Author: Suzana Popovic-Montag
Changes made in 2016 to the Income Tax Act resulted in unfair treatment to disabled Canadians by restricting which types of trusts were eligible for a “principal residence exemption” (PRE). Now the Department of Finance has issued a letter of comfort, attempting to rectify these unfair changes.
What is the PRE?
In short, the PRE allows Canadians, when selling their principal residence, to avoid being taxed on their realized capital gains. Without this exemption, someone selling their principal residence would be taxed on 50% of their capital gains, which could be very significant when taking into account the value of the property.
Injustice with the Current Rules
The changes introduced in the Income Tax Act in 2016 meant only three categories of trusts could claim the exemption. The first was life interest trusts, the second was qualified disability trusts, and the third was inter vivos or testamentary trusts established for a minor child with one or more parents being deceased.
This definition significantly restricted the type of trusts that were eligible to claim the PRE. Because the second category, qualified disability trusts, are testamentary trusts (resulting from death), this meant that disabled taxpayers who were the beneficiaries of inter vivos trusts (not resulting from death) could not claim the exception and would have capital gains on their principal residence taxed at the highest rate.
In practice, this would result in an unexpected and significant amount of income tax being due 21 years after the creation of the trust, because after 21 years the trust will have been deemed to have disposed of its capital property. If a disabled beneficiary did not have enough funds available in the trust to pay the capital gains tax, there could be severe consequences.
In response to this problem, the Department of Finance has issued a comfort letter stating that it will make recommendations to the Minister of Finance to fix the issue. This would involve amending the Income Tax Act to permit certain inter vivos trusts to claim the PRE. This would also be subject to certain conditions. Firstly, the beneficiary needs to be a resident in Canada who is disabled (able to claim the disability tax credit). Secondly, the beneficiary must be a child, spouse, common-law partner, or former spouse or partner of the trust’s settlor. Thirdly and finally, no one other than the qualifying disabled beneficiary can receive the income or capital of the trust. If these three conditions are satisfied, the disabled beneficiary would be able to claim the tax exemption for their principal residence.
Fixing the injustice
This proposal was made recently and has not yet been implemented. Any laws that put disabled Canadians at a disadvantage, even inadvertently, ought to be changed and the injustice should be corrected. Implementation of these recommendations would be welcome and cannot arrive soon enough.
Thanks for reading,
Suzana Popovic-Montag & Sean Hess
In wills, trusts, and estates litigation, much hinges upon expert evidence. In a will challenge that is based upon alleged testamentary incapacity, both the objector and propounder of the will would be prudent to enlist a capacity assessor. A party suspicious of undue influence may wish to consult a physician, a police officer, or some other party who could be privy to abuse. In a contested passing of accounts, an expert investor can speak to the soundness of a trustee’s investments.
Though in theory expert evidence should clarify the points of contention, in practice it can sometimes render matters murkier and more uncertain. For instance, what happens if two equally distinguished handwriting experts draw opposite conclusions? What if a coroner’s findings contradict the preponderance of other evidence?
Another concern is experts’ impartiality, as evidenced by Wilton v. Koestlmaier, wherein one party unsuccessfully charged an expert witness with advocating for the other side. Courts have long been apprehensive that some experts may (perhaps unwittingly) be kinder with the parties with whom they interact and from whom they collect their bills. In 1873, Sir George Jessel, M.R., wrote:
“There is a natural bias to do something serviceable for those who employ you and adequately remunerate you. It is very natural, and it is so effectual, that we constantly see persons, instead of considering themselves witnesses, rather consider themselves as the paid agents of the person who employs them.”
One possible fix for this source of apprehension is to have both parties deal with the same expert. At the very least, litigators should not employ the same expert to too great an extent, which might appear as a “red flag”.
Courts have also looked into the timing for delivery of expert reports. The Rules of Civil Procedure prescribe that expert reports are served no less than 90 days before the pre-trial conference (or 60 days for responding parties’ reports). Oftentimes, however, parties should exchange their reports well before these deadlines, for once parties receive these reports, they have a much better idea of the relative strength of their positions, which may steer them towards settlement. In Ismail v. Ismail, Grace J. spoke to this:
“How can the parties’ lawyers advise their clients concerning settlement without knowing their case and the one they must meet? How can the parties make informed decisions?”
Too many experts can increase costs exponentially (especially if the experts are famous or from faraway places), but too few experts could lead to a scantiness of evidence. As a nice medium, the Australians have come up with the practice of “hot tubbing” experts—which, despite its fun name, does not involve splashing, shouting, or the unusual combination of horn-rimmed spectacles with bathing suits. Rather, “hot tubbing” refers to having a panel of experts questioned together, which can allow for an identification of the points of agreement and disagreement and more lively discussion.
Thank you for reading. Enjoy your day!
Suzana Popovic-Montag and Devin McMurtry
We often hear of the importance of forging and maintaining good relations with the in-laws. Hence, wishing to keep everyone united, and the spouse happy, we avert our gaze when the one in-law overindulges at the Christmas party, we bite our tongue when another in-law refers to us as “hey, you in the yellow”, and we put on a stiff smile when yet another in-law visits us on our birthday to ask for a loan. In one recent Ontario case, however, we see the grim consequences of having too good a relationship with one’s in-laws.
The cautionary case of Kent v. Kent arose from a legal dispute between the deceased’s son-in-law and her grandchildren. Perhaps unaware of her son-in-law’s inclinations towards insatiability and ingratitude, the deceased left equal shares of her home to the three eventual litigants. By and by, the son-in-law sought a declaration that he was entitled to a much larger share. He argued that since his mother-in-law had registered his late wife as a joint tenant (the transfer was gratuitous), and he and his late wife had moved in a decade after, the house “became their matrimonial home”. He relied upon subsection 26(1) of the Family Law Act:
“If a spouse dies owning an interest in a matrimonial home as a joint tenant with a third person and not with the other spouse, the joint tenancy shall be deemed to have been severed immediately before the time of death.”
The grandchildren countered with the presumption of resulting trust. According to this legal principle, despite legal ownership, property should be returned, or result, to the person who actually paid for the property (the beneficial owner). The presumption can be rebutted if the transferee can show that the transferor intended to gift the property (Pecore v. Pecore).
The Court ruled in favour of the grandchildren, finding that because the transfer was made from a parent to a child, with no consideration, the presumption of resulting trust applied. The son-in-law, who could not muster any evidence in his favour, did not rebut the presumption. The Court also ascribed significance to the Will itself:
“The provisions of the will and transfer made by Marian in July 2015 suggest that she believed that she was the sole owner of the property, and in a position to dispose of it as she did.”
This ruling might provide some comfort to those who have invited their married, adult children to live in their homes. It is a bitter fact, though, that the son-in-law’s conduct can bring no good to the reputation of in-laws, and that if his example is followed, we might see more in-laws receiving bequests of “thirty pieces of silver” or trusts comprised of stockings full of coal.
Thanks for reading!
Suzana Popovic-Montag and Devin McMurtry
As we head towards the holiday season, it is a good time to think about the past. The weather is drab and the days are short, too, so we have ample opportunity to curl up in cozy chairs – rum and eggnog in hand, perhaps – to read old books, watch history documentaries, or otherwise reminisce of that which came before us. In line with this, in today’s blog we examine a case from 1919, Muirhead Estate, Re, which includes a decision that is both intriguing and continuously relevant for estate planning.
The deceased had left a widowhood clause in his will, by which he sought to discourage his widow from marrying another. Remarry, however, she did, in the event of which the executors of the Muirhead Estate applied to the court for directions as to the construction of the following clause:
“If my wife shall remarry the share hereby bequeathed to her shall revert to my estate and be divided among my said children.”
The court had to determine if the clause violated public policy, for even in 1919, conditional gifts “in general restraint of marriage” had long been against public policy. It found that there was a distinction between a restraint of marriage and a restraint of remarriage. The former was clearly grounds for voiding a clause, but the latter was legally valid. In particular, restraining the “second marriage of a woman” was an established exception to the public policy rule. As for the second marriages of men, the court found that these may have still fallen under the umbrella of public policy, but it did not explain or elaborate why.
One hundred years hence, we see from cases such as Goodwin and Brown Estate that the decision in Muirhead Estate, Re, is still good law – though the distinction of second marriages of men and women is in all likelihood obsolete. According to the public policy rule, you cannot, through conditions in your will, prevent a beneficiary from marrying; nor can you promote marital breakdown through such conditions. If, however, you think that your widow looks best in perpetual black finery, or you have a distaste for suitors characteristic of Odysseus, the law likely allows for you to include a widowhood clause in your last will.
Happy planning – and thank you for reading!
Suzana Popovic-Montag and Devin McMurtry
Estate litigation involves risk and reward, heartbreak and vindication. Costs and other consequences often flow from the strength of litigants’ positions. Delay, however, is shared equally. In a protracted legal battle, the symptoms of delay – stress, distraction, gloomy foreboding – linger around like a shadow or a bad cold. Wary of these tribulations, the courts are increasingly focused upon smoothing and straightening, and thereby shortening, the road to decisions.
In today’s blog we explore how this shift has affected the granting of adjournments in estate litigation.
Judicial economy is not always served by the refusal of an adjournment. For example, if two proceedings are interrelated, the preliminary matter should be heard first. If an appeal is scheduled before an associated lower court motion, the appeal should be adjourned until the other has been settled, lest the courts “waste limited judicial resources and increase expense for all of the parties” (Mancinelli v. Royal Bank of Canada,  O.N.S.C. 1526 at para. 5).
Reasons for granting adjournments include the ill health of a party, the emergence of new issues, and “to permit the appellants to file fresh evidence” (Morin v. Canada,  F.C.T. 1420 at para. 11). Courts are also more inclined to adjourn when the other party is not prejudiced by such a request. If there is an urgent need for resolution of the dispute – in the estates context, for instance, when an estate has been tied up for years, to the detriment of the beneficiaries – an adjournment could be denied. Other factors which may lead to the denial of a request for an adjournment consist of “a lack of compliance with prior court orders, previous adjournments … the desirability of having the matter decided and a finding that the applicant is seeking to manipulate the system by orchestrating delay” (The Law Society of Upper Canada v. Igbinosun,  O.N.C.A. 484 at para. 37).
Long waits and swollen court bookings have influenced today’s judicial decision-making. Judges are more inclined, progressively, to punish vexatious litigants, encourage parties to settle, and employ other strategies that are conducive to easing the strain on the courts. Much as the courts have emphasized the need to expedite decisions, however, the adjournment is still a mainstay in the judicial tool belt:
Perhaps to the chagrin of those opposing adjournments and indulgences, courts should tend to be generous rather than overly strict in granting indulgences, particularly where the request would promote a decision on the merits. (Ariston Realty Corp. v. Elcarim Inc.,  CanLII 13360 (O.N.S.C.) at para. 38).
In other words, fast adjudication should not compromise fair adjudication.
Enjoy the rest of your day, and thanks for reading.
Suzana Popovic-Montag and Devin McMurtry
Lewis v. Lewis is a recent Ontario Court of Appeal decision in which the Appellants challenged the dismissal of their Application from the Superior Court of Justice. At issue was whether the Appellants’ mother, Marie Lewis, had the requisite capacity to execute new powers of attorney for property and personal care. The Appellants sought to invalidate the new powers of attorney and bring back into effect prior powers of attorney which Mrs. Lewis executed in 1995.
The Appellants raised several issues on appeal. In essence, they took issue with the application judge’s assessment of the evidence and exercise of his case management discretion.
In dismissing the appeal, the Ontario Court of Appeal emphasized the following principles regarding capacity:
- Since capacity is presumed, those objecting to the document(s) have the onus to rebut that presumption, with clear evidence, on a balance of probabilities.
- Similarly, those raising the issue of suspicious circumstances and undue influence bear the onus of establishing it, on a balance of probabilities.
- The fact that someone had various chronic medical conditions throughout their life does not automatically mean that they lacked capacity. It is open to the application judge to consider the evidence. In doing so, the application judge may reject any evidence that they find to be unreliable.
- Without evidence to the contrary, it is reasonable for an application judge to take “solace” from the fact that the individual executed their new powers of attorney before their solicitor of many years.
- It is reasonable for an application judge to refer to the statements of section 3 counsel, appointed by the Office of the Public Guardian and Trustee, concerning an individual’s expressed wishes.
Good things to keep in mind when dealing with capacity issues.
Thanks for reading … Have a great day!
Suzana Popovic-Montag and Celine Dookie
In the spirit of the season, we take this opportunity to explore potential estates issues with respect to age-old Halloween stories, supposing they occurred in Ontario.
Spawned from historical and mythic accounts of Vlad the Impaler and reimagined in Bram Stoker’s classic, Dracula is the prototypical vampire – debonair and inconspicuous gentleman by day, bloodthirsty and puissant ghoul by night – a personification of evil. With such notoriety, it is unsurprising that his estate is fabulous. Once Dracula is deceased (from a silver bullet), his estate trustee could liquefy all the treasures he has accumulated through the ages. And there is no doubt that his castle, with its grand halls, ornate architecture, and scenic view of the Transylvanian mountains, would be worth a fortune. But what of the beneficiaries? If Dracula has a will, surely it would have some foul purpose that would be voided on public policy grounds. Applying the laws of intestacy, then, we would look for Dracula’s spouse and next of kin, but being as his life goals were far from romantic and familial, it is most probable “that the property becomes the property of the Crown, and the Escheats Act, 2015 applies” (Succession Law Reform Act, s. 47(7)).
Mary Shelley’s Frankenstein illustrates how social alienation can lead to monstrosity (a subject explored more subtly than in Joker), but in film and popular culture it is best remembered as a warning against science going too far (i.e., the wakening of an uncontrollable force, akin to the Jewish golem and symbolic of nuclear warfare). Now we must imagine that Dr. Frankenstein’s estate would be less than the Mummy’s (what with all the riches in an Egyptian crypt), but much as Dr. Frankenstein might port the shabby dress of a man in his station, we should not doubt that a mad scientist can accumulate valuable assets. Since the wretch probably does not have legal personhood, however, any bequest from Dr. Frankenstein to his creation would probably have to be in the form of a charitable donation (similar to the woman who gave everything to dogs, as we blogged about here). But then we must wonder if the wretch were exercising undue influence on Dr. Frankenstein … There is also the question of claimants against the estate, for the wretch’s many victims would be expected to sue.
Hansel and Gretel
The Brothers Grimm memorialized this cautionary tale about two children who get lost in the woods and end up the captives of an evil witch. In the aftermath of the children outsmarting and destroying their captor, the question arises: what will happen to her gingerbread house and other candy assets? We may infer that her will would be invalid, for a cannibalistic witch cannot be said to be operating with a sound enough mind to meet the threshold for testamentary capacity. In any case, the children could claim dependant support according to section 58(1) of the Succession Law Reform Act, for they were being fed (especially Hansel) large quantities of candy and were provided with shelter. And if estate litigation were to ensue, the Ontario Children’s Lawyer would likely have to get involved: Hansel and Gretel, precocious as they may be, are still children.
Suzana Popovic-Montag and Devin McMurtry
Disinheritance has long been a subject replete with interest. Is it a doleful mishap, a strange whim rooted in spite, a tragedy, or is it just desserts and a shield by which elderly persons can impose good behaviour on their successors? Charles Dickens was fascinated with the subject. From Great Expectations to Martin Chuzzlewit, many of his tales include fabulously wealthy testators, parasitical and destitute minor relatives, wronged rightful heirs, family bonds eroded by greed, artifice and deception – and often, in the end, a just outcome. Similar to how the poignancy of this theme stirred Dickens’ readers, aggrieved disinherited parties are often so stirred, to put it mildly, that they commence all-out legal warfare – quenching their scorn with the costly and sometimes blackened bread of estate litigation.
From the testator’s point of view, there is no foolproof method of disinheriting a child. It certainly helps if the child is not dependent, is an adult, has no basis for expecting anything, and there is a forceful, probative reason for the disinheritance (i.e. “so-and-so didn’t let me see my grandchildren”). It might be a good idea for a testator to explicitly state that he or she is disinheriting a child, lest the child later make the argument that the omission was a slip-of-the-mind rather than deliberate disinheritance. The testator may also include a clause explaining the rationale, though this can be dangerous – disinheriting someone out of racism (Spence v. B.M.O. Trust Company,  O.N.S.C. 615 at paras. 49-50).
Some drafting solicitors may suggest giving a small, nominal amount to the otherwise disinherited child – to partially appease the child, appear more moderate to a judge, or otherwise “save face”. The problem with this, however, is that as soon as someone is a beneficiary, he or she may be able to invoke beneficiary rights, such as objecting to the passing of accounts.
As for disinherited children, they may have legal recourse, such as section 58(1) of the Succession Law Reform Act, which gives the court discretion to determine if “adequate provision” has been made for a testator’s “dependants”. In Tataryn v. Tataryn Estate,  2 S.C.R. 807, the Supreme Court overturned the explicit disinheritance of a son and wife because it found that the testator failed his “moral obligation” to provide for them. If a dependant support claim leads nowhere, a disinherited child can always challenge the will, for the wellspring of arbitrary disinheritance is often incapacity or undue influence.
It is hard to lose a parent. Hard, too, is the loss of an inheritance. Keeping this in mind, testators who wish to prevent a conflagration of litigation might opt not to light the spark of disinheritance. If they feel the circumstances demand it, however, they should work with their estate planners to fortify their legal positions against the storms which might otherwise gather.
Thank you for reading,
Suzana Popovic-Montag and Devin McMurtry
Failing to account for monetary and personal digital assets in your will could have devastating consequences for your surviving family members, Toronto trusts and estates lawyer Suzana Popovic-Montag tells Maclean’s magazine.
Avoiding Common Errors in an Application for a Certificate of Appointment of Estate Trustee With a Will
Commencing an Application for a Certificate of Appointment of Estate Trustee With a Will is the first step in having a court formally declare a will as valid. This process was formerly known in Ontario as “probate”.
While these Certificates are not mandatory, some banks and financial institutions may require an Estate Trustee to obtain a Certificate in order to deal with estate assets. Aside from this, a Certificate is usually required in instances where:
- the estate is large;
- the assets cannot be easily transferred; and
- real property forms part of the estate.
Avoiding Common Errors
Although the Application for a Certificate of Appointment of Estate Trustee With a Will is fairly short in length and seems straightforward, it is rare for these Applications to be approved upon their first submission. In the majority of cases, they are returned for corrections.
In order to assist applicants in completing their forms, the Ministry of the Attorney General released the following guidelines that highlight some common errors in these Applications:
- An Affidavit of Execution of Will or Codicil (Formed 74.8) signed by one of the witnesses to the will must be filed together with the original will, which will be marked as “Exhibit A” to the affidavit.
- If there is no affidavit of execution and both witnesses cannot be found or have died, an affidavit attesting to the signature of the testator must be filed. Ideally, the affidavit should be made by someone who is familiar with the testator’s signature.
- On Form 74.4 “Application for a Certificate of Appointment of Estate Trustee With a Will (Individual Applicant)”, the question under section 5 regarding an election of the Family Law Act should only be answered if the applicant is the spouse of the deceased.
- If the will states that someone other than the applicant has the right to apply for the Certificate of Appointment of Estate Trustee (or succeeding estate trustee), that person must give up their right by completing Form 74.11 “Renunciation of Right to a Certificate of Appointment of Estate Trustee (or Succeeding Estate Trustee) With a Will.”
- This must be indicated on the Application (Form 74.4) and on Form 74.13 “Certificate of Appointment of Estate Trustee With a Will.”
4. If the applicant is not named as Estate Trustee in the will, they must obtain consent to their appointment from the beneficiaries who make up a majority share of the assets of the estate.
5. If an Estate Trustee who is named in the will or codicil is not the applicant due to death or renunciation, this should be indicated on the Application (Form 74.4) and on Form 74.13.
- If a will and/or codicil refers to a memorandum, the memorandum must be filed with the court.
- If the memorandum cannot be found, an affidavit indicating this must be filed, along with the efforts made to locate it.
- All beneficiaries named in the will must be served with Form 74.7 “Notice of an Application for a Certificate of Appointment of Estate Trustee With a Will.”
- If a beneficiary has not been served, an explanation must be given in Form 74.6 “Affidavit of Service of Notice” as to why.
- Form 74.7 must be marked as “Exhibit A” to Form 74.6 “Affidavit of Service of Notice.”
- The original will should be marked as “Exhibit A” to the affidavit in the Application (Form 74.4).
- If Form 74.8 “Affidavit of Execution of Will or Codicil” is not submitted, an affidavit must be filed with the Application that explains this and sets out the efforts made to find the people who witnessed the testator sign their will.
- On Form 74.13 “Certificate of Appointment of Estate Trustee With a Will”, the address of the court should be typed under the Registrar’s signature line.
- The date should not be filled in on this Form;
- A plain, unmarked copy of the will should be filed; and
- The court will impress a seal upon the Certificate of Appointment and the copy of the will attached.
To read the full article from the Ministry of the Attorney General about how to avoid common errors in applying for a Certificate of Appointment of Estate Trustee, visit this link.
Thanks for reading!
Suzana Popovic-Montag and Celine Dookie