During litigation, it is not uncommon for the court to admit expert evidence on matters that require specialized knowledge, technical expertise, or scientific understanding. So long as expert evidence is relevant, necessary to help the trier of fact, not barred by an exclusionary rule, and provided by a properly qualified expert, such evidence may be called on a wide range of issues – including, as demonstrated by the court’s recent decision in Resendes v Maciel, 2025 ONSC 3263, sham trusts.
The Admissibility of Expert Evidence on Trusts
In Resendes, the validity of a trust was squarely at issue. The parties were divorcing, and the wife argued that a trust established by the husband was a sham, created to shield family property, whereas the husband maintained that the trust was valid, and called expert evidence to make his case. In response, the wife argued that expert evidence was not admissible, taking the position that it was not objective or impartial, and that it would encroach on the court’s role as the ultimate trier of fact.
Notwithstanding the wife’s concerns, Justice Jain admitted the expert evidence, in part. Acknowledging that “trusts are complex,” the court recognized that a lawyer may “give evidence on legal issues where the area of law is sufficiently specialized and the evidence is necessary to assist the court.”
While expert evidence was admissible, the court struck portions of the evidence that expressed conclusions as to the husband’s intentions in creating the trust and opined on the validity of the trust. Justice Jain confirmed that the expert’s role was limited to providing information “necessary to assist the court to understand how a trust is validly created, and the factors that a court should consider in determining the validity of a trust and the indicia of a sham trust.”
In addition to addressing the nature of expert evidence that may be admissible when the validity of a trust is disputed, Justice Jain’s decision serves as a helpful reminder of several core principles surrounding sham trusts.
1. Sham trusts are void
A sham trust is not a trust at all. These arrangements are typically created for a fraudulent, deceitful, or illegal purpose, such as hiding conventional ownership of property in order to shield it from creditors or a separating spouse.* Because the settlor or trustee does not truly intend to part with their beneficial interest in the trust property, the trust does not satisfy one of the “three certainties” required to create a valid trust – certainty of intention.
Since sham trusts are invalid, the law treats them as if they never existed: all property purportedly held in the trust reverts back to the party who provided the property at the outset – typically either the settlor, or in the case of Resendes, the trustee.
2. Sham trusts are typically used to retain control of trust property
While documents or statements may appear to be valid, a sham may nonetheless be found if the parties’ subsequent conduct demonstrates ongoing dominion over the trust property. Factors that may indicate that the trust is being used to retain control over the trust property include:
- the amount of discretion the trustee has over the management of the trust;
- whether the beneficiaries are under the control of the trustee;
- whether the beneficiaries have obtained or received independent legal advice regarding the trust;
- whether the trustee can exert control over the professionals who provide services to the trust; and
- whether the trustee holds themselves out publicly as being in control of trust property.
3. Sham trusts usually raise red flags
The presence of other “red flags” may indicate that a trust is a sham. Besides the amount of control the trustee retains over the trust property, other red flags may include:
- there is no commercial logic to using a trust;
- the trust agreement post-dates the transfer of funds;
- lack of a written trust settlement;
- lack of segregation of trust funds;
- failure to keep proper accounts;
- the trust does not file income taxes;
- mixing trust funds with other funds;
- pre-taking compensation;
- failing to report compensation as income;
- making undocumented advances or treating trust property as personal assets;
- lending trust property to non-arm’s-length individuals, like family and friends; and
- the absence of an actual benefit to the beneficiaries, as compared to the trustee.
Please note that this list of red flags associated with sham trusts is not exhaustive. For other red flags associated with sham trusts, see McGoey (Re), 2019 ONSC 80.
4. Contextual analysis is used to identify sham trusts
At the end of the day, ascertaining whether a trust is a sham is a highly contextual, fact-based determination. In addition to considering the degree of control that the trustee may exert over both the trust and the trust property, the court may consider the relationship between the parties and broader notions of fairness, particularly in family law cases.
Thank you for reading, and enjoy the rest of your day,
Suzana.
*A trust created to minimize tax obligations is not considered a sham. As noted by the Supreme Court of Canada in Stubart Investments Ltd v R, 1984 CanLII 20 (SCC), a transaction undertaken solely for tax planning is not a sham unless it is intended to mislead the taxing authority. More recently, the court held in Selkirk v Selkirk, 2022 ONSC 2653 that “[t]here is nothing fraudulent, deceitful or illegal about attempting to minimize a tax burden in a way that is not legally prohibited.”