Author: Ian Hull
A couple of months ago, I blogged about a letter from the Department of Finance in which it addressed concerns regarding amendments to the Income Tax Act (the “ITA”) that have come into force as of January 1, 2016. The stated purpose of the letter was to confirm the Department of Finance’s understanding of the issues raised and to describe an option for responding to these issues. There was no promise that the option would be pursued or that any action would be taken.
However, on January 15, 2016, the Department of Finance released draft legislative proposals that would modify the income tax treatment of certain trusts and their beneficiaries. The legislative proposals, along with explanatory notes, can be found here.
Currently paragraph 104(13.4)(a) of the ITA provides that upon the death of a beneficiary of a spousal trust, the trust’s taxation year will be deemed to come to an end on the date of the individual’s death. Subsequently, according to paragraph 104(13.4)(b), all of the trust’s income for the year is deemed to have become payable to the lifetime beneficiary during the year, and thus must be included in computing the beneficiary’s income for their final taxation year. This has been raised as an issue due to paragraph 160(1.4) which makes the trust and the beneficiary jointly and severally liable for the portion of the beneficiary’s income tax payable as a result of including the income from the trust. As such, it is possible that the beneficiary could be responsible for the full income tax liability, to the benefit of the trust and the trust’s beneficiaries.
According to the draft legislation, paragraph 104(13.4)(b) is to be amended and 104(13.4)(b.1) is to be added, such that (b) does not apply to a trust unless all the requirements are met and the trust and the beneficiary’s graduated rate estate jointly elect that (b) apply. It would, therefore, be up to the trust and to the estate of the beneficiary to determine whether they wish the trust’s income to be included in the income of the beneficiary for their final taxation year.
There was also an issue raised with respect to the stranding of charitable tax credits. This situation could arise if a trust were to make a charitable donation after the beneficiary’s death. As the trust’s income for the year has to be included in the beneficiary’s income, consequently, the trust would have no income against which to deduct tax credits. Based on the draft legislation, as long as the beneficiary and the trust do not jointly elect for 104(13.4)(b) to apply, the trust’s income will be included in the trust’s tax return, and any charitable donation tax credits should be able to be deducted from that income.
The press release issued with the draft legislation stated that the Department of Finance had released the draft legislative proposals for consultation and welcomed interested parties to provide comments by February 15, 2016.
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When someone passes away, their executor is responsible for paying out of the estate any debts and liabilities for which the deceased was responsible. However, when there is debt for which two or more people are jointly liable, who becomes responsible when one of the joint debtors dies?
In the case of a joint debt, presumably all joint debtors will have taken responsibility and signed for that debt. Accordingly, when one joint debtor dies, the other joint debtors will be responsible for the full amount of the debt.
This obligation to pay the full amount of a joint debt is between the debtor(s) and the creditor. The creditor can thus seek repayment from either joint debt holder, or, after the death of one joint debtor, from the surviving debtors. As between the debtors themselves, however, there may be remedies for a situation in which one joint debtor is made to pay the full debt, without contribution from the other joint debtor. This may arise upon the death of one of the joint debtors if the Estate refuses to pay back any of the debt.
The courts have held that if liability for joint debt is shared, but only one debtor is ultimately made to pay the full amount of the debt, there may be an equitable remedy available. In Parrott-Ericson v Stockwell, 2006 BCSC 1409, the court stated that, even if there is no specific arrangement between the estate and the survivor who becomes responsible for a joint debt, “equity will impose that obligation in order to avoid unjust enrichment. That is the usual rule, because ordinarily there is unjust enrichment if the liability is not shared.”
In that particular case, unjust enrichment was not found. The joint debt in question was a line of credit secured against two properties owned jointly by the Deceased and his surviving spouse. The line of credit had been used to acquire the properties. Upon the death of the Deceased, the spouse took sole title to the properties by right of survivorship, and she also became liable for the balance of the line of credit. The court held that, although normally the estate would be unjustly enriched in this situation, as the spouse was receiving the entire benefit of the properties, it was not unjust that she be responsible for the full amount of the loan relating to that property.
Ultimately, the answer to this question may not be completely straightforward. Ensure that responsibility for joint debt is clear as between any joint debtors to ensure that you are not liable to pay the full amount of a joint debt after someone’s death, and that you have recourse to claim contribution from the deceased’s estate if necessary.
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The Honourable Susan E. Greer has been involved in the world of estate law for many years, as both a lawyer and as a recently retired Superior Court Justice. During that time, and particularly during her 23 years as a Superior Court Justice, she has observed a number of changes as she observes in this article for Advocate Daily.
Some of the changes discussed by The Honourable Ms. Greer are relevant to the practice of law generally. In particular, she mentions civility, and the fact that counsel have become less courteous over time, including in interactions with court staff, each other, and witnesses. She also refers to the increasing use of emails as exhibits to affidavits. In this regard, of note is the concern that many emails are “sent in haste, without careful consideration as to how they read or how they could be misinterpreted” as opposed to the thought that usually goes into the drafting of letters. These comments are applicable to lawyers generally, not solely the estates bar, and are important points to consider.
Specifically with respect to estate law, The Honourable Ms. Greer notes that there have been changes in several areas, including sibling rivalry increasingly being brought to the courts, and increasingly heavy scrutiny of jointly held assets. One particularly interesting development discussed in the article is the increase in will challenges commenced by children prior to the death of their parent. As noted by The Honourable Ms. Greer, this is not an issue unique to Ontario or Canada, citing a French case in which the daughter of Liliane Bettencourt, heir to the L’Oreal cosmetics company, successfully challenged the validity of her mother’s will, while her mother was still alive.
Relevant to many of the changes that have been seen in estates, according to The Honourable Ms. Greer, is the issue that the “greed factor has become more pronounced, causing bitter divisions in families that seem impossible to heal.” That being said, given that courts have moved away from awarding all costs of litigation to be paid from the estate, the possibility of being responsible for one’s own costs, as well as the costs of other parties, may serve as a disincentive for potential litigants with more frivolous claims that may be driven by greed.
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Now that the 2016 year has begun, there are several amendments to the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp) (the “ITA”) that have come into force. Some of these amendments have been discussed on this blog before. Among these amendments is the introduction of the “qualified disability trust” (the “QDT”).
The requirements for a QDT can be found in s. 122(3) of the ITA, and are as follows:
i. At the end of the trust year, a QDT must be a testamentary trust that arose on and as a consequence of an individual’s death;
ii. The trust must be resident in Canada for the trust year; and
iii. The trust and the named beneficiary or beneficiaries must have made a joint election for the trust to be a QDT.
Section 122(3) now also includes requirements for the beneficiary of a QDT:
i. Section 118.3(1)(a) to (b) must apply to the beneficiary for the individual’s taxation year in which the trust year ends, meaning that the beneficiary must be eligible for the disability tax credit; and
ii. The beneficiary can only jointly elect for one trust to be a QDT.
If a trust meets the requirements for a QDT, it will not be subject to the new rules with respect to flat top rate taxation that are now applicable to testamentary trusts. This is an important qualification, because prior to the amendments that came into force January 1, 2016, all testamentary trusts were subject to graduated rates of taxation. Now, however, trusts will only have the benefit of the graduated rates for the first 36 months following the death of a testator, during which period they will be called “Graduated Rate Estates” (“GREs”). Therefore, the QDT has significant benefits with respect to taxation of trusts.
As noted above, however, the requirements for a QDT are far from simple. With respect to the disability tax credit, there are particular requirements and limitations for eligibility. The assessment of whether a particular individual will be eligible for the disability tax credit is done by a doctor, not a financial advisor, and it can be difficult to predict whether or not someone will qualify.
There are also some elements of the QDT which may raise planning challenges, including the limit of one QDT per beneficiary. For example, if the grandparents of a disabled grandchild have chosen to create a testamentary trust for the benefit of their grandchild, only one grandparent is able to have the trust qualify as a QDT. Furthermore, the joint election for the trust to be a QDT must be made each year, and each year the beneficiary must qualify for the disability tax credit. As such, the status of the trust may change from year to year, and must accordingly adapt to the changing application of the tax rules.
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I recently tweeted an article from the Wall Street Journal entitled Five Steps to Prepare for a Decline in Your Financial Cognitive Ability. The article points out that, although we easily consult health-care providers with respect to our physical health, we may have more difficulty recognizing our limitations and changes in our financial health. As we live longer lives, the likelihood of mental and cognitive decline increases, and accordingly, the need for a plan with respect to how to cope with such a decline increases as well.
During the holidays, many of us host and attend family gatherings, which may provide a good opportunity to discuss your plans and wishes with your loved ones, at a time when everyone is together in a relaxed, low-pressure environment. While such conversations are not always easy, they are a necessity to ensure that your wishes will be carried out, and that your family will not be stressed in attempting to discern exactly what your wishes are.
The first of the five steps suggested in the article is to talk to your spouse to ensure that both parties are in agreement with respect to your financial plan. The second suggestion is to organize your finances as clearly and simply as possible. If your finances are spread out over several banks or institutions, consider consolidating accounts. At the very least, it may be wise to create an inventory of all accounts, investments, and assets so everything can be easily located and accounted for.
The next step is to review your Will and your Power of Attorney for Property, or if you do not yet have either of these documents, arrange to have them prepared by a lawyer. With respect to your Will, ensure that you have clearly thought out your choice of executor, the bequests to beneficiaries, and anyone you may be leaving out. With respect to your Power of Attorney, of course, the most vital element is that you choose a trustworthy Attorney.
The fourth suggestion is to assign roles to your family members. This involves asking the individual if they would be willing to assume the role you have selected, and communicating within your family with respect to who will be responsible for which tasks. By having this conversation in advance, and explaining the reason for your choices, you may be able to avoid any surprised or hurt feelings at a later date, based on who has, or has not, been selected for a particular role.
The last suggestion included in the article is to seek professional assistance and advice from a lawyer and/or a financial professional. They can help you feel comfortable with the planning you have put in place and give you, and your family, peace of mind.
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The “Henson trust” is a type of trust often used in estate planning to deal with situations where there is a disabled beneficiary who is entitled to receive support payments from the Ontario Disability Support Program (ODSP). The name of the Henson trust originates from an Ontario case, The Minister of Community and Social Services v Henson,  OJ No 1121, aff’d  OJ No 2093 (Ont CA), where the Court held that a discretionary trust established for a disabled beneficiary would not result in a loss of government benefits, as the beneficiary had no vested right to receive income or capital from the trust.
Under the Ontario Disability Support Program Act, if a recipient of ODSP has assets, or receives income over a prescribed limit, they will cease being eligible to receive support payments. An individual cannot hold more than $5,000.00 in assets (with some exceptions, including their principal residence and a vehicle) and continue to receive ODSP. However, ODSP often does not provide sufficient income, and the restrictions on income and assets cause recipients to subsist on very little, or risk losing their ODSP. One way to address this issue is through the establishment of the Henson trust.
The essential elements of a Henson trust are: (i) that the trustee must have absolute discretion, (ii) that the assets of the trust do not vest in the beneficiary, and (iii) that there is a gift-over following the death of the beneficiary. While usually a beneficial interest in a trust is taken into account in determining an individual’s assets, the Henson trust is an exception, due to the fact that the beneficiary in this type of trust has no vested interest in the assets, nor any right to demand that the trustee pay them from the trust. As such, the beneficiary is not required to treat the trust assets as his or her own and consequently, the Henson trust provides a method of providing additional income to a disabled beneficiary without causing them to become ineligible for ODSP.
The Henson trust, however, is not a perfect solution. First, it relies on the absolute discretion of the trustee in order to meet the requirements of the trust. Because Henson trusts are often created in a will by parents of a disabled beneficiary to ensure that their child will be properly looked after, the parents are forced to repose complete trust in their chosen trustee. That trustee consequently holds a great deal of responsibility. Thus, it is vital to choose a trustee that is unquestionably trustworthy, who will prioritize the best interests of the child and will not take advantage of their position.
Second, the Henson trust cannot avoid the rules with respect to income limits for recipients. Therefore, the payments to the beneficiary from the trust still cannot exceed the income limits for ODSP. Although the trust helps to provide a guaranteed, steady income to a disabled beneficiary, they will likely still be living on quite a low income.
If a settlor of a trust has sufficient assets to provide for a disabled beneficiary, they may want to consider a regular trust arrangement, as opposed to a Henson trust. The downside of course, is that, depending on the amount of payments to the beneficiary, they may lose their eligibility for ODSP. However, it may be worth the trade-off to ensure that your loved one can live comfortably. Before making a Henson trust arrangement, talk to a trusted advisor who can help determine the best fit for you.
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In a recent judgment, the Ontario Superior Court of Justice considered whether joint account holders owe a fiduciary duty with respect to the management and operation of a joint account.
The facts of MacKay Estate v MacKay, 2015 ONSC 7429 are not unusual. Dawn MacKay (“Dawn”) was married to Tom MacKay (“Tom”) one of Annie MacKay’s (“Annie”) three sons. Annie and Dawn had a very close relationship. In early 1999, Annie made a Power of Attorney for Property in favour of Tom. Shortly thereafter, Annie, with Tom’s assistance, named Dawn as joint bank account holder. At trial, Dawn advised that she and Annie had agreed that Dawn would assist Annie with her banking and her care, as well as provide companionship, in exchange for compensation. There were no specific terms agreed to at the time.
Around 2003, Dawn began making transfers from the joint account to herself. She stated that the transfers were in the nature of compensation and were loosely based around payment of $250.00 per week for services provided. After Dawn and Tom separated in 2008, Tom commenced an action as Annie’s litigation guardian seeking an accounting, payment of monies found due, damages for breach of trust, and punitive damages. After Annie died in 2010, in 2012, Tom, as Estate Trustee, continued the action on behalf of Annie’s estate.
The main issues considered by the court were (1) whether Dawn, as a joint account holder, owed a fiduciary duty to Annie in the management and operation of the joint bank account; (2) whether Dawn breached her fiduciary duty by making payments to herself from the account; and (3) whether Dawn was liable to repay the amount of the payments made.
To determine whether there was a fiduciary relationship, the court followed the guide from Frame v Smith,  2 SCR 99, to consider whether:
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; and
iii. the beneficiary is vulnerable to or at the mercy of the fiduciary holding the discretion or power.
Based on these indicia, the court found that Dawn did owe a fiduciary duty to Annie and that Dawn had acted as a trustee de son tort. The court also found that in making the payments to herself out of the joint bank account, Dawn had not breached her fiduciary duty and that, in fact, the payments were reasonable in the circumstances.
Although this case seems to establish that it is possible for a joint bank account holder to owe a fiduciary duty, it is not entirely clear from the decision whether this finding will apply only in the context of a non-contributing individual who is added to a pre-existing account in order to assist the account holder, or whether this may apply to all those who hold bank accounts jointly.
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In 1957, Rodney Hull, Q.C. LSM began his career as a general practitioner in the area of litigation. He thereafter quickly moved into working with a true leader of the estate bar of the day, Terrence Sheard.
In an effort to become a leading expert in the field of estate law and, in particular, estate litigation, Rodney Hull, Q.C. LSM became an author of the leading textbook in the area of estate matters, Probate Practice. As one of his five children, I witnessed first hand the monumental effort that went into the various editions of Probate Practice. There were tireless hours at the dining room table writing, reviewing and editing this important work.
In addition to being a leader at the bar as an author, Rodney Hull, Q.C. LSM was a true mentor. I had the privilege of practicing with him for 18 years and I never once saw him refuse a question or turn anyone away – whether from the bar or in the firm.
He was also always very generous with his time within the community. For instance, he spent years working as a leader at his church and he raised money for a camp for disabled children – Camp Awakening. Rodney was a wonderful husband and father to his five children.
My father was also a great friend of The Honourable Roy McMurtry, OC, O.Ont, QC LSM, who is now Counsel at our firm, and for whom he raised money during his many political campaigns and community fundraising efforts. We are truly lucky to have “The Chief”, The Honourable Roy McMurtry, OC, O.Ont, QC LSM working in our offices every day, maintaining the legacy of excellence and strong legal mentorship that my father instilled in us before his passing.
At Hull & Hull LLP, one of the greatest legacies my father left for us was to work hard and never settle for second-best. My father also had a tremendous impact on the office. He was a joy to work with and he cared deeply for those around him. My dad touched everyone who had the opportunity to work with him in a special and memorable way.
On this day following the sixth anniversary of his death, I pay tribute to a great lawyer, a special mentor and a wonderful father.
Those who knew him best loved him and miss him most.
In October 2015, the Geriatric and Long-Term Care Review Committee (the “Committee”) of the Office of the Chief Coroner for Ontario released their Annual Report for 2013 and 2014 (the “Report”). The purpose of the Report is to review circumstances surrounding deaths of elderly persons that have been investigated by the Office of the Chief Coroner and brought to the attention of the Committee, with a view towards recommending preventative measures.
Over the years, the Committee has identified themes that have been consistently present in the cases they review, including “communication/documentation” and “determination of capacity and consent for treatment”.
In 2013, the Committee reviewed 26 deaths, and in 2014, they reviewed 19 deaths. The four most common areas for improvement identified in the report were:
- Medical and nursing management;
- Communication between healthcare practitioners regarding the elderly;
- Medical/Nursing documentation; and
- Use of drugs in the elderly.
The Report and the recommendations generated in each case are made available to doctors, nurses, healthcare providers, social service agencies, and others, for the purposes of death prevention awareness. The organizations and agencies to whom the recommendations have been provided, are then asked to report to the Office of the Chief Coroner within one year of receipt, and provide an update on the status of their implementation. However, the organizations are not legally obligated to implement or respond to the recommendations.
It is also noted in the Report that “[t]rends or themes may exist due to a selection bias of cases that are referred to the [Committee] for discretionary review.” The Report also states that due to “resource issues”, the Reports for 2013 and 2014 have been summarized and combined. Therefore, there are potential deficiencies and areas in which there is room for improvement.
Reducing avoidable deaths of elderly persons is a moral imperative. Although the fact that this Report exists is a step in the right direction, we should continue to appreciate the seriousness of the issue and to examine how needless deaths of elderly persons can be prevented.
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Secret and half-secret trusts are trust arrangements made between a testator and a trustee, without disclosure of the terms of the arrangement, but where an understanding exists between the parties. Secret trusts are not mentioned at all in a testator’s will. Half-secret trusts are explicitly included in a will, but the terms of the trust are not disclosed.
There are certain requirements that must be met in order to form a secret or a half-secret trust. With respect to secret trusts, there are four required elements, as per Ottaway v Norman  3 All ER 1325 at 1332 (“Ottaway v Norman”):
- An intent by the testator to subject the trustee to an obligation in favour of a beneficiary;
- Communication of that intent to the trustee;
- Acceptance of the obligation by the trustee, either expressly or implicitly; and
- The conditions are satisfied before or after execution of the will, but before the testator dies.
With respect to half-secret trusts, the timing of the communication and acceptance is different: it must occur before or at the time of execution of the will.
Due to the nature of these types of trusts, there can be issues proving their existence. Section 13 of the Ontario Evidence Act, RSO 190, C.E-23, requires corroboration.
Accordingly, as in Re Dhaliwal Estate, 2011 ABQB 279 (“Re Dhaliwal”), where the only evidence of the existence of the alleged secret trust were the affidavits of the chief beneficiaries of the trust, the required corroboration was not provided.
According to Re Snowden  CH 528, the standard of proof for proving a secret or half-secret trust is the normal civil standard (i.e. balance of probabilities).
As per Ottaway v Norman, where a secret trust fails, the trustee will be entitled to the trust property absolutely with no obligation to the beneficiary. By contrast, if a half-secret trust were to fail, there would be an automatic resulting trust in favour of the testator’s estate. The distinction is due to the fact that, in the case of a half-secret trust, the will explicitly states that the trustee has no beneficial interest in the trust property.
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