Author: Ian Hull
On October 3, 2016, the Minister of Finance announced changes to the Income Tax Act. The purpose of these changes is to “improve tax fairness by closing loopholes surrounding capital gains on the sale of a principal residence.”
Although we have previously blogged on the proposed new reporting requirements, there are certain other proposals that merit further discussion.
Limitation Period and Tracing
One change concerns the current limitation period and tracing dispositions of principal residences. Currently, the rules are formulated so that the Canada Revenue Agency (“CRA”) may be barred from assessing or re-assessing an individual, including a trust, for taxation years that end on the third year after the date the CRA issued a Notice of Assessment.
Under the new rule, there will be no limitation period for a taxpayer’s disposition of a principal residence if it is not reported, which may allow the CRA to assess the disposition at any time.
Principal Residence Owned in a Trust
The changes also restrict when a trust may designate a property as a principal residence.
To qualify under the new rules, the beneficiary of the trust must personally reside in the proposed property. Furthermore, only three types of trust may designate a principal residence:
- Certain joint spousal and alter ego trusts for the exclusive benefit of the settlor and settlor’s spouse or common-law partner;
- Testamentary “qualified disability trusts” for the benefit of the child or a current or former spouse or common law partner of the settlor; and
- A trust for the benefit of the settlor’s minor child, where the child’s parents died in the preceding year or years.
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Last week, we discussed Cowper-Smith v Morgan, and considered when the presumption of undue influence is rebutted by legal advice. Today, we discuss the availability of the doctrine of proprietary estoppel in the circumstances of this case (the issue which the Supreme Court of Canada (“SCC”) has granted leave to hear on appeal from the British Columbia Court of Appeal (“BCCA”)).
The trial decision found that the son of the deceased, Max, had relied to his detriment on a promise made by his sister Gloria. Gloria had enticed Max to return from England to care for his ailing mother in her home by entering into an agreement to, among other things, sell Max her 1/3 interest in the home that she would inherit on her mother’s death. On the mother’s death, Gloria reneged. The trial judge, on the basis of proprietary estoppel, directed that Max was entitled to buy Gloria’s share of the property.
The BCCA decision (Smith J. dissenting on the proprietary estoppel finding), found that Max had not met the test in order to apply the doctrine. In short, the BCCA found that the remedy of proprietary estoppel could not arise as a result of assurances given by Gloria (a non-owner) with respect to her future intentions.
It is the question of whether the doctrine of proprietary estoppel applies in these circumstances that will be considered by the SCC.
The full facts of the case can be found in last week’s blog.
The Availability of Proprietary Estoppel
The BCCA applied the elements of the modern doctrine of proprietary estoppel as (in para 73 of the decision):
- an assurance or representation by the defendant that leads the claimant to form a mistaken assumption or misapprehension that he or she has an interest in the property at issue;
- a causative connection between the assurance or representation and the claimant’s reliance on the assumption such that the claimant changes his or her course of conduct;
- a detriment suffered by the claimant that flows from his or her reliance on the assumption, which causes the unfairness and underpins the proprietary estoppel; and
- a sufficient property right held by the defendant that could be transferred to satisfy the right claimed by the claimant.
In Ontario, the modern approach was established in the case of Schwark v Cutting, 2010 ONCA 61. Three factors must be present for proprietary estoppel:
- the owner of the land induces, encourages or allows the claimant to believe that he has or will enjoy some right or benefit over the property;
- in reliance upon this belief, the claimant acts to his detriment to the knowledge of the owner; and
- the owner then seeks to take unconscionable advantage of the claimant by denying him the right or benefit which he expected to receive.
The Matter for Debate
The BCCA found, in a 2-1 decision, that the doctrine of proprietary estoppel did not apply. The BCCA found that the trial court unreasonably expanded the scope of the doctrine by finding that Max could rely on Gloria’s assurance that he could buy her 1/3 interest in the property.
The majority found that Gloria’s assurance did not equate to unconscionable conduct: her obligations arose solely based on her mother’s actions and death and, as such, Max never had a proper basis to rely on Gloria’s promise: the property was not hers to give away at the time the assurance was made.
The dissenting opinion of Justice Smith proposed a solution to this dilemma by noting that, because of her cognitive deterioration, there was no possibility that the mother would have changed or rescinded the transactions that conveyed the property to Gloria on her death. As such, “Gloria’s ownership of the Property by the right of survivorship and the Declaration of Trust was therefore certain, despite not actually being owned by Gloria at the time of the promise to Max.”
It will be interesting to see how the SCC approaches this issue.
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A successful application for leave to appeal to the Supreme Court of Canada (“SCC”) is an uncommon occurrence. It is therefore of considerable interest to the estates bar that leave to appeal from a decision of the British Columbia Court of Appeal (“BCCA”) has been granted in the case of Cowper-Smith v. Morgan.
The case touches on important aspects of both undue influence and proprietary estoppel. It was in respect of the BCCA’s decision finding against the availability of proprietary estoppel as a remedy that leave was granted and we will all eagerly await the pronouncement of the SCC in due course. While the issue of proprietary estoppel in the case will be the subject of next week’s blog, the analysis of the BCCA as it relates to undue influence makes for interesting reading.
Elizabeth Cowper-Smith had three children, a daughter, Gloria, and two sons, Max and Nathan.
2001 – Upon obtaining legal advice, Elizabeth transferred her home and investments into joint tenancy with Gloria and executed a Declaration of Trust providing for Gloria to receive the assets “absolutely” upon her death. This transfer left her estate devoid of any significant assets.
2002 – Notwithstanding the Declaration of Trust, Elizabeth executed a Will leaving 1/3 of her estate to each of her children.
2007 – Gloria asked Max to return home from England in order to care for Elizabeth. Gloria offered Max the right to purchase a 1/3 interest in the home as an incentive.
Gloria reassured her brothers that the property transfer into joint tenancy with her was done simply to help manage the mother’s affairs. Upon Elizabeth’s death, however, Gloria said the transferred assets were hers.
British Columbia Superior Court Decision (2015 BCSC 1170)
Max and Nathan brought an action against Gloria alleging that Gloria exerted undue influence on Elizabeth. Max also sought a declaration that, on the basis of proprietary estoppel, he was entitled to purchase Gloria’s 1/3 interest in the house. At trial, the judge found that Gloria’s true intentions were located in her 2002 will.
British Columbia Court of Appeal Decision (2016 BCCA 200)
Gloria submitted on appeal that independent legal advice provided to Elizabeth was adequate to rebut the undue influence.
The appeal was allowed in part. The legal advice given to Elizabeth was inadequate to rebut the presumption of undue influence; however, Max did not acquire a right to purchase Gloria’s 1/3 share by promissory estoppel (again, the SCC has granted leave to appeal this latter finding).
Issue 1: Undue Influence
The trial judge, upheld by the BCCA, ruled in favour of Max and Nathan, and set held that the property was impressed with a trust for the benefit of the estate: the presumption of Gloria’s undue influence was not rebutted. This is an interesting finding, as Elizabeth obtained her own legal advice prior to executing the transfers to Gloria. Independent legal advice can be used to rebut presumptions of undue influence, if the independent legal advice qualifies as “informed advice”.
In applying Geffen v Goodman Estate,  2 SCR 353, the trial judge found a potential for domination inherent in the relationship between Gloria and Elizabeth, that gave rise to the presumption of undue influence.
The test for Gloria to rebut the presumption of undue influence was established in Geffen:
- An “examination of the nature of the transaction[s]”;
- A finding of whether the donor entered into the transactions as a result of her “own full free and informed thought”; and
- A “meticulous examination of the facts.”
The BCCA agreed with the trial judge’s conclusion that, based on this test, Gloria was not able to rebut the presumption of undue influence. Despite the fact that Elizabeth went to two lawyers, the court found that Gloria and her husband had advised the lawyers that Max and Nathan were trying to take Elizabeth’s property. Moreover, Gloria was present at some of the meetings with the lawyers. Lastly, the lawyers relied on the false information from Gloria and failed to adequately provide “informed advice” and otherwise probe for the existence of undue influence.
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With the unfortunate increase in fake news stories circulating the internet, one particular fabricated story nonetheless raises important estate planning considerations.
True: Mr. Antonino Fernandez died in August 2016. Mr. Fernandez was the owner of Corona beer, and chairman of Grupo Modelo, which also exports Modelo, and other Mexican beers. Mr. Fernandez was a philanthropist who set up establishments to encourage rural development in his birth area, as well as charitable foundations in both Mexico and Spain to ensure employment opportunities for disabled individuals.
False: In his will, Mr. Fernandez left every resident in his birth village, Cerezales del Condado in Spain, 2.5 million dollars.
A recent news hoax about the late Mr. Fernandez leaving a generous gift to each of the residents in his birth village raises the question whether such a testamentary disposition would have been valid.
Who Would Get a Distribution?
According to the fabricated story, Mr. Fernandez gave each resident of his village 2.5 million dollars upon his death pursuant to a clause in his testamentary document that apparently stated “for the benefit of the village`s inhabitants“. His village had 77 residents.
In Mr. Fernandez’s purported will, he left his fortune to his 13 siblings and extended family. Each villager did not directly get a distribution. If the disposition to the villagers did exist, would the siblings be obligated to distribute the estate based on the foregoing provision?
Would the Will Be Void for Uncertainty?
While each villager would have been informed that they were to receive a distribution from Mr. Fernandez, due to the drafting of the will, it is unclear if they would have received a distribution.
To prevent the villagers from recovering their distribution, the siblings would want to argue that the term in the will benefiting the villagers was void for uncertainty. As such a will would be ambiguous, the parties may need to look to a Judge to help interpret the will.
Pursuant to the decision of the Ontario Court of Appeal in Re Burke  OJ No 706, the judge must study the whole contents of the will, and after full consideration of all the provisions and language used therein, try to find what the intention was in the mind of the testator. When an opinion has been formed as to the intention of the testator, the court should strive to give effect to it.
As established in Montreal Trust Co. v Sinclair (1958 CarswellMan 39) “one of the commonest forms of uncertainty in this respect is where the gift provides for selection from a number of persons or bodies and does not state who is to make the selection or how it is to be made.“ In the false case of Mr. Fernandez, it may be argued that while he left a gift to the inhabitants of his village in his will, he did not specifically state how a villager was to be defined.
Furthermore, the Supreme Court of Canada in Brewer v McCauley  SCR 645 established that “a testator must, by the terms of his will, himself dispose of the property with which the will proposes to deal. He may not depute that duty to his executors or trustees“ In this case, the siblings of Mr. Fernandez could also attempt to argue that Mr. Fernandez left an unclear condition on the gift to them, and that leaving the distribution of the gift to the villagers to his siblings was an improper delegation of testamentary authority.
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We were proud to support the second annual Family Dispute Resolution conference, “FDRevolution,” held by the Family Dispute Resolution Institute of Ontario (FDRIO) last week. The FDRIO mandate includes providing information for the public and legal professionals about family dispute resolution (FDR) processes and options.
The primary focus of the FDRIO is, unsurprisingly, family law. There is a lot, however, that those of us who practice in estates can learn from FDR. We have blogged many times about the importance of family dynamics in resolving estates disputes. Last week’s conference provided a lot of valuable information about managing family relationships and effectively avoiding and resolving family disputes.
Remember culture affects everything
Baldev Mutta and Amandeep Kaur of Punjabi Community Health Services, Peel Region gave a presentation on cultural competence. They reminded the audience that culture affects decision-making, communication, and social interactions.
Legal practitioners must be aware of how culture affects their own perceptions and a client’s perceptions of a legal issue. It is important for lawyers and mediators to suspend judgement and recognize how a client’s cultural lens is different from the dominant “Canadian” culture. FDR practitioners can better help clients by asking clients to identify and describe their perceptions of the conflict or issue and then determining what values and beliefs led to that perception. Understanding how and why a client is making certain decisions can help lead to a successful resolution.
The importance of Emotional Intelligence
The keynote speaker Karen BK Chan spoke about the importance of emotional intelligence (EI) and provided some practical tools to use in dispute resolution. Chan suggested that EI is twice as important as IQ or technical skills, which she described as “threshold capabilities.” A high EI can help lawyers and mediators manage tense situations. Some practical tips for strengthening EI include: listen to , ask for, and reflect on feelings; promote empathy between parties in order to facilitate dialogue; and to name and normalize strong emotions.
For information about the FDRIO and news and events, see their website.
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Testamentary capacity is most commonly an issue when a testator prepares a new will later in life, against a form of progressive dementia, whether it became apparent before or after the creation of the will.
The Main Question to be Considered
In cases regarding progressive dementia, the question is whether the mental deterioration has deprived the testator of his or her testamentary capacity. If the testator has been deprived of their capacity, it is likely (but by no means certain) that the will they signed will be invalid. Pursuant to the case of Johnson v Huchkewich (2010 ONSC 6002), a diagnosis of dementia is not tantamount to a lack of testamentary capacity.
Requirements for Capacity
As established in Banks v Goodfellow [(1870), [1861-73] All ER Rep 47], “the standard of capacity in cases of impaired mental power, is…the capacity on the part of the testator to comprehend the extent of the property to be disposed of, and the nature of the claims of those he is excluding.” In applying the test for testamentary capacity, it is important to ensure that the testator was capable of appreciating the terms of the will, but also the circumstances surrounding the making of the will. The testator must be able to recall and comprehend circumstances beyond a range of familiar topics. As defined in Leger v Poirier (1944 CarswellNB 11), the individual must be able to have a “disposing mind and memory”, which is able to “comprehend, of its own initiative and volition, the essential elements of will-making, property, objects, just claims to consideration, revocation of existing dispositions, and the like.”
Therefore, in a case where an individual has progressive dementia and is attempting to make a testamentary document, the lawyer has an obligation to ascertain if the individual can appreciate the circumstances as a whole. The ability for the testator to rationally respond to questions is not enough to determine that the individual has full capacity.
Furthermore, it bears repeating that a testator who is incapable to manage his or her affairs due to progressive dementia, does not necessarily lack testamentary capacity. As established in the case of Cranford’s Will, Re, (1978 CarswellNfld 23), “in determining the testamentary capacity of an aged person it is necessary to be careful not to substitute suspicion for proof so as to render it impossible for old people to make wills…”
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Section 31 of the Substitute Decisions Act (“SDA”) states that an attorney for 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 a will.” An attorney for property also has the power to make gifts and loans to the grantor’s family and friends, as well as charitable gifts (SDA s37(3)).
There are strict limits, however, to how generous an attorney may be. The SDA includes guiding principles with respect to making gifts: the attorney cannot deplete the grantor’s property to the extent that there may not be enough to satisfy the needs of the grantor him or herself, during the grantor’s lifetime. The gifts or loans must also only be made if the attorney has a reason to believe, based on any expression the grantor might have made while capable, that the grantor would have made these gifts or loans if capable. Charitable gifts have further restrictions.
In addition to the prohibition against making a will, an attorney for property has an obligation to find and read the grantor’s will (SDA s33.1). Unless necessary to perform one’s duties to the incapable person, the attorney must not dispose of property subject to a specific testamentary gift, although this prohibition does not apply to a testamentary gift of money (SDA s35.1). The court highlighted the importance of the will in Weinstein v. Weinstein (Litigation Guardian of), stating obiter that s 33.1 of the SDA is “indicative of the importance the legislators attach, appropriately, to the will of an incapable person, in view of the permanent character of the will if the incapable person does not regain capacity.” Taken together, these provisions can be read to support the proposition that an attorney does not have the authority to dispose of assets in a way that undermines the grantor’s estates plan.
The case law on the subject of an attorney’s ability to make gifts is limited. Moreover, the cases largely deal with relatively small gifts. While not directly related to the issue of gifts made by an attorney on behalf of a grantor, the court in Banton v Banton held that it is improper for an attorney to deprive the grantor of his or her testamentary freedom by making inter vivos transfers. The attorneys in this case made a large transfer to a trust to protect the grantor from a predatory marriage, which is both allowed and an appropriate action for an attorney to take. However, the secondary beneficiaries of the trust were the grantor’s children, which the court held functioned as a will substitute, which is an inappropriate use of the power of attorney.
In summary, gifting must be done carefully and in a manner that would survive judicial scrutiny. An attorney should not make gifts if they represent so large a proportion of the estate that the attorney has substituted the testamentary intentions of the grantor with their own discretion. An attorney should also not make any gifts if the grantor was not in the habit of making gifts to friends and family or had expressed a contrary intention while capable.
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What happens if an individual dies intestate, and upon application for a Certificate of Appointment of Estate Trustee Without a Will, a Not Clear Certificate is returned to the applying party?
Pursuant to Rule 74.12 of the Rules of Civil Procedure:
(1) A certificate of appointment of estate trustee shall not be issued until the court has received from the Estate Registrar,
(d) on an application where there is no will, a certificate that no will or codicil has been deposited in the Superior Court of Justice.
A will being deposited in the Superior Court of Justice does not necessarily mean that the will belongs to the deceased individual. Therefore, while one may receive a Not Clear Certificate (“Certificate”) from the Estate Registrar for Ontario, it does not guarantee that a will exists in the deceased’s name. Rather, the Certificate creates the need for the applicant to take extra steps to ensure that the wills that are deposited with the Superior Court of Justice are not wills that belong to the deceased.
What Steps Should You Take?
A Certificate sent by the Estate Registrar for Ontario will contain a list of different deposit dates and court file numbers, corresponding to wills that are already deposited with the Superior Court of Justice. The listed wills on deposit will all have names similar to that of the deceased individual.
Upon receipt of the Certificate, it is the applicant’s or their lawyer’s responsibility to track down each of the deposited wills, in order to prove that they do not belong to the deceased. This involves attending the Registrar of the Court where the will has been
deposited. In some circumstances, faxing the Certificate will suffice. The Registrar will then deliver to the applicant a photocopy of the Envelope for Will on Deposit. This will allow the applicant to make the necessary investigation to determine that the will on deposit is not the will of the deceased. The Envelope for Will on Deposit contains the name of testator, the testator’s address, the name of the executor, the executor’s address, and the date the will was deposited for safe keeping.
Once the applicant gathers all of the Envelopes for Will on Deposit, the applicant must go through the envelopes and ensure they do not belong to the deceased. The applicant must then prepare an Affidavit stating that each Envelope for Will on Deposit does not belong to the deceased. The Affidavit should be filed at the Court, along with the Certificate. Once the Court is satisfied the deposited wills do not belong to the deceased, a Certificate of Appointment of Estate Trustee Without a Will should be issued. If the will does, in fact, belong to the deceased, different steps will need to be taken in order to obtain a Certificate of Appointment of Estate Trustee With a Will.
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On occasion, a Court may conclude that a disgruntled beneficiary’s agenda was simply to put up roadblocks to the executor without having any real intention or expectation of successfully challenging the validity of a Will. Such was the case in Elliot v Simmonds  EWHC 732 (CJ), which imposed costs sanctions against an individual whose “passive objection” to a Will was found to unreasonably require the executor to prove the Will in solemn form.
In England and Wales (as in Ontario), a person with a financial interest or the executor may seek proof of a will in solemn form (i.e. in open court) upon notice to all persons appearing to have a financial interest in the estate. The court must be satisfied, upon the examination of the witnesses, of the due execution of the Will and of the testamentary capacity of the testator. The onus of proving due execution and testamentary capacity is upon those propounding the Will. (The Ontario Court of Appeal recently pronounced in detail on proof in solemn form in the context of Rule 75 of the Rules of Civil Procedure in Neuberger Estate v. York 2016 ONCA 191). A previous blog on Neuberger Estate v. York can be found here.
In Elliot v. Simmonds, the Deceased (Mr. Jordan) left his entire estate to his wife (Ms. Elliot) and left nothing to his illegitimate daughter (Ms. Simmonds). Ms. Simmonds lodged a caveat (analogous to a Notice of Objection in Ontario) to prevent Ms. Elliot from obtaining probate. Furthermore, Ms. Simmonds made various allegations impugning the validity of the Will, but took no active steps to produce evidence in support. Eventually, the executor of the estate (Ms. Elliot) had no option but to prove the Will in solemn form.
Pursuant to the Civil Procedure Rules (England and Wales) (“CPR”), on a proceeding proving a will in solemn form, the Objector (in this case Ms. Simmonds) can effectively do nothing but insist that the executor attend at trial and prove the Will. Moreover, Ms. Simmonds (wrongfully, as it turned out) assumed that she was immunized against costs of her actions by part 57.78(5)(b) of the CPR which provides that:
(b) If a defendant [i.e. Objector] gives such a notice [i.e. a Notice of Appearance], the court will not make an order for costs against him unless it considers that there was no reasonable ground for opposing the Will.
At the conclusion of the trial, substantial costs had been incurred by Ms. Elliot who propounded the Will. Ms. Elliot made an application for costs, arguing that Ms. Simmonds acted unreasonably by passively placing the burden on Ms. Elliot to prove the Will notwithstanding that Ms. Simmonds had been in possession of all relevant evidence in advance of the proceeding (which supported the will’s validity), adduced no witnesses or medical evidence to the testator’s capacity, and acted obstructively in the proceedings. As such, the judge agreed with Ms. Elliot and ordered precedent setting costs of GBP65,000 against Ms. Simmonds.
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