portfolios to be superior both in the types of investments that comprise it and the performance

results generated, when compared to other investors or what investment advisors may be

recommending. Or, they may simply want to impose restrictions on the types of investments

that their trustees can hold for trusts that the testators or settlors create, for fear that the

trustees may invest in an imprudent manner. But, will trustee investment restrictions

contained in a Will or trust instrument be binding? Must trustees follow such restrictions, or

are they free to ignore them, and invest as they see fit? The recent decision of Dunn v. TD

Canada Trust1 provides an interesting insight into how the courts view such terms.

In Dunn v. TD Canada Trust, the testator died in in 1957 with a Will made in 1951 and a codicil

in 1954.2 The testator was survived by two daughters and a son, who are identified as the

“principal beneficiaries” of the Will, with the decision referring to the deceased’s grandchildren

as the “contingent beneficiaries.”3 At the time of the court proceeding, the daughters and son

1 2016 BCSC 270 (CanLII). 2 Ibid., at para.2. 3 Ibid., at para.5.

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3

of the testator had died, and as a result of a power of appointment granted under the Will, the

remaining portion of the testator’s estate became payable to the children of one of the

deceased daughters and the child and grandchildren of the other deceased daughter.4 The

beneficiaries who brought the summary trial proceeding for judicial interpretation of the clause

in the Will were all in agreement as to how the issue should be resolved.5

The following was the clause in the Will that was the subject of the application:

3. I GIVE, DEVISE AND BEQUEATH the whole of my property of every nature

and kind and wheresoever situate, including any property over which I may have

any power of appointment, to my said Trustee, upon the following trusts,

namely:

(a) TO RETAIN in the form in which they are at the time of my death all my

investments in bonds and stocks, and to sell, call in and convert into money all

the rest and remainder of my estate not consisting of money and trustee

investments at such time or times, in such manner and upon such terms, and

either for cash or credit, or for part cash and part credit as my said Trustee may

in its discretion decide upon, with power and discretion to postpone such

conversion of such Estate or any part or parts thereof for such length of time as it

may think best, and I hereby declare that my said Trustee may retain the whole

or any portion of my Estate in the form in which it may be at my death

(notwithstanding that it may not be in the form of an investment in which

trustees are authorized to invest trust funds and whether or not there is a liability

attached to any such portion of my estate), for such length of time as my said

Trustee may in its discretion deem advisable, and my Trustee shall not be

responsible for any loss that may happen to my estate by reason of it so doing.6

4 Ibid., at para.6. 5 Ibid., at paras.4 and 11. 6 Ibid., at para.16.

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(underlining added for emphasis)

The value of the estate at the time of the testator’s death was $91,386.95 with $76,780.37

being made up of stocks in 9 companies including TD Bank and Imperial Bank and in various

bonds (“BC Tel, Canada Savings Bonds and various water districts and cities or municipalities

and school districts”).7

It was noted that between approximately 1957 and 1973, the Trustee had sold most of the

original investments owned by the deceased at death, and that the deceased’s daughters had

over this time period received and/or approved the Trustee’s accounts.8

The Court indicated that the defendant’s articulation of the question for the Court more

precisely captured the issue:

Does the Will require the Trustee to retain and hold the Testator's bonds and stocks in

specie for the lifetimes of his daughters, or does the Will give the Trustee the power to retain

or sell as deemed advisable in the Trustee's absolute discretion?9

The parties agreed that the objective of Will interpretation is to discern the subjective intent of

the testator and they both agreed as to the principles of Will interpretation to apply; however,

they disagreed as to the result from that application to the facts.10 The applicants took the

position that the Trustee was required to retain the original bonds and stocks that existed at

the testators’ death during the lifetime of his daughters, with only limited encroachment and

only after all other capital was exhausted, whereas the defendants argued that while the

Trustee had power to retain the bonds and stocks, it was not required to do so and had

absolute discretion as to how to administer them.11

7 Ibid., at para.7. 8 Ibid., at paras. 9-10. 9 Ibid., at para.13. 10 Ibid., at para.15. 11 Ibid., at paras.17-18.

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The decision noted that Will interpretation is generally performed using a “staged approach”12,

with each successive step only being used if the prior step did not reveal the testator’s

intention:

1) Ordinary meaning of the words used in four corners of Will (i.e., considered when

looking at Will as a whole).13

2) Resort to the “arm-chair” rule (i.e., looking to surrounding circumstances)14

3) Other rules of construction.15

Betton, J. indicated that he did not need to resort to other rules of constructions16, and

examined several provisions in the Will, including clause 4 which exonerated the Trustee

from any responsibility for loss or damage from retaining the investments in the form they

were at the testator’s death or by reason of investments made in good faith.17 Following

the analysis of some of the clauses used in the Will, Betton, J. stated:

It is apparent that, subject to the discretion afforded the Trustee by the terms of the will,

the testator's intention was that, at the conclusion of the conversion process, the Trustee

would hold three possible types of assets:

1) the stocks and bonds that the testator held at the date of his death, if

any (clause 3(a));

2) trustee investments (clause 3(a)); and

3) any monies accumulated would be invested in investments that

insurance companies could use (clauses 3(d) and (e)).18

12 Ibid., at para.20. 13 The decision describes a number of principles derived from the jurisprudence as to how the “ordinary” meaning of words used in the four corners of the Will is to be ascertained (see paras. 22-23). 14 Ibid., at para.24. 15 Ibid., at para.27. 16 Ibid., at para.27. 17 Ibid., at para.36. 18 Ibid., at para.38 (per Betton, J.).

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The judge noted that at the time of the execution of the Will or codicil, the testator would

not have known whether he would die holding any stocks or bonds, 19 and also noted the

testator’s intent in protecting the Trustee from any liability resulting from exercising

discretion granted by the terms of the Will. Regarding that discretion, Betton, J. stated:

The issue here is really a matter of identifying the testator’s intention as to the scope of

that discretion. I do not agree with the defendants that the intention was to allow but

not obligate the Trustee to retain the bonds and stocks. If that were so, there would have

been no reason to specifically reference the bonds and stocks in the opening portions of

clause 3(a). That direction "to retain in the form in which they are at the time of my

death all my investments in bonds and stocks" would be rendered meaningless if the

intention of the testator was simply to have the Trustee follow the direction that

immediately follows those words and "convert into money all of the rest and remainder

of my estate not consisting of money and trustee investments". In other words, the

clause would simply have directed the Trustee to convert into money all of the estate not

consisting of money and trustee investments.20

Although the defendants argued that when the testator used the word “retain” in relation

to the stocks and bonds, he did not couple that with an imperative so as to clearly indicate

that a duty was imposed rather than just a power to retain. Betton, J. however countered

by observing that:

…the use of the phrase “to retain” is more indicative of a duty than a power. While the

defendants note that clause 3(a) does not say that the Trustee "must retain" neither

does it say that the Trustee "may retain". The use of the word “retain” alone and

unmodified and when read in context, in my view, is indicative of an obligation not a

power. As noted above, however, the proper construction must be based on the whole of

the will rather than individual words.21

19 Ibid., at paras.40 and 42. 20 Ibid., at para.41 (per Betton, J.). 21 Ibid., at para.44 (per Betton, J.).

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After considering the words in the Will and the arguments of the parties, Betton, J. concluded

that “…the Trustee was required to retain the testator’s bonds and stocks in specie for the

lifetime of his daughters, subject to encroachment if the balance of the capital of the estate was

otherwise exhausted.”22

What we learn from this case

Courts will endeavour to ascertain the intentions of a testator by considering the Will as a

whole, and only resort to rules of construction when such examination fails to reveal the

testator’s intentions. While it is possible for testators to impose restrictions on trustee

investments, it is important that such restrictions are carefully expressed to avoid creating the

potential for differing interpretations as to what was intended. Where a testator’s intentions

concerning trustee investments are ambiguous, it will generally mean that the court will have

to engage in an exercise of construction by relying on rules of construction to discern the intent

of the testator – which will undoubtedly result in costs and delays in the estate or trust

administration.

Testators should consider the potential risk to the trust portfolio if they restrict the ability of

the trustee to exercise discretion in how to invest. Absent any terms to the contrary in the Will

or trust instrument, many provincial Trustee Acts require that trustees follow the prudent

investor standard when investing trust assets. But, in restricting trustees’ choice or discretion

in investing, the trustees may not be investing in what others would objectively consider to be a

“prudent investor” manner. Query whether testators can adequately crystal ball the future in

terms of how certain investments will fare over time. Consider, for example, the stock value of

such companies as Nortel or Kodak.

Ideally, if testators intend to limit general discretion by which trustees can invest trust property,

the testators should provide an express exoneration clause relieving the trustees from any

liability in following the testator’s instructions. Such a clause not only gives the trustees some

comfort in following the testator’s investment restrictions which may not accord with general

22 Ibid., at para.53 (per Betton, J.).

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prudent investment principles, but can also be evidence of the testator’s intent regarding how

the trustee is to perform trustee investments.

2. When Foreign Situs Real Property May Be “Affected” by an Order of Canadian

Court – Schwartz v Fuss et al. 2015 ONSC 8143 (CanLII)

To what extent can a Canadian court affect interests in real property located in a foreign

jurisdiction? The decision of Pattillo, J. in Schwartz v. Fuss et al.23 sheds light on not only this

issue, but others as well.

The case involved a 95-year old woman (“Elsa”)24 who owned two condominium properties,

one in Toronto and one in Florida, with the Florida property being held in joint tenancy with a

daughter, Rosie.25 The decision noted that in 2009, Elsa was incapable of managing property26,

but continued to reside in her Toronto condominium where she was confined and subject to

24-hour care.27 Elsa’s expenses had been funded with a line of credit on her Toronto property,

but as a result of increasing expenses, additional funding was required.28 Two of her other

children disagreed about how to address the funding issue.29

Rosie wanted the line of credit on the Toronto home to be increased, while her siblings, David

and Teresa, took the position that the Florida property should be mortgaged or sold. It was

known that Elsa’s Will, by virtue of a codicil to it, provided Rosie with a right to purchase the

Florida property “…at the price at which Elsa acquired it by paying $25,000.00 to each of her

siblings.”30 Rosie argued that section 35.1 of Ontario’s Substitute Decisions Act, 199231 (“SDA”)

23 2015 ONSC 8143 (CanLII). 24 Ibid., at p.3. 25 Ibid., at pp.3-4. 26 Ibid., at p.16. 27 Ibid., at p.4. 28 Ibid, at pp.3-4. 29 Ibid., at p.5. In Glickman v. Fuss et al., 2015 ONSC 4384, it was noted at para.4 that Elsa had four children: Rosie, David, Teresa and Miriam. 30 Ibid., at p.6. (per Pattillo, J.). 31 S.O. 1992, chap.30.

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applied so as to preclude the court from ordering the sale of the Florida property.32 Section

35.1 provides that:

A guardian of property shall not dispose of property that the guardian knows is subject

to a specific testamentary gift in the incapable person’s will.

The decision also noted that in 2007, Rosie and David became Elsa’s co-attorneys for

property.33 However, another 2015 court decision noted that Elsa’s other child, Miriam,

together with Scotia Trust, were Elsa’s interim guardian of property.34

Pattillo, J. identified the following issues that needed to be decided:

1) what is the fair market value of the Florida property,

2) does section 35.1 of the SDA apply to the codicil which provides Rosie with the right to

purchase the Florida property,

3) was the transfer into joint tenancy between Elsa and Rosie valid,

4) what were the amounts spent on the Florida property by Rosie in respect of

renovations, maintenance, taxes, etc., and

5) should Rosie be charged with occupation rent and, if so, how much and over which

periods?35

Concerning the issue of value, the judge accepted that the value of the Florida property was

USD $340,000, which was based on the appraised value.36 As for the application of s.35.1 of

the SDA, Pattilo, J. concluded that it did not apply to prevent the sale of the Florida property for

the following reasons:

1) The codicil did not create a “specific testamentary gift” (as required by s.35.1), since it

only gave Rosie a “right to purchase” the Florida property, and

32 Supra., note #23., at p.6. 33 Ibid., at p.18. 34 Glickman v. Fuss et al., 2015 ONSC 4384, at para.7. 35 Supra., note #23, at p.4. 36 Ibid., at p.5.

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2) The SDA would permit the guardian to dispose of the Florida property “if the disposition

of that property is necessary to comply with the guardian’s duty” [s.35.1(3)(a)], and

since the primary duty of a guardian is to act in the incapable person’s best interest,

then to the extent that it is determined the sale of the Florida property is in Elsa’s best

interest, s.35.1 would not prevent this result.37

Next, Patttilo, J. examined whether the transfer of the Florida property into joint tenancy with

Rosie was valid. Rosie raised two preliminary objections – firstly that the Ontario court had no

jurisdiction to adjudicate on the right and title to the Florida property, and secondly that any

determination in respect of the Florida property would have to be made according to Florida

law.38

Pattilo, J. acknowledged that “(t)he general rule is that Canadian courts have no jurisdiction to

decide title to foreign land”, but then went on to cite Catania v. Giannattasio39 in support of the

proposition that “…Canadian courts will exercise an in personam exception to the general rule,

but only if the following four criteria are met:

1) the court must have in personam jurisdiction over the defendant. Rosie

concedes that this criterion is met in this case. All of the parties are

resident in Ontario and she has attorned to the jurisdiction of the court;

2) there must be some personal obligation running between the

parties. There is no question here given the issues between the parties

that this criterion is also met in this case;

3) the jurisdiction cannot be exercised if the local court cannot supervise

the execution of the judgment. Rosie submits that this criterion cannot

37 Ibid., at pp.6-7. 38 Ibid., at p.7. 39 1999 OJ 1197 (ON CA).

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be met because any order of this court concerning the Property cannot

be enforced in Florida. In my view, it can be enforced in Ontario if need

be through the court’s contempt powers. That is sufficient;

4) the last criterion is that the court will not exercise jurisdiction if the order

would be of no effect in the situs, in this case Florida. As will be dealt

with shortly in more detail, there is no evidence of Florida law before

me. Accordingly, Rosie has not established that a Florida court would

not exercise jurisdiction over an order of this court.40

As a result, Pattillo, J. dismissed Rosie’s preliminary objections insofar as they related to the

Ontario court exercising jurisdiction.41

One might have assumed that since the issue involved foreign real estate, the law governing the

matter would have been Florida law. However, given the urgency concerning Elsa’s care and

legal counsel for Rosie’s attempt to have evidence of Florida law admitted in an untimely and

improper format, Pattillo, J. declined to consider it.42 Instead, the judge noted:

Foreign law must be pleaded and proved as a matter of fact in our courts. Absent proof of

foreign law by expert evidence, foreign law is presumed to be identical to the law of

Ontario.43

Therefore, Ontario law was applied which gave rise to a presumption of resulting trust given

the circumstances of a transfer of property from parent to adult child for no consideration.44 In

40 Supra., note #23., at pp7-8 (per Pattillo, J.). 41 Ibid., at p.9. 42 Ibid., at p.9. 43 Ibid., at pp.9-10 (per Pattillo, J.) 44 Ibid, at pp.10-11, and 14-15. Amongst other indicia leading to the conclusion that a presumption of resulting trust existed, Pattillo, J. noted that the 2004 transfer into joint tenancy was contrary to Elsa’s intention in her 2003 codicil to give Rosie a right to purchase the property (see pp.14-15).

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the judge’s view, Rosie was not able to rebut this presumption45, and therefore Pattillo, J. held

that:

… I find that the 2004 transfer of the Property by Elsa to herself and Rosie as joint tenants

gives rise to a resulting trust in Elsa’s favour and Rosie holds her interest in the Property as

trustee for her mother. The beneficial interest in the Property remains with Elsa.46

If the Florida property was going to be sold, Rosie argued that she was entitled to

reimbursement for a number of expenses involving renovations, travel expenses and other

ongoing expenses (e.g., maintenance, utilities, etc.).47 The judge noted that there was a

concern as to whether Rosie paid the expenses or whether Elsa did, given the dearth of

evidence.48 However, he awarded some of Rosie’s claim for renovation expenses as well as her

claim for the ongoing expenses.49 However, Pattillo, J. rejected Rosie’s claim for travel

expenses.50

Concerning the final issue of occupation rent for the Florida property, Pattillo, J. stated:

…apart from maintaining the Property (which is not inexpensive) I do not consider that

Elsa would charge Rosie any occupation rent. Accordingly, I consider that the expenses

claimed by Rosie of $91,832.99 to maintain the Property since 2009 are sufficient to

cover any occupation rent which she should have to pay.51

As a consequence of having found that the Florida property belonged to Elsa alone, Pattillo, J.

held that “…it should be sold immediately.”52 However, Rosie requested that she be given the

opportunity to buy the Florida property, and Pattillo, J. agreed that in the circumstances that

would be appropriate.53 As such, the judge indicated that Rosie could buy the property from

45 Ibid., at p.15. 46 Ibid., at p.17 (per Pattillo, J.). 47 Ibid., at p.17. 48 Ibid., at p.18. 49 Ibid., at p.19. 50 Ibid., at p.19. 51 Ibid., at p.20 (per Pattillo, J.). 52 Ibid., at p.21 (per Pattillo, J.). 53 Ibid., at p.21.

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Elsa’s property guardians for USD $291,476.97, which was calculated by taking the appraisal

value of $340,000 and subtracting therefrom the amount of renovation expenses that Rosie

was awarded (i.e., $48,523.03).54 Rosie was given 10 days to advise the guardians if she was

prepared to buy the Florida property for that price,55 failing which the guardians were to sell it

for at least the valuation amount, although the final price would remain at their discretion.56

What we learn from this case

In conflict of laws, when issues arise with respect to immovable property, there is a general

understanding that the laws of the situs of the real property will govern how those issues are

resolved,57 and that the courts of the situs will alone have jurisdiction to adjudicate.58

However, as Pattillo, J. noted, there is an exception to this general precedence given to the

situs in real property matters. Concerning the ability of a court to assume jurisdiction in a

matter involving foreign real property, the exception is premised on the Canadian court being

able to assert in personam authority over the parties provided that the four criteria referred to

by Pattillo, J. are satisfied. As for applying the law of a Canadian jurisdiction to resolve an issue

involving foreign real property (versus the application of the law of the situs), this exception will

apply when no evidence of the foreign law has been pled (or admitted). In such a case, there is

a principle that the domestic court will assume that the foreign law is the same as the law of

the forum (being the law that governs the jurisdiction in which the court finds itself).59

3. Mutual Wills – when a verbal agreement is binding: Rammage v. Estate of

Roussel, 2016 ONSC 1857 (CanLII)

54 Ibid., at p.21. 55 Ibid., at para.21. 56 Ibid., at p.22. 57 Walker, Janet, Castel & Walker Canadian Conflict of Laws, 6th ed., vol.2 (Toronto: LexisNexis Canada Inc., 2005-2015) at para.23.2. 58 Ibid., at para.23.1. 59See for example: Royal Trust Corporation of Canada v. A.S. (W.) S., 2004 ABQB 284 (CanLII). Note that as indicated in this case, where statutory law is involved, the principle appears to also apply provided that the international statutory expressions of the law are mostly uniform in nature.

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Reciprocal Wills vs Mutual Wills

Often, when spouses decide to make their Wills, they make Wills that “mirror” each other.

These Wills have become known as “reciprocal Wills.”60 Although mirror Wills reflect the

wishes of the spouses at the time of signing, such Wills are not immutable; in other words, the

spouses are free to change their respective Will up to the date of their death (or incapacity).

However, in some cases, reciprocal Wills become “mutual Wills”, meaning that the testators

have agreed between themselves that the Wills “…cannot be changed, at least as to their

effect, without the consent of the other.”61

Mutual Wills tend to be an issue where the spouses have remarried and have children from

prior marriages or relationships. A not unheard of scenario in such situations is for the Wills to

provide for the surviving spouse first (either as an outright gift or in trust), and then after the

death of the survivor, a division amongst the children of both spouses. If a surviving spouse

subsequently makes a new Will that differs from the terms of the former Will so as to

effectively cut out the children of the deceased spouse, issues arise as to whether the prior

Wills were “mutual Wills,” and thus immutable absent consent.

Facts of Rammage v Estate of Roussel

One of the more recent cases to explore the issue of mutual Wills is Rammage v. Estate of

Roussel.62 The case was decided by the Honourable Mr. Justice Reid on summary judgment (i.e.,

without a trial).63 The facts involved a husband (“Alfred”) and wife (“Ruth”) who were married

and who each had two children from previous relationships.64 Prior to their marriage, Alfred

and Ruth made a cohabitation agreement that was to survive their marriage and, although it

provided that subsequently acquired property would be free from each other’s claims, the

60 Rammage v. Estate of Roussel, 2016 ONSC 1857, at para.17. 61 Ibid., at para.18. 62 2016 ONSC 1857 (CanLII). 63 Ibid., at para.4. 64 Ibid., at para.5.

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agreement also indicated that they could make testamentary gifts to each other.65 Their

relationship assumed a somewhat traditional arrangement, with Alfred the “main breadwinner”

and Ruth maintaining the home.66

The decision noted that in 1998 Alfred and Ruth signed Wills whereby each gave his or her

estate to the other, and then on the death of the survivor provided for an equal division

amongst all four children.67 After Alfred’s death in February 2009, Ruth inherited his estate,

and then made a new Will giving only her two daughters her estate.68 While the facts disclosed

that there was a deterioration in the relationship between Ruth and Alfred’s children, the

decision indicated that regardless of the reasons, the issue was whether Ruth was contractually

prohibited from changing her earlier Will.69 Ruth died four years after Alfred, on May 1, 2013.70

Legal principles

Reid, J. reviewed the legal principles concerning reciprocal wills and mutual wills which, in the

case of mutual wills, requires evidence of a binding contract in the absence of terms in the Wills

expressly indicating that they are to be “mutual” Wills:

Reciprocal wills contain terms that are mirror images of each other. By definition, they

represent the wishes of the two testators at the date of signing. The wills made by Ruth

and Alf in 1998 are clearly reciprocal. However, the simple fact that the wills were made

in that form simultaneously is not enough, by itself, to establish that they are mutual wills.

Mutual wills are reciprocal wills that the makers have agreed cannot be changed, at least

as to their effect, without the consent of the other. Once one of the testators has died, it

65 Ibid., at para.6. 66 Ibid., at para.8. 67 Ibid., at para.9. 68 Ibid., at paras.10-11. 69 Ibid., at paras.13-14. 70 Ibid., at para.16.

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is not possible for the surviving testator to receive such consent, and therefore the terms

cannot be altered.

For wills to be mutual, their provisions must be identical in the sense that each party

receives an identical interest from the other, or that the remainder or gift over is disposed

of in an identical manner.

Where wills are not specifically identified as being mutual, there must be evidence of a

binding legal contract and not “just some loose understanding or sense of moral

obligation” if they are to be deemed mutual. Whether the extrinsic evidence supports the

presence of a binding legal contract is the key issue to be determined in this case.71

71 Ibid., at paras.17-20 (per Reid, J.) (footnote reference omitted). Note: concerning the definition of mutual wills, Gareau, J. in Lavoie and Trudel, 2016 ONSC 4141 (CanLII) stated the following at para.20 of his decision:

The general definition as to what is meant by mutual wills was considered at paragraph 21 in the case of Doherty v. Berry (Estate of), 1999 ABQB 312 (CanLII). At paragraph 21 the court summarized the definition gleaned from the authorities as follow:

By the term mutual wills, what is meant are wills that dispose of property belonging to two testators (usually husband and wife), who have agreed to pool their mutual property and to provide by their wills for its disposal according to an agreed scheme. The scheme or arrangement provides for conferring reciprocal benefits (usually a life interest) on each other for the survivor and after the death of the survivor, it provides for disposal of the mutual property to other persons...as the parties have agreed. In addition, persons who make mutual wills usually agree not to alter or revoke them without the other’s consent and it is out of this agreement not to revoke that a constructive trust may arise. The agreement not to revoke may be incorporated in the will by recital or otherwise, or it may be proved outside of the will.

Accordingly there can be said to be at least two conditions for the operation of this doctrine whereby an irrevocable trust is imposed by law on the estate of the survivor in accordance with the terms of the mutual will arrangement. These two conditions are: (1) a mutual agreement not to revoke their individuals wills; and (2) the one who died first must have died without revoking or changing his will in breach of the agreement.

An agreement not to revoke is not to be inferred from the mere fact of making mutual wills, nor is it to be inferred from the fact that mutual benefits are conferred by the dispositions, but usually the agreement not to revoke can be inferred from the terms of the mutual wills.(Emphasis added) Not only the will themselves, but all the circumstances surrounding their making may provide satisfactory evidence that the wills were executed in pursuance of an enforceable agreement. [Emphasis in original.]

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The decision noted that it is the party alleging that a Will is a mutual Will who bears the onus of

proving that a binding contract existed, and the evidence required to do so must be “clear and

convincing.”72 However, the judge also observed that in the context of mutual Wills, if the

terms of the Wills do not make the gifts conditional, then the surviving testator is free to deal

with the property while he or she has it, provided that it is not inconsistent with the intent of

the agreement (meaning, for example, that the survivor could make “normal use” of the capital

while alive).73

The parties alleging that Ruth’s earlier Will was a mutual Will led evidence that Ruth and Alfred

“…acted as if they had a family consisting of four children,”74 and one of Alfred’s children gave

evidence that Ruth had confirmed prior to Alfred’s death that she and “Alf” wanted an equal

split amongst all four children following Ruth’s death.75 Ruth’s children, however, asserted that

the cohabitation agreement supported the view that Ruth intended her assets to be free from

claims by Alfred.76 It was also noted that the drafting lawyer of the impugned Will had no

recollection of Ruth or Alfred discussing or intending that these reciprocal Wills could not be

changed.77

Contractual arrangement?

Reid, J. noted that “…there was no direct written or oral confirmation that the 1998 wills were

mutual.”78 Although legal counsel for Ruth’s children raised the issue that the 1998 Wills could

not be mutual Wills because Ruth and Alfred did not each receive an “identical interest” under

those Wills, Reid. J. dismissed the argument as it was based on differing estate values, rather

72 Supra., note #62, at para.23. 73 Ibid., at para.21. 74 Ibid., at para.30 (per Reid, J.). 75 Ibid., at para.36. 76 Ibid., at para.41. 77 Ibid., at para.44. 78 Ibid., at para.47 (per Reid, J.).

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than that each Will gifted identical interests to the other (in the sense of an absolute gift in the

respective testator’s assets). 79

Because both testators were dead, the judge indicated that support for or against the intention

to make mutual wills would necessitate examination of extrinsic evidence:

That evidence must be considered contextually. I accept that a moral obligation is

insufficient to raise the terms contained in reciprocal wills to the level of a contractual

obligation.80

Reid, J. found that it was interesting that one of Ruth’s daughters deposed that if her mother

had died first, it would have been unacceptable to her that Alfred could have subsequently

changed his Will so as to disinherit her and her sister.81

The judge accepted the “uncontested evidence” of Alfred’s children as to the discussions that

took place with Ruth and Alfred concerning the “intended four-way split.”82 Reid. J. also

accepted that “(t)he 1998 wills were made in the context of a 13 year period of cohabitation to

that point including the commitment of their marriage,”83 and that both Ruth and Alfred “…had

been treating their respective stepchildren as their own.”84 Furthermore, Reid, J. stated that

between the dates of the 1998 Wills and Alfred’s death, neither Alfred nor Ruth exhibited any

behaviour “…indicating that either of them wanted to change their estate plan or would allow

the other to do so.”85

The judge then concluded that the 1998 Wills were mutual Wills based on a verbal contract that

Ruth and Alfred had between each other that arose out of the “context of the family

constellation at the time”:

79 Ibid., at para.48. 80 Ibid., at para.49 (per Reid., J.). 81 Ibid., at para.51. 82 Ibid., at para.53. 83 Ibid., at para.54 (per Reid, J.). 84 Ibid., at para.54. 85 Ibid., at para.57 (per Reid, J.).

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I conclude that, in the particular circumstances of this case, the plaintiffs have satisfied their

onus of proving the existence of a verbal contract between Ruth and Alf based on clear and

convincing evidence. That contract was that neither could change the effect of their 1998

wills without the consent of the other. It was made in the context of the family constellation

at the time and is consistent with the evidence that both Ruth and Alf, for their separate

reasons, wanted to ensure that a benefit was bestowed on their respective children by the

survivor of them.86

As a result, Reid, J. also held that the trustees of Ruth’s estate held the residue of her estate in

trust to be divided equally amongst the four children.87

What we learn from this case

Although some reciprocal Wills may also be mutual Wills, in order to qualify as mutual wills

there must be clear and convincing evidence of an agreement to that effect.

However, even where there is no direct written or oral confirmation between testators that

their Wills are to be mutual, courts may still find that mutual Wills were intended by the

testators based on a verbal contract between them resulting from the “context” of the “family

constellation” at the time of making the Wills, and that is confirmed by evidence of the

testators’ desire that the survivor of them will also benefit their respective children.

In other words, courts can find a verbal contract of mutual Will intention between the testators

based on context and conduct. Is teasing out a contract from the context and conduct of the

testators reasonable when they themselves never expressed that their Wills were to be

immutable? It will be interesting to see how the courts develop the law in this regard.

86 Ibid., at para.58 (per Reid, J.). 87 Ibid., at para.60.

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4. Financial Institutions Can Insist on Probate Before Releasing Assets of Deceased

- Collins Estate (Re), [2016] B.C.J. No. 840 (QL)

From time to time, the issue is debated of whether an executor can obtain a deceased’s assets

from a financial institution without having to first provide probate88 of the deceased’s Will. The

general argument from executors is that they do not derive their authority from probate, but

rather derive it from the Will itself89, so that a financial institution should not be able to refuse

turning over the deceased’s assets to the named executor. Financial institutions, on the other

hand, will argue that they require probate in order to be relieved of any liability should a

subsequent Will be found, or the current Will be successfully challenged as invalid. This is the

case even if the executor obtained probate from another jurisdiction.90

There is legislation that supports the premise of a financial institution being protected where it

acts on the basis of having received probate of a Will. For example, financial institutions

governed by Ontario law can benefit from ss.47(1) of Ontario’s Trustee Act which states:

47.(1)Where a court of competent jurisdiction has admitted a will to probate, or has

appointed an administrator, even though the grant of probate or the appointment may

be subsequently revoked as having been erroneously made, all acts done under the

authority of the probate or appointment, including all payments made in good faith to or

by the personal representative, are as valid and effectual as if the same had been rightly

granted or made, but upon revocation of the probate or appointment, in cases of an

erroneous presumption of death, the supposed decedent, and in other cases the new

personal representative may, subject to subsections (2) and (3), recover from the person

who acted under the revoked grant or appointment any part of the estate remaining in

88 In Ontario, a Certificate of Appointment of Estate Trustee with a Will. 89 “Ontario law has not derogated from the principle that the power of the executor arises from the will at the death

of the testator and that the effect of a grant of probate serves only to confirm the validity of the probated will as the

last will of the deceased.” Silver Estate (Re) [1999] O.J. No.5026, 31 E.T.R. (2d) 256, 93 A.C.W.S. (3d) 935 (QL)

per Haley, J. at para.10. 90 See Janet Walker, Castel & Walker, Canadian Conflict of Laws, 6th ed. (vol.2) (Markham, Ont.: LexisNexis

Canada Inc., 2005, including update issues 2005-2014) where the following appears at para.26.3a.: “A personal

respresentative appointed in another jurisdiction cannot administer the movable or immovable estate of the

deceased located in any of the Canadian common law jurisdictions unless the local court has sealed or resealed the

grant of authority or unless ancillary letters are granted.”

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the person’s hands undistributed and, subject to the Limitations Act, 2002, from any

person who erroneously received any part of the estate as a devisee, legatee or one of

the next of kin, or as a spouse of the decedent or supposed decedent, the part so

received or the value thereof.91

Although the federal Bank Act92 gives banks the ability to release deposits without requiring

probate subject to certain requirements being met, the provision is discretionary93, and the

recent British Columbia Supreme Court decision by Master Wilson in Collins Estate (Re) 94

confirms that banks can nevertheless insist on probate.

In this case, the executor for the late Peter Thomas John Collins applied for an order of the

court to compel the Bank of Nova Scotia (the “Bank”) to release the deceased’s assets without

the executor having to first obtain probate of the deceased’s Will. The Bank refused, taking the

91 Trustee Act, R.S.O. 1990, chap T.23. 92 Bank Act, SC 1991, c 46.

93 Regarding deposits, section 460 of the Bank Act provides:

460 (1) Where the transmission of a debt owing by a bank by reason of a deposit, of property held by a

bank as security or for safe-keeping or of rights with respect to a safety deposit box and property deposited

therein takes place because of the death of a person, the delivery to the bank of

o (a) an affidavit or declaration in writing in form satisfactory to the bank signed by or on

behalf of a person claiming by virtue of the transmission stating the nature and effect of the

transmission, and

o (b) one of the following documents, namely,

(i) when the claim is based on a will or other testamentary instrument or on a

grant of probate thereof or on such a grant and letters testamentary or other

document of like import or on a grant of letters of administration or other

document of like import, purporting to be issued by any court or authority in

Canada or elsewhere, an authenticated copy or certificate thereof under the seal

of the court or authority without proof of the authenticity of the seal or other

proof, or

(ii) when the claim is based on a notarial will, an authenticated copy thereof,

is sufficient justification and authority for giving effect to the transmission in accordance with the claim.

(2) Nothing in subsection (1) shall be construed to prevent a bank from refusing to give effect to a

transmission until there has been delivered to the bank such documentary or other evidence of or in

connection with the transmission as it may deem requisite.

94 [2016] B.C.J. No. 840 (QL).

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position that the executor had to first obtain probate of the Will, although it did agree to

release sufficient funds to pay the necessary probate fees.

The decision indicated that the deceased had died leaving an “electronic document” (an email)

which was subsequently signed and witnessed, 95 and which had been accepted in an earlier

court decision as the Will of the deceased.96 It also indicated that approximately two weeks

prior to his death on April 21, 2015, he had remarried.97 Curiously, the decision indicated that

the executor was intending to obtain probate, but was having difficulty “…due to the nature of

the estate.”98

The executor argued that his authority derived from the Will and as a result of the Will having

been declared valid in the earlier court proceeding, he was entitled to the money at the Bank.

The Bank stated that while it does “…as a matter of policy…” release smaller amounts “…in less

murky circumstances…” it “…cannot and should not be compelled to do so.”99 The Bank cited

two reasons for this position: (i) to ensure funds are given to the right people as it appeared

unclear who would ultimately be entitled to the deceased’s money, and (ii) for the Bank’s

protection.100 Regarding the latter position, the Bank indicated that probate gave rise to the

defense of res judicata should it be subsequently determined that funds were paid to the

wrong person, since the grant of probate is an order of the court.101

Master Wilson reviewed the decision of Mr. Justice Savage in Romans Estate v. Tassone,102

where the judge in that case stated the following:

[40] The authorities in my view make several matters clear: (1) an action

can be commenced without obtaining probate, as an executor’s authority is

based on the will, (2) before proceeding with an action already commenced,

95 Ibid., at para.2. 96 Ibid., at para.3. 97 Ibid., at para.2. 98 Ibid., at para.3, per Master Wilson. 99 Ibid., at para.5. 100 Ibid., at para.5. 101 Ibid., at para.5. 102 2009 BCSC 194.

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the parties to an action may require that the Plaintiff prove their authority by

producing letters probate, (3) the court may require that a Plaintiff prove their

authority, by producing letters probate, of its own motion, when appropriate

and (4) the court may order a stay of proceedings any time after the

commencement of an action where it is in the interests of justice to do so,

pending the issuance of letters probate.

[41] In the instant case, as the production of the [Solicitor’s] file would

compromise a substantive right of the deceased, that of solicitor-client

privilege, and such right enures to the personal representative of the testator,

the Solicitor was correct to call upon the Plaintiff to produce letters probate

proving her authority to act on behalf of the estate at this juncture.

[35] The Solicitor cites Tarn v. The Commercial Banking Company of

Sidney (1884), 12 Q.B.D. 294. In that case the executors commenced an

action to collect on a bill of exchange which became due shortly after the

testatrix’s death. The Bank acknowledged the debt but refused to pay the

proceeds over until the executors produced probate of the will.

[36] The Bank sought an order that proceedings in the action be stayed,

the master refused to grant the order, a decision upheld by the trial court. On appeal it

was held that the action should be stayed until the executor

obtained probate. The defendants could not be called upon to “... pay over

sums of money, or to hand over securities, to persons who might not have a

good title and could not give a valid release”.103

103 Ibid., at paras.40-41, and 35-36.

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Master Wilson did not see any difference in the underlying principles between what Mr. Justice

Savage found in relation to the issue of privilege and the issue that was before the court in

Collins Estate (Re),104 concluding that:

I consider Mr. Justice Savage’s analysis in Romans Estate to be binding on

me. In all of the circumstances, I conclude that the Bank cannot be compelled to

hand over the funds to the executor at this juncture and that the Bank is within its

rights to require probate be obtained first. I am aware of no prejudice to the

executor, given the Bank's offer to pay the probate fees directly to court. As such,

the executor's application is dismissed with liberty to reapply once 30 days has

elapsed from the granting of probate.105

Master Wilson also awarded costs to the Bank.106

What we learn from this case

Financial institutions can insist on receiving probate of Wills before releasing assets to

executors appointed therein. This requirement is not based on principles of reasonableness – a

financial institution simply has the right to require probate to be fully protected when releasing

assets of a deceased. However, financial institutions may have policies that will permit

executors in some circumstances to obtain a deceased’s assets without probating the

deceased’s Will, but these exception policies are completely discretionary. Typically, as part of

such exceptions, financial institutions will insist on releases and indemnities.

Where the circumstances and/or potential risks are considered unacceptable, the financial

institutions can rightfully insist that probate be obtained first before they will release assets of

the deceased to the executor named in the deceased’s Will. It appears that only probate will

ensure that the financial institution has the protection of the court in terms of res judicata

104 Supra, note #94, at para.7. 105 Ibid., at para.8, per Master Wilson. 106 Ibid., at para.9.

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should it subsequently be determined that the Will was invalid, and assets paid to the wrong

person.

5. Beneficiary Designations and Tax Liability - how equity can intervene [Morrison

Estate (Re) 2015 ABQB 769 (CanLII)]

Background

In Morrison Estate (Re),107 one of the beneficiaries of the estate (Cameron, a son of the

deceased) applied to the court for advice and direction seeking a direction that a RRIF

belonging to the deceased was an asset of the deceased’s estate and not the property of the

designated beneficiary (Douglas, who was another son).108 The estate did not take part in the

application, but Douglas (the co-executor) who was the designated beneficiary defended the

application in his personal capacity.109

Facts

The deceased was survived by four children, his wife having predeceased him.110 The

deceased’s Will appointed two of his children (Douglas and Heather) as alternate executors

(after his wife) and, if his wife predeceased him, divided his residue equally amongst his

children except for $11,000.00 which was to be deducted from another son’s share (Robert) to

account for a loan given him by the deceased during the deceased’s lifetime.111 The $11,000.00

was to be divided equally amongst the deceased’s surviving grandchildren.112

107 2015 ABQB 769 (CanLII). 108 Ibid., at paras.1-2. 109 Ibid., at paras.3, 5 and 8. 110 Ibid., at para.4. 111 Ibid., at para.6. 112 Ibid., at para.6.

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The RRIF valued at $72,683.25113 at death was the largest single asset of the estate, the

deceased’s house having been sold shortly before death with $25,000 from the proceeds gifted

to each of the deceased’s 4 children.114 The facts indicated that the beneficiary designation in

favour of Douglas had been made after the deceased signed his Will and after the death of the

deceased’s wife.115

Although Douglas received the proceeds of the RRIF, the estate bore the burden of the resulting

tax, and as it turned out, the estate did not have sufficient funds to satisfy the tax liability and

the gift of money to the grandchildren.116 The estate had approximately $77,000 in bank

accounts and insurance proceeds, but $28,780.19 was paid for taxes (most of which related to

the RRIF proceeds), resulting in only $21,733.64 remaining in trust after funeral expenses and

debts, which was insufficient to fund the $11,000 gift to the grandchildren, since in the

circumstances it was to be taken out of Robert’s equal share (in other words, $44,000 would

have had to remain to be divided amongst the children in order to fully fund the

grandchildren’s gift).117

The Argument

Cameron argued that Douglas held the proceeds of the RRIF in trust for the estate because

there was no consideration given for the beneficiary designation and because Douglas did not

prove that his deceased father had intended to gift Douglas the proceeds to the exclusion of his

113 Ibid., at para.34. 114 Ibid., at paras.7-8. 115 Ibid., at para.9. 116 Ibid., at paras.10-11. 117 Ibid., at paras.34 and 36.

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brothers and sister.118 Cameron referred to the seminal Supreme Court of Canada case, Pecore

v. Pecore119, among others to support his application.

In perhaps a telling statement, Graesser, J. wrote the following regarding the potential impact

of the application:

The results of this application could have significant impact on the investment and

brokerage industry. There are undoubtedly millions of RRSPs, RRIFs and life insurance

policies that have designated beneficiaries instead of the proceeds going to the owner’s

estate.

I suspect that many owners, as well as many investment advisors and brokers, are

unaware of the potential consequences of the Supreme Court’s decision in Pecore as it

relates to beneficiary designations, as well as the income tax consequences of an RRIF or

RRSP beneficiary being someone other than the owner’s spouse.120

Analysis by the Court

After noting that there was little jurisprudence on the topic, Graesser, J. reviewed what little

was available,121 and went on to note that:

118 Ibid., at para.12. 119 2007 SCC 17 (CanLII), [2007] 1 SCR 795. 120 Morrison Estate (Re), supra., note #107, at paras.18-19 (per Graesser, J.). 121 Ibid., at paras.23, and 24ff.

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It seems manifestly unfair for this estate to be unable to pay modest bequests to the

testator’s grandchildren because he had given most of his estate away to one of his four

children and the tax consequences of that transfer denuded the estate.122

In analyzing the matter, Graesser, J. noted that Alberta’s Wills and Succession Act123 expressly

recognized and addressed beneficiary designations. The judge expressed the view that

“(b)eneficiary designations are essentially powers of appointment conferred on the owner by

the terms of the contract.”124

Graesser, J. went on to state that the decision in Pecore v. Pecore (i.e., presumption of resulting

trust), should not be applied to beneficiary designations, including life insurance policy

designations.125 According to Graesser, J. : “To apply Kerr v Baranow and Pecore v Pecore to

RRSP, RRIF or life insurance beneficiary designations would, in my view, create untold

uncertainties in what are likely hundreds of thousands if not millions of beneficiary designations

in Canada.”126

However, after considering the English case of In re A Policy No. 6402 of the Scottish Equitable

Life Assurance Society127 and the Manitoba Court of Appeal decisions in Dreger v Dreger128 and

Northern Trust Company v. Coldwell et al129, Graesser, J. appears to suggest that despite his

122 Ibid., at para.39 (per Graesser, J.). 123 SA 2010, c W-12.2 (see s.71). 124 Morrison Estate (Re), supra., note #107, at para.49 (per Graesser, J.). 125 Ibid., at para.53. 126 Ibid., at para.53 (per Graesser, J.). The reference to Kerr v. Baranow, 2011 SCC 10 (CanLII) appears to be in relation to the presumptions that can apply when transfers are gratuitous, as in the case of a beneficiary designation. 127 [1902] 1 Ch. D. 282. 128 [1994] 10 WWR 293 (MBCA). 129 (1914), 25 Man. R. 120 (MBCA).

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reservations, jurisprudence outside of Alberta suggests that beneficiary designations could be

subject to the presumption of resulting trust:

While I am sorely tempted to hold that designations of beneficiary forms for RRIFs (and

inferentially RRSPs and life insurance) should be treated differently from other forms of

gifts (such as joint ownership of property, joint bank accounts and joint investment

accounts where an actual present ownership interest is transferred to the done), I am

mindful of stare decisis and am loathe on the facts of this case to reject what appears to

be settled law in England through Scottish Equitable Life and the Manitoba Court of

Appeal in Dreger and Northern Trust.130

Decision on application of presumptions to beneficiary designations not required in this case

However, Graesser, J. indicated that a review of the evidence allowed him to resolve the matter

without having to resort to any presumptions, because what needed to be decided in this case

was whether Douglas proved on a balance of probabilities that his deceased father had

intended to give Douglas the RRIF.131

Intention to gift RRIF

Although the judge noted that the evidence around intent to gift the RRIF was “somewhat

conflicting”,132 in the end the judge was of the view that the evidence tipped the balance of

130 Morrison Estate (Re), supra., note #107, at para.66 (per Graesser, J.). 131 Ibid., at para.68. 132 Ibid., at para.69 (per Graesser, J.).

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probabilities “…at 50.01%”133 that there was an intention to favour Douglas rather than an

intention that Douglas was to hold the RRIF on a resulting trust for the estate or his siblings134 --

a rather slim margin to be sure! Thus, the judge found that Douglas was entitled to the RRIF.135

Income tax consequences

Determining that Douglas was entitled to the RRIF did not, however, end the matter.136

Graesser, J. found it “manifestly unfair” that the Estate was burdened with the tax liability

associated with the RRIF, whereas Douglas as the designated beneficiary benefited to the full

amount.137 Graesser, J. questioned whether investment advisors who give advice concerning

beneficiary designations are also aware of the tax consequences associated with beneficiary

designations.138

The judge considered the context of the gift by the deceased father to each of the children of

$25,000 from the proceeds of the sale of his home and concluded:

It would seem highly unlikely that Mr. Morrison, by giving each of his children $25,000,

intended to leave insufficient funds in his estate to satisfy the bequests to his

grandchildren. That suggests to me, and I draw the inference, that Mr. Morrison was

unaware of the tax consequences of designating his son as a beneficiary. He must have

133 Ibid., at para.74 (per Graesser, J.). 134 Ibid., at para.74. 135 Ibid., at para.75. 136 Ibid., at para.76. 137 Ibid., at para.65 (per Graesser, J.). 138 Ibid., at para.81.

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been under the impression or understanding that Douglas would bear any tax liability on

the RRIF and no burden would fall on his estate.139

As a consequence, Graesser, J. was of the view that Douglas “…received an unintended and

unexpected benefit from the Estate.”140

Making it right? Using equity to fashion a remedy for perceived unfairness flowing from tax

liability

The judge noted that many Wills provide executors with the discretion to impose a condition to

an in kind transfer to a beneficiary that the beneficiary be liable for paying any tax associated

with a gift under the Will, or reimbursing the Estate for any tax.141 He then went on to

describe two remedies to what he considered to be a “wrong” done to the Estate with having

to bear the tax liability for the RRIF – one was rectification of the Will, and the other was the

jurisdiction of the Court under the Judicature Act142 to apply an equitable remedy.143

Greasser, J. dismissed the first remedy of rectification because he did not think that his 50.01%

weighting in favour of an intention to give Douglas the RRIF amounted to “clear and

139 Ibid., at para.80 (per Graesser, J.). 140 Ibid., at para.80 (per Graesser, J.). 141 Ibid., at para.87. 142 RSA 2000, C J-2. 143 Morrison Estate (Re), supra., note #107, at paras.89-90, and 98 (per Graesser, J.).

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convincing” evidence that the Will did not reflect the intention of the testator (which is

required under WESA to invoke the statutory power of rectification).144

However, Graesser, J. was of the view that s.8 of the Judicature Act did permit the court to

fashion an appropriate remedy. Section 8 provides:

(8) The Court in the exercise of its jurisdiction in every proceeding pending before it

has power to grant and shall grant, either absolutely or on any reasonable terms and

conditions that seem just to the Court, all remedies whatsoever to which any of the

parties to the proceeding may appear to be entitled in respect of any and every legal or

equitable claim properly brought forward by them in the proceeding, so that as far as

possible all matters in controversy between the parties can be completely determined

and all multiplicity of legal proceedings concerning those matters avoided.

As a result, Graesser, J. held:

Probate law’s origins are in equity, so I do not find it inappropriate to consider

equitable remedies where the common law is inadequate to remedy a wrong.

In these circumstances, I find that the tax paid by the Estate conferred a benefit in

that same amount to Douglas. He has been unjustly enriched by the payment. While the

Estate was under a legal obligation to pay the tax, it was under no legal obligation to

Douglas to pay it for him.

It would be unjust for Douglas to retain the benefit. Principles of unjust enrichment

justify a direction that Douglas reimburse the Estate for the tax it paid on his behalf.

144 Ibid., at paras.90-97.

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An alternative approach using equitable principles and remedies is that the tax paid

by the Estate resulted from Mr. Morrison’s mistaken understanding of the consequences

of the beneficiary designation. Reimbursement by Douglas flows from equitable

principles surrounding mistake.

Either approach results in a declaration of a constructive trust on the proceeds of the

RRIF received by Douglas to the extent of the Estate’s payment to CRA on account of the

RRIF.

Requiring reimbursement by Douglas will replenish the Estate to the amount intended

by Mr. Morrison to be available for distribution, and prevents the manifest injustice of

having an unintended tax consequence of a beneficiary designation frustrate the

testator’s intentions.

I recognize that the approach I have taken here may be viewed as extraordinary. But

that is what s 8 is for: creating an equitable remedy where the law would otherwise

leave the injured party (here, the Estate and beneficiaries other than Douglas) with no

adequate remedy.145

In summary, Graesser, J. allowed Douglas to keep the RRIF but Douglas had to reimburse the

Estate for the full amount of tax paid associated with the RRIF.146 Although Cameron was able

to get his costs paid from the Estate on a solicitor and client basis, Douglas was responsible for

his own costs. 147 Douglas was also holding the RRIF proceeds on a constructive trust for the

Estate up to the value of the tax paid by the Estate relating to the RRIF.148

What we learn from this case

145 Ibid., at paras.104-110 (per Graesser, J.). 146 Ibid., at para.117. 147 Ibid., at para.117. 148 Ibid., at para.118.

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Without having had to decide the issue, Graesser, J. does appear to suggest that some non-

Alberta jurisprudence supports the view that the presumptions will apply to registered plans

and life insurance designations.149 Nevertheless, he acknowledges the uncertainty and notes

that the potential problems that could arise if this jurisprudential thread were to find traction in

the Alberta courts might be mitigated or addressed if some indication of “intent” on the part of

the designator were made and available:

It is likely that the law in this area will be uncertain for some time. The “definitive” case

may be many years away from being finally decided, and legislatures may never choose

to weigh in on these issues. The Pecore issue is one that might be addressed by

amending the beneficiary designation forms by having an express statement as to the

designator’s intentions, rather than leaving the issue to be dealt with by evidence at

trial. It would be a simple matter of having the designator indicate that a gift is

149 Ibid., see para.66. The decision also refers to the Ontario case of McConomy-Wood v. McConomy, 2009 CanLII 7174 (ON SC). Although Herold, J. in that case refers to presumptions in the context of registered plan designations, he does not decide the issue on that basis, stating at para.55: “In my respectful view, there is no need to resort to a presumption in the case at bar. There is an abundance of evidence with respect to what mother’s intentions always were.” Interestingly, the decision found that the designated beneficiary (a daughter) was holding the proceeds of the registered plan in trust for the beneficiaries of her mother’s estate in equal shares. Whether in Ontario presumptions are applicable to registered plan beneficiary designations remains an open issue, as suggested by the following quotation from Herold, J. where he stated at para.55 (underlining added for emphasis):

Because I haven’t the slightest doubt as to what mother’s intentions were when she named Lisa as the designated beneficiary of the RIF, it should not be necessary to look to the presumptions. If I had to do so, however, I would agree with the current trend expressed by the Supreme Court of Canada in Pecore, against applying a presumption of advancement when there is a gratuitous transfer between a parent and a non-dependent adult child. With respect to a presumption of resulting trust, there would clearly be a windfall to Lisa, a corresponding deprivation to the other two beneficiaries, but whether or not there was a juridical reason may or may not be subject to some debate. In any event, I do not find it necessary to look to the presumptions to resolve this issue, and if I did I would find, as in Pecore, that there is no presumption of advancement, and any presumption of resulting trust is overwhelmingly rebutted by the evidence. Indeed, except for Lisa’s uncorroborated evidence that mother told her at some point in the last several weeks of her life that “you will be rewarded” (ostensibly here on earth) the rest of the evidence clearly and consistently indicates an intention to treat all three children equally. I have, accordingly, concluded that Lisa holds the entire net proceeds of the RIF, after payment of taxes and other legitimate estate expenses that were paid from it, in trust for the beneficiaries of the estate in equal shares.

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intended. While an explanation might be better yet, even a check mark in a box on a

form would be better than an evidentiary void.

If Pecore is found to apply to beneficiary designations, I can forsee a floodgate of

litigation against the designated beneficiaries by disappointed siblings. Much of this

might be avoided by variations to the beneficiary designation forms, and some

documentation of intent by the donor. Certainty is far better than entering the world of

secret trusts.150

Although Graesser, J. refers to varying the beneficiary designation forms to signify intent, this

may not be possible where the forms are pre-made forms available from financial institutions.

However, declarations of intent could potentially be made in the designator’s Will, particularly

where the Will is made after the beneficiary designation. When made with the assistance of a

drafting lawyer, the designator can also benefit from the drafting lawyer’s legal advice as to the

legal and tax consequences of the designation.

In this regard, the designator’s Will might contain a simple statement that confirms that the

intent of the designator, with respect to any designations made in favour of anyone other than

the estate, is for the beneficiary so designated to receive the proceeds of the registered plan or

life insurance, and not the estate. Such a statement could also potentially be made by a

separate stand-alone written instrument. Any such a statement should just be a

“confirmation” statement, rather than an attempt at creating another beneficiary designation

(so as to avoid any confusion with the validity of the original designation to the extent that it is

considered valid). With legal advice being provided at the same time as the intent is stated in

the Will, a designator should also have the benefit of understanding the legal and tax

consequences associated with a particular designation.

150Morrison Estate (Re), supra., note#107, at paras.119-120 (per Graesser, J.).

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As noted by Graesser, J., such “certainty” will be “…far better than entering the world of secret

trusts”151 in terms of determining who was intended to receive the proceeds.

Since Graesser, J. did not decide the issue of whether the presumption of resulting trust applied

to beneficiary designations, it remains to be seen on which side the jurisprudence will fall in

terms of whether resulting trusts apply to beneficiary designations or not.

6. Unrestricted Trust Discretionary Powers to Draw on Income and Encroach on

Capital Allow Life Interest Beneficiary to Accumulate Wealth - Holgate v. Sheehan

Estate, 2015 ONCA 717 (CanLII)

In Holgate v. Sheehan Estate152, the Ontario Court of Appeal affirmed a decision of the trial

court that the terms of two trusts permitted a life interest beneficiary to receive proceeds from

the trusts in order to “save” such proceeds (and thus be able to pass such proceeds through her

estate to her own beneficiaries).

Terms of the trusts

The deceased, John Holgate was married to May Sheehan (“Mrs. Holgate”) and they each had

children from prior marriages.153 The deceased’s Will established two trusts described in the

decision as the “Holgate Trust” and the “U.K. Trust”154 having the following terms:

The Holgate Trust provided as follows:

To hold and keep invested the residue of my estate or the amount

thereof remaining for the sole use and benefit of my wife, MAY

HOLGATE, during her lifetime, with power and authority to my

151 Ibid., at para. 120 (per Graesser, J.). 152 2015 ONCA 717 (CanLII). 153 Ibid., at para.2. 154 Ibid., at para.12.

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Trustee to draw on both the income and the capital of my estate for

the care and support of my said wife, as my Trustee in their

discretion considers advisable. In availing themselves of this

discretionary power to encroach on the capital of my estate for my

wife’s benefit, it is my strong wish and desire that at all times my

Trustee’s first consideration shall be my wife’s well-being and

comfort and that all her needs and requirements of every kind shall

be provided for adequately in all respects out of my estate, as I do

not feel that my estate need be largely conserved for the future use

of my children and step-children. I therefore authorize and

empower my Trustee to be generous in the exercise of this

discretionary authority, even though there may be a considerable,

or if necessary, total depletion of the capital of my estate by reason

of such encroachments. [Emphasis added.]

The U.K. Trust provided as follows:

To hold all my interest in real and personal property situated in the

United Kingdom for the sole use and benefit of my wife MAY

HOLGATE, during her lifetime, with power and authority to my

Trustee to draw on the income, (but not the capital) of the said real

and personal property for the use and benefit of my said wife, and

on her death to pay or transfer to such of my sons, JOHN EDWARD

HOLGATE and STEPHEN CRAVEN HOLGATE, who shall survive me,

and if more than one (1) in equal shares between them, whatever

interest I may have in the said real and personal property, both

income remaining and capital. [Emphasis added.]155

155 Ibid., at paras.13-14.

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The deceased’s solicitor and Mrs. Holgate were appointed as the trustees of these

trusts.156

Issue: using vs. saving money from trusts

The deceased’s sons argued that the trusts did not permit Mrs. Holgate to “save”

money received from her life interest, and that instead she could only “use” it.157

Consequently, in their view Mrs. Holgate violated the terms of the trusts by having

accumulated wealth.158 This position of the deceased’s sons is not altogether

surprising since the “bulk” of Mrs. Holgate’s estate following her death went to

her children.159

Trial proceedings – mid-trial motion to determine matter of interpretation

The sons commenced an action seeking various relief that included an accounting,

freezing of funds, general damages amounting to $5,000,000 and a declaration

that they were entitled to either a resulting or constructive trust interest in both

the deceased’s estate as well as the estate of Mrs. Holgate.160

At trial, the parties consented to a mid-trial motion utilizing rule 21 to determine

an interpretation issue, specifically, whether the trusts’ provisions precluded Mrs.

Holgate from accumulating wealth.161 The trial judge “…concluded that nothing in

the will or codicil prevented Mrs. Holgate from accumulating wealth.”162

156 Ibid., at para.12. 157 Ibid., at para.4. 158 Ibid., at para.4. 159 Ibid., at para.4. 160 Ibid., at para.5. 161 Ibid., at para.6-7. 162 Ibid., at para.8.

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The Appeal

The sons appealed on the grounds that the trial judge erred in the interpretation

of the trusts, that the trial judge had no jurisdiction to hear a rule 21 motion during

trial and by considering evidence from the trial,163 and for leave to appeal the

award of costs given at trial.164

The Court of Appeal, in a unanimous decision written by Benotto, J.A, dismissed

the appeal.165

Analysis

In agreeing with the trial judge’s interpretation166, the Court noted that in respect

of the Holgate Trust the trial judge concluded that the deceased’s intent was clear

that there was no restriction on Mrs. Holgate’s ability to save money and that “(a)

considerable or total depletion of the capital of the estate was contemplated.”167

As the Court stated:

The will contained no limitations on the use of income, no requirement to

recapitalize unused income, and no requirement for Mrs. Holgate to look

to her own resources before accessing trust income. The language of the

163 Ibid., at para.9. 164 Ibid., at para.10. 165 Ibid., at para.33. The Court granted leave to appeal the costs, but dismissed the appeal as to costs. (See para.32). 166 Ibid., at para.19. 167 Ibid., at para.16.

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will, according to the trial judge, came as close as possible to conferring an

absolute gift on Mrs. Holgate of the entire residue.168

Regarding the U.K. Trust, the Court noted that the trial judge determined that there were no

limitations on the use of the trust assets, pointing out that the codicil revoked a prior provision

in the Will that gifted the U.K. assets to the deceased’s sons, and that it was the deceased’s

wish to provide Mrs. Holgate with enough funds during her lifetime.169

Regarding the expression of intent in the Will, the Court observed that:

Both trusts indicate an intention that there be no limitation on the discretion of the trustees

to draw on income or (in the case of the Holgate Trust) to encroach on capital, and that there

be no prohibition on accumulating funds.

In the Holgate Trust, the words “care and support” and “well-being and comfort” appear in

the context of the following phrases used by Mr. Holgate:

• “for the sole use and benefit of my wife”;

• “power and authority to my Trustee to draw on both the income and the capital of

my estate for the care and support of my said wife, as my Trustee in

their (sic) discretion considers advisable”;

• “it is my strong wish and desire that at all times my Trustee’s first consideration shall

be my wife’s well-being and comfort and that all her needs and requirements of

every kind shall be provided for adequately in all respects out of my estate”;

168 Ibid., at para.17. 169 Ibid., at para.18.

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• “I do not feel that my estate need be largely conserved for the future use of my

children and step-children”; and

• “I therefore authorize and empower my Trustee to be generous in the exercise of

this discretionary authority, even though there may be a considerable, or if

necessary, total depletion of the capital of my estate by reason of such

encroachments”.

These words and phrases indicate a clear intention on Mr. Holgate’s part to allow his wife

unrestricted access to the funds. Likewise in the U.K. Trust, there are no words of limitation

regarding access to and use of income; the trustees are empowered to draw on the income of

the estate for the use and benefit of Mrs. Holgate.170

Rule 21 Motion

Although the Court expressed concern with using a Rule 21 motion mid-trial (the rule states

that the motion is to be brought “before trial” and no evidence is admissible), because the

parties all consented and because the Court did not agree that the trial judge was influenced by

evidence at the trial, the Court dismissed this ground of appeal.171

What we learn from this case

Widely-drawn discretionary powers regarding either or both income and capital distributions

that indicate an intention to permit a life tenant to have unrestricted access to trust income or

capital as the case may be “…and that there be no prohibition on accumulating funds”172 appear

170 Ibid., at paras.19-21. 171 Ibid., at paras.24-31, and 32. 172 Ibid., at para.19.

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to permit a life tenant to receive such trust income or capital for the purpose of accumulating

wealth in the life tenant’s own name.

Concerning trust income (which was the primary source of trust distribution at issue in Holgate

v. Sheehan Estate173), such an intent to permit a life tenant to receive discretionary

distributions of income for the purpose of accumulating wealth may be discerned where the

terms of the trust contain no limitations on the use of a trust’s income, no requirement for

unused income to be “recapitalized”, and no requirement for a life tenant beneficiary to use his

or her own personal resources first before benefitting from the income of the trust.174

7. Does “net value” of estate include mortgage insurance proceeds for purpose of

determining whether estate value exceeds spouse’s preferential share on an

intestacy (Ontario)? Re Estate of Richard Lewis Crane, 2016 ONSC 291 (CanLII)

Ontario’s Succession Law Reform Act175 (“SLRA”) provides that on an intestacy, a surviving

spouse is entitled to a “preferential share” of the deceased spouse’s estate. The current

prescribed preferential share is $200,000.176 Section 45 of the SLRA sets out the rules

concerning the availability of a spouse’s preferential share in his or her deceased spouse’s

estate:

173 The trial decision indicated that the parties admitted that the life tenant had not encroached on capital from the Holgate Trust, although the decision noted that there was an allegation of capital encroachments concerning the U.K. Trust which “possible” encroachment was in dispute and remained to be resolved: Holgate v. Holgate, 2015 ONSC 259 (CanLII) at para.9. 174 Supra., note #152, at para.17. 175 R.S.O., 1990, c.S.26 as am. 176 Ont. Reg. 54/95.

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“45. (1) Subject to subsection (3), where a person dies intestate in respect of property

having a net value of not more than the preferential share and is survived by a spouse and

issue, the spouse is entitled to the property absolutely. 1994, c. 27, s. 63 (1).

(2) Subject to subsection (3), where a person dies intestate in respect of property having a

net value of more than the preferential share and is survived by a spouse and issue, the

spouse is entitled to the preferential share absolutely. 1994, c. 27, s. 63 (1).

(3) Despite subsection (1), where a person dies testate as to some property and intestate

as to other property and is survived by a spouse and issue, and,

(a) where the spouse is entitled under the will to nothing or to property having a net

value of less than the preferential share, the spouse is entitled out of the intestate

property to the amount by which the preferential share exceeds the net value of the

property, if any, to which the spouse is entitled under the will;

(b) where the spouse is entitled under the will to property having a net value of more

than the preferential share, subsections (1) and (2) do not apply. 1994, c. 27,

s. 63 (1).

(4) In this section,

“net value” means the value of the property after payment of the charges thereon and the

debts, funeral expenses and expenses of administration. R.S.O. 1990, c. S.26, s. 45 (4);

2009, c. 34, Sched. T, s. 4.

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(5) The preferential share is the amount prescribed by a regulation made under subsection

(6). 1994, c. 27, s. 63 (2).

(6) The Lieutenant Governor in Council may, by regulation, prescribe the amount of the

preferential share.”

In summary, if the deceased died with a surviving spouse and issue, and if the net value of the

estate is greater than $200,000, the surviving spouse is entitled to the full preferential share.

However, if the net value of the estate is less than $200,000, the surviving spouse is entitled to

the entire estate – the issue get nothing.

But, what happens if the estate of a deceased spouse primarily consists of a house that has a

mortgage against it, but which mortgage is insured so that on death, the mortgage will be paid

off? Does the payment and discharge of the mortgage get taken into account in determining

the “net value” of the estate for the purpose of determining whether it exceeds the preferential

share of the surviving spouse? This was the issue explored in the recent decision of Broad, J. of

the Ontario Superior Court of Justice in Re Estate of Richard Lewis Crane.177

In this case, the deceased’s only asset that formed part of his estate was a house owned solely

by him and valued at approximately $294,500 at the time of his death on which there was a

mortgage of $100,339.26.178 The deceased was survived by a spouse and two children from a

prior relationship.179 The children applied to court for an order that the surviving spouse pass

her accounts as administrator of their father’s estate.180 Because the value of the house, net of

177 2016 ONSC 291 (CanLII). 178 Ibid., at paras.2-4. 179 Ibid., at para.1. 180 Ibid., at para.8.

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the mortgage, was less than the preferential share, the surviving spouse took the position that

the children had no financial interest in the estate.181 Unsurprisingly, the children disputed this

view, claiming that the net value of the estate pursuant to s.45 of the SLRA included the value

of the mortgage life insurance, with the result that they did have a financial interest in the

estate.

The Court noted that there was no jurisprudence that addressed the issue of whether the

proceeds of the mortgage insurance policy should be taken into account for the purpose of

determining the “net value” of the estate pursuant to s.45 of the SLRA.182 However, Broad, J.

did state that:

In my view the object of s.45 of the SLRA is to confer limited protection on surviving

spouses of persons dying intestate by providing them with entitlement to a preferential

share in the assets of the intestate estate after satisfaction of the debts and obligations

of the estate. The scheme of the section is to strike a balance between affording

protection to surviving spouses on the one hand and recognizing the legitimate interests

of the surviving issue of the deceased in the estate on the other. This is done by placing a

maximum limit on the preferential share to be given to surviving spouses.183

The judge was of the view that the concept of “net value” used in s.45 of the SLRA was

designed to ensure that the true value of the estate was used in order to determine whether

the surviving spouse’s preferential share exceeded that value.184 That true value would be

arrived at after deducting “legitimate claims of third parties.”185 However, as for the mortgage

181 Ibid., at para.7. 182 Ibid., at para.12. 183 Ibid., at para.14 (per Broad, J.). 184 Ibid., at para.16. 185 Ibid., at para.16.

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insurance proceeds, Broad, J. had this to say:

…However where a third party such as the mortgage insurer in this case is contractually

bound to the estate to pay off a charge or debt of the estate on the death of the

deceased such payment should, in my view, be taken into account in determining the

true value of the estate in intestacy. On the date of the deceased’s death the estate

became entitled to enforce the obligation of the mortgage insurer to pay off the

mortgage and accordingly there is no functional difference between the estate paying

the mortgage debt from other resources and the estate submitting a claim to the insurer

to pay the mortgage debt, as was done in this case.186

Broad, J. took the position that it was not necessary to have the mortgage insurance proceeds

“…form part of the estate of the deceased…” for such proceeds to be “…taken into account for

the purpose of determining ‘net value’ under s.45 of the SLRA.”187 The judge also stated that

the finding in Fray v. Evans188, in which the Ontario Court of Appeal stated that the “the

valuation date for purposes of calculating entitlement to a preferential share [under s.45 of the

SLRA] is the date of death”189 did not help the surviving spouse because that case did not

consider “…whether payment of a mortgage charge against property under a mortgage

insurance policy is to be considered ‘payment’ of the charge for the purpose of determining the

net value of the property under subsection 45(4) of the SLRA.” 190

Noting that ss.45(2) contemplates post-death deductions like funeral expenses and estate

administration expenses to arrive at the estate’s “net value”, Broad, J. concluded that it did not

186 Ibid., at para.17. 187 Ibid., at para.18. 188 2013 ONCA 776 (C.A.). 189 Quoting para.32 of Fray v. Evans decision. 190 Supra., note #177, at para.20 (per Broad, J.).

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matter that the payment of the mortgage insurance proceeds occurred after death.191

Accordingly, Broad, J. stated:

On the date of death the right of the estate to require the insurer to pay off the

mortgage debt crystallized. The true value of the property in intestacy was no longer

subject to the charge represented by the mortgage, given the insurer’s obligation to pay

it off. The deceased arranged, by virtue of the mortgage insurance policy, to have the

mortgage paid on his death, thereby increasing the net value of his estate for

distribution among his beneficiaries under the SLRA.192

Although the surviving spouse argued that under the Estate Administration Tax Act 1998193

(“ETA”), mortgage insurance payable to a named mortgagee does not affect the deduction of

the mortgage charge as an encumbrance on the property for the purpose of calculating the

total value of the estate to determine the applicable estate administration tax, Broad, J. was of

the view that the EAT had “…no application to the question under consideration in this case.”194

For Broad, J., s.45 of the SLRA had to be interpreted “harmoniously” with the “scheme and

object” of the SLRA, which the judge indicated was “…to arrive at the true value of the property

in intestacy for determining whether it exceeds the preferential share of the surviving spouse,

and if so, to what extent.”195

Consequently, Broad, J. ordered that the net value of the estate for the purposes of s.45 of the

SLRA was to be determined without reduction of the amount owing under the mortgage given

the payment of the outstanding mortgage balance pursuant to the mortgage insurance

191 Ibid., at para.20 192 Ibid., at para.20 (per Broad, J.). 193 S.O. 1998 Chap.34, Sch., s.1. 194 Supra., note #177, at paras.21-22. 195 Ibid., at para.22 (per Broad, J.).

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policy.196 The judge also declared that the issue (i.e., deceased’s children) had a financial

interest in the estate in accordance with s.46 of the SLRA.197

What we learn from this case

It has been accepted (at least in Ontario) that for the purpose of calculating estate

administration tax, the value of a mortgage encumbrance on a deceased’s property is to be

deducted when determining the total value of the estate for estate administration tax, even if

that mortgage debt will subsequently be satisfied by mortgage insurance that pays off the

mortgagee. However, for the purpose of determining the “net value” of the estate and

whether it exceeds a spouse’s preferential share pursuant to s.45 of Ontario’s SLRA, it appears

that the proceeds of mortgage insurance are to be included.

8. Intended Charitable Gift Void as Being Contrary to Public Policy – Royal Trust Corporation of Canada v. The University of Western Ontario et al., 2016 ONSC 1143 (CanLII)

Recent cases, most notably the Canadian Association for Free Expression v. Streed et al198 and

Spence v. BMO Trust Company199, have shone the spotlight on the concept of “public policy”

and its ability to render trust provisions or, in the case of the trial decision in Spence v. BMO

Trust Company, the entire Will, invalid. Royal Trust Corporation of Canada v. The University of

Western Ontario et al.200 is a recent Ontario contribution to the growing jurisprudence in this

area.

196 Ibid., at para.23. 197 Ibid., at para.23. Note: s.46 of the SLRA gives a surviving child or children an interest in the intestate’s estate. 198 2015 NBCA 50 (CanLII). 199 2015 ONSC 615 (CanLII). 200 2016 ONSC 1143 (CanLII).

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In this case, which was released as an endorsement, the testator died January 1, 2015201 with a

Will dated July 20, 1994202 that contained the following provisions (emphasis retained from

judgment):

Paragraph 3(d)(ii): My Trustee shall expend the balance of the income of my estate, and

all income of my estate following the death of my sister, in the sole discretion of my

Trustee, but after consultation with its Windsor Advisory Board, for so long as it exists,

and thereafter, with a committee comprised of senior trust administrators of my Trustee

and no more than two persons not ordinarily employed by my Trustee, such persons to be

chosen from those with a science, industry or medical background, other than academics,

administrators and government officials, for such one or more of the following purposes,

it being my intention that my Trustee in its sole discretion may in any one year allocate a

portion or all of the income to one or more of the following purposes so long as it is

following a plan, to be updated from time to time to carry out all such purposes at such

time and times as it determines:

…

(E) To provide funds, from time to time and in the discretion of my Trustee for awards or

bursaries to Caucasian (white) male, single, heterosexual students in scientific studies,

including medicine, genetics, biology, chemistry, physics and those going into medical

pharmacology research. The selection of these students shall be made by my Trustee’s

Windsor Advisory Board, or with the committee it constitutes pursuant to this paragraph

3(d)(ii). It is my wish hereby expressed that the committee in determining the terms of

such awards or bursaries that they take into consideration academic achievement, but not

necessarily the highest marks, but a minimum cumulative average of at least 10.0 (B+)

and an honest desire to work and achieve in his or her chosen profession and be of good

201 Ibid., at para.7. 202 Ibid., at para.1.

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character. Extracurricular activities (i.e. non-academic) of the applicant shall not be taken

into consideration in qualifying a student for purpose of these awards or bursaries. In

addition, students with the necessary academic qualifications who through work histories

have demonstrated that they are not afraid of hard manual work in their selection of

summer employment shall be given special consideration in the selection process. If no

paid employment is available, then a full-time voluntary manual labour job may be

considered as a substitute. These awards shall be directed to students who are going to

attend the University of Western Ontario or those for whom it may be a hardship to go to

the University of Western Ontario then they can be awarded to these particular students

who wish to attend the University of Windsor. No awards to be given to anyone who plays

intercollegiate sports. Further, to similarly provide funds for an award to be known as the

Ellen O’Donnel Priebe Memorial Award in the discretion of my trustee, under the same

terms as the awards above, except this award is to go to a hard-working, single,

Caucasian white girl who is not a feminist or lesbian, with special consideration, if she is

an immigrant, but not necessarily a recent one. This award is for someone going into a

field the scientific study (not medicine) on the terms outlined above for the male

applicants. The awards, at the discretion of the Trustee may be for some or all of the

tuition payable by such applicants in the year of the award applicants must reapply if these

are desired in subsequent years and the Trustee will reassess each candidate at that time

to evaluate their academic progress and adherence to remaining single. The number of

the awards or bursaries available shall be determined at the discretion of the Trustee

depending on the amount of award available for this purpose. The awards or bursaries

may be paid directly to the University to be attended by an award recipient on account of

tuition.

…

(G) In the event that one or more of the foregoing provisions shall be declared to be of a

non-charitable nature, or, if the qualifications set forth for receipt of an award referred to

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above are adjudged by a court of competent jurisdiction to be void for public policy, then

the provision for such gift shall be deleted without prejudice to the remaining provisions

of this paragraph 3(d)(ii).203

Royal Trust Corporation of Canada, the Trustee appointed under the Will, applied to the Court

for opinion, advice and direction on the following questions:

a) Does the Will provide the Trustee with a discretion to choose whether or not to disperse

funds for the purposes of paragraph 3(d)(ii)(E) of the Will?

b) Are any of the provisions in paragraph 3(d)(ii)(E) of the Will void or illegal or not capable

of being lawfully administered by the trustee because they are contrary to public policy,

discriminatory on the basis of race, creed, citizenship, ancestry, place of origin, colour,

ethnic origin, sexual orientation, or otherwise and/or uncertain?

c) If so, who is entitled to the trust funds under the Will?

d) Is there a general charitable intention expressed in the Will sufficient to permit the court

to exercise its inherent jurisdiction in the matter of charitable trusts and direct that the

trust be administered cy-pres?

e) If the court exercises its inherent jurisdiction to direct that the trust be administered cy-

pres, how should the Trustee administer the trusts?204

The endorsement indicated that the Trustee took a neutral position on the application205, the

various charities took no position206, and the Human Rights Commission which was served as a

matter of courtesy, neither appeared nor took any position on the application.207 The Office of

203 Ibid., at para.8. 204 Ibid., at para.1. 205 Ibid., at para.5. 206 Ibid., at para.2. 207 Ibid., at para.3.

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the Public Guardian and Trustee (the “PGT”), however, requested that the court declare

paragraph 3(d)(ii)(E) void as being contrary to public policy.208

Mitchell, J. referred to Canada Trust Co. v. Ontario Human Rights Commission209, the seminal

decision in this area where the Ontario Court of Appeal found the charitable trust in that case

“…to be void on the ground of public policy to the extent that it discriminated on the ground of

race (colour, nationality, ethnic origin), religion and sex.”210 However, in a footnote to Mitchell,

J.’s endorsement, it was noted that the cy-pres doctrine was applied by the Court of Appeal so

that the charitable trust could be maintained by no longer offending public policy since the

“offending restrictions” were removed.211

Although Mitchell, J. referred to the guiding principle as stated in Canada Trust Co. v. Ontario

Human Rights Commission that trusts were to be evaluated on a “case-by-case” basis when

their validity is being challenged and that “…not all restrictions amount to discrimination and

are therefore contrary to public policy”212, the judge had “…no hesitation in declaring the

qualifications relating to race, marital status, and sexual orientation and, in the case of female

candidates, philosophical ideology, in paragraph 3(d)(ii)(E) of the Will void as being contrary to

public policy.”213 The judge further noted that “(A)lthough it is not expressly stated by [the

testator] that he subscribed to white supremacist, homophobic and misogynistic views as was

the case in the indenture under consideration in Canada Trust Co., the stated qualifications in

paragraph 3(d)(ii)(E) leave no doubt as to [the testator’s] views and his intention to discriminate

on these grounds. “ 214

208 Ibid., at para.4. 209 1990 CanLII 6849 (ON CA). 210 Supra., note #200 (per Mitchell, J.). 211 Ibid., at footnote #5. 212 Ibid., at para.13. 213 Ibid., at para.14. 214 Ibid., at para.14 (per Mitchell, J.).

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As for the application of the doctrine of cy-pres, Mitchell, J. indicated that it did not apply to the

Will because the Will already contained “…an express provision as to the consequences of a

declaration by the court that the qualifications for entitlement of an award or bursary are void

as against public policy.”215 In other words, paragraph 3(d)(ii)(G)of the Will provided that in the

event a court declared a provision void for public policy, then that provision was to be deleted

without prejudice to the remaining provisions of paragraph 3(d)(ii).216

As a result of finding paragraph 3(d)(ii)(E) void on the ground of public policy, Mitchell, J. stated

that she must give effect to the testator’s intentions and delete the charitable trust established

under that paragraph.217 Therefore, the judge answered the questions posed above as follows:

(a) Does the Will provide the Trustee with a discretion to choose whether or not to disperse

funds for the purposes of paragraph 3(d)(ii)(E) of the Will?

No.

(b) Are any of the provisions in paragraph 3(d)(ii)(E) of the Will void or illegal or not capable

of being lawfully administered by the trustee because they are contrary to public policy,

discriminatory on the basis of race, creed, citizenship, ancestry, place of origin, colour,

ethnic origin, sexual orientation, or otherwise and/or uncertain?

Yes. The qualifications relating to race, gender, marital status and sexual orientation in

paragraph 3(d)(ii)(E) are void as being contrary to public policy.

215 Ibid., at para.15. 216 Ibid., at para.15. 217 Ibid., at para.16.

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(c) If so, who is entitled to the trust funds under the Will?

The beneficiaries of the other charitable trusts established in paragraphs

3(d)(ii)(A),(B),(C),(D) and (F) of the Will.

(d) Is there a general charitable intention expressed in the Will sufficient to permit the court

to exercise its inherent jurisdiction in the matter of charitable trusts and direct that the

trust be administered cy-pres?

No. The Will requires that upon the court’s declaration that the qualifications are void as

being contrary to public policy the charitable trust established in paragraph 3(d)(ii)(E) fails

in its entirety and is to be deleted.

(e) If the court exercises its inherent jurisdiction to direct that the trust be administered cy-

pres, how should the Trustee administer the trusts?

Not relevant given the court’s decision in (d).218

What we learn from this case

In Wishart Estate, Re,219 Riordan, J. stated: “Obviously public policy is a very general term,

difficult to define and a determination of what is against public policy can of course be

subjective.”220 He also stated: “The term ‘public policy’ cannot be comprehensively defined in

specific terms but the phrase ‘against public policy’ has been characterized as that which

conflicts with the morals of the time and contravenes any established interest of society.”221

218 Ibid., at para.17 (per Mitchell, J.). 219 1992 CanLII 2679 (NB QB). 220 Ibid., at pg.16 (per Riordan, J.). 221 Ibid., at pg.15 9per Riordan, J.).

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While “public policy” may be a difficult concept to define, it has certainly become an important

one for both testators and lawyers to understand.

Key to the result in Royal Trust Corporation of Canada v. The University of Western Ontario et

al. appears to be that the terms of the testamentary trust would have required the trustee to

act contrary to public policy. As Royal Trust Corporation of Canada v. The University of Western

Ontario et al. confirms, if the terms of a trust contravene public policy, they will be declared

void by a court. Discriminatory provisions relating to race, gender, sexual orientation and even

philosophical ideology may offend to an extent that they will be considered as against the

current morals of society or the interests of society as practiced or understood.

However, as noted in Canada Trust Co. v. Ontario Human Rights Commission, not every

restriction amounts to discrimination. Illustrative of this principle is the recent decision of

Dewar, J. of the Manitoba Court of Queen’s Bench in Re The Esther G. Castanera Scholarship

Fund222 where the judge stated the following in relation to a testamentary scholarship trust

fund whose terms provided that only women could benefit:

Every gift requires a contextual assessment. A one-size-fits-all policy does not fairly

provide the necessary comfort to a testator that his/her gift will be treated in the

manner anticipated by them. .223

***

222 2015 MBQB 28 (CanLII). 223 Ibid., at para.42 (per Dewar, J.).

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Where the gift can be articulated as promoting a cause or a belief with specific reference

to a past inequality, there is nothing discriminatory about such a gift. It may well be that

at some point in the future, society will conclude that insufficient opportunities are

granted to men simply because they are men, but that does not exist today. In my view,

in today’s environment, it is not offensive for this gift to benefit women rather than men,

and I am not prepared to change it.224

Arguably, whether terms of a trust contravene public policy or not can likely be discerned by

applying “common sense” or the proverbial “sniff test”. If the terms are such that a reader

would consider them to offend current sensibilities, then they will likely be declared void if

reviewed by a court. As such, testators, settlors (of inter vivos trusts), their drafting lawyers,

and executors and trustees must all be alive to this concept of public policy.

Testators and settlors should carefully consider whether their intent regarding restrictions for

trusts/gifts will be effective. Drafting lawyers, if faced with requests by testators or settlors to

insert restrictive provisions that the jurisprudence has held to offend public policy, should

advise their clients that such provisions have been declared void by the courts. Finally,

executors and trustees should consider whether the terms of any gift or trust might contravene

public policy and, if uncertain, seek legal advice or the advice and direction of the courts.

Should a charitable trust be declared void as against public policy, a court might be able to

apply the doctrine of cy-pres to “save” the charitable gift by applying a trust scheme that carries

out the testator’s or settlor’s general charitable intent, by removing the offending terms. Of

course, a testator or settlor may provide in their Wills or trust instruments for alternative gifts

should a gift or trust be held by a court to be void as against public policy, as was the case in the

224 Ibid., at para.44 (per Dewar, J.).

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Will examined by the court in Royal Trust Corporation of Canada v. The University of Western

Ontario et al.

9. More Public Policy – Ontario Court of Appeal Overturns Decision of Superior

Court of Justice That Voided Will on Grounds of Public Policy: Spence v. BMO

Trust Company, 2016 ONCA 196 (CanLII)

The estate and trust legal community exhaled a sigh of relief following the greatly anticipated

release of the decision by the Ontario Court of Appeal in Spence v. BMO Trust Company.225 The

decision, released March 8, 2016, some 6 months after it was heard, overturned the decision of

the application judge that had caused some consternation among the estates and trusts bar.

The case involved a father (Eric) who left a Will that was declared void by the applications judge

on the grounds that it disinherited one of his daughters for reasons that extrinsic evidence

(evidence outside the Will) had indicated were discriminatory and consequently in

contravention of public policy. The result of the Will being declared void was that the testator’s

two daughters would inherit his estate equally under the laws of intestacy (and certain of his

grandchildren who were provided for in his Will would be disinherited).

Issues on Appeal

The Ontario Court of Appeal was asked to examine four issues, described as follows:

(1) Was the Extrinsic Evidence admissible before the application judge?

225 2016 ONCA 196 (CanLII).

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(2) If the answer to question (1) is ‘yes’, did the application judge err in her

assessment of the Extrinsic Evidence?

(3) Did the application judge err by improperly interfering with Eric’s

testamentary freedom?

(4) In any event, did the application judge err by setting aside the entire

Will, rather than only the residual bequest?226

Principle of Testamentary Freedom

In beginning its analysis of the matter, the majority of the Court of Appeal referred to the

principle of “testamentary freedom” indicating that “…no one, including the spouse or children

of a testator, is entitled to receive anything under a testator’s will, subject to legislation that

imposes obligations on the testator.”227 The decision also noted that the Will in question did

not contain any conditions that required a beneficiary, or obliged an executor or trustee, to act

contrary to law or public policy.228

The majority reviewed several cases involving the court’s use of public policy to scrutinize the

validity of testamentary gifts, including Canada Trust Co. v. Ontario (Human Rights

Commission)229, McCorkill v. McCorkill Estate230, and Peach Estate (Re)231. According to the

majority, “(t)hese, and analogous cases, confirm that Canadian courts will not hesitate to

intervene on the grounds of public policy where implementation of a testator’s wishes requires a

226 Ibid., at para.23. 227 Ibid., at para.32 (per Cronk, J.A.). 228 Ibid., at paras.56-57. 229 (1990), 1990 CanLII 6849 (ON CA), 74 O.R. (2d) 481. 230 2014 NBQB 148 (CanLII), aff’d 2015 NBCA 50 (CanLII), leave to appeal to S.C.C. denied [Canadian Association for Free Expression v. Fred Gene Streed, Executor of the Estate of Harry Robert McCorkill (a.k.a. McCorkell), deceased, et al., 2016 CanLII 34017 (SCC). 231 2009 NSSC 383 (CanLII).

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testator’s executors or trustees or a named beneficiary to act in a way that collides with public

policy.”232

Conditional Gifts that Historically were Subject to Being Voided by Public Policy

The majority of the Court of Appeal identified certain categories of conditional gifts for which

courts have used public policy to void the gifts, describing these categories as follows:

…conditions in restraint of marriage and those that interfere with marital relationships…

…conditions that interfere with the discharge of parental duties and undermine the

parent-child relationship by disinheriting children if they live with a named parent

…conditions that disinherit a beneficiary if she takes steps to change her membership in

a designated church or her other religious faith or affiliation

…conditions that incite a beneficiary to commit a crime or do any act prohibited by

law.233

Categories of “Unworthy Heirs” that Result in Voided Gifts

However, it appears that it is not just certain categories of conditional gifts that can attract the

public policy sword so as to permit court interference with testamentary freedom, but outright

gifts to certain “unworthy heirs” may also result in courts voiding such gifts. The decision

indicates that Canadian law now recognizes three kinds of “unworthy heirs” where courts will

232 Supra., note #225, at para.70 (per Cronk, J.A.). 233 Ibid., at para.55 (per Cronk, J.A.).

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void gifts to such beneficiaries (even if the gift itself is not conditional, but rather absolute).

These unworthy heirs are categorized as follows:

beneficiaries who claimed entitlement to a testator’s property after having killed the

testator

…terrorist groups who, contrary to ss.83.02 and 83.03 of the Criminal Code, sought to

benefit from a testator’s financial support

…beneficiary whose self-declared reasons for existence involve activities that constitute

offences under Canadian criminal law and run contrary to Canadian public policy against

discrimination234

Conclusion on Public Policy Inquiry Concerning Spence Will

After reviewing the law concerning public policy based inquiries regarding the validity of Wills,

the majority of the Court concluded that there was no foundation by the application judge to

have conducted a public policy-driven review of the Spence Will.235 The testamentary gift in

the Spence Will was unconditional and unequivocal, and was of a private nature. According to

the majority:

The court’s power to interfere with a testator’s testamentary freedom on public policy

grounds does not justify intervention simply because the court may regard the testator’s

testamentary choices as distasteful, offensive, vengeful or small-minded. 236

234 Ibid., at para.63. 235 Ibid., at para.113. 236 Ibid., at para.111 (per Cronk. J.A.).

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It appears that where there is an unconditional (outright) gift of a private nature, even if the

testator indicated that the gift was made for discriminatory reasons, it may not attract the

court’s public policy scrutiny (provided, presumably, that the beneficiary of the gift was not a

member of any of those categories that the courts have determined to be “unworthy heirs”,

and the gift does not require that the beneficiary or executor/trustee act in a manner that

contravenes public policy):

Here, assuming that Eric’s testamentary bequest had been facially repugnant in the

sense that it disinherited Verolin for expressly stated discriminatory reasons, the bequest

would nonetheless be valid as reflecting a testator’s intentional, private disposition of his

property – the core aspect of testamentary freedom. 237

As the majority stated:

Absent valid legislative provision to the contrary, the common law principle of

testamentary freedom thus protects a testator’s right to unconditionally dispose of her

property and to choose her beneficiaries as she wishes, even on discriminatory

grounds. To conclude otherwise would undermine the vitality of testamentary freedom

and run contrary to established judicial restraint in setting aside private testamentary

gifts on public policy grounds.238

Conclusion Concerning Admissibility of Extrinsic Evidence

237 Ibid., at para.73 (per Cronk, J.A.). 238 Ibid., at para.75 (per Cronk, J.A.).

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The majority noted that extrinsic evidence of the testator’s intentions is generally not

admissible if the Will is clear and unambiguous.239 However, two exceptions to the general rule

were noted if the issue involves construction of a Will.240 Firstly, courts are prepared to admit

direct evidence of intention where the Will is equivocal (i.e., where words can equally describe

two or more persons or things), and secondly will admit evidence of surrounding circumstances

(the so-called “sitting in the arm-chair of the testator” principle) where a Will is ambiguous.241

However, the Spence Will was neither ambiguous nor equivocal.242 The majority felt that

relaxing the evidence rules in estates matters would result in negative implications for estates

law.

As with evidence of a testator’s intentions, where the testator’s wishes are neither

ambiguous nor equivocal, the admission of third-party extrinsic evidence about a

testator’s alleged motive would undercut faithful implementation of a testator’s

intentions as expressed in her written will. It would also encourage disappointed

beneficiaries to seek an estate distribution different from that intended by the testator

based on extrinsic evidence of alleged improper motive by the testator, thereby fostering

unnecessary litigation and leading inevitably to confusion, uncertainty and

indeterminacy in estates law. Where possible, such mischief must be avoided.243

Therefore, the majority determined that the application judge erred in admitting extrinsic

evidence of the testator’s intention.244

239 Ibid., at para.90. 240 Ibid., at para.93 241 Ibid., at para.92. 242 Ibid., at para.94. 243 Ibid., at para.100 (per Cronk, J.A.). 244 Ibid., at paras.110 and 113.

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Concurring Decision of Lauwers, J.A.

In his concurrent decision, Lauwers, J.A. was of the view that to expand the public policy

exception to testamentary freedom to include testing whether Wills were discriminatory in

intent or motivation when excluding beneficiaries would be unwarranted.245 According to

Lauwers, J.A. such an expansion could lead to a “slippery slope” whereby the court would be

required to inquire into testators’ motivations beyond just those based on racist discrimination,

so that if the original court decision in Spence were to remain, then this:

…would increase uncertainty in estates law and open the litigation floodgates. The

respondents’ proposal would greatly extend both the court’s jurisdiction and its burden,

and would disrupt estates law, which now functions smoothly to pass property from one

generation to the next.246

Further, Lauwers, J.A. noted that no law entitled Verolin to a share in her father’s estate247, and

he concluded that neither the Charter of Rights and Freedoms 248 nor the Ontario Human Rights

Code249 provided any support to a claim to such a share by Verolin:

The Charter does not reach or seek to affect the private conduct of individuals in their

relations with each other…. 250

245 Ibid., at paras.119-120. 246 Ibid., at para.123 (per Lauwers, J.A.). 247 Ibid., at para.124. 248 The Constitution Act, 1982, Schedule B to the Canada Act 1982 (UK), 1982, c 11. 249 Human Rights Code, RSO 1990, c H.19. 250 Supra., note #225, at para.125 (per Lauwers, J.A.).

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Similarly, the reach of the Code is limited. The Code does not regulate the actions of

individuals unless they are supplying “services, goods [or] facilities” as provided in s.1, or

“accommodation” under s.2, in the market. Individuals are otherwise free to hold and to

act on their prejudices, however unsavoury, so long as they do not breach the criminal

law.251

Leave to Appeal to Supreme Court of Canada dismissed

On June 9, 2016, the Supreme Court of Canada denied leave to appeal both this case252 as well

as an earlier decision involving public policy from the New Brunswick Court of Appeal. 253

In McCorkill, the Court awarded costs to most of the respondents. For the Spence dismissal, no

costs were awarded.

The cases are now integral to understanding when, in Canadian common law jurisprudence,

public policy can be used by courts to invalidate certain gifts made in Wills.

What we learn from this case

Spence v. BMO Trust Company provides clarification on when courts may use public policy to

scrutinize and potentially invalidate testamentary gifts. The crux appears to be whether the gift

requires either the beneficiary or the executor/trustee to act in a manner which contravenes

public policy. In other words, it seems to require a type of “conditional” gift. If the gift is

outright and of a private nature and does not involve the beneficiary or executor/trustee acting

in a manner which contravenes public policy, courts will not intervene on public policy grounds

251 Ibid., at para.126 (per Lauwers, J.A.). 252 2016 CanLII 34005 (SCC). 253 Canadian Association for Free Expression v. Fred Gene Streed, Executor of the Estate of Harry Robert McCorkill (a.k.a. McCorkell), deceased, et al. 2016 CanLII 34017 (SCC).

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“…simply because the court may regard the testator’s testamentary choices as distasteful,

offensive, vengeful or small-minded.”254

The decision also indicates that there are four (4) categories of conditional gifts which will

attract the court’s intervention with a testator’s testamentary freedom by voiding such gifts on

grounds of contravening public policy. Further, the case confirms that there are three (3)

categories of “unworthy heirs”, gifts to whom will also be voided by the courts.

Finally, the decision confirms that at common law, extrinsic evidence to prove a testator’s

intentions will only be admissible in certain circumstances, and not where a Will is clear and

unambiguous.

Lawyers should ensure that testators are aware of how courts will react to discriminatory,

conditional gifts, and counsel against these being included in Wills if requested by testators,

since such clauses risk being declared void for public policy. Moreover, if a testator insists on

including such a clause, the drafting lawyer should consider requesting that the testator include

an express statement in the Will that the lawyer advised the testator that the clause would

likely be declared void for public policy by a court of law (and the Will should provide for

alternate beneficiaries in that event).

And while the majority of the Court of Appeal suggested that where testators include reasons

for leaving someone out of a Will, even if discriminatory, may not result in court intervention

on the grounds of public policy, testators should be cognizant that any express inflammatory or

discriminatory language in their Wills will likely draw the ire of the disinherited beneficiaries

and the potential to have their Wills and the estate administration tied up in litigation for some

time (with the concomitant costs that will follow as a result).

10. Purchase Money Resulting Trust – Andrade v. Andrade

254 Supra., note #225, at para.111 (per Cronk, J.A.).

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The recent unanimous decision of the Ontario Court of Appeal decision in Andrade v.

Andrade255 addresses a number of interesting legal issues in resolving a dispute as to the

ultimate beneficial owner of a house.

Facts

The facts involved a mother who had 7 children and who immigrated with the eldest child to

Canada from Portugal.256 She worked in Canada and eventually was successful in bringing her

other 6 children to Canada.257 The mother stopped working to care for the children, but when

the children each became teenagers they stopped their schooling to enter the workforce and,

while living at home, gave their earnings to their mother.258

After living in apartments, the mother “decided to buy” a house which also had apartment units

that could be rented.259 Although she signed the offer to purchase and borrowed a small cash

deposit, the mother directed that the house be put into the joint names of her eldest son

(Henry) and her second daughter (Maria Jesus), and these children signed the mortgages

required to finance the bulk of the purchase (a small remaining balance was noted as having

been paid on closing).260 Subsequently, but again on the mother’s direction, the house was

transferred to the son (Henry) and a brother (Joseph) as tenants-in-common, and the

mortgages were renewed in their names.261

As the children married and moved out, they stopped giving their employment earnings to their

mother.262 The mother, though, was actively involved in renting out the apartment units.263

255 2016 ONCA 368 (CanLII). 256 Ibid., at para.6. [Note: the trial decision indicated that the mother’s spouse had predeceased her: Andrade v Andrade, 2014 ONSC 4473 (CanLII) at para.5]. 257 Ibid. 258 Ibid., at para.7. 259 Ibid., at para.9. 260 Ibid., at paras.10-11. [Note: testimony given at the trial decision indicated that these two children were put on title because they were the only adult children who were earning enough income to potential qualify for a mortgage: Andrade v Andrade, 2014 ONSC 4473 (CanLII) at para.14]. 261 Ibid., at para.12. 262 Ibid., at para.13. 263 Ibid., at para.14.

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And while the mother claimed a rental tax credit264, Henry and Joseph declared the rental

income and claimed house expenses on their tax returns.265 The facts also indicated that the

mother paid the bulk of the house expenses from her own bank account, which was comprised

of her unmarried children’s earnings, rent collected from tenants, and later on her old age

security benefits and a settlement amount from a lawsuit.266

Following Joseph’s death, his wife, Manuela, registered “her interest as Joseph’s executor on

title,”267 and demanded various relief, including that the house be sold so that she could obtain

Joseph’s interest in it.268 Unsurprisingly, Manuela’s demands were “resisted” by both the

mother and her surviving children, 269 which led to Manuela initiating a court proceeding to

declare that she was the beneficial owner of a half interest in the house and for an order of

partition and sale.270 After the mother died, her son (Leo) who was her estate trustee assumed

her interest in the litigation.271

Trial Decision

Manuela was successful at trial and obtained an order that the house be sold at fair market

value and the net proceeds divided between her and the mother’s estate.272 The trial judge

based his decision on the following:

1) The mother had no money of her own that was used in the purchase of the house.273

2) The children gave their earnings from work to their mother.274

264 Ibid., at para.17. 265 Ibid., at para.17. 266 Ibid., at para.16. 267 Ibid., at para.18. 268 Ibid, at para.18. 269 Ibid., at para.18. 270 Ibid., at para.18. 271 Ibid., at para.20. 272 Ibid., at para.21. 273 Ibid., at para.22. 274 Ibid., at para.23.

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3) There was no trust contemplated for the mother’s benefit at time of the house

purchase.275

4) Although not deciding anything around the beneficial ownership, he noted that title to

the house was taken in names of two adult children (Henry and Maria Jesus) jointly.276

5) The subsequent transfer to Henry and Joseph as tenants in common “had far more to do

with Joseph’s coming of age and his financial responsibility for the [house] than with

Maria Jesus’s marriage three years previously”…277

6) Certain “subsequent dealings with the house” evidenced that Henry and Joseph were

the “actual owners,”278 including how income from the property was treated for income

tax purposes.279

The trial judge rejected the legal argument of a resulting trust in the mother’s favour because

the mother never owned nor paid for the house; and he likewise dismissed the notion of a

constructive trust remedy that might result where money is provided by one person but title

taken by another, because according to the trial judge the mother never had money of her own

that was used for the purchase of the house.280

Finally, the trial judge did not find sufficient evidence to support that a trust for the mother’s

benefit was intended, and also concluded that in light of tax treatment of the house, it would

be contrary to public policy to find in favour of the mother being the owner of the house.281

Appellate Decision

The Court of Appeal noted that the trial judge made no finding as to the beneficial ownership

of the property,282 and that the trial judge’s rejection of the resulting trust and constructive

275 Ibid., at para.24. 276 Ibid., at para.25. 277 Ibid., at para.26 (quoting the trial judge’s decision). 278 Ibid., at para.27. 279 Ibid., at para.29. 280 Ibid., at para.32. 281 Ibid., at para.34. 282 Ibid., at para.38.

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trust claims rested on his determination that the mother had no money to pay for the house or

the mortgages, and as such could not be the beneficial owner.283 However, according to the

Court, the judge erred in his determination that the mother did not contribute her own funds

for the purchase and financing of the house.284

According to the Court, the trial judge erred in the characterization of the money used to pay

for the house as belonging to the children.285 Instead, the Court took the position that once the

money was given by the children to their mother, the money belonged to the mother

notwithstanding the expectation that it would be used to support the family (and was used for

that purpose).286 The money was therefore a “gift” and no longer belonged to the children who

gave it. 287 In other words, the Court was of the view that the trial judge “confused” the

mother’s money with its source.288 The Court indicated that there was no evidence that any of

the title holder children gave their mother the money with the intent that they would acquire a

property interest in the house, and the children that testified were unanimous in their view that

once their earnings were given to their mother, she could use it “as she saw fit. 289

The Court also held that the rent generated from the house was that of the mother, 290 and that

the mother did, in fact, have some of her own sources of income beyond that of what her

children gifted to her.291

According to the Court of Appeal, the trial judge made a palpable and overriding error when he

found that the mother had no money of her own which led to his rejection of the resulting trust

claim.292

283 Ibid., at para.40. 284 Ibid., at para.43. 285 Ibid., at para.45. 286 Ibid., at para.45. 287 Ibid., at para.46. 288 Ibid., at para.46. 289 Ibid., at para.48. 290 Ibid., at para.52. 291 Ibid., at paras.53-55. 292 Ibid., at para.56.

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Resulting trust

The Court of Appeal reviewed the legal principles to support a resulting trust as follows:

[57] “A resulting trust arises when title to property is in one party’s name, but that party,

because he or she is a fiduciary or gave no value for the property, is under an obligation

to return it to the original title owner”: Pecore v. Pecore,2007 SCC 17 (CanLII),[2007] 1

S.C.R. 795, at para. 20.

[58] A purchase money resulting trust can occur “where a person advances a

contribution to the purchase price of property without taking legal title”: Nishi v. Rascal

Trucking Ltd.,2013 SCC 33 (CanLII), [2013] 2 S.C.R. 438, at para. 21. It is one of the “classic

resulting trust situations” and can arise when a party contributes directly to the purchase

price or the mortgage: Eileen E. Gillese, The Law of Trusts, 3rd ed. (Toronto: Irwin Law,

2014) at pp. 113-15. In Kerr v. Baranow, 2011 SCC 10 (CanLII), [2011] 1 S.C.R. 269, at para.

12, Cromwell J. noted that it has been “settled law since at least 1788 in England (and

likely long before) that the trust of a legal estate, whether in the names of the purchaser

or others, ‘results’ to the person who advances the purchase money”.

[59] Except where title is taken in the name of a minor child, where property is acquired

with one person’s money and title is put in the name of another, there is a presumption of

resulting trust. While some authorities refer to a presumption of resulting trust arising

when a gratuitous transfer is made between unrelated persons, the presumption of

advancement between spouses was abolished by statute in Ontario (see Family Law Act,

R.S.O. 1990 c.F.3, s.14) and between parents and adult children by the Supreme Court

in Pecore: see para. 36.

***

[61]…A presumption is of greatest value in cases where evidence concerning the

transferor’s intention may be lacking (for example where the transferor is deceased).

“[T]he focus in any dispute over a gratuitous transfer is the actual intention of the

transferor at the time of the transfer … “[T]he presumption will only determine the result

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where there is insufficient evidence to rebut it on a balance of probabilities”: Pecore, at

paras. 5 and 44.

[62]… The intention of the grantor or contributor alone counts, as the point of the resulting

trust is that the claimant is asking for his or her own property back: Kerr v. Baranow, at

para. 25.

[63] The relevant time for ascertaining intention is the time of the acquisition of the

property, when the funds were advanced: Nishi v. Rascal Trucking Ltd., at paras. 30 and

41; Pecore, at para. 59. Evidence of intention that arises subsequent to a transfer must be

relevant to the intention of the transferor at the time of the transfer. The court must assess

the reliability of such evidence and determine what weight it should be given, guarding

against evidence that is self-serving or tends to reflect a change in intention: Pecore, at

para. 59. 293

Since the Court of Appeal found that the mother had contributed her own funds to the

purchase and financing of the house, the Court considered that the presumption of resulting

trust applied; however, the Court indicated that the decision in this case did “…not turn on the

application of a presumption.”294 Why?

The Court of Appeal indicated that a presumption is “of greatest value” if there is insufficient

evidence of the transferor’s intention at the time of transfer, and that the presumption will

then determine the result if there is insufficient evidence to rebut it.295 In this case, once it was

accepted that the mother’s money was used to purchase the house and finance it, a “purchase

money resulting trust” might arise.296

293 Ibid., at paras.57-59, and 61-63. 294 Ibid., at paras.60-61. 295 Ibid., at para.61. 296 Ibid., at para.64.

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However, because the trial judge erroneously considered that the mother had no money to

purchase the house, he focused on the wrong persons when trying to identify intent.297 Rather

than looking to the intent of the mother at the time of the purchase, he looked to a “commonly

shared intention” of the children to purchase the house in trust for the mother and, finding

none, held that no resulting trust arose.298

Because the mother used her own money to purchase the house, the Court of Appeal indicated

that the issue was whether the mother intended to confer beneficial ownership on the title

holders to the exclusion of herself and her other children. 299 In other words, the intent of the

children was irrelevant to the issue at hand. In reviewing the evidence, the Court of Appeal

concluded that there was no evidence that at the time of purchase the mother intended to give

beneficial ownership to any of her children,300 nor did this change with the subsequent change

in title to Henry and Joseph.301

Although Henry and Joseph had signed agreements to sell the original house and buy another,

the Court noted that their names on the agreements was “equally consistent” with them being

their mother’s nominees.302 As for how the rental income from the house was treated, the

Court stated that this “…was consistent with legal title, but did not reflect what was actually

occurring.”303 Again, the Court stated that the issue was to determine the mother’s

intention.304 According to the Court; “The fact that a party represents or deals with property in

a certain way that is inconsistent with beneficial ownership does not preclude a claim of

beneficial ownership in litigation.”305

297 Ibid., at paras.65-67. 298 Ibid., at para.65. 299 Ibid., at para.67. 300 Ibid., at para.72. 301 Ibid., at paras.75-78. 302 Ibid., at para.85. [ Note: the sale of the original house and purchase of a replacement was never completed: Andrade v Andrade, 2014 ONSC 4473 (CanLII) at para.36]. 303 Ibid., at para.88. 304 Ibid., at para.92. 305 Ibid., at para.92.

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Although the Court indicated that tax treatment is “some evidence” of intention, the Court also

stated that “…the analysis cannot not [sic] begin and end with the tax treatment of the

house.”306 What was necessary was to determine the mother’s intent at the time of the

transaction, and that according to the Court, remained “…a question of fact to be determined

on the whole evidence.”307 In the end, the Court determined that the mother’s tax returns

“shed little light” on whether it was her “…intention to confer beneficial ownership of the

property on her sons.”308

The Court therefore concluded that:

(i) it was the mother’s money that was used to buy the property, even though some of

it was money that had been given to her by her children,309

(ii) although title was in the name of her children, she did not intend to benefit the

titleholders to the exclusion of her other children,310 and

(iii) the income tax returns of the parties did not reflect the reality of how the property

was handled, even though it was consistent with legal title.311

As a result, the Court found that the mother was the beneficial owner of the house by way of a

resulting trust.312

Public policy

Although the trial judge thought that for public policy reasons it would be inappropriate to

impose a trust in favour of the mother’s estate, the Court was of the view that “…the trial judge

cast the net too broadly in concluding that it would be against public policy to recognize [the

mother’s] estate as the beneficial owner of the house when she had received the tax credits on

306 Ibid., at para.95. 307 Ibid., at para.95. 308 Ibid., at para.96. 309 Ibid., at para.97. 310 Ibid., at para.97. 311 Ibid., at para.97. 312 Ibid., at para.98.

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the basis that she was not the beneficial owner.313 While the Court referred to the “clean

hands” doctrine and that claims may be barred on considerations of illegal purpose,314 it also

noted that “…actions unrelated to one’s claim will not necessarily bar a plaintiff from her

remedy…”315

According to the Court, the mother’s tax filings were not fundamental to the cause of action

seeking equitable relief in relation to her interest in the home. While the tax returns were

relevant evidence, they were not dispositive of the mother’s claim, as the tax returns were not

necessary to establish the relief sought.316 Therefore, the Court concluded that the trial judge:

…erred in treating the fact that Luisa claimed tax credits as dispositive of her trust claim

for public policy reasons alone. While her tax treatment of the property, considered in

isolation, was evidence inconsistent with her beneficial ownership, her actual intention in

relation to the property was a question of fact to be determined based on the whole of

the evidence.317

Thus, the Court allowed the appeal and declared that the estate of the mother was the sole

beneficial owner of the house, that Manuela held the registered title in the property as trustee

for the mother’s estate, and that Manuela was to transfer all of her right, title and interest in

the property to the mother’s estate.318

What We Learn From This Case

Where legal title to a property is taken in the name of one individual, but the money used to

acquire that property was given by another, a purchase money resulting trust can arise.

Whether a resulting trust exists will depend on the intent at the time of the purchase. If the

313 Ibid., at para.99. 314 Ibid., at para.100. 315 Ibid., at para.104. 316 Ibid., at para.105. 317 Ibid., at para.107. 318 Ibid., at para.108.

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contributor intended to confer beneficial ownership on the legal title holders to the exclusion

of the contributor, then no resulting trust would arise. If no such gifting of beneficial ownership

was intended, a resulting trust will exist.

Further, even where income tax information relating to a property is presented in income tax

returns to reflect legal title ownership (i.e., the income tax returns would suggest that the legal

title owners own the property absolutely), this will not necessarily preclude the existence of a

resulting trust in favour of the actual beneficial owner of the property, provided that the

beneficial owner can establish his or her title without having to rely on the tax returns to do so.

Again, the intent at the time of the purchase is key.

11. Estate Trustee Indemnification for Legal Costs – Brown v. Rigsby

The Ontario Court of Appeal in the case of Brown v. Rigsby319 summarized the rules that apply

when considering whether or not an estate trustee will be entitled to legal costs from the

estate. The Court stated:

[14] In summary, subject to the discretion of the court, the general rules governing an

estate trustee’s ability to recover legal costs from an estate are as follows:

- an estate trustee is entitled to indemnification from the estate

for all reasonably incurred legal costs;

- if an estate trustee acts unreasonably or in his or her own self-

interest, he or she is not entitled to indemnification from the

estate; and

319 2016 ONCA 521 (CanLII).

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- if an estate trustee recovers a portion of his or her costs from

another person or party, he or she is entitled to indemnification

from the estate for the remaining reasonably incurred costs.320

In this case, the Court denied the appellant estate trustees the ability to recover their legal

costs from the estate.321 It did so because in the Court’s view the appellants’ conduct was both

unreasonable and served to promote their own self-interest at the expense of both the estate

and the other beneficiaries.322

12. How much influence is required to constitute “undue Influence”? Driscoll v.

Driscoll, et al, 2016 ONSC 4628 (CanLII)

Undue influence is grounds for potentially invalidating a Will.323 But, how much influence

constitutes “undue” influence? Rutherford, J. in Driscoll v. Driscoll, et al324 provides the

following explanation as to the nature of undue influence:

Undue influence is not simply influence that leads a testator to want to make provision for

someone in a Will, but some such powerful influence as to coerce the testator to do so

even against her will. Whether or not I should find suspicious circumstances sufficient to

alter the onus of proof as to the probability of undue influence, it makes no difference. On

all the evidence, a finding that Jon Driscoll exercised undue influence on his mother such

that she made her Will in his favour is not even close. I cannot possibly find on the balance

of probabilities, that there was any undue influence, by Jon or anyone else in this case.325

In describing the law of undue influence, Rutherford, J. stated the following:

320 Ibid., at para.14. 321 Ibid., at para.20. 322 Ibid., at paras.18-19. 323 Boghici Estate v. Benke, [2005] O.J. No.214 (Ont. S.C.) (QL) at para 26. 324 2016 ONSC 4628 (CanLII). The decision also describes the law relating to testamentary capacity. 325 Ibid., at para.47 (per Rutherford, J.).

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The law as to “undue influence” in the making of a Will was concisely set out by Day J.

in Pascu v. Benke (2005) 13 E.T.R (3d) 296 (Ont. S.C.) at para 26. He wrote,

26 Undue influence is another ground which may be applied to invalidate a

will. To constitute undue influence in the eyes of law, there must be coercion. The

burden of proof of undue influence is on the attackers of the will to prove that the

mind of the testator was overborne by the influence exerted by another person or

persons such that there was no voluntary approval of the contents of the will. The

burden is the civil burden on the balance of probabilities. Undue influence

sufficient to invalidate a will extends a considerable distance beyond an exercise

of significant influence or persuasion on a testator; as indicated above, coercion is

required. Essentially, the testator must have been put in such a condition of mind

that if he could speak he would say, “This is not my wish, but I must do it.” A

testamentary disposition will not be set aside on the ground of undue influence

unless it is established on a balance of probabilities that the influence imposed by

some other person or persons on the deceased was so great and overpowering

that the document reflects the will of the former and not that of the deceased

testator. Further, it is not sufficient to simply establish that the benefiting party

had the power to coerce the testator, it must be shown that the overbearing power

was actually exercised and because of its exercise the will was

made. References: Mackenzie, James in Feeney’s Canadian Law of Wills, 4th ed.

(Butterworths Canada Ltd., 2000), at paras. 3.1.3; 3.5; 3.6; 3.7 and 3.13; Mitchell

v. Mitchell, 2001 CanLII 28083 (ON SC), 57 O.R. (3a) 259; Banton v.

Banton (1998),164 D.L.R. (4th) 176 (Gen. Div.); and Vout v. Hay (1995),1995 CanLII

105 (SCC), 7 E.T.R. (2d) 209 (S.C.C.).326

326 Ibid., at para.46 (per Rutherford, J.).

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Therefore, influencing a testator to make a Will with a particular outcome does not necessarily

invalidate the Will. The influence must be on the level of “coercion” such that the testator

believes he or she has no choice as to the terms of his or her Will.

13. Automatic right to proof of Will in solemn form? Can estoppel preclude a Will

challenge? – Neuberger v. York, 2016 ONCA 191 (CanLII)

In the unanimous decision written by Gillese, J.A, the Court of Appeal in Neuberger v. York 327

determined that Rule 75.01 of the Rules of Civil Procedure328 does not grant any person having

a financial interest in an estate to automatically be entitled to require that a Will be proven in

solemn form. It also indicated that the equitable doctrines of estoppel by convention or

representation should not be available to dismiss challenges to the validity of Wills.

For ease of reference, Rule 75.01 states:

75.01 An estate trustee or any person appearing to have a financial interest in an

estate may make an application under rule 75.06 to have a testamentary instrument

that is being put forward as the last will of the deceased proved in such manner as the

court directs.

The deceased, Chaim Neuberger, was a successful businessman who died leaving behind a

significant real estate empire, 329 two daughters, Myra and Edie, and their adult children.330

Although the deceased intended to treat his daughters equally331, the result of his estate

planning and multiple Wills was that Myra and her children would benefit to the tune of about

$13 million more than Edie and her children under the deceased’s latest Wills.332 This occurred

because the terms of an earlier set of multiple Wills (the “2004 Wills”) resulted in an equal

327 2016 ONCA 191. [note: Supreme Court of Canada dismissed the application for leave to appeal: 2016 CanLII]. 60508 (SCC). 328 R.R.O. 1990, Reg.194. 329 Supra., note #327, at paras.6 and 15. 330 Ibid., at paras.3 and 6. 331 Ibid., at para.3 332 Ibid., at paras.7 and 24.

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division of the deceased’s estate, whereas the division of assets in the last multiple Wills (the

2010 Wills) created the inequality.333

Both daughters were appointed as joint executors and trustees under the 2004 Wills and the

2010 Wills334 , and each arranged for the payment of taxes associated with certain corporate

assets per the terms of the 2010 Secondary Will.335 The Court also observed that Edie

undertook a number of estate administration tasks in her capacity as estate trustee under the

2010 Wills, although the Court did note that not many “key” aspects of the administration had

been completed (e.g., there had been no distributions from the estate).336

Eventually, litigation ensued, including a challenge to the validity of the 2010 Wills by Edie.337

Her son, Adam, also sought to challenge the validity of those Wills.338

The motion judge made a number of findings, including that Edie was estopped both by

representation and by convention from being able to challenge the validity of the 2010 Wills.339

She also indicated that rule 75.01 was “discretionary in nature”, and that Edie and Adam had

failed to establish an “arguable case.”340

Edie and Adam appealed the decision of the motion judge.

333 Ibid., at paras.26-27. 334 Ibid., at para.23. 335 Ibid., at para.29. 336 Ibid., at paras.30-31. 337 Ibid., at para.36. 338 Ibid., at para.37. 339 Ibid., at paras.59-60. 340 Ibid., at paras.58 and 61.

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The Court of Appeal analyzed the following issues (describing the first as a preliminary issue):

(i) Is there an automatic right to proof in solemn form pre-probate?341

(ii) Did the motion judge err in her analysis of Edie’s right to challenge the 2010 Wills?342

(The Court decided that this issue did not arise on the appeals in question, as the motion

did not decide the merits of the Wills challenges)343

(iii) Did the motion judge err in barring the wills challenges based on estoppel?344

(iv) Did the motion judge err by failing to take into account the relevant policy

considerations?

(v) Did the motion judge err in barring Adam from pursuing his Wills challenge because he is

a “straw man”?

(vi) Did the motion judge err in her factual finding in respect of Adam?

The Court examined the nature of “probate”345 (along with the role of the court and its

jurisdiction in matters of probate346) as well as the requirements for proof in solemn form.347 It

also reviewed the application of Rule 75 and its various subrules, noting that since no certificate

of estate trustee had been issued, certain of the subrules did not apply.348 However, the Court

confirmed that as the matter involved contentious estate proceedings, it was Rule 75 that was

relevant, as opposed to Rule 74 which governs non-contentious estate proceedings.349

341 Ibid., see heading to para.99. 342 Ibid., see heading to para.103. 343 Ibid., at paras.101-102. 344 Ibid., see heading to para.117. 345 Ibid., at para.66. 346 Ibid., at paras.67-68. 347 Ibid., at paras.77-79. 348 Ibid., at paras.69ff (the Court indicated that Rules 75.04 and 75.05 did not apply). 349 Ibid., at para.70.

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Regarding the contention by Adam that there is an automatic right to proof in solemn form

prior to probate being granted, the Court of Appeal disagreed.350 In analyzing the text of Rule

75.01, the Court stated: “…the Interested Person cannot require proof in solemn form – he or

she can request proof in solemn form but cannot require it.”351 Referring to Rule 75.06, the

Court provided the following analysis of how it should be applied:

…an applicant or moving party under rule 75.06 must adduce, or point to, some evidence

which, if accepted, would call into question the validity of the testamentary instrument

that is being propounded. If the applicant or moving party fails in that regard or if the

propounder of the testamentary instrument successfully answers the challenge, then the

application or motion should be dismissed. If, on the other hand, the applicant or moving

party adduces or points to evidence that calls into question the validity of the

testamentary instrument which the propounder does not successfully answer, the court

would generally order that the testamentary instrument be proved. In determining the

manner in which the instrument be proved, the court would have recourse to the powers

under rule 75.06(3).

This approach gives meaning to both rule 75.01 and rule 75.06(3). It also meets the

concern about potentially needless depletion of estates.

Further, this approach is consistent with the jurisprudence on rule 75. To date, the courts

have not approached challenges to the validity of a will on the basis that an Interested

Person has an absolute right to proof in solemn form. Instead, when faced with a request

for proof in solemn form prior to the issuance of a certificate of appointment of estate

trustee, they have considered the evidentiary basis underlying the request. 352

350 Ibid., at para.81. 351 Ibid., at para.84. 352 Ibid., at paras.89-91. [Note: Rule 75.06 states in part (as provided in Appendix A to the decision):

75.06 (1) Any person who appears to have a financial interest in an estate may apply for directions, or move for directions in another proceeding under this rule, as to the procedure for bringing any matter before the court.

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As such, the Court concluded that the appellants were not entitled as a matter of right to proof

in solemn form of the 2010 Wills notwithstanding the absence of probate, and whether they

would be entitled to proof in solemn form would be up to the court hearing such a request if

and when the appellants decided to pursue such a proceeding.353 As the Court later stated:

“…rule 75 provides the court with sufficient discretion that it can screen out meritless claims for

formal proof of testamentary instruments and, for those with merit, control the manner in

which the instrument is proved.”354

(2) An application for directions (Form 75.5) or motion for directions (Form 75.6) shall be served on all persons appearing to have a financial interest in the estate, or as the court directs, at least 10 days before the hearing of the application or motion. ... (3) On an application or motion for directions, the court may direct,

(a) the issues to be decided;

(b) who are parties, who is plaintiff and defendant and who is submitting rights to the court;

(c) who shall be served with the order for directions, and the method and times of service;

(d) procedures for bringing the matter before the court in a summary fashion, where appropriate;

(e) that the plaintiff file and serve a statement of claim (Form 75.7);

(f) that an estate trustee be appointed during litigation, and file such security as the court directs;

(g) such other procedures as are just.]

353 Ibid., at paras.97-98. 354 Ibid., at para.122.

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With respect to the equitable doctrines of estoppel by representation355 and estoppel by

convention356, the Court was of the view that the motion judge erred in finding that these were

grounds to bar a challenge to the validity of the Wills.357 It did so based on two

“considerations” which can be described as: (i) that there was no jurisprudential basis for

extending the doctrine of estoppel to challenges involving the validity of wills, and (2) because

allowing estoppel would be contrary to the policy for having probate in the first place.358

After analyzing the jurisprudence, the Court stated:

355 The Supreme Court of Canada in Canadian Superior Oil v. Hambly, [1970] S.C.R. 932 (QL) described the elements of the doctrine of estoppel by representation as follows:

(1) A representation or conduct amounting to a representation intended to induce a course of conduct on the part of the person to whom the representation is made.

(2) An act or omission resulting from the representation, whether actual or by conduct, by the person to whom the representation is made.

(3) Detriment to such person as a consequence of the act or omission. 356 The Supreme Court of Canada in Ryan v. Moore, [2005] 2 SCR 53, 2005 SCC 38 (CanLII) at para.59 described the doctrine of estoppel by convention as follows:

After having reviewed the jurisprudence in the United Kingdom and Canada as well as academic comments on the subject, I am of the view that the following criteria form the basis of the doctrine of estoppel by convention:

(1) The parties’ dealings must have been based on a shared assumption of fact or law: estoppel

requires manifest representation by statement or conduct creating a mutual assumption. Nevertheless, estoppel can arise out of silence (impliedly).

(2) A party must have conducted itself, i.e. acted, in reliance on such shared assumption, its actions

resulting in a change of its legal position.

(3) It must also be unjust or unfair to allow one of the parties to resile or depart from the common assumption. The party seeking to establish estoppel therefore has to prove that detriment will be suffered if the other party is allowed to resile from the assumption since there has been a change from

the presumed position. 357 Supra. note #327, at para.103. 358 Ibid., at para.103.

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Indeed, there is nothing in the jurisprudence to support the extension of the equitable

doctrines of estoppel by convention or representation to matters involving the validity of

a will. Accordingly, it was an error to have dismissed the Wills Challenges on the basis of

those doctrines.359

As a result of there being no foundation in the jurisprudence to support the use of estoppel to

bar challenges to the validity of Wills, the Court stated: “In light of this determination, it is

unnecessary to consider whether the motion judge erred in her application of those

doctrines.”360

As for whether the motion judge erred by failing to take into account relevant policy

considerations, the Court referred to the function of estoppel as creating “transactional

certainty between private parties in civil disputes” but noted that a Will is a private document

and challenges to Wills engage interests beyond those of the litigants, including the public at

large.361 Consequently, because probate is an in rem pronouncement that a Will represents the

“true testamentary intentions” of the testator and confirms the estate trustee’s authority,

courts when issuing probate have a responsibility to testators, those having “legitimate interest

in the estate” and the “public at large” to probate only valid Wills.362 As a result, “[i]f the

doctrine of estoppel were available to bar a party from having the validity of a will determined,

the court’s ability to discharge that responsibility would be in jeopardy.”363

Referring to the motion judge’s finding that Edie’s Will challenge brought less than two years

after her father’s death constituted “undue delay”364, the Court stated that such “…reasoning

359 Ibid., at para.115. 360 Ibid., at para.115. 361 Ibid., at para.118. 362 Ibid., at para.118. 363 Ibid., at para.118. 364 Ibid., at para.119.

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would place estate trustees with doubts as to the validity of a will in an untenable position” 365

because they would either have to bring “premature” will challenges or perform no estate

administration while investigating whether sufficient grounds existed for a Will challenge.366

The Court held that the motion judge erred in finding that Adam was a “straw man” in the

litigation, i.e., that he was merely an agent for Edie and only engaged in the litigation to support

his mother.367 According to the Court, Adam appeared to have a financial interest in the estate

of his grandfather and therefore had a right to bring the motion to ask for proof in solemn form

of the 2010 Wills.368 Finally, given the evidence that had been submitted on behalf of Adam in

relation to his claim, the Court expressed puzzlement over the motion judge’s conclusion that

Adam provided no explanation for why he commenced his own challenge to the 2010 Wills.369

As a result, the Court allowed the appeals.370

What We Learn From This Case

The decision indicates that even though a person may have a financial interest in an estate, this

does not give that person an automatic right to require that the Will be proven in solemn form.

Further, notwithstanding that a putative estate trustee appointed in an unprobated Will may

have begun taking steps in the administration of the estate governed by the Will, the equitable

doctrines of estoppel by convention and estoppel by representation will not be available to bar

365 Ibid., at para.121. 366 Ibid., at para.121. 367 Ibid., at para.123. 368 Ibid., at para.125. 369 Ibid., at paras.132. 370 Ibid., at para.133.

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subsequent claims even by that estate trustee (e.g., in a personal capacity) as to the validity of

the Will.

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TAB 10

Life Insurance Update

Robin Goodman, TEP

Vice President, Insurance, Trust and Estate Planning Services

RBC Wealth Management Financial Services Inc.

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

Life Insurance Update1 Robin Goodman, B.A., LL.B., TEP Vice President, Insurance Trust and Estate Planning Services RBC Wealth Management Financial Services Inc

2017 Exempt Test Changes

One of the primary reasons life insurance is an effective tool to maximize a family’s estate planning

objectives, whether they are to extract equity from a corporation, to buy out a shareholder’s interest at

death, to equalize gifts amongst beneficiaries, or to maximize estate values, is because of the tax

sheltering attributes of an exempt life insurance policy in Canada. These attributes come about

primarily as a result of the provisions of S. 148 and Ss. 89(1) of the Income Tax Act (Canada)2 (the “Act”),

which, along with related regulations, sets out the tests to determine whether:

1. a policy is exempt from accrual tax; and

2. how much of a policy’s proceeds , when received by a corporation, can be credited to the

corporation’s capital dividend account (“CDA”) and paid out as a tax free or capital dividend to

shareholders.

These rules permit a significant amount of tax sheltering of investment dollars deposited into the policy,

and for many years the insurance industry, estate planners and clients have been able to count on the

status quo, coming up with new products and structures that maximize the tax saving benefits.

In the last number of years, the Department of Finance has taken aim at these tax sheltering benefits,

eliminating those structures they thought were abusing the intent/spirit of the Act, and modernizing the

rules to reflect newer policy types as well as longer life expectancies.

Modernization of the Exempt Test

Today’s rules regarding taxation of life insurance policies were first introduced in 1982, when the

concept of exempt testing was introduced3. Exempt life insurance policies in Canada are those policies

that are free from accrual taxation on annual investment earnings within the policy, permitting cash

surrender values (“CSV”) in the policies to grow tax free and to be paid out to the beneficiary of the

policy as part of the overall tax free death benefit. Cash surrender value4 is liquidity available in the

policy prior to the death of the life insured, and represents the amount of cash that could be extracted

1 Portions of this paper are being published by the Ontario Estates, Trusts and Pensions Journal (2016) 2 Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp) 3 Pre-1982 policies are considered grandfathered policies and are free from accrual tax reporting. (ss. 148(10) of the Act). 4 Cash surrender value, or “CSV”, is defined at ss.148(9) of the Act

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from the policy upon surrender of the policy while the life insured is still alive5. Today’s exempt policies

can be structured so that there is significant cash value built up in the later years.

In order to be exempt, the savings element of these policies must be tested at each anniversary against

that of a fictitious benchmark policy. As long as the savings of the actual policy does not exceed the

savings of the benchmark policy6, the actual policy remains exempt. From a tax policy perspective, this

benchmark policy reflects the maximum amount of accumulated investment7 that the government is

comfortable sheltering from tax under the “insurance” umbrella, with the implied requirement that the

insurance contract should still be primarily acquired for the purposes of providing insurance proceeds at

death, rather than tax sheltered investment accumulation during lifetime.

Most Canadian life insurance policies are structured as exempt life insurance policies, and Canadian

insurers have systems in place which manage the policy to ensure that it stays exempt until it pays out

at the death of the life insured. The insurer will monitor how close accumulations within the policy

come to the MTAR limit in any given year; in some circumstances they will notify the owner of the policy

that there is more tax sheltering room available, and if there is too much accumulation in the policy in

any given year, they will effectively moving excess dollars out of the policy into a taxable side account in

order to keep the policy “pure”, and then slowly pour the excess funds back into the policy when there

is room for them under the exempt umbrella.

Many policies with newer bells and whistles were introduced after 19828, and were designed to

maximize the benefit of the MTAR limits, sometimes beyond the level that the Minister of Finance was

comfortable with. As a result, it has been acknowledged by both the government and the insurance

industry for the past many years that these MTAR rules needed updating and modernizing so as to

reflect newer product design and to ensure that all products were built to be consistent with underlying

tax policy and were treated on a level playing field.

In 2013, draft legislation was introduced with a view to modernizing these rules and limits. This

legislation was modified somewhat, and re-introduced as draft legislation in 2014 (now Bill C-43), the

terms of which will come into effect January 1, 2017. These new rules will now have the general effect

of reducing the maximum amount of tax exempt accumulations permitted within a new policy long

term. Policies issued prior to the effective date will be grandfathered under the current exempt rules,

unless there is a term conversion or coverage is added to that policy which requires new underwriting.

While the changes are technical in nature they will generally have an effect on the tax sheltering nature

of new policies in the following ways:

1. The maximum amount that can be deposited to the policy will be reduced;

5 CSV that is accessed by withdrawal while the life insured is alive results in an income inclusion to the owner to the extent that the CSV exceeds the adjusted cost basis or the policy, described in detail below. 6 As set out in Reg. 306 and 307 of the Act 7 Referred to as the maximum tax actuarial reserve, or MTAR limit 8 Such as a type of permanent policy called a Universal Life Policy

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2. The amount of permissible investment accumulation or CSV that is exempt from taxation within

the policy will be reduced;

3. The speed at which one can essentially “pay up” a policy with a view to having sufficient internal

accumulations available so no further deposits are required to maintain the policy in good

standing (known as the “quick pay” period) will be extended; and

4. The actual cost of the insurance could be increased as a result of a change to the Investment

Income Tax9 that the insurers must pay.

The extent to which these changes will affect any individual applying for new coverage will be

determined by:

1. the type of policy acquired (for instance, it is expected that the changes will have a greater

impact on Universal Life insurance policies as opposed to Whole Life insurance policies)

2. the age of the life(s) insured (it is expected that there will be a more dramatic impact on

younger lives insured), and

3. the extent to which the premium is intended to generate cash surrender value (policies that are

simply structured to provide a death benefit with minimum premiums paid annually until the

death of the life insured, for instance, will not likely see much, if any, impact).

The Cost of Living Longer

As part of the modernization overhaul, the draft legislation also requires the use of an updated mortality

table when calculating such things as the pure underlying cost of the insurance (referred to as the Net

Cost of Pure Insurance, or “NCPI”10), which has an impact on how much of the CSV is taxable if

withdrawn in any given year, and how much of the insurance death benefit can be paid out as a tax free

capital dividend from a corporation which is a beneficiary of a life insurance policy. Like so many other

calculations relating to life insurance, the actual NCPI formula is a complex one. Simply put, however,

this pure underlying cost of insurance increases each year as we age, similar to what we would expect to

see if we applied for a new insurance at each birthday. The mortality table that has been used for this

calculation up until now dates back to the early 1970’s.

Adjusted Cost Basis calculations

Although we most often don’t see the impact on the yearly increases to mortality costs in our premium

obligations11, the NCPI does have an impact on the adjusted cost basis (“acb”)of the policy12. The acb

9 “IIT” is Investment Income Tax that life insurance companies must pay on their policy reserves. This tax is set out in Part XII.iii of the Act, and is increasing for Universal Life Policies. As a result, the “price”, or premium amount, of Universal Life insurance policies will be increasing as of 2017. There is no IIT increase for Whole Life Policies. 10 NCPI is a cumulative amount calculated pursuant to Reg 308 of the Act 11 Many permanent policies have what is referred to as a level cost structure, which levelizes the costs of the policy over their required lifetime and allows the premium payor of the policy to pay a predictable, equal, level deposit each year to the policy. There are some policies, however, such as term policies and policies with increasing yearly term costs (referred to as yearly renewable term policies), which do reflect this ever increasing mortality factor. 12 Ss.148(9) of the Act

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of the policy is essentially the difference between the amount that is deposited to the policy and the net

cost of pure insurance. For policies with level cost structures, the amounts deposited in the early years

exceed the NCPI, but over time the net cost of pure insurance increases13, and eventually crosses over

and exceeds the amounts deposited to the policy. Once the policy has reached its crossover point14, the

acb of the policy is zero.

A policy’s acb is a critical tax calculator, as it determines things such as:

1. The taxation arising from a disposition of a policy while the life insured is still alive, calculated by

the cash surrender value less the acb of the policy at the time. These dispositions arise where:

a. Cash surrender value is withdrawn from the policy prior to the death of the life insured;

b. The policy is transferred from owner to owner prior to the death of the life insured; and

c. The policy is gifted (ie. To a charity or foundation) prior to the death of the life insured.

In this case, the longer it takes for the acb to grind down to zero, the more flexibility the policy

owner has and the longer he/she can extract tax free dollars from the accumulating account.

2. The credit to the capital dividend account (“CDA”) of a corporation when the corporation

receives insurance proceeds at the death of the life insured. Although the exempt insurance

proceeds are received free of tax by the corporation (beneficiary), the proceeds can only be

extracted tax free by shareholders/estate if there is sufficient CDA available. Insurance proceeds

are credited to the CDA based on a formula that subtracts the acb of the policy at death from

the death benefit received.

In this case, the longer it takes for the acb to grind down to zero, the more likely it is that an

untimely death will result in the taxation of a portion of the insurance proceeds as they are paid

from the corporation to the shareholder(s). Given the high dividend rates applicable in most

provinces today15, this tax could take a bit bite out of the overall objective of the life insured and

the internal rate of return on the moneys deposited to the policy.

Updated mortality tables will mean, in many cases, that the acb of a policy will take longer to grind

down to zero (sometimes predicted to not get to zero until life expectancy). This is a bit of a double

edged sword; it is helpful for dispositions and policy transfers but it could be problematic in the event of

a corporate held policy where the life insured dies prematurely. Unfortunately, the extent of this

change has not yet been determined.

Insured Annuity strategies

13 Reducing the acb by this yearly increase 14 Different for each age, policy type and overfunding amount 15 For example, Ontario’s top ineligible dividend rate currently rounds in at approximately 45%

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The other place where we will see a significant impact arising from the updated mortality tables is in the

world of life insured annuities. An insured annuity is a combination of two products: a life annuity and a

life insurance policy. It is a structure that works well for older clients looking for maximized guaranteed

income during lifetime with a guaranteed tax free return of capital at death. A sum of money is used to

acquire a life annuity, as well as an insurance policy which returns the initial capital outlay at death. The

income from the annuity is partially used to fund the annual premium costs of the insurance policy, and

even with this, at certain older ages the annual annuity income (net of taxes and insurance premiums)

often exceeds that income that would be received from other taxable fixed income products on the

market today. This is because of the taxation that is applied to life annuity products.

Life annuities provide guaranteed annual income for life, with a portion of the income treated as a

return of capital. The amount treated as a return of capital is dependent on the age of the annuitant at

the time of acquisition of the policy, and the presumed life expectancy of that individual (based on

annuity mortality tables). The sooner mortality is expected (based on the table), the greater the amount

of income that is treated as tax free capital. This blend of tax free capital and taxable income often

results in a lower than average effective tax rate applied to the total income received (particularly when

compared to other fixed, guaranteed income products), which means the annuitant receives a

comparatively enhanced after-tax amount of income annually, even after paying insurance premiums

which guarantees the capital to the next generation.

Insured annuities are typically purchased either by an individual or a corporation, depending upon

where the available capital is and what we are trying to accomplish. In the simplest form, annuity

income from a personally held life annuity is paid directly to that individual, that individual pays tax on

the income, and at death, the life insurance proceeds are paid out to that beneficiary set out in the

beneficiary designation. Alternatively, if the individual is a shareholder of a corporation and that is

where the available capital is, the corporation would be the owner of both the annuity and the life

insurance policy. In that case, the corporation would receive the annuity income each year and pay tax

on that income16. A portion of the after tax income would be used by the corporation to fund a life

insurance policy it owns (typically with a death benefit equal to the initial capital used to acquire the

annuity), and the remaining after-tax income from the annuity would be paid by the corporation to the

shareholder, often in the form of a dividend17. At death, the life insurance proceeds (or return of

capital), when paid out at death, generate the same CDA credit as described above, with the same

ability to extract corporate capital tax free to next generation shareholders.

16 Corporate annuities are subject to non-prescribed tax treatment set out in reg. 308 of the Act. Personally held annuities are treated as prescribed annuities, with the annual taxation levelized for life. A non-prescribed annuity has a tax table that reflects the diminishing amount of annual capital retained by the insurer. In the early years, a large component of the annuity income is taxable (income), which diminishes over time. In the later years, a larger and larger portion of the income represents a return of tax free capital. 17 The taxation of that dividend in the hand of the individual shareholder would depend on whether there is CDA available, and if not, whether the dividend received was characterized as an eligible or an ineligible dividend. This dividend payment might also result in a refund of taxes pre-paid by the corporation on the taxable income it earned (referred to as the “Refundable Dividend Tax on Hand”).

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The Annuity Mortality Table is being modernized to the year 2000, which will have an impact on the life

expectancy used to calculate the portion of the annuity income which is to be treated as a tax free

return of capital. The longer life expectancy is, the smaller the portion of the income that will be treated

as capital and the greater the tax cost to the income. It is expected that post 2016, the internal rates of

return on insured annuity contracts will not look as attractive as they look today. Existing policies issued

pre-2017 will be grandfathered.

Summary

Changing all policy structures and calculations to meet these new requirements is a big job, and the

insurance companies have been working diligently for the past few years on updating these changes to

reflect the new rules. Unfortunately, at the date of writing this paper, most insurance companies in

Canada have not yet released their new (2017) software. This means that we are not yet able to truly

ascertain the impact that these rules will have in various different sectors, and can’t examine the

specifics of whether and by how much the new rules will reduce the internal rate of return on the

moneys invested into policies (the return on the amount invested based on the amount paid out tax free

at death), whether personally held or held by and paid to a corporation. That being said, most advisors

have suggested that clients looking to acquire new insurance should apply for and secure the policy pre-

2017, if possible.

Although we do know that there will be some impact based on these changes, the changes are often

described as “evolutionary rather than revolutionary”, and this author cautions against thinking that

insurance planning won’t be viable planning post 2016. The basis of life insurance planning has been and

will remain the same; financial protection that provides needed liquidity at death. The rules will not

take away the tax advantages of planning with permanent life insurance policies, and there will still be

significant accumulation potential within these policies post 2016. It is anticipated that the impact of

these changes, even at their “worst”, will still make life insurance more attractive for long term legacy

planning than almost all other conservative investments available today, and in some cases, the new

rules might even surprise us and make certain plans at certain ages more attractive next year than they

are today. We planned with life insurance before these changes and we will continue to plan with life

insurance after these changes, and that is the bottom line message that clients should be receiving.

Life Insurance and Life Interest Trusts

As an update to past commentary from CRA regarding life insurance held and paid for by a life interest

(spousal) trust, a question was submitted to CRA in 2013 and a draft technical interpretation was

requested in 2014 by the Conference for Advanced Underwriting (“CALU”). A response was received in

2015 by CRA18 . In this response, CRA essentially confirmed their previous position that, in their view, a

spousal trust would not qualify for a tax deferred rollover of capital property19 when the trust pays for

18 (TI 2014-052936E5) 19 S. 104(4) of the Act

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(or the trustee has a duty to pay for20) premiums on an insurance policy on the life of the life interest

beneficiary. Their rationale for this position is that someone other than the spouse would obtain the

use of trust capital or income, which is in contradiction to the condition21 that no one other than the

spouse may receive or otherwise obtain the use of the income or capital from the trust while the spouse

is alive. (Similar wording exists as it relates to the required conditions to be met to qualify as an alter ego

or joint partner trust). This position is essentially a re-articulation of CRA’s earlier position on the

matter, dating back to the STEP and CALU roundtables in 200622, and is consistent in the confusion it

seems to bring to the matter.

CRA seems to take the position that a trustee may take steps and invest funds for the preservation and

even the increase in value of the capital of the trust, and appears to have no problem with the trustee

paying for protective costs such as property insurance premiums to protect homes, real estate, etc.

which is held by the trust. CRA has also indicated23 that it is not of the view that other property in the

trust must be invested for the “benefit” of the spouse or life interest beneficiary, and in fact confirmed

in earlier technical interpretations24 that the mere act of a trustee investing in capital property that does

not produce income, such as common shares, would not be considered to create the right of anyone

other than the spouse to receive or otherwise obtain the use of the trust property

It is difficult to understand how or why the CRA believes that an investment by the trustees of a trust

that has qualified as a life interest or spousal trust would effectively result in the trust not qualifying for

the rollover anymore. In fact, in question 11 of the 2016 STEP conference CRA Roundtable, the CRA

confirmed their prior position25 that a spousal trust qualifies or does not qualify as a Qualifying Spousal

Trust26, (which permits the rollover of capital property to the trust and the deferral of capital gains until

the death of the surviving (beneficiary) spouse) on the date the trust was created, and that one must

look to the TERMS of the trust as of that date to determine whether the trust qualifies or not.

CRA seems to be of the view that the sole purpose of the premium payments is to establish and

maintain the rights of the ultimate beneficiaries to receive the insurance proceeds after the spouse’s

death. It is unclear why that is any different than maintaining any other property in the trust during the

spouse’s lifetime, and it is also unclear why it is believed that the insurance proceeds will go to any of

the residual beneficiaries. In the typical structure, the insurance would be owned and paid for by the

trust, and the beneficiary of the policy would be the trust, not individual beneficiaries. The proceeds

may or may not be received by the trust at death, as the policy could lapse, or the policy could have had

cash surrender value which the trustees might have withdrawn or borrowed against to provide income

or capital to the spouse during lifetime, etc.. Even if the proceeds are received by the trust at death,

they could very well be used to pay taxes owing by the trust as a result of the deemed disposition it

20 STEP Roundtable 2006-0174041C6 21 Ss. 104(4)(iv) 22 See fn. 20 23 See fn 24 24 2012-0435681C6 25 IT-305R4 (archived) 26 Ss. 104(4)(a)(iii)

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faces at the death of the spouse, rather than being received by the beneficiaries. This might be used so

that the trustees don’t have to sell or break apart capital properties at death to fund the tax liability of

the trust, and as such, it is difficult to understand how this would be different than any other strategy

the trustees implement to maintain the capital of the trust, be it property insurance, an internal savings

account or a “ring fencing” of trust assets that are intended to fund the trusts taxes at death.

Be that as it may, this remains CRA’s position as of today’s date. Apparently the response has been sent

to Finance for review, so practitioners can hope that a different response, or one that helps us to

understand the distinction between this type of investment and any other type of investment for the

same purpose, is received on the next go around. In the meantime, practitioners should plan with

spouse trusts and life insurance at their own peril.

Caselaw Update

The Bank of Nova Scotia Trust Company vs. Ait-Said, 2016 ONSC 4051 (Canlii)

F.W. Briggs (“Briggs”) died on Oct. 18, 2014, having executed a Last Will and Testament on August 23rd,

2011. In this Will, Briggs left all of his real estate to his wife if she survived him, and if she predeceased,

he left his real estate to be divided in specific shares amongst five of his friends. Briggs and his wife

were estranged from their children.

Mrs. Briggs predeceased her husband, and at the time of his death, all five of Briggs’ beneficiaries had

survived. After his death, photocopies of a document dated July 29, 2013 were found, some with

handwritten notes at the bottom of them, some signed and some not. The original 2013 document has

not been found, and the court went through a detailed analysis to determine whether any or all of the

photocopy and the copies with handwritten notes of them could be considered a valid holograph codicil.

For the purposes of this discussion, the relevant document was the July 29, 2013 document, which the

court ultimately found to be a valid holograph codicil. In that codicil, Briggs left the total contents of his

safety deposit box, as well as his “beloved year 2000 Volvo V 70 station wagon” to Ms. Lockhart, one of

the 5 beneficiaries in his 2011 Will. His codicil stated that “I can only hope that Elizabeth will find good

homes for such of these treasures as are surplus to her own requirements…”. Amongst the items in

the safety deposit box were three life insurance policies, totaling $60,342.46, with Mrs. Briggs

designated as beneficiary.

Counsel for the trustees of the estate took the position that the holograph codicil is not a “declaration”

within the meaning of the Insurance Act27 , as it didn’t specifically describe the insurance policy.

Elizabeth Lockhart, on the other hand, argued that a person doing a holograph codicil would not be

expected to comply with the same standards and formalities as a person executing a formal will with a

lawyer, and as such, the Document should be sufficient to constitute an insurance Declaration. In the

27 R.S.O. 1990, c. I.8, s. 171

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alternative, she argued that all of the words in a testamentary document should be given effect to,

based on the case of Re Stark 28, and the wording in the codicil “…I wish to leave…the total contents of

my safety deposit box…”must be given some meaning. If the court is looking at the dominant intention

of the testator as if “sitting in the testator’s chair” at the time, these words, she argues, should oblige

the estate trustee to honour Brigg’s intentions and pay the insurance proceeds to Ms. Lockhart as if it

were holding the proceeds in trust for her.

The Court’s start position was that Brigg’s estate was the beneficiary of the policy, pursuant to s. 194 of

the Insurance Act which deals with the distribution of funds where a beneficiary predeceases a life

insured. As in this case, the section requires that proceeds be payable to the insured or the insured’s

personal representative where there is no surviving designated beneficiary of the policy. The Court

further found that this deemed beneficiary was not changed by the terms of the 2013 Codicil, as it did

not constitute a Declaration within the meaning of the Act. In order for it to have been a Declaration, it

would have had to identify the insurance contract or describe the insurance fund, which it did not do.

As well, the Court found that the codicil was focused primarily on physical possessions, and that that

wording did not indicate that Briggs intended to leave the insurance proceeds to Ms. Lockhart. The

Court noted that the reference by Briggs to “his treasures” was unlikely a reference to the life insurance

policies, but rather to the personal possessions which had meaning to him. As such, the fact that the

policies were contained in the safety deposit box in and of itself did not implicitly include the proceeds

of the policies with the gift of the deposit box items.

Dagg vs. Cameron Estate, 2016 ONSC 1892 (CanLII)

This was a case that looked at whether and when insurance proceeds can be made available to

dependents of a testator, and whether a spouse can have creditor rights resulting from a support order

which could, in effect, trump the rights of dependents under ss. 72(1) of the SLRA29 to the life insurance

proceeds.

In this case, Stephen Cameron was married to Anastasia from 2003 to 2012. They had two children prior

to their separation. Stephen had an insurance policy for $1 million, which became the subject of

litigation. When Stephen took out the policy in 2010, he designated Anastasia as beneficiary of the

policy. When they commenced matrimonial proceedings in 2012, a temporary consent order was made

requiring Stephen to irrevocably designate Anastasia as beneficiary of the policy.

The terms of this order was to remain in full force and effect pursuant to a later temporary custody and

support order in 2013. By this time, Stephen was in a new relationship with Evangeline Dagg, and had

just found out that she was pregnant. Shortly after the second custody and support order was issued,

Stephen found out that he had cancer and amended the beneficiary designation of the policy to divide

28 1969, CanLII 440 (ONCA) 29 Succession Law reform Act, (“SLRA”) RSO 1990, c.S26

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the proceeds between Anastasia, Evangeline and Anastasia’s two children. By motion dated November

2013, Stephen was ordered to return the designation to Anastasia. Stephen died in November of 2013,

and his son was born shortly after that. At the time of his death, the matrimonial proceedings were still

underway between Anastasia and Stephen’s estate.

This decision is an appeal from an order dated October 2, 2015, and dealt with the question of whose

rights supersedes whose where we have a beneficiary designation (in favour of Anastasia), dependents

as defined by s. 72(1) of the SLRA (Angeline, the three children, and Anastasia), and an existing

unsatisfied support order under the Family Law Act/Divorce Act.

The first question before the Court was whether s. 72(1) of the SLRA applied when there was an

“irrevocable” beneficiary designation. Ss. 72(1) of the SLRA effectively claws back life insurance

proceeds into a deceased’s estate where that deceased left dependents, and left inadequate proceeds

in the estate to satisfy the dependents’ right for support. In order for ss. 72(1) to apply, the deceased

had to own an insurance policy effected on his or her life. Ownership is not defined in the SLRA, nor is it

defined in the Insurance Act30. S. 191(1) of the Insurance Act, which deals with Irrevocable Beneficiary

designations, states that the Insured31 may not alter or revoke the designation without the consent of

the irrevocable beneficiary, and the insurance money is not subject to the control of the Insured or the

Insured’s creditors and does not form part of the Insured’s estate. The parties here all agreed that an

irrevocable designation does not, in and of itself, change the ownership of the policy. Anastasia does,

however, argue that the designation effectively strips Stephen of all meaning incidents of ownership

over the policy, forcing him to relinquish control over the policy and its proceeds. Accordingly, she

argues that the orders requiring the irrevocable designation stamped a trust over the proceeds, with

Stephen as bare trustee and Anastasia as beneficial owner of the policy.

The Court found that the incidents of control over the policy were not relevant to this issue, and that the

interpretation of “Owner” must be broad and flexible to reflect the purpose of the SLRA, which is to

prevent the depletion of an estate through direct transfers of an asset outside of a Will, where there are

dependent support needs. In this case, the orders to irrevocably designate could be varied or

terminated based on changing circumstances.

The second question before the Court was whether Anastasia could claim some or all of the insurance

proceeds otherwise captured by s. 72(1) of the SLRA as a creditor. That section states that “this section

does not affect the rights of creditors of the deceased in any transaction with respect to which a creditor

has rights” (none of the words Creditor, Transaction or Rights is defined in the SLRA). Anastasia argues

that she is a creditor because she is legally entitled to receive support from Stephen. The Court found

that she is indeed a creditor, but not a secured creditor, and as such, did not stand in front of the

dependents. In order for a finding that Anastasia was a secured creditor, the Orders would have had to

refer to the insurance as a form of “Security”, which they did not do. The Court found that the

insurance money was more likely to be used to satisfy fixed spousal and child support, rather than as

30 Footnote 27 31 Defined as the person who makes a contract with the insurer, other than in cases of group insurance. Ss. 171(1) of the Insurance Act

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security for a diminishing obligation for support over time. Without this specific reference, the support

order did not give Anastasia rights ahead of other dependents.

Finally, the Court looked at the question of whether Anastasia was entitled to damages for breach of

contract, as Stephen was required to designate her as beneficiary of the policy. The Court looked to the

case of Turner and DiDonato32, where a surviving spouse successfully sued for breach of contract after

her deceased ex-husband had altered the beneficiary designation of a contract of which she was to be

sole beneficiary pursuant to a separation agreement. In that case, the court distinguished agreements

where the language indicated that the policy was to secure a support obligation that diminished over

time, rather than ones where the language entitled the spouse to the full amount of the insurance

proceeds, regardless of the present value of the outstanding support obligations at the time. In this

case, Anastasia asserted that the purpose of the insurance was to provide her with security, rather than

underlying a common intention that she was to receive the full amount of the insurance proceeds, even

were there no ongoing support obligation.

Although it seems hard to correlate the second and third findings in this case, the court seems to have

found that the insurance was intended to provide Anastasia with security for the support order, but not

sufficient security to put her in the position of a secured creditor. Since the Court found that Stephen

owned the policy for the purposes of ss. 72(1) of the SLRA, she did not stand before the other

dependents of the estate, namely Evangeline and Stephen’s three children, and as such, the proceeds

were to be divided.

Golini vs. The Queen (2016) TCC 174

This was a tax case where the Tax Court of Canada found that Mr Golini had to recognize an immediate

shareholder benefit in respect of amounts he personally borrowed, because he used his corporation’s

assets as security for that borrowing. The facts of the case were very complicated, but in essence

involved an estate freeze and a corporate reorganization. After the reorganization, one of his sub-

corporations (“Subco”) borrowed funds from an offshore bank. It then used those borrowed funds to

redeem shares of Holdco, which in turn used the funds to acquire an offshore issued annuity, and

another offshore issued insurance policy. The amount used to acquire the annuity and policy was used,

in a series of steps, to flow money into an unrelated Canco, which ultimately loaned the same amount of

money to Mr. Golini, secured by the corporate owned insurance policy and annuity. Mr. Golini used the

borrowed funds to purchase high paid up capital pref shares in the corporation which originally

borrowed the money, and paid a guarantee fee of $40,000 to Holdco, deducting the fee and interest on

the borrowing.

CRA reassessed a dividend to Mr. Golini for the grossed up amount of the funds loaned to Mr. Golini (he

borrowed $6 million and the dividend was for $7.5 million), and it denied the interest expense on the

borrowing. The Minister of Revenue clearly found this structure offensive, as it argued sham,

shareholder benefit, GAAR, tax shelter rules and unreasonable interest.

32 Turner vs, Di Donato(2009) ONCA 235 (Canlii)

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In this case, the Court seemed to have trouble with three parts of the overall results:

1. That Mr. Golini had immediate and tax free access to money which he used to acquire an

interest in the corporate structure which indirectly helped him acquire the funds in the first

place.

2. That corporate assets from within the corporate entity (an insurance policy and an annuity)

were used to secure the loan, and in fact, were understood to be the way in which the

shareholder loan would ultimately be repaid. and

3. That the guarantee fee payable by Mr. Golini was insufficient given the value of the benefit he

received.

The Court found that Mr. Golini received a shareholder benefit under ss. 15(1) of the Income Tax Act.

“…in its simplest terms, immediate access to $6 million tax free with only the obligation of a guarantee

fee of $40,000/year for 15 year, is a benefit arising from his position as a shareholder, and a benefit

conferred by Holdco, given the inadequacy of the guarantee fee and the foregoing by Holdco of

retaining the insurance proceeds”. “everyone’s understanding was the annuity and the insurance were

the only manner in which the Obligation of the loan would be met…and he does not have to repay the

loan and therefore has an immediate benefit from the receipt of the $6 million…”

It is not a surprise that the Court would find that corporate assets, when used to secure personal

borrowings by a shareholder of that corporation, creates a benefit for that shareholder which should be

taxable. There has long been a thought, however, that the benefit would not arise when the

shareholder pays a guarantee fee for the “use” of the assets. In this case, it seems that the guarantee

fee was insufficient given the amount borrowed and the reality of the structure, that is, that money is

borrowed and usable immediately, and that the loan will not practically be paid off until death, using

those corporate assets pledged as security. The amount of the benefit, in this case, was assessed as the

cost of the insurance less the guarantee fee ($400,000/year less $40,000 per year), or $5.4 million.

The amount included in Mr. Golini’s income was the dividend reassessed by CRA of $7.5 million, which

amounted to less tax owing than would have been the case had the shareholder benefit of $5.4 million,

which would have been taxed under ss. 15(1) of the Income Tax Act as an income inclusion.

Although the Court was very clear that this was a unique structure and not one which can be

extrapolated to other leveraging structures such as the 10/8 or LIA’s, it now leaves open the question of

whether all shareholder borrowing structures using life insurance will be open to “attack”, and if so,

what the benefit amount will be found to be. At this time, it is not yet known whether the case will be

appealed.

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TAB 11

Changing Trustees

Jordan Atin, C.S.

Lesley Donsky

Elizabeth Legge

Atin Professional Corporation

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

* Student-at-law - Hull and Hull, LLP ** Counsel at Hull & Hull LLP

Changing Trustees

by Elizabeth Legge* Lesley Donsky*

Jordan Atin** Overview

The purpose of this paper to examine the circumstances, in which one or more

trustees can retire, be removed, or replaced. This paper will consider the

removal and replacement of trustees with respect to inter vivos trusts, and

testamentary trusts. Generally speaking, the principles of equity and the

legislative provisions apply mutatis mutandis to these forms of trust; where they

diverge will be noted.

Throughout the analysis, we have also sought to answer the question of to what

extent a settlor or trustee can specify in the trust instrument how and under

what circumstances a trustee replacement can be implemented.

This paper begins with an examination of the legislative framework that

governs the retirement and replacement of trustees in Ontario, along with

recent cases in which the court grapples with whether or not to change a trustee.

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Secondly, we outline the procedural steps necessary to removing and replacing

a trustee.

Trustees vs. Executors

It is common practice for a testator to appoint the same person to act as both

executor and trustee.1 Wills rarely divide the function of a person between the

two roles in any specific way.2 “An executor holds strictly a representative

capacity; he stands in and enforces the right of the testator”3, he is in charge of

settling the debts of the estate and administering the property. “A person who

holds property in trust for another is a trustee [within the meaning of s. 43(2)

of the Trustee Act, RSO 1980, c 240]. A fiduciary relationship exists between such

persons.”4 Once an executor has begun to act, he or she can’t retire from her

position without an order of the court removing him or her.5 Therefore, sections

2 and 3 of the Trustee Act, as explained below, will not apply to an executor. A

trustee is able to resign, but an executor may not resign once he or she has

started to act as an executor. It is possible for a person to resign as trustee while

continuing to act as an executor.6 As explained in McLean, Re, the distinction

1 Suzana Popovic-Montag and Joshua Eisen, “Resignation and Renunciation of Executors and Trustees,” (2013),

18:2 The Probater, May 2013. 2 Re McLean [1982], 135 DLR 667 (On HCJ) 3 Fitzgerald v. Minister of National Revenue (1949), [1949] SCR 453 4 Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1985), 1985 CarswellOnt 146, 5 Supra note 1. 6 Ibid.

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between the office of executor and trustee is chronological, and once a trust is

established pursuant to a will, an executor’s duty is considered complete.7

Therefore, an individual appointed as executor and trustee under a will can

resign after a testamentary trust is established, as he or she is only resigning as

a trustee.

Legislative Framework

The administration of trusts is within the inherent jurisdiction of the court in

Ontario. 8 The Ontario legislature, as in other Canadian jurisdictions, has

codified certain aspects of the law surrounding the administration of trusts

through statute. In Ontario, the relevant statute governing trustees and the

administration of trusts is the Trustee Act.9

Trust Provisions Prevail

The trust instrument may provide a procedure for resignation or removal as

well as addition or replacement of a trustee. Pursuant to section 67 of the Trustee

Act, the powers bestowed by the act are in addition to, and subject to, the terms

of the trust document.10 The document itself, therefore, must be the first place

that co-trustees and beneficiaries look to determine how a change of trusteeship

7 Ibid. 8 St. Joseph’s Health Center v Dziewkowski, [2007] OJ No 4641 (Ont SCJ) at para 25. 9 Trustee Act RSO 1990, c T23 [Trustee Act]. 10 Trustee Act at s 67.

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can be effected. If there is no specific provision in the trust instrument regarding

the retirement of a trustee, the Trustee Act will govern.

Although section 67 is not explicitly considered, the court declined to override

the power of appointment provided by the trust document in Feinstein v

Freedman. 11 In this case, family tensions had led the court to appoint an

independent trustee, Mr. Feinstein, to administer the testamentary trust in 2008,

with all of the powers, authority, and discretion bestowed by the trust

document.12 The trust document provided that a trustee may resign on 30 days’

notice, which Mr. Feinstein did in 2012.13 The former trustees, who retained the

power to appoint a new trustee under the trust document, signalled they would

reappoint themselves. The issue was in regard to procedure, and specifically,

which procedure was appropriate for the removal of the trustee, and whether

the previously removed trustees could reappoint themselves.14 Even though

the factual findings skewed in favour of appointing a new independent trustee,

the court declined to intervene.15 Therefore, the former trustees were free to

reappoint themselves.

11 Feinstein v Freedman, 2014 ONCA 205. 12 Ibid at 6. 13 Ibid at 9. 14 Ibid at 13. 15 Ibid at 42.

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Retirement

Three or More Trustees

If there are more than two trustees appointed one may retire by declaring a

desire to be discharged by deed, pursuant to section 2 of the Trustee Act. This

option is only available to trustees, not executors or administrators.16 Section 2

explicitly does not apply to executors or administrators. Therefore, if an

individual is appointed as trustee and executor they can only retire their

position as trustee with section 2. Section 2 can only be used for retirement of a

trustee if:

(1) there are more than two trustees;

(2) one trustee (by way of deed) declares a desire to be discharged;

(3) the co-trustees and such other person as is empowered to appoint

trustees consent by deed to the discharge; and

(4) the co-trustees consent to the vesting in them alone of the trust property.

Retirement of a trustee under section 2 does not require a new trustee to be

appointed.

16 Trustee Act, supra note 6, at s 2(2).

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Where there are only 1 or 2 trustees, section 2 of the Trustee Act does not apply.

In such a case, a trustee wishing to retire can use to section 3 of the Trustee Act,

which will be explained below.

Fewer than Three Trustees

If the trust document does not give the power of appointment to anyone, the

continuing trustees or the personal representatives of the last surviving or

continuing trustee may appoint a new trustee by writing, pursuant to section 3

of the Trustee Act.17 A trustee cannot be discharged pursuant to section 3 unless

there are at least two continuing trustees or a trust company to act as the sole

trustee, unless the trust only originally appointed one trustee.18

Section 3 of the Trustee Act enumerates the situations in which a trustee may be

replaced or removed without application to court:

(1) the trustee dies;

(2) the trustee remains out of Ontario for more than twelve months;

(3) the trustee wishes to be discharged;

(4) the trustee is bankrupt or insolvent;

17 Ibid at s 3(1). 18 Ibid s 6(c).

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(5) the trustee is convicted of an indictable offence; or

(6) the trustee refuses, is unfit, or is incapable of administering the trust.19

These grounds are a codification of the common law rules. Some of the events

that provide grounds for replacement or removal, such as death or conviction

of an indictable offence, are clear and do not provide parties much leeway for

dispute. Some grounds of replacement or removal, however, might be

challenged by the trustee in question. It will be clear, for example, that a trustee

has declared bankruptcy, but it might be less obvious whether or not a trustee

is insolvent.

Section 3 of the Trustee Act is unclear about whether a retiring trustee may

appoint his or her own replacement. It is strange that a retiring trustee might

not be able to appoint a succeeding trustee, as section 4 of the Trustee Act

permits the last surviving trustee to appoint a successor by will. A line of cases

suggests a trustee may retire and appoint a replacement.20

However, in Re Moorhouse, the court held that it was not within a retiring

trustee’s power to replace a successor.21 This was recently followed in Ontario

19 Ibid at s 3. 20 See, e.g. McLachlin v Usborne (1884), 7 OR 297; Thompson v Jenkins (1928), 63 OLR 33; Bruce (Township) v

Thornburn (1987), 26 ETR 96. 21 Moorhouse, Re, [1946] 4 DLR 542.

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in Chambers v Chambers.22 In Merry Estate v Merry Estate, the retiring trustee and

the continuing trustee disagreed about whether and who to appoint as a

replacement trustee. 23 The retiring trustee wished to appoint another

independent trustee in his place, while the continuing trustee, the husband of

the beneficiary, wanted to continue as sole remaining trustee. The trust

instrument was silent on the issue. The court held the continuing trustee had

the power of appointment and there was nothing in his conduct to cause the

court to override his exercise of discretion. 24 Thus, the court allowed the

retiring trustee’s application to be removed but declined his application to

appoint his choice of successor. Instead, the court made an order that the trust

assets be vested in the continuing trustee alone.25

Grounds for Changing Trustees

Whether or not a trustee is unfit or incapable of administrating a trust is often

contested. If there is disagreement between interested parties about whether

section 3 applies in a particular case, an application to court will be necessary.

Therefore, while section 3 is designed to provide a simpler procedure than the

22 Chambers v Chambers, 2013 ONCA 511. 23 Merry Estate v Merry Estate, [2002] OJ No 4472. 24 Ibid at 33. 25 Ibid at 34.

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section 5 application to court, it might prove necessary proceed to court in any

event.

Removal – When You Need Court Approval

If retirement or resignation by way of a deed is not an option, an individual

must apply to the court for assistance. The court is generally reluctant to

interfere with a testator’s intentions in making their appointments, and the

court must therefore find necessity in removing the trustee.26 In the absence of

misconduct, a court may also remove a trustee if it is in their opinion that the

proper administration of the trust will be affected or threatened.27 “The court

has power, under s. 37 of the Trustee Act, to remove personal representatives,

and the court has jurisdiction to remove trustees under s. 37 and s. 5 of the

Trustee Act”28.

Once a personal representative (executor or administrator) has taken office, he

or she can only be removed by court order. Section 37 deals with the removal

of personal representatives and allows an application for removal to be made

by “any person interested in the estate of the deceased.” Section 37 of the Trustee

26 Weil, Re, p1961], OR 888 at 889 (Ont CA) 27 Consiglio, Re (No 1), [1972] 3 OR 326 (Ont CA) 28 Carmen S. Theriault, ed. Widdifield on Executors and Trustees, 6th ed., looseleaf (Scarborough, Ont.: Carswell,

2002-) 15.2 at 1.

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Act can grant an order for an executor who desires to retire. In this case, the

grounds for removal of an executor are the same as those upon which the court

can remove a trustee.

Sections 5 and 37(1) of the Trustee Act provide for removal of trustees by way

of application to court. These sections codify the court’s inherent jurisdiction to

remove and replace trustees. Section 5 of the Trustee Act provides for the

appointment of a new trustee in substitution or in addition to existing trustees,

or in the case of a trust with no trustee. Section 37(1) of the Trustee Act provides

that the court can remove a personal representative on the same grounds as the

court would remove any other trustee and may appoint another executor or

administrator.

Any person with a beneficial interest of a trust or a co-trustee may apply to

court under the Trustee Act for the appointment of a new trustee.29 Likewise,

section 37(3) of the Trustee Act allows for an application for the removal and

replacement of a personal representative by either a trustee wishing to retire

from the position, a co-trustee alleging misconduct of another, or “any person

interested in the estate of the deceased.”

29 Ibid at s 16(1).

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Unlike section 2, section 5 requires a replacement trustee if a trustee is being

removed. The court has inherent jurisdiction to remove a trustee.30 Section 5

only allows for removal of a trustee if the trustee is acting contrary to his or her

duties. The leading case for removal of trustees is Letterstedt Broers (1884), 9

App Cas 371 (South Africa PC), which states that “…in cases of positive

misconduct Courts of Equity have no difficulty in interposing to remove

trustees who have abused their trust.”31 Pursuant to Anderson, Re, the key

consideration in every case of removal is whether the removal of the trustee is

necessary for the welfare of the beneficiaries.32 The case of Rose v Rose highlights

the “actions, inactions and conditions” that make a trustee subject to removal,

such as: misconduct, inability or unwillingness to carry out the terms of the

trust, incapacity, personally benefitting from the trust, and any other grounds

that may show the trustee is not fit to control another’s property.33

Where the application to resign and for discharge must be made to the court,

the trustee or personal representative must have a satisfactory reason for

30 Supra note 8. 31 Letterstedt v. Broers (1884), (1883-84) L.R. 9 App. Cas. 371 (South Africa P.C.) at 385-9. 32 Anderson Re (1928), 35 OWN 7 at 8 (Ont HC) 33 2006, 24 ETR (3d) 217 (Ont SCJ)

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wishing to resign, and the court may refuse to discharge a trustee.34 In contrast,

section 2 or section 3, do not require reasons for removal.

Disputes between Co-Trustees

Trustees must act in concert. That is, where there is more than one trustee, all

must act35 and they must make decisions unanimously,36 unless a contrary

intention appears in the trust document.37 Where a dispute between co-trustees

cannot be resolved and frustrates the administration of a trust, the court may

exercise its jurisdiction to remove one or more of the trustees. When the

administration of a trust in the best interests of the beneficiaries becomes

impossible or improbable because of hostility between trustees or personal

representatives, the court will be required to interfere to protect the

beneficiaries’ interests.38

In Maasbree Group Trust (Trustee of) v Van den Hoef, the divorce of the two

beneficiaries sparked conflict between two of the trustees, the son and daughter

of the beneficiaries.39 The trust property in question was the family cottage, and

34 Supra note 28 15.1 at p 6. 35 Gibb v. McMahon (1905), 9 OLR 522. 36 Haasz, Re (1959), 21 DLR (2d) 12. 37 Middlebro v. Ryan [1925] SCR 10. 38 Elliott (Litigation Guardian of) v. Elliott Estate [2008] O.J. No. 4941 at 7. 39 Maasbree Group Trust (Trustee of ) v Van den Hoef, 2006 Carswell Ont 7928, 219 OAC 179

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two of the trustees could not agree whether or not to sell the property. One

beneficiary supported the sale and one did not. At trial, the court ordered that

the property be sold, rather than appoint an independent trustee, as the trust

property was insufficient to pay the potential independently appointed trustee.

This decision was overturned on appeal. The Court of Appeal held that the sale

of the property would not benefit the beneficiaries.40 Moreover, the intention in

the trust document was that the property should be maintained unless all

trustees agreed that it be sold.41 The court ordered that the trustees who wanted

to sell the house should be removed, leaving only the managing trustee to

administer the trust.42 Because the removal was effected under section 5 of the

Trustee Act, one of the co-trustees remained in place as a trustee of the family

cottage. This would not be allowed under the section 3 procedure of the Trustee

Act.

Disputes between a Trustee and Beneficiary

As in situations of contention between co-trustees, where a beneficiary seeks

the removal of a trustee, the court will consider the best interests of the

beneficiaries above all.43 Best interests of the beneficiaries are not to be confused

40 Ibid at 39. 41 Ibid at 35. 42 Ibid at 44. 43 Supra note 31.

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with the wishes of the beneficiaries.44 That is, the court will give weight to the

consideration that the settlor or testator, chose to appoint a particular trustee

for the benefit of the beneficiaries, rather than to make an absolute gift to the

beneficiaries. The courts will respect the decision not to bestow legal title on the

beneficiary except in exceptional circumstances. Beyond the decision to make

the gift in the form of a trust, the court will defer to the settlor’s decision to

appoint the named trustee.45Again, the settlor made the selection based on

criteria unknown to the court and the court will not interfere with the settlor’s

confidence in the trustee lightly.46

In Radford v Radford Estate, the court dismissed a beneficiary application for the

removal of a trustee.47 The friction between the trustee and beneficiaries, once

again rooted in familial feuding, was significant but did not interfere with the

trustee’s ability to administer the estate. In fact, the court found that the enmity

only caused the beneficiaries to perceive the trustee as impartial, and resulted

in their intermeddling in the estate.48 The court would not replace the testator’s

choice of trustee, even though the trustee had not handled every aspect of

44 Hood, Re (1892), 40 NSR 33. 45 Oldfield v. Hewson 2005 CarswellOnt 405, [2005] O.J. No. 375 at 19. 46 Weil, Re [1961] O.R. 888 at 5. 47 Radford v Radford Estate [2008] O.J. No. 3526 48 Ibid at 118.

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administration perfectly.49 Other recent cases in which the Ontario courts have

denied beneficiary applications to remove estate trustees include Woolnough v

Dare,50 Grafton Estate v Canada Trust Co,51 Sentineal v Sentineal,52 and Jonston v

Lanka Estate.53

If the enmity between trustee and beneficiaries interferes with the trustee’s

ability to act in the best interests of the beneficiaries or to maintain an even

hand, the court may interfere and remove the trustee. As per Libman v Feldberg,

where there is marked hostility between the executor and beneficiaries, even if

the executor’s actions have been blameless, the executor should be removed.54

The rationale for this is that removal of a trustee is not a punishment for past

bad behaviour, but is done to protect the future administration of the trust.55

In the recent case of Venables (Litigation Guardian of) v. Gordon Estate, the court

removed the trustee due to his severe and enduring hostilities with his half-

brother, a beneficiary. 56 The animosity between the brothers resulted in

49 Ibid at 120-1. 50 Woolnough v. Dare 2016 ONSC 5051 51 Grafton Estate v Canada Trust Co , 2012 ONSC 6955 52 Sentineal v Sentineal 2011 ONSC 6007 53 Jonston v Lanka Estate 2010 ONSC 4124 54 Libman v. Feldberg , [2002] OJ No 4868 (Ont. SCJ) at 16. 55 Radford v. Radford Estate, [2008] OJ No 3526 at 106. 56 Venables (Litigation Guardian of) v. Gordon Estate 2012 ONSC 956.

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interruptions to their elderly mother’s income as payments.57 Interestingly, the

court justified this decision by describing the beneficiaries as more than “mere”

beneficiaries. 58 One beneficiary, the elderly and dependent mother of the

squabbling half-brothers, had herself once been the trustee of the trust. The

other beneficiary was given co-management powers over the trust assets in a

previous settlement agreement, which gave him an “enhanced position” in

respect to the trust, closer to co-trustee than beneficiary.59

Procedure

In deciding the appropriate procedure to remove a trustee, it must be

determined whether the case fits section 3 or section 5 of the Trustee Act. Under

section 3 of the Trustee Act, a person seeking removal does not need to go to the

court for removal.60 Removal can be done in writing by the person or persons

listed in the section, as mentioned above in this paper. If the circumstances of

the case will not allow for a section 3 removal, the parties must apply to court

through sections 5 and 37 of the Trustee Act.

57 Ibid at 36. 58 Ibid at 32. 59 Ibid at 36. 60 Supra note 5 at s 3.

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Where a trustee remains out of Ontario for more than twelve months, which is

grounds for removal under section 3 of the Trustee Act, evidence by affidavit

should be provided confirming the trustee’s absence.61 The remaining trustee

in Ontario, having knowledge of the facts, should make the affidavit sign a

deed appointing a replacement trustee.62

Pursuant to section 5 of the Trustee Act, in order to remove an executor or

trustee, an applicant must bring an application in the Superior Court of Justice

under Rules 14.05 3(a) and (c) and Rule 75.04 of the Rules of Civil Procedure

(the “Rules”).63 In Toronto, the application will likely be brought pursuant to

the practice direction concerning the estates list of the Superior Court of Justice.

As per Rule 14.05(3) (a) and (c)64:

(3) A proceeding may be brought by application where these rules

authorize the commencement of a proceeding by application or where

the relief claimed is,

(a) the opinion, advice or direction of the court on a question

affecting the rights of a person in respect of the administration

of the estate of a deceased person or the execution of a trust;

(c) the removal or replacement of one or more executors,

administrators or trustees, or the fixing of their compensation;

61 Ian M. Hull, “Changing and Removal of Trustees” in Estates: What’s New and Wonderful, or Cold and

Ghostly (Toronto: Canadian Bar Association – Ontario, 1998) at 9. 62 Ibid. 63 Ibid at s 5. 64 Rules of Civil Procedure, RRO 1990, Reg 194, s. 14.05(3)(a) and (c).

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Furthermore, per Rule 75.0465:

75.04 On the application of any person appearing to have a financial

interest in an estate, the court may revoke the certificate of appointment

of the estate trustee where the court is satisfied that,

(a) the certificate was issued in error or as a result of a fraud on the

court;

(b) the appointment is no longer effective; or

(c) the certificate should be revoked for any other reason.

Along with an application brought under Rule 14, an affidavit must be filed in

support of the application for removal, to set out the grounds being relied upon

for removal of the trustee. The responding party will then have the opportunity

to file affidavits in opposition of their removals which will be subject to cross-

examination.

Under the Trustee Act section 37(2), if the court removes a personal

representative upon any ground upon which the court may remove any other

trustee, and appoints some other proper person or persons to act in the place of

the executor or administrator so removed, it may be necessary for the new

appointee to pay a bond paid to the court as security.66 The security is paid to

65 Ibid at s 75.04)

66 Supra note 5 at s 37(2).

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ensure that the newly appointed representative will properly distribute the

estate assets and manage the trust property in their care.

Section 37(3) of the Trustee Act allows for an application for the removal and

replacement of a trustee by a trustee wishing to retire from the position, a co-

trustee alleging misconduct of another, or “any person interested in the estate

of the deceased.67” This provision seems to create a different threshold for

replacing executors than applying at first instance under the section 29 of the

Estates Act.

In order to remove a personal representative pursuant to section 37, attention

should be paid to section 37 subsection 6, which states that a certified copy of

the order of removal for the trustee should be filed with the Estate Registrar for

Ontario, with a supplementary copy filed with the Superior Court of Justice.

Upon the removal of an executor, the courts will often have to nominate a

replacement. Sometimes there is no requirement for replacement if there are

surviving executors or trustees, or, in the case of the death of the sole trustee,

67 Ibid at s 37(3).

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where the latter has an executor ready to act.68 Replacement can be done by the

court as per sections 5 and 37 of the Trustee Act, or through section 3 where a

sole executor may appoint his successor. Section 3 of the Trustee Act needs to be

used in tandem with section 4, which states that subject to express terms in the

will, the sole or last surviving trustee may appoint a replacement by will.

Conclusion

In conclusion, while the courts will be reluctant to interfere with a testator’s

intentions, it is possible to have a trustee retire, or be removed or replaced, with

or without application to court. The court will balance the best interests of the

beneficiaries with respecting the intention and choices of the settlor or testator

in determining whether or not to grant the application to remove a trustee.

68 Eric N Hoffstein, “To act or not to act: vexing issues facing trustees,” online:

http://www.fasken.com/files/Publication/7d96dba5-07b8-4900-ab71-3988d4e7c427/Presentation/

PublicationAttachment/3c532139-550e-4604-8f30-3f5f04f6070f/To_Act_or_Not_to_Act.pdf

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TAB 12

PANEL MATERIALS

Estate & End of Life Planning – Legal, Medical, and .. Ethical Considerations

Sally Bean

Director, Ethics Centre and Policy Advisor

Sunnybrook Health Sciences Centre

Jan Goddard

Goddard, Gamage, Stephenson LLP

Dr. Michel Silberfeld

Geriatric Psychiatrist

November 4, 2016

19TH ANNUAL

Estates and Trusts Summit – DAY TWO

19th Annual Estates and Trusts Summit - DAY TWO

Professionalism Panel 2016 Case Study #1 Assessing client capacity to change their testamentary documents Bill Grates: long-time client, smart, successful entrepreneur, now retired, mid-70s and recent widower. Three children: eldest son has three children; younger son has one child; and daughter has no children. Bill schedules a meeting with you to update his Will and power of attorney arrangements in view of wife’s recent death. He fails to show up at the meeting. You call and he initially cannot recall scheduling a meeting with you but then with embarrassment backtracks and mumbles that he had a different date in his calendar. You reschedule. At the next meeting you quiz him to update your information about his assets and family. Uncharacteristically, he cannot give you any direct answers about his assets other than that there has not been much change. When you ask about his grandchildren, he cannot recall their names or specific ages, but is able to tell you how many children his two sons have and that they are all under age 18. You are getting concerned about his forgetfulness and inability to answer what appear to be straightforward questions, but his will instructions are clear and sensible – to appoint all three children as executors, divide residue equally among them with gift over to a deceased child’s issue. He appoints all three as attorneys for property and personal care. He promises to send you asset information later and you are comfortable with this. A few days later he calls you to changes instructions to add a $200,000 legacy for each grandchild. You question him about what proportion of the residue this represents because you have no idea of the current net worth. You point out that his daughter has no children and question whether this is fair. He insists he wants to be remembered by his grandchildren and thinks his daughter will likely have children in the future. You question him about her age and he simply says – don’t worry about it, this is what I want. You send out the draft documents to him for review but hear nothing back. Again this is un- characteristic as he always got back to you promptly and with questions. A few weeks after you have mailed out the draft documents, his daughter calls you with concerns about her father’s forgetfulness. Apparently he has paid some bills more than once and others not at all. The daughter is quite close to her father and has been concerned for some time about his declining mental capacity. You called Bill to follow up on the draft Will and power of attorney documents hoping to address these concerns. The call does not go well. He gets angry at you for suggesting he is experiencing a decline and accuses you of taking sides against him. He claims his children are trying to take control of his finances and he wants you to help him keep control. What do you do? Should you allow Bill to execute the new will and power of attorney documents? Or, do you need to verify that he has capacity? Assuming you feel capacity is an issue, how do you approach this issue with Bill in view of his denial of the problem?

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Case study #2 Same facts regarding composition of family of Bill Grates. Bill schedules a meeting with you to update his Will and power of attorney arrangements in view of wife’s recent death. He fails to show up at the meeting. He calls you two days later, explaining he is in hospital and had fainted shortly before he was to leave his house to meet you. He proceeds to let you know that he has been diagnosed with terminal brain cancer, the tumour being what caused his fainting episode. He says the doctors have indicated he only has a few weeks or perhaps a couple of months left to live. He seems depressed and distraught, and says that his predicament has caused him to realize that he needs to make changes to his Will. He asks if you can come to the hospital. You agree and on the day you are visiting him, you notice that while he can hold a conversation with you, he doesn’t seem to be his “old” self; he is very weak, sometimes doesn’t finish his thought, and appears to either be distracted or to not be “present” at times. The nurse on call lets you know that he has been given some strong pain medication. The nurse also explains that Bill’s status has rapidly declined and he may not survive to the end of the week. Bill manages to convey to you that he wants you to prepare a Will which gifts half his residue to the XYZ charity, an organization that he says his wife had been both involved with and a strong supporter of. The other half of his residue he wants divided equally among his grandchildren. He explains that his children don’t need any more money and that he has already given all of them substantial gifts in the past few years anyway. What do you do? Should you allow Bill to execute a new will? If so, do you “write” one up on the spot given the nurse’s indication that Bill is in serious decline? Do you need to verify that he has capacity, and if so, how do you do so given the “urgency” of the situation? Variation: When you visit Bill in hospital, Bill tells you that he thinks one of his grandchildren has been telling lies about Bill to other family members, and wants to leave him out of the will completely. Bill’s other Will instructions are the same as above. What do you do?

Case study #3 Medically-assisted death Assume Bill is in the hospital, recently diagnosed with ALS. You are visiting him and he tells you he dreads his future and wants to end it all before he is completely debilitated. He wants you to help him persuade his doctor to provide assistance. How do you respond? Variation: Bill’s family comes from a religious and cultural background that regards life as sacred and any activity that seeks to end life as morally wrong. Since Bill’s diagnosis, he no longer holds to these beliefs, but his wife believes that Bill’s illness is prompting the change in his religious/moral views (and thus his desire to seek physician assisted death), and she asks to speak to you and Bill’s physicians. What do you do?

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Ontario's current guide to advance care planning http://www.livingwellseontario.ca/livingwell/assets/File/AdvancedCare_Guide.pdf

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Michel Silberfeld MD, FRCP

ESTATE & TRUSTS SUMMIT 2016

SECTION 1: CAPACITY FOR WILLS AND POWERS OF ATTORNEY

WILLS: points of issue 1 recognition accepted as opposed to full recall memory

low threshold: many who show signs of cognitive impairment are capable

(see ref) level of testator performance sought in testing: Spar-worst; Silberfeld-

optimal fluctuating level of performance accepted if, testator is persistent and

consistent during lucid intervals

WILLS: points of issue 2 with a proportional division of assets an incomplete and partially incorrect

knowledge of assets can be accepted if the testator acknowledges their gap in information

in the choice of beneficiaries: “the best is last” phenomena

POA: underlying assumptions choices pertain to situations in the future

directives may have to be updated

values change with the course of illness threshold: testamentary Vs treatment

safeguard by witnessing- not necessarily a capacity assessment

POA Property: giving threshold: equal to or less than financial capacity

incomplete though not incorrect knowledge of assets and expenses are compatible with capacity

acknowledgment of limitations with respect to property indicates a capable need to take prudential steps

directive ability requires the ability to detect errors corroborative financial information

history of financial indiscretions (? trigger)

POA Property: springing/revoking

functional test: exposure to risk cognitive failure Vs. financial indiscretion

implementation Vs. direction threshold for revocation equal to giving

revocation without capacity to manage property

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Michel Silberfeld MD, FRCP

SECTION 2: DECISION MAKING CAPACITY

“The ability to make an acceptable informed choice with respect to a specific decision.”

the functional task: the making of a specific decision retreat from a reliance on the presence of a disability alone as sufficient to

indicate incapacity

the emphasis is on choice the emphasis is on preferences and held values

even wishes expressed by an incompetent person have a place

Indications of Incapacity: Disability The presence of illness which affects cognition

Reception of information & ability to express oneself Orientation, attention, memory

Conduct of ADL and IADL (with or without assistance) Awareness of risks to self and others

Congruence of belief, feeling, and action Reality distortion

Responsiveness to social milieu

Indications of Incapacity: Functional

“The ability to make an acceptable informed choice with respect to a specific decision.”

the functional task: the making of a specific decision Review the process and decisions to be made with the client

Observe the client’s choices and the reasons for them Observe if the client recognizes and concurs about what they could not

understand freely

The justification for the opinion is not relevant, acceptable, or sufficient to support it

The opinion is the expression of an illness and its severity No attempt by the client has been made to understand their errors

The client is making an incompetent assent The client reveals a poor appreciation of own subjective state

Is capacity the answer? Capacity/consent is to protect people from unwanted intrusions and to

permit them to have a surrogate of their choice if incapable It is not clear that this approach is working well in protecting the interest of

people even where they have the satisfaction of having their wishes followed

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Michel Silberfeld MD, FRCP

For some people self-determination is worth any cost: vulnerability= others

decide your Quality of Life

The use of tests: there are no context specific tests for mental capacity as defined under the

Act tests only do well in finding the “gray” cases

tests don’t discriminate well in the gray area tests only give a very limited knowledge of the person responding to the test

tests may not reveal compensatory maneuvers a person can take to overcome deficits

tests do not take sufficient allowance for the person’s individual context errors on test are not explored: they can reveal a novel solution; or a

question misunderstood General observations

meet with the client prior to assessment

give the assessor a draft document let client speak without structure

do not make sense out of none sense

SECTION 3: REQUEST FOR TERMINATION OF LIFE Informed Consent AKA PHYSICIAN ASSISTED DEATH

Informed consent The HCCA requires:

the consent must relate to the treatment Does "death" qualify as a treatment?

the consent must be informed Informed about death?

Informed consent the person received the information about the treatment that a reasonable

person in the same circumstances would require in order to make a decision about treatment; and

the person received responses to his or her requests for additional information about those matters.

Informed consent The minimal information includes:

the nature of the treatment- ?death the expected benefits of death

the material risks of death? the material side effects of death

alternative courses of action the likely consequences of not having death as a treatment

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Michel Silberfeld MD, FRCP

Voluntary consent the consent must be given voluntarily

the consent must not be obtained through misrepresentation or fraud persuasion is permitted providing it does not overcome the person’s true

choice What is an authentic choice for death?

Capacity to consent to health care

A person is capable with respect to a treatment, admission to a care facility or a personal assistance plan, if the person is able to understand the

information that is relevant to making a decision about the treatment, admission of personal assistance plan, as the case may be, and able to

appreciate the reasonably foreseeable consequences of a decision or lack of decision.

Capable consent: clinical A person must say what they mean & mean what they say

Understanding the information does not require a person to be medically knowledgeable

Appreciating the consequences is in terms of the impact on the person’s life The judgment of capacity

Not a medical act Performed for the state with respect to legislation

What is the relationship between the state and a citizen that a citizen must petition the state to end their life?

Presumption of capacity Incapable assent: often missed

Recap

Consent must be:

Voluntary Informed

Capable At stake is the individual’s right of self-determination

Is the right of self determination to die a right granted by the state?

FREDERICK ATS HALL https://releve.canlii.org/en/on/onca/doc/2003/2003canlii7157/2003canlii7157.html?searchUrlHash=AAAAAQAKc2lsYmVyZmVsZAAAAAAB&resultIndex=34

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