Howard J. Feldman made a presentation on the circumstances where a net family property ("NFP") equalization can set aside an estate feeze. He also discussed structuring the estate freeze transaction to qualify as an exclusion from the transferee child’s NFP.
To refresh: the classic estate freeze is a transaction involving a business-owning parent and his or her child. The parent transfers the equity shares in the business to the child but retains control of the company through preferential shares ("prefs"). The prefs have a fixed redemption and liquidation value, so all capital growth is with the equity shares transferred to the child. The parent "freezes" his own level of equity in the business, leaving future capital growth to the child. The goal is to avoid the child receiving the equity in the company on the parent’s death, because the capital gains tax liability would presumably have grown significantly. Capital gains tax is payable when the parent transfers the shares under the estate freeze transaction, but presumably smaller than it would be on the parent’s death.
The problem is that an estate freeze during the transferor parent’s marriage potentially removes assets from that parent’s property for the purposes of the NFP equalization. This can conflict with the philosophy of the NFP equalization payment, which is that marriage is a partnership and spouses’ collective increase in net worth during the marriage should therefore be evenly divided between the spouses at the end of the marriage. The parent’s subsequent death or divorce can trigger a challenge by the spouse of the estate freeze.
Among Mr. Feldman’s points and recommendations:
- the form of the transaction and relevant documents is critical (see the paper for reasons)
- the solicitor must have a well-documented file and written instructions from the client, due to the risk of the transaction being challenged
- Declarations to Revenue Canada and financial institutions are not considered binding in family law
- a gift of shares under a corporate reorganization may not excluded where there is not family trust, but beware that sooner or later the leading cases may be overturned (with a plethora of qualifications and circumstances detailed in the paper)
- gifting shares or the cash to buy the shares are subject to numerous, complex considerations (no pun intended)
This barely scratches the surface of the summary and recommendations. It is well-worth the read. The entire Six-Minute Estates Lawyer 2009 program can be purchased here.
Have a good day,
A Mareva injunction is a court order that freezes the assets of individuals or companies. It can be obtained without notice to the target individuals and/or companies and can then be extended on notice.
Mareva injunctions are usually employed in civil actions, typically situations involving fraud, where a plaintiff seeks to prevent a defendant from dissipating assets or removing them from the jurisdiction, pending final determination of the plaintiff’s action.
In Will challenge proceedings, particularly involving large complex estates, a Mareva injunction may be of use in cases where there is a high risk of dissipation or removal of contested assets by one or more parties to the proceedings, thus defeating the purpose of the Will challenge.
A party seeking a Mareva injunction without notice to other affected parties must make out a strong case of dissipation or removal of assets, through sworn evidence. There is also a duty of full and frank disclosure of all material facts and law, given that the affected parties are not able to defend against the injunction at first instance. Finally, the party seeking the injunction must give an undertaking as to damages. That is, the party must undertake to pay damages to the affected parties in the event that it is subsequently determined by a Court that the Mareva injunction should not have been granted. In Ontario, further to Rule 40.02, a Mareva Order obtained without notice is valid for ten days. It can then be extended by a Court, on notice to the affected parties. An affected party, once it receives notice, may immediately move to quash the injunction.
A Mareva Order may prove a valuable tool in preserving contested estate assets in Will challenge proceedings.
Have a great day!
Bianca La Neve