As 2020 begins to wind down and mercifully come to an end, we are reminded of new rules coming into force for administrators of trusts beginning January 1, 2021.
As part of its 2018 federal budget, the Government of Canada introduced new tax return filing and information reporting requirements for trusts. Currently, a trust must file a T3 return if it has tax payable on its assets, or income or capital is distributed to beneficiaries.
Going forward, the Canada Revenue Agency (CRA) will begin to collect detailed information on the identity of all trustees, beneficiaries and settlors, as well as any person who has the ability to apply control over trustee decisions about appointment of income or capital. This information includes the name, address, date of birth, jurisdiction of residence, and taxpayer identification number (“TIN”). This information must now be filed with a T3 return.
For some trusts, a T3 return may never have been required before, for others, these new reporting requirements could prove very onerous. Trustees and administrators are encouraged to plan ahead and seek the advice of a tax professional as non-compliance carries significant penalties of around $2,500.00 on top of any existing penalties.
When it comes to estate planning, the new rules will affect most express trusts, and settlors preparing their testamentary documents should also seek the advice of a planning professional. Especially as it is yet unknown how the new rules may affect the use of secret and semi-secret trusts.
Oosterhoff on Trusts (9th ed.) reminds us that with a secret trust, “the Will neither discloses the existence of the trustee, nor the beneficiary,” and under a “semi-secret trust, the Will discloses the existence of the trustee, but not the beneficiary” (p.830).
We are expecting the CRA to issue clarification and guidance in the coming months as the new rules yield a host of as yet unanswered questions, namely: By seeking out personal details from beneficiaries, does a trustee then risk breaching the terms of a trust that was settled on terms meant to stay private? Is there a risk of increased non-reporting through the use of secret trusts? And what happens if the required information is not available, or withheld?
As our managing partner, Suzana Popovic-Montag told the Law Times in February of this year, “There has been a historical lack of transparency in the administration of trusts and estates, and governments are now taking an interest in the use of these tools in the transfer of assets for taxation purposes.” Beyond the questions raised above, Suzana goes on to say that we should “‘expect concern surrounding privacy issues’ any time there are new or enhanced disclosure obligations.”
The federal government is looking to crack down on aggressive tax avoidance, and beginning January 1, 2021, a new era of disclosure will begin. While the full picture is not yet completely clear, we will keep you posted.
Thanks for reading!
Ian Hull and Daniel Enright
 The TIN includes a social insurance number for individuals, a business number for corporations and partnerships, or an 8 digit trust account number issued by CRA to trusts.
Sometimes there is a grey area when it comes to a person’s loss of capacity, and the time when his or her attorney for property first began to act on an incapable’s behalf. In such a situation, it can be difficult to determine the starting date for an attorney’s fiduciary accounting period.
The recent decision of The Public Guardian and Trustee v Willis at al, 2020 ONSC 3660, dealt with this kind of situation. One of the issues was whether the respondent should be required to pass his accounts for the period before he became the attorney for property for his mother, Mrs. Willis.
The respondent was his mother’s only living child, and was acting as her attorney pursuant to a power of attorney for property dated May 2, 2018. Mrs. Willis was assessed as incapable of managing her property in September 2018, but the decision notes that she had been “clearly suffering from some cognitive deficits prior to June 2018”.
The Public Guardian and Trustee (the “PGT”) sought to have the respondent provide an accounting back to January 1, 2015, because the respondent had arranged several mortgages on his mother’s behalf in that period. The respondent, however, only agreed to pass his accounts starting from May 2, 2018 when he became his mother’s attorney for property. One of the main reasons that the respondent did not want to pass his accounts prior to that period was due to the expense, because it was clear that Mrs. Willis was insolvent, and the respondent would likely have to personally bear the costs of passing his accounts. The PGT clarified during the hearing that it was not seeking court format accounts for the period from 2015-2018, but only “justifiable explanations of money coming in and out of his mother’s RBC account and how mortgage advances were spent plus all relevant disclosure.”
The court found that the respondent had assisted his mother with paying bills and arranging mortgages prior to the time that she was assessed as incapable. It was also noted in the decision that there was “no doubt” that even while Mrs. Willis was capable, she was unsophisticated, vulnerable, and relied on the respondent. The respondent also had access to his mother’s bank account before January 1, 2015.
The court held that, even if an individual is not specifically appointed in a fiduciary role (such as an attorney) one must look at the types of duties that the individual was carrying out to determine if they were acting in a fiduciary capacity. On this basis, the court found that the respondent had been acting as a fiduciary for Mrs. Willis for some time, and determined that he should provide detailed explanations of financial transactions upon the PGT’s request from January 1, 2015 to May 1, 2018 (in addition to the passing of accounts to which the respondent had consented starting from May 2, 2018).
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Trustees may be cautious or uncertain when administering trusts, even when the trust deed gives them unfettered discretion in carrying out their duties.
In Ontario, trustees are able to seek advice and directions from the court under section 60 of the Trustee Act and also seek advance approval of various exercises of discretion in administering a discretionary trust. The jurisdiction of the Court to approve the exercise of discretion by trustees was formally recognized in Public Trustee v. Cooper  WTLR 901, a decision of the High Court of Justice in the UK. These orders are often referred to as “Cooper orders”. However, trustees must consider when it is appropriate to involve the Court in decisions that should be made by trustees.
Justice Hart in Cooper outlines instances in which trustees can seek directions from the Court. He states that parties may seek to obtain the blessing of the Court for a “momentous decision” that they have resolved to make in the trust’s life. As long as the proposed course of action is within the proper exercise of the trustees’ powers and where there is no real doubt as to the nature of the trustees’ power, the Court may make a declaration that the trustee’s proposed exercise of power is lawful. The Courts have made it clear that they will not exercise discretionary powers on behalf trustees.
Cooper Orders have been successfully sought in Canada. In Toigo Estate (Re) 2018 BCSC 936, the Trustees of an Estate sought the Court’s declaration that their exercise of discretion was lawful. The deceased created a spousal trust which permitted the trustees uncontrolled discretion to encroach on the capital of the estate in favour of his wife. After his wife’s death, the residue of the estate was to be divided amongst the deceased’s children and grandchildren.
The wife asked the trustees for a significant encroachment. The trustees had uncontrollable discretion to make the encroachment. However, they still wanted the Court’s “opinion, advice or direction” as to whether they should proceed.
The Court held that because of the magnitude of the encroachment, the Court could provide advice on this “momentous decision”. In making the decision, the court asked the following questions:
- Does the trustee have the power under the trust instrument and the relevant law to make the “momentous decision”?
- Has the trustee formed the opinion to do so in good faith and is it desirable and proper to do so?
- Is the opinion formed by the trustee one that a reasonable trustee in its position, properly instructed, could have arrived at?
- Is the Court certain that the decision by any actual or potential conflicts of interest?
Ultimately, trustees need to consider whether it’s suitable in their circumstances to apply to the court for a stamp of approval when taking drastic or “momentous” action.
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Recently, the Ontario Court of Appeal ruled that even where a gift is not validly executed, the intention of the parties can still be fulfilled through a bare trust.
A father made a profitable investment that was held by his wife in trust for their three children in equal shares. One brother sold his share of the investment, so that the remaining portion of the investment was to be divided 50/50 between his brother and sister. The sister subsequently disclaimed her share of the investment for tax reasons, with the result that her share reverted back to the mother. It was understood and orally communicated that the mother would hold the investment and gift the income from the investment to the sister, with the principal coming back to the sister as part of the mother’s inheritance. When the mother was eventually declared incapable and the brothers became their mother’s Attorneys for Property, they were suspicious of this arrangement between their mother and their sister, and brought an action against the sister and her husband.
The main issue was whether the past and future proceeds of the investment had been validly gifted by the mother to the sister, and whether the sister’s husband, who had assumed responsibility for using the proceeds, was liable as trustee de son tort.
In the initial ruling, the application judge rejected the sister’s claim to the funds and held that the gift from the mother was invalid. Funds had been transferred by the mother to the sister through signed blank cheques. A valid gift requires delivery from the donor to the recipient (Bruce Ziff, Principles of Property Law, 6th ed. (Toronto: Carswell, 2014); Teixeira v. Markgraf Estate, 2017 ONCA 819, 137 O.R. (3d) 641, at paras. 38, 40-44), and the gift was not considered delivered until the cheque had been cashed. In this case, by the time the cheques were cashed by the sister, the mother had been declared incapable and lacked the capacity to gift. The judge ruled that the money belonged to the mother, and that the sister and her husband had to account for it, and the husband was liable as trustee de son tort.
This result was overturned recently in the Court of Appeal. The court found that the applicable legal mechanism here was not a gift, which was invalid, but instead was a valid bare trust. A bare trust is where the trustee has no obligations other than to convey the trust property to the beneficiaries on their demand (Donovan W. M. Waters, Mark R. Gillen & Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012) at pp. 33-34).
The decision turned on whether there had been sufficient certainty of intention from the mother to create a bare trust, and the court found that there had been. The trust did not have to be formally evidenced in writing because the trust property was funds in a bank account and not land or an interest in land (Statute of Frauds, R. S. O. 1990, c. S.19, ss. 4, 9-11; see also In the Estate of Jean Elliott (2008), 4 E. T. R. (3d) 84 (Ont. S. C.) at para. 42.). There was sufficient evidence in the conduct of the parties to show an intention for the funds to be held for the sister as well as one of her brothers in equal shares, and the certainty of intention for the mother to hold the money as bare trustee was satisfied. As there was a valid trust, the husband was not liable as trustee de son tort because he had not acted inconsistently with the terms of the trust. While the proceeds that had already come from the investment were held on bare trust by the mother, the future distributions from the investment were not, as future property cannot be the subject matter of a trust (para. 58 and 84 of the judgment).
Moral of the story
This is a great indicator of how, when a gift is invalid, the court will use the legal mechanism of a bare trust to give effect to the intention of the parties, so long as their intention is sufficiently certain.
Thanks for reading,
Ian M. Hull and Sean Hess
This week on Hull on Estates, Stuart Clark and Kira Domratchev discuss the decision of Nelson v Trottier, 2019 ONSC 1657, and the legal obligations of the survivor in circumstances where there is a mutual wills agreement.
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
In the past, in estate litigation matters, it was often the case that some or all of the litigating parties’ costs would be paid out of estate assets. However, in more recent years, the courts have been moving away from this general practice, and increasingly making costs awards providing for the payment of costs by one of the parties, personally. In particular, if the court views a party, including an estate trustee, to have behaved improperly or unreasonably, it may decide that such a party must pay the other party’s costs, personally. We have blogged about instances of such an outcome before.
A recent decision of the Ontario Superior Court of Justice has reaffirmed this general trend. The decision in Ford v Mazman, 2019 ONSC 542, involved a motion to pass over the named estate trustee, and appoint the two sole beneficiaries of the estate in question, as estate trustees. Although the named estate trustee and the beneficiaries were initially on good terms, within several months of the testator’s passing, the relationships began to break down, with the estate trustee beginning to make accusations towards the beneficiaries, in relation to the testator. The court found that it was “not a case of mere friction—this is a case of outright hostility from [the estate trustee] to the beneficiaries”, also commenting that it was difficult to fathom why the estate trustee acted as she did, and that her accusations were unwarranted. Ultimately, the court made an order passing over the estate trustee.
After the parties were unable to reach an agreement as to costs, the court made an endorsement in this regard in Ford v Mazman, 2019 ONSC 1297. After a discussion of the costs principles applicable to estate litigation, the court stated as follows:
“I am mindful that an estate trustee should be fully compensated for any reasonable costs incurred in the administration of the estate. However, the actions of the [estate trustee] are far from reasonable. I was not provided any rationale as to why her animus became necessary in the administration of her good friend’s estate.”
Ultimately, the court made a costs award in favour of the beneficiaries, payable by the estate trustee, personally.
This costs decision serves as an important reminder that parties entering into estate litigation proceedings should not count on their costs being paid out of the estate. Additionally, even though the estate trustee’s conduct in this case appears to be extreme, litigants should still keep in mind the importance of acting reasonably.
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The Supreme Court of Canada’s recent decision in Moore v Sweet provided meaningful clarification on the Canadian law of unjust enrichment and, in particular, the juristic reason analysis.
As it made a finding of unjust enrichment, it was not necessary for the Court to consider the second issue before it, being whether, in the absence of unjust enrichment, a constructive trust could nevertheless be imposed in the circumstances on the basis of “good conscience”.
In 1997, the Supreme Court released its decision in Soulos v Korkontzilas. That case considered situations that may give rise to a constructive trust remedy. In referring to the categories in which a constructive trust may be appropriate, which were noted to historically include where it was otherwise required by good conscience, Justice McLachlin (as she then was) stated as follows:
I conclude that in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation…Within these two broad categories, there is room for the law of constructive trust to develop and for greater precision to be attained, as time and experience may dictate.
Since 1997, Soulos and the above excerpt have been interpreted inconsistently by scholars and courts of appeal throughout Canada. Some consider Soulos to restrict the availability of constructive trust remedies to only situations where there has been a finding of unjust enrichment or wrongful conduct, while others favour a more liberal interpretation.
The appellant in Moore v Sweet sought, in the alternative to a remedy on the basis of unjust enrichment, a remedial constructive trust with respect to the proceeds of the life insurance policy on the basis of good conscience. In choosing not to address this issue, Justice Côté (writing for the Majority) stated as follows:
This disposition of the appeal renders it unnecessary to determine whether this Court’s decision in Soulos should be interpreted as precluding the availability of a remedial constructive trust beyond cases involving unjust enrichment or wrongful acts like breach of fiduciary duty. Similarly, the extent to which this Court’s decision in Soulos may have incorporated the “traditional English institutional trusts” into the remedial constructive trust framework is beyond the scope of this appeal. While recognizing that these remain open questions, I am of the view that they are best left for another day.
It will be interesting to see if and when the Supreme Court ultimately chooses to determine “the open questions” regarding the availability of the remedial constructive trust. Until then, it appears that some debate regarding the circumstances in which it may be imposed will remain.
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Multiple wills are an extensively used estate planning tool designed to reduce the amount of Estate Administration Tax payable. Essentially, the grant of a Certificate of Appointment is limited to the assets referred to in the will that is being probated, and Estate Administration Tax is only paid on the assets falling under the will that is being probated.
This estate planning strategy was tested and approved by the courts in Granovsky Estate v. Ontario.
Where there is only one will, can similar probate fee/administration tax savings be accomplished by applying for a limited grant? According to the Manitoba Court of Appeal decision of Pollock v. Manitoba, the answer is NO.
In Pollock, the deceased died leaving personal property, mainly shares in privately held corporations, having a value of about $12.5m, and real property having a value of $1m. Probate was required to deal with the real property, but not required to deal with the shares. If probate could be obtained in relation to just the real property and not the value of the shares, the estate would save $75,000 in probate fees. (Using current Estate Administration Tax rates in Ontario, the saving under such a scheme would be $187,500!)
The Manitoba legislation allowed the administration of an estate of a deceased person to be limited to certain assets “as the court thinks fit”. The Manitoba Court of Appeal considered a long line of cases dealing with the issue and concluded that the court must have a “strong reason” for making a limited grant, and stated “I do not regard the saving of probate fees as a sound reason for making a limited grant of probate. An applicant for a limited grant is, of course, entitled to take the least expensive way of administering an estate, but the chosen way must be one permitted by the legislation. The saving of probate fees is not, as I see it, a sufficiently strong reason to justify a limited grant. Nor is a limited grant a money-saving device contemplated by the legislation.”
In Ontario, the Rules of Civil Procedure specifically allow for limited grants. However, the grant is “limited to the assets referred to in the will”: Rule 74.04(1). Thus, in Ontario, if there is only one will, the result would be as in Pollock: even if probate of the will was needed in order to deal with only one asset, Estate Administration Tax would need to be paid on all assets of the estate.
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Alberta recently passed legislation which will allow for the use of Henson trusts in estate planning in the province. Although Henson trusts are commonly used in Ontario, prior to this new legislation, the law in Alberta provided that the value of an individual’s interest in a trust was to be included in calculating his or her assets for the purpose of determining eligibility under Alberta’s Assured Income for the Severely Handicapped (“AISH”) program, thus preventing the effective use of Henson trusts.
A Henson trust is a type of trust often used here in Ontario in situations where a beneficiary is a recipient of The Ontario Disability Support Program (“ODSP”). An individual’s eligibility for ODSP is determined based on his or her income and assets. The Henson trust has emerged as a strategy to provide for a disabled beneficiary without compromising his or her eligibility to receive ODSP benefits.
The regulations to the Ontario Disability Support Program Act, 1997, S.O. 1997, c. 25, Sched. B provide that if a person has a beneficial interest in a trust that is derived from an inheritance or proceeds of a life insurance policy, provided that it does not exceed $100,000.00, this interest will not be included in calculating his or her assets. On the other hand, a Henson trust is not restricted as to size, as it is set up to be fully discretionary, such that the beneficiary does not have a vested interest in the trust.
A Henson trust would usually be set up such that the beneficiary who is a recipient of ODSP is the subject of the trustee’s absolute discretion to make distributions to him or her. Upon the beneficiary’s death, there will typically be a gift-over to a person or entity other than the disabled beneficiary. As the disabled beneficiary is not entitled to any assets from the trust (given the trustee’s absolute discretion), it is not considered to be an asset of his or hers. The trustee of a Henson trust should still be mindful in making discretionary distributions to the disabled beneficiary, so as not to exceed the maximum annual income receivable by them, and possibly risk disentitling the beneficiary to ODSP benefits.
As discussed in this article, Alberta recently passed An Act to Strengthen Financial Security for Persons with Disabilities (SA 2018, c 12), which provides that a person’s interest in a trust is not to be included in the calculation of that person’s assets for the purpose of AISH, and repeals the section of the regulations which previously allowed for the inclusion of a trust interest in this calculation. As noted in the article, this will now allow for the use of Henson trusts in Alberta, and provide more flexibility in estate planning where a disabled beneficiary is receiving government support.
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The Substitute Decisions Act, 1992, S.O. 1992, c. 30 (the “SDA”), governs, among other things, the appointment of guardians for incapable persons. There are two types of guardians: a guardian for property and a guardian for personal care.
Sections 22(1) and 55(1) of the SDA provide that the Court may, on any person’s application, appoint a guardian of property or of the person, for a person who is incapable of managing property or personal care if, as a result of the said incapacity, it is necessary for decisions to be made on his or her behalf.
In order to appoint a guardian for someone, the Court will need to make a finding of incapacity for that person. This is an important hurdle, and the Court will generally need to see evidence that the person in question has been assessed as incapable of managing property and/or personal care prior to making a finding that he or she is incapable.
Depending on the circumstances, a person may submit to a capacity assessment voluntarily. However, according to section 78(1) of the SDA, if a person refuses to be assessed, an assessor shall not perform the assessment. Section 79 of the SDA allows the Court to order that a person be assessed, provided that the Court is satisfied that there are reasonable grounds to believe the person is incapable. Additionally, to obtain a Court Order for an assessment, there must be a proceeding under the SDA, in which the person’s capacity is in issue. The Ontario Court of Appeal in Neill v Pellolio, 2001 ONCA 6452 held that there is no stand-alone relief available for an Order for a capacity assessment in the absence of an application brought under the SDA. Accordingly, obtaining a finding of incapacity from the Court may not be a simple endeavour.
The SDA also has in place measures to protect an individual’s decision-making rights from undue restriction. Sections 22(3) and 55(2) state that the Court shall not appoint a guardian if it is satisfied that the need for decisions to be made will be met by an alternative course of action that does not require the Court to find the person incapable, and is less restrictive of the person’s decision-making rights than the appointment of a guardian.
Accordingly, for example, if a person has already granted a power of attorney, allowing the named attorney to act would constitute a less restrictive course of action which also does not require the Court to make a finding of incapacity in order for decisions to be made for an incapable person. Furthermore, if a person is incapable of managing their property or personal care, but remains capable of granting a power of attorney, that would likely also constitute a less restrictive course of action, and would allow that person to exercise their decision-making rights.
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