Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
OVERVIEW ................................................................................................................................................ 5
What is a Trust? ...................................................................................................................................... 5
Common Definitions ............................................................................................................................. 6
Why a Trust? ........................................................................................................................................... 6
Dispositive Discretions ......................................................................................................................... 7
Tax Avoidance ...................................................................................................................................... 8
Part 1: FUTURE INTERESTS .................................................................................................................. 9
A - General............................................................................................................................................... 9
Vested in Interest .................................................................................................................................. 9
Types of Future Interests..................................................................................................................... 10
Reversions ...................................................................................................................................................... 10
Remainders ..................................................................................................................................................... 10
Executory Interests ......................................................................................................................................... 11
B - Rule Against Perpetuities (RAP) ................................................................................................... 11
Overview ............................................................................................................................................. 11
Christ’s Hospital v. Grainger 1849 Eng No RAP where contingent gift btwn charities .......................... 12
Life-in-Being (LIB) ............................................................................................................................ 12
Perpetuities Act s. 6 – DEF’N of Perpetuity Period ....................................................................................... 12
STEP 1 - Certainty and Wait & See .................................................................................................... 13
(OLD) Rule of Initial Certainty ...................................................................................................................... 13
(NEW) Perpetuities Act s. 4 WAIT & SEE .............................................................................................. 13
Perpetuities Act - Other Certainty Provisions ................................................................................................. 14
STEP 2 - Age Reduction Rules ........................................................................................................... 15
RAP Applied to Condition Subsequents ............................................................................................. 16
STEP 3 - Class Closing Rules ............................................................................................................. 16
(OLD) Common Law ..................................................................................................................................... 16
(NEW) Andrews v. Partington ....................................................................................................................... 17
Perpetuities Act s. 8(2) and (3) - Where Wait & See & Age Reduction insufficient: .................................... 17
PROBLEM SOLVING RULES.......................................................................................................... 18
RAP applied to General and Special Powers of Appointment (NOT EXAMINABLE)..................... 25
Saunders v. Vautier (the other way to end the trust) ........................................................................... 26
C - The Rule Against Indestructibility ................................................................................................ 27
D - The Rule Against Accumulations .................................................................................................. 28
Part 2: TRUST CREATION .................................................................................................................... 31
1 - Consideration ................................................................................................................................... 31
2 - Form.................................................................................................................................................. 31
Trust by Declaration ........................................................................................................................... 31
Trust by Transfer................................................................................................................................. 31
Gift ...................................................................................................................................................... 32
3 - Subject Matter ................................................................................................................................. 32
1 - Requirement of Property................................................................................................................ 32
2 - Requirement of Certainty .............................................................................................................. 33
“OBJECT RULES” ........................................................................................................................................ 33
Trusts for Individual Benes = List Certainty .................................................................................................. 34
Discretionary trusts = Criterion Certainty ...................................................................................................... 34
Re: Connor 1970 DLR’s (CA) Uncertain class................................................................................. 34
Re: Baden’s Deed Trusts 1970 Eng Mere powers vs Discretionary Trust ......................................... 35
Re: Baden’s Deed Trusts (2) 1970 Eng Movement away from strict initial certainty ................ 36
Re: Baden’s Deed Trusts 1971 HL Discretionary trusts ................................................................... 36
Purpose Trusts: (see SUB 3 – below) ............................................................................................................. 37
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
4 - Intention to Create Trust ................................................................................................................ 37
The Commissioner of Stamp Duties v. Jolliffe. 1920 OZ Modified objective standard ........................... 37
Resulting Trust .................................................................................................................................... 38
Precatory Words.................................................................................................................................. 38
Johnson v. Farney 1913 ONCA “Wish”, “request”, etc ≠ TRUST ........................................................... 39
Hayman v. Nicholl 1944 SCC Look at the will as a whole – Precatory Words no good ......................... 39
SUB 3 - PURPOSE TRUSTS ............................................................................................................... 40
Exception for Charity: No Certainty of Objects Necessary ................................................................ 40
Historical - Defition ........................................................................................................................................ 41
Re: Foveaux Applying the Statute of Charitable Uses ....................................................................... 42
Income Tax Special Cmsrs v. Pemsel Eng Principal divisions of “Charity” ....................................... 42
Recent - Definition ......................................................................................................................................... 42
Requirements of a Charity: ....................................................................................................................... 42
Recent cases re: Exception for Charity ..................................................................................................... 43
Case Law: Charitable vs Non-Charitable Purposes ........................................................................................ 43
Morice v. The Bishop of Durham 1805 Eng Charitable purposes & Default rule re: certainty .................. 43
Re: Endacott 1960 Eng Exceptions where non-charitable, public nature trusts will be enforceable .......... 44
Leahy v. AG of NSW 1959 Eng Gift to unincorp. group is endowment, not gift to members .................. 44
Rule in Whitby vs. Mitchell abolished ........................................................................................................... 45
5 - Incompletely Constituted Trusts .................................................................................................... 45
Settlor’s Actions.................................................................................................................................. 45
Milroy v. Lord 1862 Eng CA What is required to create a perfect Trust ................................................. 45
In re: Rose. 1952 Eng CA Settlor must do everything within THEIR power ......................................... 46
Perfection of the Imperfect Gift: The Rule in Strong v. Bird .............................................................. 47
Disclaimer by Trustee ......................................................................................................................... 48
Smith v. Stuart 1866 Eng. OLD – Disclaimer makes trust void ab initio ............................................... 48
Mallot v. Wilson 1903 Eng NEW – Disclaimer leads to Declaratory Trust .............................................. 48
Re: Paradise Motor 1968 (page 381) Disclaimer by Bene IS repudiation of gift ..................................... 48
6 - Writing.............................................................................................................................................. 49
Statute of Frauds ................................................................................................................................. 49
Examples ........................................................................................................................................................ 50
7 - Trusts Imposed by Operation of Law ............................................................................................ 51
Constructive Trusts ............................................................................................................................. 51
Rochefoucauld v. Boustead 1897 Eng: Where SofF creates injustice = constructive trust........................ 51
Resulting Trusts .................................................................................................................................. 52
Resulting trust will be implied by operation of law where: ............................................................................ 52
Presumption of resulting trust arises where: ................................................................................................... 52
Presumptions of Advancement ....................................................................................................................... 53
Pecore v. Pecore 2007 SCC 17 Presumptions of Advancement re: Joint Accounts ..................... 54
Madsen Estate v. Saylor 2007 SCC 18. .................................................................................................... 56
Family Law Act .............................................................................................................................................. 56
Statutory Trusts ................................................................................................................................... 56
9 - Testamentary Trusts ....................................................................................................................... 57
Valid Creation of a Testamentary Trust .............................................................................................. 57
Testamentary vs. Inter Vivos Dispositions ..................................................................................................... 59
Incorporation by Reference ............................................................................................................................ 60
Secret and Half Secret Trusts .............................................................................................................. 60
Re: Boyes (1884) 26 Ch. D. 531: .................................................................................................................. 61
Ottaway v. Norman [1972] Eng TEST for a Secret Trust ................................................................... 62
Blackwell v. Blackwell 1929 Eng Half-Secret Trusts = valid (like Secret Trust)............................... 62
American perspective on Secret Trusts .......................................................................................................... 64
Timing of the Communication ....................................................................................................................... 65
Precatory Words & Secret Trusts ................................................................................................................... 65
Hayman v. Nicholl 1944 SCC .................................................................................................................. 65
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Part 3: TRUSTS TAXATION (63-99)..................................................................................................... 67
A - Introduction..................................................................................................................................... 67
General ................................................................................................................................................ 67
Post-1972 Inter Vivos Trusts .............................................................................................................. 67
Income Tax Act: Taxation of Trusts ................................................................................................... 68
Intro to Capital Gains .......................................................................................................................... 69
B - Taxation on creation of trust.......................................................................................................... 70
Inter Vivos Trusts ............................................................................................................................... 70
Testamentary Trusts ............................................................................................................................ 70
Deemed Dispositions ...................................................................................................................................... 71
Spousal Trusts ..................................................................................................................................... 71
Definition of a Spouse .................................................................................................................................... 71
Testamentary Roll Over – s. 70(6) ................................................................................................................. 72
Inter Vivos Roll-Over – s. 73(1) ..................................................................................................................... 72
Examples ........................................................................................................................................................ 73
Alter Ego and Joint Spousal Trusts (NOT EXAMINABLE) ......................................................................... 74
C - Taxation of a trust’s income .......................................................................................................... 74
Individual vs Trust .............................................................................................................................. 74
Deemed Dispositions of Trust Property .............................................................................................. 74
Examples ........................................................................................................................................................ 75
Income Splitting / Multiple Trusts ...................................................................................................... 76
Rates of Tax.................................................................................................................................................... 76
Income Taxed to the Bene .................................................................................................................. 77
EXCEPTION: s. 104(13.1) and (13.2) ........................................................................................................... 77
“PAYABLE” 104(24) .................................................................................................................................... 78
Capital Gains (realized within the Trust) are Taxed to the Trust ........................................................ 78
Example: ......................................................................................................................................................... 78
Preferred Bene Election ...................................................................................................................... 79
Eligibility Criteria for a Preferred Bene ......................................................................................................... 79
Flow-through Character of Income ..................................................................................................... 79
Tax Free Payments to Benes ............................................................................................................... 79
The Attribution Rules – Spousal/Minor Income ................................................................................. 80
Definition: Arm’s Length, s. 251 ................................................................................................................... 81
Definition: Extended meanings of certain relationships, s. 252 .................................................................... 83
The Attribution Rules – Spousal Capital Gains .................................................................................. 84
Income Accumulating in a Trust ......................................................................................................... 85
Trusts with Reserved Power of Revocation or Control ...................................................................... 85
D - Taxation on the termination of a trust .......................................................................................... 86
s. 106(3) - Property Transferred in Satisfaction of the Income Interest ............................................. 86
s. 107(2) - Property Transferred in Satisfaction of the Capital Interest ............................................. 87
s. 107(2) of little benefit to Spousal / Joint spousal / Alter ego Trusts ........................................................... 88
s. 107(4) Exception for Spousal Trusts Terminated Prematurely .............................................................. 89
Review Problem ............................................................................................................................................. 89
Tax Planning with Trusts (NOT EXAMINABLE) ............................................................................. 90
Part 4: TRUST CHARACTERISTICS................................................................................................... 91
A - The Trustee...................................................................................................................................... 91
Appointment, death, retirement and removal (NOT EXAMINABLE) .............................................. 91
Trustee Act s. 2, 3, 4, 5 ................................................................................................................................... 91
Duty of Fidelity to the Trust Instrument ............................................................................................. 92
Trustee Act s. 67 & 68 .................................................................................................................................... 92
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Duty of Loyalty / Fiduciary Duties to Benes ...................................................................................... 93
Keech v. Sanford 1726 Eng No advantage for the trustee as individual .................................................. 93
National Trust Co v. Osadchuk 1943 SCC No conflict of interest permitted PERIOD ............................. 93
Examples & Ratification ................................................................................................................................ 94
Duty of Care........................................................................................................................................ 95
Speight v. Gaunt 1883 Eng HL Prudent man of business TEST ............................................................... 95
Learoyd v. Whiteley 1887 Eng ....................................................................................................................... 96
Trust Company Conflicts .................................................................................................................... 97
Sources of Investment Monies for Trust Companies ...................................................................................... 97
Re: Brown [1944] 4 D.L.R. 419 .................................................................................................................... 97
Fales v. Permanent Trust Co 1976 SCC ......................................................................................................... 98
TRUSTEE ACT s. 35 (re: technical breach relief) ......................................................................................... 99
Trustee’s Power of Investment ......................................................................................................... 100
Rule Development ........................................................................................................................................ 100
Ontario Regime: ........................................................................................................................................... 100
TRUSTEE ACT s. 26-28 (re: trust investments) .................................................................................... 101
Capital or Income? ....................................................................................................................................... 102
Re: Waters 1956 SCC Nature of the actual property = nature of the trust property ........................ 102
The Unitrust .................................................................................................................................................. 103
Duty to be Even Handed ............................................................................................................................... 103
Re: Smith [1971] 2 O.R. 541 Even hand requires consideration of even hand ................................. 104
Re: Fleming 1973 ON Even hand + nature of asset at time of testator’s death ............................... 105
Control of Trustee Discretions by the Court ..................................................................................... 106
Trustee Act s. 60 – Application to Court ...................................................................................................... 106
Ontario Rules of Civil Procedure s. 14.05: ................................................................................................... 106
Re: Boukydis (1927) 61 O.L.R. 561 TA s. 60 – don’t bother unless you try first! ................................ 107
Re: Haasz 1959 Cda Trustee disagree = court more likely to intervene ............................................... 108
Rights of the Trustee ......................................................................................................................... 108
Remuneration: .............................................................................................................................................. 108
Trustee Liability: Contribution and Indemnity ............................................................................................. 109
Re: Pauling Eng 1964 Indemnity from bene where valid consent to breach ................................... 110
Third Party Liability for Breach of Trust (NOT EXAMINABLE)......................................................... 110
B - The Bene ........................................................................................................................................ 111
Power to Terminate the Trust............................................................................................................ 111
Saunders v. Vautier (1841) 4 Beav. 115; 49 E.R. 282 (V.C.). ...................................................................... 111
Making the Trust “Unbreakable” ...................................................................................................... 111
Re: Smith [1928] Ch. 915 (Ch.D.) Variation on Saunders v. Vautier..................................................... 112
Differences with the United States ............................................................................................................... 113
Abolishing the Rule in Saunders v. Vautier ................................................................................................. 113
The Power to Vary the Trust ............................................................................................................. 113
Variation of Trusts Act (everywhere except US) ......................................................................................... 113
Power to Control the Trustee’s Discretions ...................................................................................... 115
Re: Brockbank [1948] Ch. 206 Trustee discretion = trustee discretion ................................................ 115
Butt v. Kelson [1952] Ch. 197 Contra Brockbank ................................................................................... 116
The Power to Alienate a Beneficial Interest ..................................................................................... 117
Formalities .................................................................................................................................................... 117
Restraints on Alienation ............................................................................................................................... 117
Re: Macleay 1875 Eng LIMITED Direct Restraint = Valid ........................................................... 117
Re: Leach [1912] 2 Ch. 422 Determinable Limitation..................................................................... 118
C - The Settlor ..................................................................................................................................... 119
Re: Knetchell [1952] 4 D.L.R. 763. No Power to Revoke where other benes ..................................... 119
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
OVERVIEW
TRUST OVERVIEW --- See pages 479-483
What is a Trust?
Necessary elements of a trust:
(1) Property
(2) a Trustee; and
(3) a Bene
DEFINITION A Trust exists when the legal title to property is held by one person (The Trustee)
and the equitable title is held by another (The Bene, also referred to as the cestui que trust). A Trust is
the relationship which exists between two persons (or classes of persons) when one or more persons
holds the legal title to property and the other or others holds the equitable title.
CHARACTERISTICS Throughout the duration of the trust, the management of the property (by
the trustee) is separated from the enjoyment of the property (by the Bene).
o HOWEVER, not every separation of a legal and equitable title constitutes a trust
EG – Where a separation into the two types of title is a part of some other legal
relationships such as the common law mortgage.
NOTE: Professor Cullity says, every separation of the legal and equitable title which
does not fall within any other recognized category is a trust
o SUB-TRUSTS it is possible to create trusts of equitable interests in property, sometimes
referred to as “sub-trusts.” In these cases, the trustee possesses an equitable as opposed to
legal title.
Bene’s interest can be:
o divided into shares
o subject to conditions (contingent)
o postponed in time to other interests (future)
o dependent on the discretion of the trustee (discretionary).
EXPRESS TRUST CREATION An express trust can be created inter vivos by either:
(a) The Settlor transferring property to Trustee to hold on trust for the Bene;
(b) (less commonly) The Settlor declaring themselves to be a Trustee of property for the Bene.
TRUST BY OPERATION OF LAW Trusts can also be created by the operation of law
Statutory trusts, resulting trusts and constructive trusts are created in this way unlike
express trusts which are created deliberately by the Settlor.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
A trust is not created until property is vested in the trustee – UNTIL VESTING, AN
INTEREST IS CONTINGENT
o The mere signing of the trust instrument does not create a trust.
o The benefit of an enforceable covenant can probably serve as property (as a chose in action)
for this purpose
EG - a covenant by the settler to transfer property to the transferee.
A chose in action gives an individual the right to seek the recovery of money, a debt
or a thing. It allows you to go to Court and recover property by means of a lawsuit.
SEE PAGE 39
Common Definitions
Fee Simple:
An estate in fee simple would not terminate naturally unless and until the fee simple estate holder
died without heirs.
Results in the person obtaining the both of the legal and equitable titles.
Normally the case when land is sold or conveyed as a gift.
Fee Tail:
Continues as long as there are lineal descendents of the original tenant in tail (i.e., direct
descendants having the same name)
This estate was abolished in Ontario in 1956 by Conveyancing and Law of Property Act s. 4
Life Estate: Estate is limited to the lifetime of the person to whom it is granted.
Future Interest:
An interest which confers a right to the enjoyment of the property at a future time.
Despite the title, the right is a presently existing proprietary interest and only the right of
enjoyment is postponed.
Can be either vested or contingent.
Why a Trust?
Why Do People Create Family Trusts? (Pages 484 - 488 of the casebook).
Inter vivos / living trust = created by living persons
Testamentary trust = created by Will and only become operative on the death of the testator
Rather than making a direct gift, settler may create a trust for the following reasons:
1) Settlor’s desire for the assets being given away to be managed by an experienced trustee(s)
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
2) Minor benes
3) Adult benes not ideally equipped (and/or not wishing) to manage the property
4) TRUST FOR SALE - Division in $ or Shares - where property must be divided between
several benes
o Settlor would direct the trustee to sell the property and divide the proceeds of the sale
among the benes in the shares specified in the trust instrument.
o Rationale 1: The asset is amenable only to monetary (not actual) division
o Rationale 2: Testator at the time of making the will does not know what assets he or she
will own, or what debts they will owe at the time of their death.
Often they will want to dispose of the bulk of their estate not by directing
particular assets to particular benes, but by directing dollar amounts (pecuniary
legacies) to particular benes and then diving the residue (what is left) among
other benes.
o Under this type of trust the trustee sells the assets named in the trust into a single fund of
cash. The trustee must then use the cash:
1. to pay debts, funeral expenses, taxes and administration fees; and
2. pay the pecuniary legacies as outlined in the trust instrument and then
3. pay what is left in residue to be divided in accordance with the testator’s will.
5) Postponement of Enjoyment: - testator may wish for the payment of capital to the benes to be
postponed until some contingency has been satisfied.
Trustee (having legal title of funds) will have to hold the fund until the time comes for it to be
paid over to the bene.
The trustee may be directed by the trust instrument to invest the funds pending it’s being paid
to the “capital bene”
o Income from the investments may be paid to an “income bene” or “life tenant”, if the
income is not to go to the primary “capital bene” or “remainderman”
o The testator could also direct the trustee to accumulate income until the capital is
distributable (subject to the limitations of the Accumulations Act).
Barring settler instructions re: investment of funds, the Trustee Act in each province provides
either a list of “authorized investments” or other powers of investment.
o In Ontario the relevant provisions are located in ss. 26 - 31 of the Trustee Act which
can be found on pages 437 - 439 of the casebook.
6) Successive Interests - testator or settlor may create successive interests in the trust property.
o Allows settler to provide for two generations of benes.
o EG - Settlor gives L the right to receive income from the trust fund for his or her life (i.e.,
L is a “life tenant” / “income bene”), and gives R the right to receive the capital on the
death of L (i.e., R is the “remainderman” or “capital bene”)
o NOTE: The projection of control can be extended down to a third generation by an
appropriately drafted instrument, but great care must be taken not to offend RAP
Dispositive Discretions
Major advantage of establishing a trust is the ability to delegate administrative powers to a trustee
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o THEREBY, taking into account circumstances that the settlor cannot foresee at the time
that they execute the trust instrument.
Standard discretions:
o Ability to sell the settlor’s assets
o How / when to invest the proceeds
o Etc
Dispositive discretions include:
1) MAINTAIN INFANT BENES
o Enables the trustee to exercise some choice as to who are to be the benes, or as to how much
each bene is to receive.
EG - The power to maintain (provide income to) or advance infant benes. Trustee can
have the power (via the will or the trust instrument) to make payments of income to the
parent or guardian of the minor bene to be used for the benefit of the minor until the
minor attains the age of full entitlement (often the age of majority or 25).
These types of clauses often extend to capital as well as income, and the amount and
timing of the payments to be made including whether payments are to be made at all
through the discretion of the trustee.
2) POWER OF ENCROACHMENT
o Allows the trustee the power to augment the payment of income from the trust (eg – to a
widow who is an income bene) with capital payments (encroachment on capital) if the
income alone turns out to be inadequate for her comfortable maintenance.
o In this instance, the trustee is granted the power to exercise their discretion to encroach on the
capital that would otherwise be kept for the children and give it to the widow.
3) SPRINKLER CLAUSES
Empower the trustee to allocate income at their discretion among a group of benes, depending on
the trustee’s assessment of each individual’s need (and marginal tax rate). This is commonly
referred to “sprinkling” or “scattering” income.
Tax Avoidance
Recent changes in the Income Tax Act have made the use of trusts as a tax avoidance vehicle less
desirable (eg., income trusts)
Also been a repeal of succession duty and gift tax by all provinces.
Nevertheless, as we shall see in the unit regarding the taxation of trusts, some important tax
advantages can be achieved through the use of trusts, and in addition trusts have a subordinate
role to play in many estate plans.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Part 1: FUTURE INTERESTS
A - General
DEFINTION: Future interest is an interest in property which confers a right to the enjoyment of the
property at a future time. It is a presently existing proprietary interest and only the right
of enjoyment is postponed.
CHARACTERISTICS: Future interests are either vested or contingent
Vested in Interest
Interests in the context of trusts “vested in interest” (never vested in possession).
Vested in possession only when there is a right of present enjoyment (hence not a future interest).
A future interest (remainder or reversion) is vested when:
(1) the identity of the person who is to take the property is ascertained; and
(2) there is no condition precedent to its becoming possessory other than the regular
termination of the prior estates.
Example: To L1 for life, remainer to L2 for life, remainder to R in fee simple
L1 = Life estate, Vested in possession and vested in interest
L2 = Determinable life estate, Vested in interest, until L1 dies at which point interest will fall into
possession
R = RFS - Vested in interest, until both L1 and L2 are dead at which point interest will fall into
possession
Example: To L1 for life, remainder to L’s children in fee simple who attain 21
L1 = Life estate, vested in possession and vested in interest
L’s children = Contingent remainder in fee simple NOT VESTED until they attain 21
Even if a child of L reaches 21, but dies before interest vests in possession, they’re estate will
take the vested future interest (which devolves according to his will or on intestacy)
Grantor = RFS, if no children of L reach 21 in L1’s lifetime EFS reverts to Grantor
Example: To A for life and then to B
A = Life estate, vested in interest and possession
B = vested in interest
o If B dies before A, then the remainder (fee simple) goes to B’s heirs
Example: To A for life and then to B if B is living at A’s death
B = CRFS, will vest in interest and possession immediately following A’s death
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Grantor = If B dies before A, then the reversion (fee simple) goes back to grantor
Example: To A for life, remainder to B for life, but if B marries then to X
A = life estate, vested in interest and possession
B = NOTHING, “but if” is a CS so it is void – not a natural termination
Grantor = Reversion in fee simple
Types of Future Interests
(1) Reversions,
(2) Remainders; and
(3) Executory interests.
Reversions
A reversion is the interest left in a grantor when they fail to dispose of their whole interest by
their grant.
Reversion happens by operation of law
A reversion is always a vested interest since it has never left the grantor and therefore it cannot
depend on the happening of a contingency for its creation.
Example: To L1 for life, remainder to L2 for life.
Since only life estate is granted, there is the estate in fee simple in reversion.
It will fall into possession on the termination of the interests that have been granted.
Remainders
This is the interest created by the grantor who, having granted away a particular estate, grants a
further estate limited to commence after the particular estate.
Remainder arises by the act of the grantor
A remainder may be either vested or contingent.
Remainder Rule #1 & 2: A remainder must always be supported by a precedent freehold estate
Example: To A for life, and 1 day after his death to B and his heirs
A = life estate
B = nothing, because upon A’s death there is 1 day where there is no precedent freehold
estate and the grant goes poof!
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Remainder Rule #3: There is nothing left after a grant in fee simple
Example: To A and his heirs, but if the land shall cease to be a used as a dairy farm to B and his
heirs.
Void since grant of fee simple to A exhausted the property / grantors power
Remainder Rule #4: A remainder designed to defeat a particular estate (eg., “but if”) is
void. Only the Grantor can recover land from breach of a condition.
Example: To A for life, but if he becomes bankrupt to B and his heirs.
(CONDITION SUBSEQUENT) = VOID
Example: To A for life until he becomes bankrupt, remainder to B and his heirs.
(DETERMINABLE) = VALID
Executory Interests
This is the interest created by the grantor who, having granted away a particular estate, grants a
further estate limited to commence after the particular estate.
B - Rule Against Perpetuities (RAP)
a.k.a. Rule Against Remoteness of Vesting
Overview
PURPOSE: To prevent owners of property from projecting control over their property for too long a
time after they have ceased to be owners. Favours the living in the enjoyment of property
over the “dead hand of the past”.
RULE: Interests in property must vest, if at all, within the period of “a life in being” and 21
years. A contingent remainder which could vest outside the perpetuity period is invalid.
HOW: Does not restrict the duration of trusts or other interests in property. Rather, restricts the
length of time that may elapse between the creation of an interest and the vesting (i.e.,
when identity of bene is ascertained and when no CP’s) of that interest.
DETAILS:
Applies only to contingent (i.e., non-vested) future interests. – both CP’s and CS’s
Trust may last longer than the perpetuity period; only the interests must vest within the
perpetuity period
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
MECHANISM:
START:
Inter vivos trust = date upon which trust is created (i.e., generally the date upon which
property is first transferred to the trustee)
Testamentary trust = date of testator’s death
PERIOD:
LIB plus 21 years
Christ’s Hospital v. Grainger 1849 Eng No RAP where contingent gift btwn charities
RAP DOES apply to dispositions to charities, UNLESS a gift to one charity is followed by
that charity re-gifting to another charity upon a contingency which could (otherwise) violate
the perpetuity period
Life-in-Being (LIB)
o Age of Majority and Accountability Act s. 9 creates an exception for the usual age of majority
(age 18) for the RAP (age 21)
o FAMILY TRUST Settlor may specify individuals whose lives are to count as lives in being
for the purposes of the trust.
Any number of lives may be taken as provided that they are not so numerous as to make
it impossible to ascertain a survivor.
o IF NO LIB’S SPECIFIED Must infer from the nature of the disposition.
Perpetuities Act s. 6 – DEF’N of Perpetuity Period
Measurement of perpetuity period
6 (1) Except as provided in section 9, subsection 13(3) and subsections 15(2) and (3), the
perpetuity period shall be measured in the same way as if this Act had not been passed,
but, in measuring that period by including a life in being when the interest was created, no
life shall be included other than that of any person whose life, at the time the
interest was created, limits or is a relevant factor that limits in some way the period
within which the conditions for vesting of the interest may occur.
Idem
(2) A life that is a relevant factor in limiting the time for vesting of any part of a gift to a
class shall be a relevant life in relation to the entire class.
EFFECT: Makes any life that is relevant to an individual, who is part of a class of benes, relevant to
the whole class
Idem
(3) Where there is no life satisfying the conditions of subsection (1), the perpetuity period
is twenty-one years.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
LIB EXAMPLE: To my nieces and nephews on attaining age 30
LIB’s, according to Hogg, under PA s. 6(1) would include:
(1) Any parent of the testator within childbearing age (since they could still produce
more children who could produce qualifying nieces and nephews) = RELEVANT
FACTOR
(2) Any brother or sister of the testator (because they could produce qualifying nieces or
nephews
(3) Any nieces and nephews born at the death of the testator (because each would be a
life in being for his or her own interest and by s. 6 (2) becomes a life in being for the
other class members as well).
STEP 1 - Certainty and Wait & See
(OLD) Rule of Initial Certainty
PRE Perpetuities Act ONLY…
RULE An interest was valid only if, at the creation of the interest, there was ZERO chance
that the interest would vest outside the perpetuity period
EVEN IF later events (i.e. events after the creation of the interest) made the postulated
circumstances impossible, the interest was invalid
(NEW) Perpetuities Act s. 4 WAIT & SEE
Presumption of validity and "Wait and See"
4(1) Every contingent interest in property that is capable of vesting within or beyond the
perpetuity period is presumptively valid until actual events establish,
(a) that the interest is incapable of vesting within the perpetuity period, in which case
the interest, unless validated by the application of section 8 or 9, shall be treated as void
or declared to be void; or
(b) that the interest is incapable of vesting beyond the perpetuity period, in which case
the interest shall be treated as valid or declared to be valid.
PURPOSE: To remedy some of the injustices perpetuated by the common law rule of initial certainty.
EFFECT: An interest which might otherwise violate RAP will be valid if actual events result in
the RAP not being violated
4(1)(a) – cannot vest INSIDE PP = void (subject to PA s. 8, 9)
4(1)(b) – cannot vest OUTSIDE PP = valid
DISADVANTAGE: The ultimate validity of a disposition is in doubt until events place it beyond doubt.
s. 5(2) – INCOME DURING UNCERTAINTY - During the time that an interest is only
presumptively valid, income arising from the interest (which is not otherwise disposed of) shall
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be treated as income arising from a valid contingent interest, and any uncertainty whether the
limitation will ultimately prove to be void for remoteness shall be disregarded
s. 5(1) – COURT MAKES ORDER UPON APPLICATION - at any time, upon application,
the Court has the power to “make an order as to validity or invalidity of an interest based on the
facts existing and the events that have occurred at the time of the application.”
Perpetuities Act - Other Certainty Provisions
s. 7 --- Presumptions and evidence as to future parenthood
(1) Where, in any proceeding respecting the rule against perpetuities, a question arises that
turns on the ability of a person to have a child at some future time, then,
(a) it shall be presumed,
(i) that a male is able to have a child at the age of fourteen years or over, but
not under that age, and
(ii) that a female is able to have a child at the age of twelve years or over, but
not under that age or over the age of fifty-five years; but
(b) in the case of a living person, evidence may be given to show that he or she will or
will not be able to have a child at the time in question.
Idem (LATER ERRONEOUS EVIDENCE = NO MATTER WHERE DECISION MADE )
(2) Subject to subsection (3), where any question is decided in relation to a limitation of
interest by treating a person as able or unable to have a child at a particular time, then he or
she shall be so treated for the purpose of any question that arises concerning the rule
against perpetuities in relation to the same limitation or interest despite the fact that the
evidence on which the finding of ability or inability to have a child at a particular time is
proved by subsequent events to have been erroneous.
Idem (EXCEPTION TO (2) ABOVE WHERE CHILD IS BORN/ADOPTED/ETC)
(3)Where a question is decided by treating a person as unable to have a child at a particular
time and such person subsequently has a child or children at that time, the court may make
such order as it sees fit to protect the right that such child or children would have had in the
property concerned as if such question had not been decided and as if such child or children
would, apart from such decision, have been entitled to a right in the property not in itself
invalid by the application of the rule against perpetuities as modified by this Act.
Idem (NON-NATURAL PROCREATION IRRELEVANT TO EVIDENCE)
(4)The possibility that a person may at any time have a child by adoption or by means other
than by procreating or giving birth to a child shall not be considered in deciding any question
that turns on the ability of a person to have a child at some particular time, but, if a person
does subsequently have a child or children by such means, then subsection (3) applies to
such child or children.
s. 9 --- Spouses (SPOUSE AS BENE IS ALWAYS LIB)
(1) Where any disposition is made in favour of any spouse of a person in being at the
commencement of the perpetuity period, or where a limitation creates an interest in
property by reference to the time of the death of the survivor of a person in being at
the commencement of the perpetuity period and any spouse of that person, for the purpose
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of validating any such disposition or limitation, that but for this section would be void as
offending the rule against perpetuities as modified by this Act, the spouse of such person
shall be deemed to be a life in being at the commencement of the perpetuity period
even though such spouse was not born until after that time.
Definition
(2) For the purposes of subsection (1),
"spouse" means a person,
(a) to whom the person is married, or
(b) with whom the person is living in a conjugal relationship outside marriage, if the two
persons,
(i) have cohabited for at least a year,
(ii) are together the parents of a child, or
(iii) have together entered into a cohabitation agreement under section 53 of the
Family Law Act.
STEP 2 - Age Reduction Rules
THE NEED:
Testators/settlers often try to postpone the vesting of a gift until the bene attained an age greater than
21 (which would result in more violations of RAP)
Example: T grants to the use of L for life, then for L’s children that attain 25 (L survives T).
Gift to L’s children violates RAP child of L might be born after T’s death and might attain
25 more than 21 years after the death of L, the life in being.
The gift would have been valid if the specified age was 21 as opposed to 25 because L’s
children must attain 21, if at all, within 21 years of L’s death.
NOTE: IF L PREDECEASED T, then the gift would be valid because it would eliminate
the possibility of after-born children.
IE - All of L’s children would be lives in being at T’s death; and each must attain
25, if at all, within their own lifetime.
IF WAIT & SEE INSUFFICIENT:
o While the wait and see rule is one possible remedy to the problem of lives having to vest
more than 21 years after the death of a life in being it may be insufficient to save the gift… in this
case, recourse may be had to the age reduction rules found in section 8 as follows:
s. 8 --- Reduction of age
(1) Where a limitation creates an interest in property by reference to the attainment by any
person or persons of a specified age exceeding twenty-one years, and actual events
existing at the time the interest was created or at any subsequent time establish,
(a) that the interest, would, but for this section, be void as incapable of vesting within the
perpetuity period; but
(b) that it would not be void if the specified age had been twenty-one years,
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the limitation shall be read as if, instead of referring to the age specified, it had referred to
the age nearest the age specified that would, if specified instead, have prevented the
interest from being so void.
EFFECT: If an interest violates RAP only because it is contingent on the bene attaining an age > 21,
then it will still be valid (IE – contingent age will be read as the age necessary to keep the
interest valid – SO LONG AS IT CAN BE READ AS >20).
APP: AT INTEREST CREATION - Age reduction rules can be applied ONLY IF it is certain at that
time that the specified age is “incapable” of being attained within the perpetuity period (otherwise
must “wait and see”)
AFTER INTEREST CREATION - Age reduction is resorted to only if waiting and seeing
establishes that the interest is “incapable of vesting within the perpetuity period” at which time
the specified age must be reduced to the age nearest to that age which, in the light of the facts
disclosed by waiting and seeing, would have prevented the disposition from being too remote.
RAP Applied to Condition Subsequents
RAP applies to contingent future interests, AND to the duration of condition subsequents.
CS = a contingency that occurs after an interest has vested.
CS = where the conduct of the bene results in their being divested of their interest on the happening
of the condition.
RULE: If a CS is satisfied outside of the perpetuity period, then the condition fails and the interest is
indefeasibly vested.
Example: “To A for life and then to B for life, but if B marries, then to X.”
Should B marry outside of the perpetuity period of a life in being and 21 years, then B would
be allowed to keep his interest
STEP 3 - Class Closing Rules
(OLD) Common Law
Common Law Class gift violates RAP unless the exact share of every member was certain to be
established within the perpetuity period.
This all or nothing approach meant that if any class member failed to qualify for vesting
within the perpetuity period, then the entire class gift was void for everyone.
Example: T to the use of grandchildren of A. (A survives T. At T’s death three of A’s children are
living, and a fourth is born thereafter).
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INVALID at common law
the gift to A’s fourth child’s child might vest outside the perpetuity period if that child were
born more than 21 years after the death of one of the persons in being at the time of T’s death.
FURTHER the gift would be equally invalid even if A did not have a fourth child because at
T’s death, there is a possibility of a fourth child.
(NEW) Andrews v. Partington
Allows a class to be closed, thereby preserving the gift to members whose interests had vested
Rules apply to trust instruments when intending to save class gifts:
Rules DO NOT APPLY if there are explicit directions in the trust instrument for closing of the class
(1) If at the earliest moment for distribution contemplated by the settlor or testator (normally
the death of the income bene) any member of the class of benes has a vested interest, then
the class closes and includes only those members or potential members alive at that time;
(2) If at the earliest moment for distribution no class member has qualified, then the class
closes as soon as one member interest vests.
EXCEPTION: where the class members qualify by birth alone, then the class does not close
artificially at all.
Perpetuities Act s. 8(2) and (3) - Where Wait & See & Age Reduction insufficient:
If, after applying s. 4(1) (wait and see) and s. 8(1) (age reduction), the entire class’ interests are still not
vested within the perpetuity period then the following sections deems those (non-vested) members to be
excluded from the class:
Exclusion of class members to avoid remoteness [Where age reduction ineffective]
(2) Where the inclusion of any persons, being potential members of a class or unborn
persons who at birth would become members or potential members of the class, prevents
subsection (1) from operating to save a limitation creating an interest in favour of a class
of persons from being void for remoteness, such persons shall be excluded from the class
for all purposes of the limitation, and the limitation takes effect accordingly.
Idem [Where wait & see ineffective]
(3) Where a limitation creates an interest in favour of a class to which subsection (2) does
not apply and actual events at the time of the creation of the interest or at any subsequent
time establish that, but for this subsection, the inclusion of any persons, being potential
members of a class or unborn persons who at birth would become members or potential
members of the class, would cause the limitation to the class to be void for remoteness,
such persons shall be excluded from the class for all purposes of the limitation, and the
limitation takes effect accordingly.
Interpretation
(4) For the purposes of this section, a person shall be treated as a member of a class if in
the person's case all the conditions identifying a member of the class are satisfied, and a
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person shall be treated as a potential member if in the person's case some only of those
conditions are satisfied but there is a possibility that the remainder will in time be satisfied.
EFFECT: If waiting and seeing fails to resolve the issue, class will be closed per the statute.
Abolishes the all or nothing rule and allows a class gift to take effect in favour of those
members of the class who have attained a vested interest within the perpetuity period.
For example, consider the following 4 examples:
(1) To the grandchildren of A
(2) To the grandchildren of A who attain 21
(3) To A for life, remainder to A’s grandchildren
(4) To A for life, remainder to A’s grandchildren who attain 21
In examples 1 and 3, if one or more grandchildren are alive at T’s death (the earliest moment of
distribution), only that grandchild or grandchildren can share in the gift. If there are no grandchildren
alive at T’s death, the class will not close until A’s children are all dead or infertile.
In example 2, we have a situation contemplated in the latter half of the class closing rules, namely, we see
shares of members of a class that do not vest at birth. In this case, the class closes as soon as the share of
one member of the class vests or at the earliest moment for distribution, whichever is the later. Any other
members of the class who are alive at that time are included as potential benes of the gift. Members who
are born subsequently will be excluded. Here, if one grandchild has attained 21 at the death of T, the
class closes and includes all grandchildren who were alive at that time. The maximum size of the class is
now ascertained and an immediate distribution can be made to the grandchild who has attained 21. If any
of the other grandchildren who have been included in the class die before reaching 21, the grandchild
whose interest has vested will be entitled to receive an extra benefit.
Example 4 is the same as example 2, except that in this case the earliest moment for distribution occurs
upon the death of A, the life tenant and not the death of the testator T.
PROBLEM SOLVING RULES
1) wait and see;
2) age reduction
3) exclude via class closing rules
1. Are any interests contingent (i.e. not vested)?
These are the only interests to which the rule applies. The rule is not concerned with the
duration of interests but rather with the time of vesting.
If YES, proceed
If NO, stop – rule doesn’t apply
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2. Are there any lives in being, and if so who are they?
LIB = person alive/conceived at the creation of the trust + satisfy the statutory definition in s.
6(1).
o If YES, perpetuity period ends 21 years from the death of the last survivor.
o If NO, perpetuity period ends 21 years from the creation of the interest.
CLASS GIFTS ONLY = remember the wider definition found in s. 6 (2).
SPOUSE = s. 9 will operate to make an unascertained or unborn spouse a life in being.
3. At the creation of the interest is it certain that they will all vest within the perpetuity period?
If YES = valid future interests
If UNCERTAIN = Wait & See (s. 4(1)), see below
o DO FERTILITY PRESUMPTIONS HERE
CLASS GIFTS ONLY = class closing rules may be relevant here.
4. In the case of the uncertain class of contingent interests, WAIT & SEE until subsequent events
establish either that the interests must vest if at all within the perpetuity period (valid) OR that
the interests cannot possibly vest within the perpetuity period (invalid).
Could require waiting for the entire perpetuity period
o IE - waiting until all the LIB’s have died and then waiting for an additional 21 years from
the death of the last survivor.
In most cases the position is clarified well before the end of the period.
CLASS GIFTS ONLY = class closing rules may be relevant here.
5. If anything turns on the capacity of anyone to have children, apply the presumptions of fertility
or obtain evidence of the actual capacity of the person in question: s. 7.
In practice this problem is usually solved by the wait and see rule. However, there are
recorded instances of births that occur outside of the ages specified under s. 7.
6. AGE REDUCTION - If an interest is invalid only because vesting is subject to attaining an age
greater than 21, then apply the age reduction rules in s. 8.
Remember that you cannot reduce the age contingency below 21 and that you can only
reduce the age contingency if the reduction will save the interest from invalidity.
7. CLASS CLOSES - In the case of a class gift, if after Waiting & Seeing, and applying age
reduction (if applicable), some potential members of the class cannot attain a vested interest
within the perpetuity period, and other members of the class either have attained a vested
interest or must do so if at all within the perpetuity period, then those potential members who
cannot qualify in time are excluded from the class and the gift is valid for the others.
8. In the case of powers of appointment, distinguish between “general” and “special” powers (as
defined in s. 11 and explained on pages 33 – 36 of the casebook) and between the creation of the
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power and the exercise of the power (see also pages 49 – 52 of the casebook). [This topic is not
examinable]
Examples
Example 1: To the use of L for life, remainder to L’s first son to attain the age of 21
LIB = L and L’s living sons
CERTAIN VESTING L’s son’s WILL attain age 21 during L’s life
Example 2: To L for life, then to L’s first born daughter, then for X. (L is not married)
LIB = L or X, or L’s first born daughter if alive at the time of the grant?
CERTAIN VESTING L can only have a daughter while he is still alive, and if no daughter
then X inherits in FS at Testator’s death
Example 3: To X Corp to accumulate income for 25 years, then to transfer income and corpus to
Y Corp. if at the time Y Corp is Canadian controlled.
LIB = NONE, so perpetuity period is 21 years
Since X is a corporation and not a LIB, the gift must vest (in Y Corp / any contingent
interest) within 21 years
Example 3a: To X Corp to accumulate income for 25 years, then to transfer income and corpus to
T’s first born son.
Apply wait & see, and if still inconclusive
Example 4: AGE REDUCTION – To first child of X to attain 30 years. (X is not married at T’s
death, and at X’s death there are two children Y, and Z age 2 and 3 respectively)
LIB = X
Age reduction rule is applied to reduce the age to 23 years
NOT reduced to 24 (when it would vest for Z, the older child) B/C there is a chance that Z
will die before the gift vests in which case the application of age reduction rule would not be
sufficient to save the gift for Y …ALTNERATIVELY…could re-apply age reduction if Z
dies before reaching age 23
Example 5: AGE REDUCTION - To use of L for life, remainder to those of L’s children who
attain 25
(a) At T’s death L is dead and has 2 children (A & B) aged 5 and 2
LIB = A and B
CERTAIN VESTING = since both A and B are LIB’s no perpetuity issue
(b) At T’s death L is alive but unmarried and with no children. Two years after T’s death L
marries W. Ten years after T’s death L & W die leaving 2 children A aged 8 and B aged 6
LIB = L
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CERTAIN VESTING = A and B are CERTAIN (IF THEY LIVE … so Wait & See) to reach
25 within perpetuity period (21 years after L dies)
(c) At T’s death L is alive – L is unmarried and has no children – two years after T’s death L
marries W – 10 years after T’s death L and W die leaving two children, C aged 5 and D aged 2
LIB = L
Step 1 – Wait & See (to ensure C lives to age 25)
o C = CERTAIN VESTING (assuming alive at age 25)
Step 2 (OPTION 1) – Age reduction for D ONLY
o C reaches 25 and his interest vests
o Apply age reduction when D is 23 and make his interest vest
Wait & See takes precedence to don’t apply Age Reduction until W&S unable to
save the gift
o BENEFIT = Closest keeping with T’s wishes AND Applies rules in proper order
o DETRIMENT = Unfair to C that D gets to inherit 2 years younger
USE THIS Step 2 (OPTION 2) –Age reduction for BOTH done at time of L’s death
o BENEFIT = Fair to both benes AND W&S partially satisfied since at the time of L’s
death it is certain that one of the interests will not vest in time (and so Age Reduction is
the only way to save the gift)
o DETRIMENT = Further deviation from T’s wishes than Option 1
NOTE: Alberta’s Perpetuity Act (though NOT Ontario’s) eliminates this uncertainty by
providing that Age Reduction for one bene is applicable to all benes
(d) same as (c) above, but sixteen years after L’s death, D, then aged 18, dies
C would inherit D’s share since D would die before attaining 25.
ASSUMING STEP 2 ABOVE - The age reduction rules WOULD apply here since once the
decision is made to use age reduction, it cannot be revoked. (i.e. at the time of L’s death)
As a result, C would inherit at age 23.
(e) At T’s death L is alive – L is married to W (no children) – 10 years after T’s death L dies,
survived by his wife W and two children, E, aged 5 and, F, aged 2 – two years after L’s death W, E
and F are alive – E and F live beyond 25
Same as C - APPLY AGE REDUCTION AFTER WAITING AND SEEING, SAVING THE
GIFT FOR BOTH
LIB = not W
1 - b/c W’s life doesn’t limit the time that interest may vest (COMMON LAW)
2 – PA s. 9 does not apply
Section 9 is not applicable here since the disposition is not made to a spouse of a person
in being, nor is there any reference in the trust instrument to the time of death of a person
in being at the commencement of the perpetuity period.
(f) would the answer to (c), above, be affected if W had survived L for two years?
No difference, W is not a LIB
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Example 6: T to the use of L for life, remainder to those of L’s children who attain 25 or marry
before attaining 25
(a) At T’s death L is dead and has 2 children (A & B) aged 5 and 2 ….
Same as Example 5a
LIB = A & B
CERTAIN VESTING (assuming they live to 25 / marry)
(b) At T’s death L is alive but unmarried and with no children. Two years after T’s death L
marries W. Ten years after T’s death L & W die leaving 2 children A aged 8 and B aged 6
Same as Example 5b
(c) At T’s death L is alive – L is unmarried and has no children – two years after T’s death L
marries W – 10 years after T’s death L and W die leaving two children, C aged 5 and D aged 2
LIB = L
Wait and see if D marries in the PP, and if not apply age reduction when D turns 23
NOTE: C still must wait until 25 or else get married.
(d) same as (c) above, but sixteen years after L’s death, D, then aged 18, marries
No need for age reduction – D’s interest vests upon marriage (at age 18)
C can use the rule in Saunders v Vautier because D is no longer a bene of the trust
(e) same as (c) above, but sixteen years after L’s death, D, then aged 18, dies
Age Reduction would be inapplicable and we would wait until C marries or turns 25,
whichever is sooner
Example 7: CLASS CLOSING RULES - T to the use of his wife for life, remainder to his nieces
and nephews
(a) At T’s death his parents are dead. He is predeceased by his wife and survived by a brother and a sister
each without children. T’s brother has a child, N1, 19 years after T’s death. T’s sister has a child, N2,
25 years after T’s death. No other nieces and nephews are ever born.
LIB = bro and sis
THEREFORE, certain that N1 and N2 interests will vest within the PP (i.e., when they are born)
(b) At T’s death his parents are dead. He is survived by his wife and a brother and a sister and a nephew
N1 (son of brother). One year after T’s death his brother has a second son, N2. Two years after T’s
death his wife dies. Three years after T’s death his sister has a daughter N3. No other nieces and
nephews are ever born.
CLASS CLOSES when wife dies (because there are already two vested interests) – so N1 and
N2 inherit, N3 does not.
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IF, there had been a CP (“attain 21”) then the class closes only once the first interest vests
when N1 (or whoever) reaches age 21.
IF there was no CP and no N’s born at time of wife’s death then WAIT&SEE until all LIB’s
are infertile
(c) At T’s death his mother is still alive, aged 56. T is predeceased by his father and his wife and
survived by a brother and sister, each without children.
Same as (a) above, since we can apply the presumptions of fertility to distribute the gift
sooner – IE – if bro or sis (who are LIB’s) have any children they will inherit
(d) T pre-deceases parents when they are both aged 56. T’s wife dies before him and T is survived by a
brother and a sister, each without children.
UNCERTAIN at creation of interest when the interests of any potential nieces and nephews
may vest.
WAIT AND SEE until events establish that T’s Father can no longer have any children
THEN CLOSE THE CLASS (and any living nieces/nephews inherit)
This is the case since the presumptions of fertility eliminate the possibility that T’s
Mother may have more children, but not T’s Father.
o OR, the class closes when events determine that there will be no further children of bro’s / sis’s
who were alive at the time it is determined that T’s Father could produce no further bro’s/sis’s???
(e) At T’s death T’s parents are both alive each aged 45. T is also survived by his wife and a brother B1.
One year after T’s death, T’s parents have a third son, B2. Two years after T’s death his parents and B1
die. Ten years after T’s death W dies. Twenty-two years after T’s death B2 has a daughter N1. Thirty
years after T’s death B2 has a second daughter, N2. Thirty-three years after T’s death B2 dies.
LIB = W, since (via s. 9 of the Perpetuities Act) the trust instrument creates an interest with
reference to her death – IE = a life estate
o W’s death also allows us to use the class closing rules to determine whose interests will
vest.
LIB = T’s parents, since they could conceivably have more children.
1 – Wait & See if any interests will vest within the perpetuity period.
W is the last to die = the first opportunity to distribute the trust property to a class of benes.
o At this time the class would close if there were any nieces and nephews.
Since there are none, the class stays open.
o N1 and N2 are born within 21 years after W’s death and both qualify.
o NOTE: B2’s death naturally closes the class but bears no impact on the outcome since
B2’s death occurs outside the perpetuity period.
(f) At T’s death T’s parents are both alive each aged 45. T is also survived by his wife, a brother B1 and a
nephew N1 (son of B1). One year after T’s death, B1 has a second son, N2. Two years after T’s death N2
dies. Three years after T’s death T’s wife dies. Four years after T’s death B1 has a third son N3. No more
nieces and nephew are ever born.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
LIB = W, since (via s. 9 of the Perpetuities Act) the trust instrument creates an interest with
reference to her death – IE = a life estate
o W’s death also allows us to use the class closing rules to determine whose interests will
vest.
o N1 inherits = alive when W dies
o N2’s estate inherits = born before the class was closed.
o N3 = excluded by the class closing rules since he was born after W’s death.
Example 8: T to the grandchildren of A who attain 21.
(a) At T’s death A is dead. A has two children, B and C, who are alive. There are no grandchildren.
LIB = B and C
The disposition would be valid under the common law since it does not offend the rule
against perpetuities
(b) At T’s death A is alive. A has two children, B and C, who are alive. There are no grandchildren. Two
years after T’s death A has a third child D. Twenty-five years after T’s death the position is as follows: A,
B, C and D are still alive. A has had not more children. B has had two children, X and Y, aged 21 and 18.
C and D have had no children. Twenty-seven years after T’s death C has a child, Z.
LIB = A, B and C
1 – Wait & See … 25 years after the death of T, no lives in being have died AND since D
could have children after all of the lives in being have died THERE IS UNCERTAINTY that
could void the gift for remoteness.
TO SAVE THE GIFT, apply class closing rules (WHEN X REACHED AGED 21)
o CCR #2: Class closes as soon as the share of one member of the class vests or at the
earliest moment for distribution (IE – WHEN A GRANDCHILD OF A ATTAINS 21),
whichever is the later.
o X and Y are included in the class but Z is not since they were born after the class was
closed.
o Y’s interest is contingent – must attain age 21 for it to vest
IE - 25 years after T’s death, we can distribute half of the trust property to
X and hold the rest for Y when they turn 21.
If Y dies before they turn 21, X would get the other half.
(c) At T’s death A is alive. A has two children, B and C, who are alive. There are no grandchildren. Two
years after T’s death A has a third child, D. Twenty-five years after T’s death A, B and C are all killed in
a crash. At the time of the crash D has a child, E, aged 2. Two months after the crash a second child, F, is
born to D after a normal pregnancy. Three years after the crash a third child, G, is born to D.
LIB = A, B and C
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
INITIAL UNCERTAINTY since A could have a 3rd child that could outlive the other 3 and
have a child who could live beyond the perpetuity period.
TO SAVE THE GIFT, use CCR’s
o E = inherits since they attain 21 within 19 years of the death of the lives in being.
o F = inherits the law makes exceptions for gestation periods.
o G =does NOT inherit b/c they are 18 when the perpetuity period ends and age reduction
cannot reduce the age below 21.
RAP applied to General and Special Powers of Appointment (NOT EXAMINABLE)
Powers of appointment defined in PA s. 11
PA s. 4, in effect, applies the Wait & See rule to the creation of powers of appointment
No specific PA sections deal with exercise of powers – rather general provisions deal with
powers of appointment in the same way as other limitations
General power of appointment:
WHO EXERCISES:
o power that only one person (the “donee” of the power) can exercise
WHO OWNS:
o donee is regarded as the owner of the property as soon as the power is exercisable
WHO CAN BENEFIT:
o donee has uncontrolled discretion to choose anyone as a bene under the trust instrument,
including themselves
o EXAMPLE:
“On trust for such of the descendents of my parents as my brother shall appoint.”
CREATION OF POWER (VALIDITY):
o GPA valid if it is exercisable within the perpetuity period BUT can also be exercised outside of
the perpetuity period
EXERCISE OF POWER (APPOINTMENT):
o Appointment under GPA is considered disposition of donee’s own property, so perpetuity period
begins to run at the date of appointment (not the date of creation of the power)
o WAIT & SEE:
Under the Perpetuities Act, the wait and see rule now applies to the creation of powers of
appointment so that with respect to general powers, then, becoming exercisable (vs. being
exercised) within the perpetuity period is analogous to the vesting of an interest within
the perpetuity period.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Special power of appointment:
WHO OWNS:
o Donee is NOT regarded as the (legal) owner of the property as soon as power is exercisable –
rather upon appointment, the property is deemed as a disposition of the settler/testator
WHO CAN BENEFIT:
o Donee can only choose the instrument-defined person or class of persons
o EXAMPLE:
“On trust for such of my children as my husband shall appoint.”
NOTE: SPA can be accompanied by a duty to appoint.
EG – “Blackacre to A upon Trust for L for life, then for such of L’s children as L
shall by deed or will appoint, L being under a duty to make an appointment.”
CREATION OF POWER (VALIDITY OF TRUST):
o only if it must be exercised, if at all, within the perpetuity period.
If it is exercisable outside of the perpetuity period, then it is void.
EXERCISE OF POWER (VALIDITY OF APPOINTMENT):
o Appointment under SPA is treated as disposition of settlor’s / testator’s property (not the donee /
trustee’s property), SO perpetuity period runs when the power is created (not appointed/assigned)
o INITIAL CERTAINTY - Second-look doctrine:
For purposes of perpetuity period re: SPA’s, can look (at the time of appointment) at
facts existing both at the commencement of the period (i.e., time of creation), and also at
the facts existing at the date of the appointment.
IE – initial certainty (at the time of creation!) is NOT REQUIRED – only
retrospective certainty req’d
o WAIT & SEE (redundant on top of ‘Second-Look doctrine’):
Under the Perpetuities Act, for special powers, the power is valid only in so far as it is in
fact exercised within the perpetuity period.
If after waiting and seeing the power is not exercised, it is invalidated by the Act.
Saunders v. Vautier (the other way to end the trust)
Saunders v. Vautier (1841) 4 Beav. 115
PURPOSE:
When combined with RAP, these rules can ensure that a trust cannot last for ever.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Allows the owners of already-vested (within the perpetuity period) interests to, upon attaining
their majority, bring the trust to an end.
RATIONALE:
One of the reasons why we need a rule limiting the duration of a non-charitable purpose trust
is that a trust for a purpose has no individual benes who could use the rule in Saunders v.
Vautier to bring it to an end and hence, the trust could become perpetual. A charitable trust
also lacks benes and can be made perpetual however, the law takes a benevolent approach to
charity and the public supervision of charitable trusts.
PRE-REQS:
In order for both of these rules to operate, the trust is required to have human benes.
PURPOSE TRUST - the law must find different ways in order to ensure that a trust does not
last perpetually – the rule in Saunders v. Vautier can not be applied to end the trust
RULE:
SOLE BENE - If the sole bene of a trust is sui juris (= AGE OF MAJORITY AND OF SOUND
MIND) then they can compel the trustee to transfer the legal title to the trust property to them (the
bene) and thereby bring the trust to an end.
MULTI BENE - If all the benes are sui juris, and if they all agree, they can combine to bring the
trust to an end.
o EXEMPTIONS - rule cannot be applied if:
(a) One or more of the benes does not agree to bring the trust to an end,
(b) One or more of the benes are under the age of 21; and
(c) There is a possibility of benes who are yet unborn.
C - The Rule Against Indestructibility
a.k.a (Other) Rule Against Perpetuities
(OLDEST) Original common law Rule Against Indestructibility:
A purpose trust may only last for a LIB + 21 years (the perpetuity period)
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(OLD) Recent English common law:
All purpose trusts, except charitable purpose trusts, are void ab initio
IE – a trust (except for a charitable one) MUST have an individual bene(s)
(NEW) Ontario Statute – Perpetuities Act s. 16
s. 16 --- Specific non-charitable trusts
(1) A trust for a specific non-charitable purpose that creates no enforceable equitable
interest in a specific person shall be construed as a power to appoint the income or the
capital, as the case may be, and, unless the trust is created for an illegal purpose or a
purpose contrary to public policy, the trust is valid so long as and to the extent that it is
exercised either by the original trustee or the trustee's successor, within a period of
twenty-one years, despite the fact that the limitation creating the trust manifested an
intention, either expressly or by implication, that the trust should or might continue for a
period in excess of that period, but, in the case of such a trust that is expressed to be of
perpetual duration, the court may declare the limitation to be void if the court is of opinion
that by so doing the result would more closely approximate the intention of the creator of
the trust than the period of validity provided by this section.
Idem
(2) To the extent that the income or capital of a trust for a specific non-charitable purpose
is not fully expended within a period of twenty-one years, or within any annual or other
recurring period within which the limitation creating the trust provided for the expenditure of
all or a specified portion of the income or the capital, the person or persons, or the person
or person's successors, who would have been entitled to the property comprised in the
trust if the trust had been invalid from the time of its creation, are entitled to such
unexpended income or capital.
PURPOSE: To establish the validity in Ontario of trusts for non-charitable purposes.
IE – to modify the common law Rule Against Indestructibility which held that a trust
for a non-charitable purpose could not last longer than the perpetuity period of a life in
being plus 21 years.
EFFECT: “A trust for a specific non-charitable purpose that creates no enforceable equitable
interest in a specific person … is valid so long as and to the extent that it is exercised
… within a period of twenty-one years”.
To reduce (or increase from the English common law that they are ‘void ab initio’) the
permissible duration of a non-charitable purpose trust from a LIB + 21 years to just
twenty-one years.
D - The Rule Against Accumulations
DEFINITION: Prohibits directions to accumulate income for any period longer than is specified
by the Accumulations Act RSO 1970
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
RATIONALE: Necessary to have a period-limiting rule for a non-charitable purpose trust, since
there are no individual benes that could use the rule in Saunders v. Vautier to
bring the trust to an end.
COMMON LAW:
With respect to income that may be accumulated under a trust:
(1) The Accumulation must vest within the perpetuity period; and
(2) When a person (or persons) is absolutely entitled to income being accumulated, they may
invoke the rule in Saunders v. Vautier to bring an end to the accumulation, notwithstanding a
contrary direction in the trust instrument.
STATUTE – Accumulations Act:
s. 1 Maximum accumulation periods
(1) No disposition of any real or personal property shall direct the income thereof to be
wholly or partially accumulated for any longer than one of the following terms:
1. The life of the grantor.
2. Twenty-one years from the date of making an inter vivos disposition.
3. The duration of the minority or respective minorities of any person or persons
living or conceived but not born at the date of making an inter vivos disposition.
4. Twenty-one years from the death of the grantor, settlor or testator.
5. The duration of the minority or respective minorities of any person or persons
living or conceived but not born at the death of the grantor, settlor or testator.
6. The duration of the minority or respective minorities of any person or persons
who, under the instrument directing the accumulations, would, for the time being, if
of full age, be entitled to the income directed to be accumulated.
vs ITA: This is different than under the ITA treatment, in that it applies only to income (cash in the
trust) vs. the ITA under which a deemed disposition is inferred by the Act, doesn’t
actually have to take place
Application of subs. (1) restrictions
(2) The restrictions imposed by subsection (1) apply in relation to a power to accumulate
income whether or not there is a duty to exercise that power, and such restrictions also
apply whether or not the power to accumulate extends to income produced by the
investment of income previously accumulated.
Idem
(3) The restrictions imposed by subsection (1) apply to every disposition of real or personal
property, whether made before or after its enactment.
Previous acts, etc., not affected
(4) Nothing in subsection (1) affects,
(a) the validity of any act done; or
(b) any right acquired or obligation incurred,
under this Act before the 6th day of September, 1966.
Accumulations for the purchase of land
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(5) No accumulation for the purchase of land shall be directed for any longer period than
permitted under subsection (1).
Application of invalid accumulations
(6) Where an accumulation is directed contrary to this Act, such direction is null and void,
and the rents, issues, profits and produce of the property so directed to be accumulated
shall, so long as they are directed to be accumulated contrary to this Act, go to and be
received by such person as would have been entitled thereto if such accumulation had not
been so directed.
EFFECT:
s. 1(a) - The Act specifies 6 allowed periods of accumulation, but only one of those periods may be taken.
Despite s. 6 (1) of the Act, a direction to accumulate income for a period in excess of any one of the
allowed periods is not wholly void, but only void as to the excess. An invalid limitation is modified so
that it can last no longer than the most appropriate of the allowed periods.
EG - if a will directs that income be accumulated “for the life of A,” the direction is valid for only
21 years from the death of the testator. In effect, the accumulation period is changed from “the
life of A” to the “life of A or 21 years from the death of the testator whichever is the shorter
period.” Sometimes it is not obvious what the appropriate modification is to an invalid limitation.
s. 2 Saving as to debts or portions for children
Nothing in this Act extends to any provision for payment of debts of a grantor, settlor,
devisor or other person, or to any provision for raising portions for a child of a grantor,
settlor or devisor, or for a child of a person taking an interest under any such conveyance,
settlement or devise, or to any direction touching the produce of timber or wood upon any
lands or tenements, but all such provisions and directions may be made and given as if
this Act had not been passed.
EFFECT:
s. 2 - Where income is accumulated during the minority of an infant who has a vested interest in the
income, not because of any direction in the trust instrument, but simply because an infant cannot give a
valid receipt for it, the Act does not apply.
EG - if a will directs that income be accumulated for 21 years from the death of the testator and
then be paid to A’s first son, and at the expiry of 21 years, A’s first son is aged 2, the accumulation
of surplus income which is not required for the infant’s maintenance, and (and must) continue for
another 16 years
s. 3 Rules as to accumulations not applicable to employee benefit trusts
(1) The rules of law and statutory enactments relating to accumulations do not apply and
shall be deemed never to have applied to the trusts of a plan, trust or fund established for
the purpose of providing pensions, retirement allowances, annuities, or sickness, death or
other benefits to employees or to their surviving spouses, dependants or other benes.
4 - Where the trust instrument directs the accumulation of income in which a bene has a vested
interest, then under the rule in Saunders v. Vautier, the bene can stop the accumulation as soon as
they attain 21 notwithstanding the contrary direction in the trust instrument. The Act, of course,
will not apply to the direction to accumulate once it has become ineffective.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
s. 1(3) - Income which is directed to be accumulated in excess of a period allowed by the Act is, for the
excessive part of the period, released from the direction by the Act, and under s. 1 (3) goes “to such person
as would have been entitled thereto if such accumulation had not been so directed.” There is a great deal
of caselaw on the meaning of these words, and a number of rules have been developed. In many cases,
however, the income for the excessive part of the period simply results to the settlor or their estate.
Part 2: TRUST CREATION
Sample Trust document here
1 - Consideration
Trusts like other forms of gratuitous dispositions do not always require that benes give
consideration before being able to assert their rights.
HOWEVER, placing a clause in the instrument for the provision of a nominal form of
consideration although not essential, helps serve as a safeguard and allow for the enforcement of
a chose in action (see discussion below).
2 - Form
Basic forms: Inter vivos or testamentary
Trust by Declaration
Example:
ATTEMPT:
o S declares in writing that henceforth he holds his estate in fee simple in Blackacre upon trust
for B. B has given no consideration. S dies without having conveyed the legal estate to B.
RESULT = TRUST FORMED
o In this example, no consideration is necessary on B’s part.
o The declaration by S entitles B to an equitable interest in Blackacre.
o THEREFORE, B can exercise their rights under Saunders v. Vautier to have the legal title
transferred to them even though S has died without conveying the legal title.
o All that is necessary here is that the trust be a proper one.
Trust by Transfer
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Example:
ATTEMPT:
S conveys her estate in fee simple in Blackacre to T to hold upon trust for B. Neither T nor B
has given consideration. S and T die without T having conveyed the legal estate to B.
RESULT = TRUST FORMED
B will be able to claim the equitable title to Blackacre against the heirs of S’s estate even
though no consideration has been given.
As a valid trust, the equitable title vests in B and as such, they can use their rights in
Saunders v. Vautier to compel the transfer of the legal title.
Gift
Example:
ATTEMPT:
S conveys their estate in fee simple in Blackacre to B as a gift. B has given no consideration
RESULT = NO TRUST
No trust since there is no separation of the legal and equitable titles as was the case in the two
preceding examples.
3 - Subject Matter
1 - Requirement of Property
PROPERTY = “all present rights, legal or equitable which are correlative to duties in some other person
or persons and which are valuable – i.e. worth money.”
KEY MUST distinguish between property rights and rights which the courts have classified as “mere
expectancies or possibilities.”
(a) RIGHTS IN REM
Rights against persons in general - pertain to the world at large and not to any particular
person.
judgement in rem - judgement that binds the world - called “choses in possession.”
Choses in possession:
HOW: rights which comprise an estate in land and rights of ownership in chattels
items of tangible personal property capable of physical possession AND capable of
transfer by delivery.
o Possession of a chose in possession is prima facie evidence of ownership.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(b) RIGHTS IN PERSONUM
rights that are enforced only against specific individuals - called “choses in action.”
Choses in action
o HOW: rights which are conferred by contract or by covenant.
o intangible personal property right recognized and protected by law.
does NOT confer present possession of a tangible object.
IE - chose in action gives an individual the right to seek the recovery of
money, a debt or a thing.
EG - This applies even if one possesses the paper title to property but the
property itself is in the possession of another. A chose in action allows you
to go to Court and recover property by means of a lawsuit. One has the right
to sue in their own name even if they are an assignee of an instrument.
Hence someone assigned a contract that creates a debt can go to Court and
sue in their own name to recover from the debtor.
NOTE: a right to sue for unliquidated damages in tort or contract however,
cannot be made the subject matter of a trust.
2 - Requirement of Certainty
Property rights to be affected by the trust MUST be described with sufficient certainty in the
instrument creating the trust to enable the trustee (OR THE COURT) to distribute the income and
capital of the trust
“OBJECT RULES”
(1) NECESSARY Certainty of Objects applies to trusts for ANY purpose OR individuals
(2) NECESSARY Rule Against Indestructibility a trust for non-charitable purpose may
not last longer than a life in being and 21 years
(3) LIKELY UNNECESSARY every trust must have an individual bene who can enforce it
a. DOES NOT APPLY to trusts with charitable purposes
b. Historically, not applied to trusts for non-charitable purposes UNTIL English cases
Astor, Shaw and Endacott
i. It has been relaxed somewhat in the most recent English cases (Denley,
Lipinski, below).
c. Ontario PA s. 16 makes non-charitable purpose trusts valid without an individual
bene for a period of 21 years
For reference:
Re: Astor, [1952] Ch. 534, Re: Shaw, [1957] 1 W.L.R. 729, Re: Denley, [1969] 1 Ch. 373, Re:
Lipinski, [1976] Ch. 235, Re: Russell (1977) 1 E.T.R. 285, see also excerpts from Waters Law of Trusts
on reserve pg. 503 – 513.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Trusts for Individual Benes = List Certainty
Rule of Certainty requires “list certainty.”
o IE – the description of the benes be sufficiently specific to allow the trustees to compile a list of
the benes.
EG - a gift “to all my children” would obviously suffice where “all my friends” would
not
Discretionary trusts = Criterion Certainty
where the trustees are given the power to select the benes, the class of potential objects need not be
defined to the standard of list certainty – only require “criterion certainty”:
o description must be sufficiently specific to enable the trustees to determine whether or
not any particular individual is within the class.
“criterion certainty” is necessary in order to uphold trusts that made a gift to a class of
individuals that was not easily ascertainable.
“criterion certainty” = description that is sufficiently specific to enable the trustees to
determine whether or not any particular individual is within the class of benes
Re: Connor 1970 DLR’s (CA) Uncertain class
FACTS:
Testator directs in her will that the residue of her estate be divided among her “close friends in such a
way and at such time as my trustee in her discretion shall determine.”
PRIORS:
At trial, the court held that the disposition created a trust with a “fiduciary power,” that is, a power
that is coupled with an obligation or duty to exercise it.
To be valid, all possible benes must be ascertained at the time of the exercise of the power.
Clause not void for uncertainty and that there would be “no great difficulty in ascertaining” the
testatrix’s “close friends.”
The court then directs the trustee to placed advertisements in 6 different localities asking for close
friends of the testatrix to come forward.
ISSUE:
Is the class of individuals sufficiently described in the trust instrument so as to allow the trustee to
make a distribution?
HELD:
Insufficiently certain, intestacy as to the residue of the estate
“friendship” in ways undefinable, as is “close”
If ads are necessary to ascertain the members of a class (vs, say, discover their whereabouts) there is
clearly difficult in ascertaining the class.
Further, once claimants have been ascertained, must decide whether each one qualifies as a close
friend Likely result is MANY borderline cases
o THEREFORE, if the limits could not be defined, no class could be ascertained.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Re: Baden’s Deed Trusts 1970 Eng Mere powers vs Discretionary Trust
FACTS:
Businessman dies leaving a trust establishing a fund that was to be distributed to “any of the officers
and employees or ex-officers or ex-employees of Matthew Hall and Co. or to any relatives or
dependants of any such persons in such amounts at such times and on such conditions (if any) as they
think fit.” Executors notify the trustees that in their view, the trusts were wholly void
PRIORS:
At trial, Q is whether the trust was void for uncertainty. Held that that the deed was one that
conferred mere powers as opposed to constituting a discretionary trust.
HISTORICALLY:
Previous case held that where trustees are given a power of selection, the power is valid if it can be
said with certainty whether any given individual is or is not a member of the class and does not fail
because it is impossible to ascertain every member of a class (In Re: Gulbenkian’s Settlements
[1968] 3 W.L.R. 1127)
ISSUE:
Do the relevant provisions constitute mere powers or a discretionary trust? Is the trust void for
uncertainty?
HELD:
Appeal allowed
OLD / INVALID VIEW:
o Failure to exercise - power:
there is a resulting trust in favour of the settlor upon failure to exercise the power or in
the case of an invalid exercise
o Failure to exercise - trust:
if the trustees fail to exercise their discretion, the court can compel them to exercise the
trust.
o To determine validity – power:
necessary for the trustee to know whether a particular individual does or does not come
within the ambit of the power.
o To determine validity – Trust:
necessary that the class among whom the trustees are to exercise their discretion must be
ascertainable.
NEW / CORRECT VIEW:
o Distinction between the validity test for powers and for trusts is wrong – they should be the
same test:
the trust is valid if it can be said with certainty that any given individual is or is not a
member of the class.
o Differences between mere powers and discretionary trust powers maintained are:
MERE POWERS:
trustees may be under a fiduciary duty to consider whether or in what way they
should exercise their power, but the court will not normally compel its exercise
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Court will intervene if the trustees exceed their powers, and possibly if they are
proved to have exercised it capriciously.
DISCRETIONARY TRUST POWER:
if the trustees do not exercise it, the court will. It will do so in the manner best
calculated to give effect to the settlor’s or testator’s intentions.
It may do so by appointing new trustees, or by authorizing or directing
representative persons of the classes of benes to prepare a scheme for
distribution, or even, should the proper basis for distribution appear by itself
directing the trustees so to distribute.
o TRUSTEE’S DUTY OF INQUIRY / ASCERTAINMENT:
trustees ought to make a survey of the range of objects or possible benes as will enable
them to carry out their fiduciary duty. A wider and more comprehensive range of
inquiry is called for in the case of trust powers than in the case of mere powers.
Questions: Is it enough for one person to be in a class in order for it to be considered valid? Is the
distinction between discretionary trusts and powers relevant in determining the wishes of the settlor?
Re: Baden’s Deed Trusts (2) 1970 Eng Movement away from strict initial certainty
ISSUE:
This time, counsel for the executors contended that the class of individuals was so broad as to be
“administratively unworkable.” IE – the definition of “relative” in the trust instrument had presented
an evidentiary problem in satisfying the test set forth by the House of Lords.
o Specifically, it would be impossible to prove that an individual was not a relative of an employee
or former employee since at best, one could only prove that any given individual could not
provide sufficient proof that they were a relative.
RATIO:
“relatives” not deemed to uncertain…
o “A trust for selection will not fail simply because the whole range of objects cannot be
ascertained.”
o Ok, so long as at least a substantial number of objects can be said with certainty to fall within the
trust (even if others are “not proven” to be inside the trust)
Movement away from absolute necessity for initial certainty – beginning of flexibility to give
effect to testator’s intention
Validity or invalidity is to depend upon whether you can say of any individual “is or is not a member
of the class,”
Re: Baden’s Deed Trusts 1971 HL Discretionary trusts
FACTS:
Trustees were given the power to distribute income to “any of the officers and employees or ex-
officers or ex-employees of [a particular company] or to any relatives or dependants of any such
persons in such amounts at such times and on such conditions (if any) as they think fit.”
HELD:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Although it would be impossible to compile a list of objects of the discretion, only criterion
certainty is required
LATER:
Criterion certainty had been achieved, and the trust was therefore upheld: Re: Baden’s Deed
Trusts (No. 2) [1970] Ch. 9 (C.A.).
Purpose Trusts: (see SUB 3 – below)
General rule is that the purposes must be defined with sufficient certainty to enable the trustee to
carry out the trust and, if necessary, to enable the court to enforce the trust.
Trusts for “charitable” purposes form an exception to the general rule: They are not subject to
the requirement of certainty of objects.
SEE ‘F – PURPOSE TRUSTS EXPLORED’ BELOW
4 - Intention to Create Trust
KEY: To determine whether a trust exists, Court must decide whether there was an intention to impose
a trust obligation
QUESTION: Is this determination to be objective or subjective?
The Commissioner of Stamp Duties v. Jolliffe. 1920 OZ Modified objective standard
FACTS:
Mr. Joliffe opens a bank account in Queensland in the name of “Mrs. Hannah Jolliffe – Edwin
Alfred Jolliffe, Trustee.” After the death of Mrs. Jolliffe, Mr. Jolliffe withdraws the balance
along with the accrued interest before paying the taxes due under the administration of Mrs.
Jolliffe’s estate. Mr. Jolliffe claims that he never intended to set up a trust for his wife and was
withdrawing his own funds.
Note, in Australia at the time, one could only earn interests on one account under a certain
amount. Mr. Jolliffe felt that if he opened an account in his own name, he would not be able to
earn interest.
ISSUE:
Did the settlor (Mr. Jolliffe) intend to set up a trust? Should the appropriate test be an
objective or subjective one?
HELD:
We know of no authority that would justify us in deciding that “by using any form of words,
a trust can be created contrary to the real intention of the person alleged to have created it.”…
It is obviously essential that in order to create a trust, there should be the intention of creating
a trust, and therefore “if upon consideration of all the circumstances the court is of the
opinion that the settlor did not mean to create a trust, the Court will not impute a trust
where none was in fact contemplated.”
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
As a result, judgment is awarded to Mr. Jolliffe.
DISSENT:
Express trusts are declared either by word or by writing. These declarations appear either by
direct or manifest proof, or violent and necessary presumption.
GOOD RULE An open declaration of trust is therefore an expression of intention
that is final and beyond recall.
o Declaration not necessarily formal (unless required by statute)
o IMPLIED declaration of trust requires evaluation of the actual intent of the act or words
relied upon
INTENTION alone = insufficient
MERE CONDUCT without (evidence of) INTENTION = insufficient
VESTING:
o “Once a clear declaration of trust is made, that is an effectual vesting of the property in
equity in the bene.”
“If the law permits him to deny the effect of his explicit statement of trusteeship – to deny it
that is, as against his wife’s estate – merely because of his secret inconsistent mental attitude,
then there is no security for any declaration of trust however formal or explicit.”
Questions: Do you believe the test should be an objective or subjective one? Does Jolliffe in order to
establish that he didn’t intend to create a trust, have to realize that he is doing something illegal?
Resulting Trust
DEFINITION:
o a trust that is implied by law where the settlor intended to retain the beneficial interest in
a property but has transferred the legal title to a third party who was to act as trustee
IMPLIED = by the settlor’s lack of intention to transfer the beneficial interest.
“RESULTING” = As a result of the lack of intention, the beneficial interest is said to
“result,” “remain with,” or revert back to the settlor or their estate as the case may be.
BASIS:
o The rules that give rise to a resulting trust are based upon a presumed intention.
o Evidence of the actual intention can rebut the presumption of a resulting trust.
Precatory Words
Precatory words = words and phrases used in a will giving the bene some sense of direction of what the
testator wishes to be done with the property after they dispose of it in due course.
IE – not quite a life estate with a remaining interest – rather a request that the bene make a
particular disposition of property in their own will.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Johnson v. Farney 1913 ONCA “Wish”, “request”, etc ≠ TRUST
FACTS:
The testator dies leaving behind a will leaving all of his real and personal property to his
wife. The gift is prefaced with the statement “I also wish if you die soon after me that you
will leave all you are possessed of, to my people and your people equally divided between
them, that is to say your mother and my mother’s families.”
After subsequently purchasing a piece of real property prior to his death, the testator added a
codicil to his will requesting that his Wife do as she saw fit with the property but that if she
were to die intestate, the property was to be divided equally among the testator’s and his
wife’s siblings.
The Wife dies 5 years later and leaves all of the property to the members of her own family.
ISSUE:
Did the precatory words in the will lead to the creation of a trust?
HELD:
Appeal dismissed Wife’s heir keeps property
o Clear that the testator did not intend his expressed wish as a mandate
Language of “wish” or “request” must not be given a mandatory meaning
Must look at the whole will to determine whether the alleged bene is either (a) a mere trustee
or (b) they take beneficially with the superadded expression of a desire or a wish that they
will do something in favour of a particular object, but without imposing any legal obligation.
Hayman v. Nicholl 1944 SCC Look at the will as a whole – Precatory Words no good
FACTS:
Codicil leaving money to daughter (Sutherland) says that funds given “in full confidence that
she will dispose of the same in accordance with the wishes that I have expressed to her.”
o Daughter uses the money to buy a car and purchase securities in her own name
Other children claim that the money was intended to be held in trust for their benefit.
o At the trial level, it could not be proven that Mrs. Sutherland was aware of any trust
obligations imposed on her.
After bene dies intestate the other children claim that a resulting trust should exist and that
they as the residual legatees be entitled to any funds left over from their mother’s bank
account.
ISSUE:
Can the Court infer that a resulting trust is said to exist here?
Do the instructions contained in the codicil direct that Mrs. Sutherland act as trustee in
accordance with the wishes expressed to her by her mother?
HELD:
Agift to A in “full confidence” that they will do certain things does not as a general rule
establish a trust.
The unambiguous language of other codicils (which did impose trusts) makes it clear that a
trust was not the intention in this codicil
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
The word “confidence” is a neutral word. If the will as a whole indicates an intention to
create a trust, the Court will so construe the will; otherwise it will not.
Per Justice Rand: To give effect to the true intentions of the testator, it is necessary that we
view the entire testamentary instrument as a whole.
Questions: Was the Court right to differentiate between the 4th codicil to Mrs. Sutherland and the others?
Are the intentions of the testator being ignored here? What does this case tell us about the use of
precatory words?
SUB 3 - PURPOSE TRUSTS
The “objects” of a trust are the benes/purposes for whom/which the trust is established
Exception for Charity: No Certainty of Objects Necessary
Trusts for charitable purposes are exempt from the requirement of determinate benes
Since they are for the public benefit, the AG (as the Crown’s representative) was, since the
seventeenth century given responsibility for their enforcement.
o In Ontario Charities Accounting Act provides that the Public Trustee enforces charitable trusts
DEFINITION OF CHARITY:
No statutory definition of (legal concept) of charity
o Technically, may be described as one which is beneficial to at least a section of the public
Conflicting common law:
o ENGLAND – tax benefits for trusts “established for charitable purposes only.” have led to trend
toward restricting the scope of the concept
o CANADA – less restrictive definition that in England
o Historically, reliance is placed upon the preamble of the English Statute of Charitable Uses
(1601) to define a range of charitable uses which can be expanded upon through analogy.
Privileges for Charitable Purpose Trusts
1. They do not have to satisfy the rule requiring the certainty of objects.
a. If the terms of the charitable purpose trust are vague, the Trustees can apply to a court
with a specific plan that becomes a plan for the trust – “approving the scheme”
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
b. If all of the objects of the trust are charitable, then the Court has the power to remedy the
deficiency in the definition of the objects consistent with the general language of the
trusts which would give certainty to the trusts;
2. They are not subject to the Rule Against Indestructibility.
a. This allows you to have a permanent trust that exceeds the perpetuity period.
3. They do not have to have an individual bene that can enforce the terms of the trust.
a. IE - holding in cases such as Endacott does not apply to trusts for charitable purposes.
b. The Public Trustee also has the right to enforce the terms of the trust as if they were the
bene.
4. They are subject to the doctrine of Cy-près.
a. Allows a Court to modify the trust in keeping, as close as possible, with the wishes of the
grantor.
b. Allows a Court to amend charitable trusts when their objects can no longer be carried out
i. EG - if a trust has as its objects, a hospital that subsequently closes, the Court can
modify the terms of the trust to make it for the benefit of another hospital.
ii. Courts have also used this doctrine to modify trusts of a discriminatory nature.
c. Only for trusts of a charitable trusts, not private trusts.
d. NOTE: residual bene can argue that this doctrine ought not to be used by a Court, and if
successful, may be able to gain a resulting trust on the trust property.
Historical - Defition
The Statute of Charitable Uses 43 Eliz. 1 c. 4 (1601)
An Act to redress the mis-employment of Lands, Goods, and Stocks of Money
heretofore given to certain charitable uses.
Whereas Lands, Tenements, Rents, Annuities, Profits, Hereditaments, Goods, Chattels,
Money and Stocks of Money, have been heretofore given, limited, appointed and
assigned, as well by the Queen’s most excellent Majesty, and her most noble Progenitors,
as by sundry other well disposed Persons; some for Relief of aged, impotent and poor
people, some for Maintenance of sick and maimed Soldiers and Mariners, Schools of
learning, Free Schools, and scholars in universities, some for Repair of Bridges,
Ports, Havens, Causeways, Churches, Sea-banks and Highways, some for education
and Preferment of Orphans, some for or towards Relief, Stock or Maintenance for
Houses of Correction, some for Marriages of poor Maids, some for Supportation, Aid
and Help of young Tradesmen, Handicraftsmen and persons decayed, and others for
Relief or redemption of prisoners or Captives, and for Aid or ease of any poor
Inhabitants concerning payments of Fifteens, setting out of Soldiers and other
taxes; which Lands, Tenements, Rents, Annuities, profits, Hereditaments, Goods,
Chattels, Money and Stocks of Money, nevertheless have not been employed according to
the charitable Intent of the givers and Founders thereof, by reason of Frauds, Breaches of
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Trust, and Negligence in those that should pay, deliver and employ the same: For Redress
and Remedy whereof, Be it enacted.
EFFECT: Preamble list is not exhaustive and HAS considerable weight.
Re: Foveaux Applying the Statute of Charitable Uses
Chitty, J says:
Charity in law is a highly technical term. The method employed by the court is to consider
the enumeration of charities in the Statute of Elizabeth, bearing in mind that the
enumeration is not exhaustive. Institutions whose objects are analogous to those
mentioned in the Statute are admitted to be charities; and, again, institutions which are
analogous to those already admitted by reported decisions are held to be charities. The
pursuit of these analogies obviously requires caution and circumspection. After all, the
best that can be done is to consider each case as it arises, upon its own special
circumstances.
Income Tax Special Cmsrs v. Pemsel Eng Principal divisions of “Charity”
Lord McNaughten, says:
“Charity” in its legal sense comprises four principal divisions:
trusts for the relief of poverty;
trusts for the advancement of education;
trusts for the advancement of religion; and
trusts for other purposes beneficial to the community, not falling under any of the
preceding heads.
o The trusts last referred to are not the less charitable in the eye of the law,
because incidentally they benefit the rich as well as the poor, as
indeed every charity that deserves the name must do either directly or
indirectly.
COMMENTARY:
Note that in order to fall within the fourth category, the purpose must still satisfy the requirement of
being within the “spirit and intendment of the Statute of Elizabeth.”
Recent - Definition
Modern categories that have (per Cullity) been included as charitable objects fall under the following
headings:
1. the advancement of education or religion;
2. the relief of poverty;
3. illness or disablement;
4. the promotion of health, culture, industry, national defence or governmental works.
Requirements of a Charity:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
1. The purpose must be exclusively charitable;
2. To be charitable, it must be beneficial in the special sense; (i.e., charitable not profit-oriented)
3. Its beneficial effects must be available to a section of the public;
4. the purpose must contain no element of private profit.
Recent cases re: Exception for Charity
Vancouver Society of Immigrant and Visible Minority Women v. M.N.R. [1999] 1 S.C.R. 10
University of Victoria v. The Queen (B.C.) (2000) 185 D.L.R. (4th) 182 (B.C.S.C.) (upholding
trust to provide bursaries for Roman Catholic Students)
Re: Christian Brothers of Ireland (2000) 47 O.R. (3d) 674 (Ont. C.A.) (holding that assets of a
charitable corporation are available to satisfy tort claims against that corporation).
Case Law: Charitable vs Non-Charitable Purposes
The common law characterization is separate from the formal statutory requirements needed
to make a trust one for charitable purposes
NOTE:
o Many of the following results overridden due to PA s. 16 – HOWEVER, the important
point is the characterization of a trust as being for a charitable or non-charitable purpose.
Morice v. The Bishop of Durham 1805 Eng Charitable purposes & Default rule re: certainty
FACTS:
Residue of a personal estate to be disposed of “to such objects of benevolence and liberality as the
Bishop of Durham in his own discretion shall most approve of.”
Next of kin asks for a declaration that the residuary bequest be declared void and hence form a
resulting trust that would be distributed to them through the estate.
At trial, The Bishop of Durham expressly disclaims any beneficial interest in himself.
ISSUE:
Do the purposes of “liberality and benevolence” mean the same as objects of charity?
HELD:
Not charitable purpose, trust too indefinite to be disposed of to any other purpose, therefore residue
remains un-disposed of and must be distributed via the estate = RESULTING TRUST
Statute of Elizabeth and analogous purposes are the ones to be considered charitable
“liberty and benevolence” (are not synonymous with “charity”) and may include objects that are not
included in the Statute of Elizabeth in the largest construction of it
Question is not whether the purposes MAY be charitable, it is whether they are BOUND to be
charitable
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
RATIO:
If not charitable purposes, and no certainty of objects, then result is resulting trust
Re: Endacott 1960 Eng Exceptions where non-charitable, public nature trusts will be enforceable
FACTS:
Testator leaves his residuary estate to the North Tawton Parish Council “For the purpose of providing
some useful memorial to myself.”
PRIOR
At trial level the gift was found to be invalid.
ISSUE
Is public character synonymous with charitable purpose?
HELD:
Objects of this trust are, clearly, not charitable.
HERE, although this trust is specific, in the sense that it indicates a purpose capable of expression, it
is of far too wide and uncertain of a nature to qualify within the class of cases cited.
Trusts of a public nature which the courts will enforce (even where not “charitable”):
(1) trusts for the erection or maintenance of monuments or graves;
(2) trusts for the saying of masses, in jurisdictions where such trusts are not regarded as charitable;
(3) trusts for the maintenance of particular animals;
(4) trusts for the benefit of unincorporated associations (though this group is more doubtful);
(5) miscellaneous cases
o Scope should not be extended or result would be validation of almost limitless heads of non-
charitable trusts
Principle that a non-charitable trust must have ascertained or ascertainable benes is too
important to narrow in this way
Also, where ruled not a trust STILL cannot say they survive as powers
o HERE, comes closest to (4) above, HOWEVER, court interprets “useful” to mean as opposed to
“ornamental” and court can’t envisage a useful memorial whose utility is confined (as the trust
requires) to the residents of North Tawton
Leahy v. AG of NSW 1959 Eng Gift to unincorp. group is endowment, not gift to members
FACTS:
The testator leaves a grazing property known as “Elmslea” to his executors and trustees “upon trust
for such order of the Catholic Church or the Christian Brothers as my executors and trustees shall
select…”
ARG:
It was argued that the clause in the trust should not be construed as creating a purpose trust, but rather
should entitle the trustees to make an absolute gift to any order of nuns they might select.
ISSUE:
Does a trust in favour of an unincorporated society, which is not a separate entity in law, violate the
rule against indestructibility if it is to be regarded as a continuing entity?
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Is this gift a gift to its individual members as tenants in common or is it a gift to a “community”?
HELD:
By making a gift to an unincorporated body of persons by their society name, the testator’s intention
was to create a trust, not merely for the benefit of the existing members of the selected order, but for
its benefit as a continuing society and for the furtherance of its work.
RATIO:
Trusts for the benefit of a named bene that is an unincorporated association of persons is
presumed to be intended as an endowment to the society (i.e., a perpetual gift), not a gift to the
individual members
o This is fine if it is for an exclusively charitable purpose/association – but it fails (PRE- PA s. 16)
if it is for a non-charitable purpose (under PA s. 16, can only last for 21 years)
Can’t make a charitable gift to an unincorporated association if the objects of the corporation
are not charitable
Rule in Whitby vs. Mitchell abolished
Rule applied to legal and equitable remainders in land. It prohibited the limitation, after a life interest to
an unborn person, of a remainder to an unborn person. This rule would strike down some limitation
which would be valid under the modern law of perpetuities. (This topic is not examinable).
Question: To what extent would a section similar to s. 16 of the Ontario Perpetuities Act have affected
the decisions in Re: Endacott and Re: Leahy?
5 - Incompletely Constituted Trusts
Refers to whether the trust property has been properly transferred to a trustee by a settlor / testator.
Settlor’s Actions
Milroy v. Lord 1862 Eng CA What is required to create a perfect Trust
FACTS:
Settlor wishes to establish trust for his niece (gift of 50 bank shares), via Trustee who has power of
attorney over all Settlor’s personal assets
Security certs are transferred by Settlor to Trustee, but a copy of the power of attorney is not left with
the bank as is required (per bank bylaws) for a share transfer via power of attorney to be effective
Trustee was entitled to receive the dividends from the securities and these were paid over to the bene
in the form of 13 shares of a different company purchased (in the name of the Settlor) with the
dividend proceeds
Upon Settlor’s death executor claims the 50 banks shares and the 13 dividend-proceed shares as part
of the estate
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Note: A power of attorney cannot be exercised after the death of the principal.
PRIORS:
At trial all shares were awarded to the niece / bene
ISSUE:
Is this a validly constituted trust?
HELD:
50 shares to the estate, 13 shares to the trust bene
Turner – INVALID trust – to be valid, settlor must have done everything which, according to the
nature of the property comprised in the settlement, was necessary to be done in order to
transfer the property and render the settlement binding upon him.
This can be done by:
1 - Actually transferring the property to the bene (a gift)
2 – Transferring the property to a trustee for the purposes of settlement (a trust)
3 – Declaring that they themselves hold the property in trust for these purposes. (trust)
If a gift is imperfect through one of these modes, the court will not give effect to it by applying
another of these modes.
o “there is not equity in this court to perfect an imperfect gift.”
o HERE, no perfect trust was ever created in the Trustee, the 50 shares never legally vested in him
The PofA allows him to transfer the shares into his own name, but he is the AGENT of
the Settlor, not a Trustee
o HERE, the Settlor made a (perfect) gift of the 13 dividend-proceed shares
The 13 shares were purchased from the proceeds of dividends which were handed over to
the niece and treated as hers by the Settlor.
Since the shares were purchased with the money of Mrs. Milroy and that the purchase
having been made in Mr. Medley’s name, there would therefore be a resulting trust for
Mrs. Milroy.
Question: See the excerpt from Gott v. Gott reproduced on page 372 of the casebook. Does this case
cast doubt upon the holding in Milroy v. Lord?
In re: Rose. 1952 Eng CA Settlor must do everything within THEIR power
FACTS:
Living Settlor, via Corporation, transfers shares to Trustee for his wife and son. HOWEVER, the
transfer is not registered in the books of the Corporation (as is required by their articles in order to
recognize the share transfer) until AFTER the Settlor dies (post April 10, 1943).
Upon Settlor’s death, Crown claims estate duty on the shares that, they say, were not transferred on
March 30, 1943 (the unofficial pre-death transfer date) but rather were transferred AFTER April 10,
1943 which is the relevant tax law date to allow the Crown to claim duty on the shares – IE – the
shares needed to be transferred BEFORE that date in order to avoid duty.
ARG:
Since the share transfer wasn’t registered until after April 10, 1943 they had not yet been divested in
equity and were subject to Crown tax.
ISSUE:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Did Rose divest himself of the legal title by the April 10 deadline, and if so, is this enough to save the
gift from being taxed?
HELD:
Milroy v Lord does not apply here – TRANSFER done before April 10 – no tax payable
Milroy v Lord says that no trust is created where a document which is intended to effect a transfer
does not in fact complete the transfer (because it is the incorrect documetn to pass an interest in the
property), EVEN THOUGH the intention was that it should create a trust
o HOWEVER, if it is the right document to transfer the property / create the trust THEN a trust
may arise to give effect to the transfer
o EG - Re: Fry, the testator had done everything in his power to divest himself of the shares in
question. He had executed a transfer. There was nothing else that the testator could do.
If at the date of the Settlor’s death some act remained to be done BY THE SETTLOR to
complete the gift, then the court will not compel their personal representatives to do that act
and the gift remains incomplete and fails.
o THAT IS the trust is NOT invalid because, by the regulations of the company (during which the
shares are registered and the Directors approve the transfer), there had to be a gap before the bene
could (as between herself and the company) claim the rights which the shares gave her vis-à-vis
the company.
RATIO:
If the donee does everything that they have to do within their power, than the actions of
others i.e. the actions of the corporation or its directors, do not effect the validity of the
transfer.
COMMENTARY:
It is possible to argue that the trust by transfer in this case ends up looking like a trust by
declaration.
Please see the problems on pages 378 – 79 of the casebook to see the application of these cases.
Perfection of the Imperfect Gift: The Rule in Strong v. Bird
Strong v. Bird 1874 Eng:
An imperfect gift is perfected, where:
(a) the donor intends to make an immediate gift to the donee,
(b) this intention does not change before the death of the donor,
(c) the donor fails to do everything which is necessary to be done by them to vest the legal title to the
subject matter of the gift in the donee,
(d) the donor dies, and
(e) the donee becomes an executor or administrator (“estate trustee” in Ontario) (either sole or jointly
with others) of the donor’s estate thereby obtaining legal title to the subject matter of the gift;
then
Application to Trusts:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(a) the donor is the settlor,
(b) settlor’s intention is to create an immediate trust by transferring the property to a trustee
to hold on trust for the bene.
(c) settlor dies
(d) intended trustee (not the bene) becomes the estate trustee, then this accident will perfect
an incompletely constituted trust.
Disclaimer by Trustee
Trustee has the right to disclaim their role as trustee since no individual can be forced to
become the express trustee of an express trust created by another individual.
Smith v. Stuart 1866 Eng. OLD – Disclaimer makes trust void ab initio
a disclaimer by the trustee defeats the trust.
This is the case since the disclaimer was held to destroy the equitable interest of the bene ab
initio (or from the date at which the trust was created not the date of the disclaimer).
Mallot v. Wilson 1903 Eng NEW – Disclaimer leads to Declaratory Trust
Default rule is that a property passes to a trustee until such time as they divest it by some
disagreement.
o Thus, a trust in this manner is not held to be void ab initio and be held as never to have
existed as in Smith
THEREFORE, until the moment the trustee disclaims, the trust exists and so upon disclaimer,
the trust property reverts to the settlor who thereafter holds the property in trust for the bene.
o IE - the settlor has created the trust, and has then become trustee of it as a result of the
action that has taken place.
RATIO:
Disclaimer by a trustee results in a declaratory trust = LEGAL title reverts to the
settler/testator (while beneficial title still held by the bene)
o VS resulting trust, where both the legal and equitable title revert to the settler due to
lack of certainty
Re: Paradise Motor 1968 (page 381) Disclaimer by Bene IS repudiation of gift
FACTS:
(i) Uncle transferred shares to nephew without telling nephew;
(ii) Uncle and the nephew quarreled and uncle said he was going to take back the shares;
(iii) Nephew said he didn’t want the ------- shares;
(iv) Nephew subsequently changes his mind.
HELD:
(1) The Uncle’s purported revocation at stage (ii) was ineffective;
(2) The nephew’s disclaimer at stage (iii) was effective;
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(3) The Nephew’s change of mind at stage (iv) was ineffective.
RATIO:
1 Once an individual has completed the formalities of the transfer of the legal title, they cannot then
withdraw
2 A repudiation of a gift (or trust) will be result in the return of
3 The law will also step in to give effect to those intentions once they have been properly made.
KEY NOTE: settlor can still retain a power to revoke the trust explicitly in the trust instrument itself and
hence override the common law rule.
6 - Writing
Chapter 7
s.. 9 – writing serves as evidence of the trust/transfer
s. 11 – writing IS the transfer / substitutive
KEY Q: Is the (required) writing an evidentiary or constitutive requirement?
Statute of Frauds
s. 9 Declarations or creations of trusts of land to be in writing
Subject to section 10, all declarations or creations of trusts or confidences of any lands,
tenements or hereditaments shall be manifested and proved by a writing signed by the
party who is by law enabled to declare such trust, or by his or her last will in writing, or else
they are void and of no effect.
EFFECT: The writing requirement provides the evidentiary basis to prove the trust for land.
Note: Personal property trusts can be oral
s. 10 Exception of trusts arising, transferred, or extinguished by implic. of law
Where a conveyance is made of lands or tenements by which a trust or confidence arises
or results by implication or construction of law, or is transferred or extinguished by act or
operation of law, then and in every such case the trust or confidence is of the like force
and effect as it would have been if this Act had not been passed.
EFFECT: EG – resulting, constructive and declaratory trusts are valid without writing – evidence of
the trust can be oral, etc
s. 11 Assignments of trusts to be in writing
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
All grants and assignments of a trust or confidence shall be in writing signed by the party
granting or assigning the same, or by his or her last will or devise, or else are void and of
no effect.
EFFECT: In order to make an assignment of a trust, the document creating the assignment must be
written.
This is a constitutive requirement. – IE - while the original trust creation can take place
orally (depending upon the nature of the trust property), any subsequent grants or assigns
must be in writing in order to be valid.
Examples
(i) S orally declares that he holds his estate (land) on trust for B. B writes to S asking him to convey the
estate. S writes back saying: "I know I made an oral declaration of trust in your favor, but I have just
learned about the Statute of Frauds and I have decided to keep the land." Advise B.
Section 9 applies. While the trust is validly created, we require evidence to demonstrate S’s intention
to create a trust for B. Since there is no written evidence of this declaration, B has no evidence to
advance their claim on the land and as a result, S gets to retain the property;
(ii) S conveys his estate to T in writing. S intends T to hold the estate on trust for B. T understands this
and genuinely agrees to it. The conveyance is absolute in form, making no mention of the trust in favor
of B. B calls on T to convey the estate. T refuses, claiming that the estate as his own. Advise B.
Section 9 applies. Despite the intention of S to create a trust for B, the lack of evidence allows T to
refuse B’s request to convey the legal title.
(iii) V sells his estate (in land) to S for valuable consideration provided by S. At S’s direction however, V
conveys the estate to T. S intends T to hold the estate on trust for him (S). The conveyance is absolute in
form, making no mention of the trust in favor of S. S calls on T to convey the estate to him. T refuses,
claiming the estate as his own. Advise S.
Section 9 applies. Since S has no means of proving the trust (between T and himself) as a settlor in
writing, they are prevented from recovering the land by the Statute of Frauds. This outcome has
since been modified by caselaw (see discussion below);
(iv) S, the holder of 100 shares in a company, orally declares that he holds the shares on trust for T. T
then orally declares that he holds his interest in the shares on trust for B. Later, T acknowledges in
writing that he holds his interest in the shares on trust for B. After this, S transfers legal title to the shares
to T. B asks T to transfer title to him. He refuses, claiming the shares as his own. Advise B.
Section 9 DOES NOT apply, so the initial declaratory trust of shares of S in favour of T is valid.
Section 11 applies to the second declaration (T in favour of B) since it is an assignment of T’s
equitable interest in the shares – IE – before T gets possession / legal title of the shares / the interest
vests. Even though there is EVIDENCE of T’s trust in favour of B, the TRUST IS INVALID
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
because Section 11 requires that assignments must be in writing – IE – T’s written acknowledgment is
not writing of the trust it is mere evidence of the trust – it’s written too late – the writing must be the
assignment.
7 - Trusts Imposed by Operation of Law
Constructive Trusts
o Constructive Trusts are trusts that are imposed by the operation of law as an equitable remedy to
correct an injustice.
o Quite often, it will be imposed on property held by one party who is held by the court to have
acted improperly towards another. As such, they can be found to be valid even though they are
sometimes in clear violation of the intentions of the parties.
ISSUE: Operation of the Statute of Frauds can result in some injustices
EXAMPLE: example (ii) above – where, despite the settlors intention to create a trust, and the
trustee’s acceptance of that trust, the trustee is able to rely on the Statute of Frauds in
essence to perpetuate a fraud of their own.
This issue is dealt with under the case of…
Rochefoucauld v. Boustead 1897 Eng: Where SofF creates injustice = constructive trust
HELD:
“It is a fraud on the part of a person to whom land is conveyed as a trustee, and who
knows of it so conveyed, to deny the trust and claim the land himself. Consequently,
notwithstanding the Statute [of Frauds], it is competent for a person claiming land
conveyed to another to prove by parol evidence that it was so conveyed upon trust
for the claimant, and that the grantee knowing the facts, is denying the trust and
relying upon the forms of conveyance and the statute, in order to keep the land
himself. “
RATIO:
GOAL: to prevent unconscionable behaviour on the part of the Trustee.
METHOD: Impose a constructive trust on the trust property in favour of the bene.
o Since the constructive trust is imposed by the operation of law, s. 10 of the Statute of
Frauds applies and one no longer needs to rely upon writing to enforce the terms of a
constructive trust.
COMMENTARY:
Uncertain whether this is an express trust where the Court attempts to circumvent the statute
or whether this is a constructive trust to which s. 9 of the statute does not apply.
Constructive Trusts are typically imposed:
(i) Where a fiduciary gains benefit from his or her position
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(ii) Where a stranger receives trust property otherwise than as a bona fide purchaser for value of
the legal estate without notice’
(iii) Where a stranger intermeddles with trust property;
(iv) Where the owner of property enters into a specifically enforceable contract for sale;
(v) A situation analogous to that discussed in the case of Rochefoucauld v. Boustead
(vi) Secret Trusts
(vii) Where the labour of one spouse contributes to the acquisition of assets in the name of the
other spouse (Pettkus v. Becker [1980] 2 S.C.R. 834; Peter v. Beblow [1993] 1 S.C.R. 980);
(viii) General principles of unjust enrichment (Petkus v. Becker supra, Peter v. Beblow supra) or
good conscience (Soulos v. Korkontzilas [1997] 2 S.C.R. 217).
This topic will not be examinable except for items (v) and (vi).
Resulting Trusts
Resulting trusts based upon the presumed intention of the settlor / testator.
Effect is that trust property reverts to the settlor if there is any uncertainty as to the objects of
the trust
Resulting trust will be implied by operation of law where:
(i) Express trust does not exhaust the beneficial interest;
Example: S transfers Blackacre in fee simple to T upon trust for her husband for life.
Question: Who is entitled to the beneficial remainder interest?
Answer: The remainder is held on a resulting trust for S. The law presumes that S never disposes
of the remaining interest and hence, Blackacre returns to S’s estate.
(ii) Presumptions of Resulting Trusts
NOTE: Presumptions can be rebutted by language that expresses the true
intention.
Presumption of resulting trust arises where:
1) A Purchase in the name of another;
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Example: P purchases in fee simple from V. Consideration moves from P to V. However, P directs
V to convey the legal title to a Trustee, T.
Two possible intentions:
1 – gift to T
2 – in trust to T for P
Where unable to learn P’s true intentions:
o Law presumes that T holds the legal title for P since P is the individual who has given
consideration for the purpose
2) Joint Purchase
Example: P purchases property from V and instructs them to convey the title to both Trustee and P.
Therefore, T and P are joint tenants who hold the legal title to the property on trust for P.
If P dies before T, T would hold the property as a trustee for the benes of P’s estate. This
presumption often arises in the case of joint bank accounts. Often, the funds held in the
account is provided by one of the parties.
This provision can be overridden by the presumption of advancement if characterized
by one of three relationships listed below (Husband to Wife, Father to Child and persons
in loco perentis to child).
3) Gratuitous Disposition
Example: S conveys property to T, and no consideration is given by T.
Two possible intentions:
1 - S intended to make a gift to T
2 - S intends to make T a trustee for themselves and therefore T still holds the beneficial
title.
The law presumes that there is a resulting trust (this is the result of these presumptions
arising from a time when it was unusual to give land away).
TO MAKE THIS AN EFFECTIVE GIFT:
Require a transfer of the legal title (Re: Rose) and an intention to make a gift. Clear
language will be necessary to express such an intention. Examples include the phrase “I
make a gift to….” or “In consideration of the natural love and affection I have for T, I…”
Presumptions of Advancement
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o Shares of what would otherwise be a resulting trust are presumed by law to be advanced to certain
familial relations.
o IE – the presumption of a resulting trust is rebutted within one of the three
enumerated categories.
1) Husband to Wife
o Under common law, NOT Wife to Husband, until FLA s. 14…
FLA s. 14 PRESUMPTIONS
The rule of law applying a presumption of a resulting trust shall be applied in questions of
the ownership of property between spouses, as if they were not married, except that,
(a) the fact that property is held in the name of spouses as joint tenants is proof, in
the absence of evidence to the contrary, that the spouses are intended to own the
property as joint tenants; and
(b) money on deposit in the name of both spouses shall be deemed to be in the
name of the spouses as joint tenants for the purposes of clause (a).
Example: In this case then, when a husband establishes a joint tenancy with his wife, the
Act overrules the common law presumption and helps to resolve the question as
to who the ultimate owner of the property is.
2) Father to Child [not mother to child, not child to parent]
3) Person in loco parentis to child (an individual who stands in the place of a parent)
The presumptions of a resulting trust with respect to the presumptions of advancement were recently
revisited by the Supreme Court of Canada. The Supreme Court found that the rule for resulting trusts was
still a valid one, but that the test for the presumption of advancement needed to be refined. Consider the
case below:
Pecore v. Pecore 2007 SCC 17 Presumptions of Advancement re: Joint Accounts
FACTS:
o Father gratuitously places bulk of assets in joint accounts with his daughter Paula whose
family (inc. quadriplegic husband, Michael) he helps support financially
o Paula’s father alone deposited funds into the joint accounts, he continued to use and control
the accounts, and declared and paid all the taxes on the income made from the assets
o In his will, Father makes specific bequests to Paula, Michael and her children but did not
mention the accounts and residue of the estate was to be divided equally between P and M.
o Upon Father’s death, P redeems the balance in the joint accounts on the basis of a right of
survivorship (which is part indicated in the bank account contract documents).
o P and M later divorced
P ARG:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o M claims that P held the balance in the accounts in trust for the benefit of her father’s estate
and, consequently, the assets formed part of the residue and should be distributed according
to the will.
PRIORS:
o At trial, held that P’s father intended to make a gift of the beneficial interest in the accounts
upon his death to P alone, concluding that the evidence failed to rebut the presumption of
advancement.
o CA dismissed M’s appeal, but found that it was not necessary to rely on the presumption of
advancement because the presumption is only relevant in the absence of evidence of actual
intention or where the evidence is evenly balanced.
ISSUE:
o Has the presumption of a resulting trust been rebutted? Does the presumption of
advancement apply? What is the standard of proof applicable to these presumptions?
HELD:
oPresumptions of advancement provide a guide for courts where evidence as to the transferor’s
intent in making the transfer is unavailable or unpersuasive AND they provide a measure of
predictability for individuals who put property in joint accounts or other gratuitous transfers.
o GENERAL RULE re: gratuitous transfers = presumption of resulting trust and ONUS is
on the transferee to demonstrate that a gift was intended.
o PRESUMPTION OF ADVANCEMENT may apply, depending on the relationship
between the transferor and transferee, and ONUS (BOP) on the party challenging the transfer
to REBUT the presumption of a gift.
o Presumption of Advancement PARENT TO MINOR CHILD
o DOES NOT APPLY TO: dependent/independent adult children
o not to dependent adult children b/c difficulty in determining “dependence”
would lead to uncertainty
o Rebuttable presumption (of resulting trust) that adult child is holding the
property in trust for the ageing parent to facilitate the free and efficient
management of that parent's affairs.
Evidence of dependency of an adult transferee child can be used to
(attempt to) rebut the presumption of a resulting trust
o JOINT ACCOUNTS:
o Rights of survivorship, both legal and equitable, vest when the account is opened
o IE - the gift of those rights of survivorship (interest in the account balance at
the time of the transferor’s death) is inter vivos
o HERE, Presumption of resulting trust means surviving joint account holder
must prove that the transferor intended to gift the right of survivorship.
o EVIDENCE:
o types of evidence considered to determine transferor intent depend on the facts of the
case, and may include:
(1) Wording used in bank documents
(2) Control and use of the funds in the account
(3) Granting of a power of attorney
(4) Tax treatment of the joints account, and
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(5) Evidence subsequent to the transfer if relevant to the transferor’s intention at
the time of the transfer.
o WEIGHT to the discretion of the trial judge how each factor should be weighted
o HERE, trial judge erred in applying the presumption of advancement, rather, s/b presumption
of resulting trust
o HOWEVER, error does not affect the disposition of the appeal because (the trial
judge found) the presumption of resulting trust would be rebutted by the evidence
that demonstrated the intention on the part of the father that the balance left in the
joint accounts was to go to Paula alone on his death through survivorship.
Madsen Estate v. Saylor 2007 SCC 18.
HELD:
o Where a parent opens a joint bank account with an adult child, a resulting trust is presumed and in
order to rebut this presumption, the child must demonstrate on a balance of probabilities that the
parent intended to gift over the right of survivorship.
The Effect of Illegality (NON-EXAMINABLE)
o Where one transfers a piece of property to a spouse so as to avoid their creditors.
Family Law Act
o Family Law Act R.S.O. 1990, c. F.3; makes changes in the law in order to achieve a fairer
division of property between spouses than the division that is produced by the common law.
o FLA policy is that both spouses should share equally in the property accumulated during the
period of marriage, regardless of which spouse is the beneficial owner of the property.
o Crystallizes into legal form only on divorce, separation or the death of one of the spouses.
o At that time, each spouse’s “net family property” must be valued and the spouse with the
lesser value is entitled to be paid one half of the difference between the two values,
thereby equalizing the value of each spouse’s net family property.
o The Act makes provision for domestic contracts (marriage contracts, cohabitation agreements and
separation agreements) under which spouses can formally agree to vary or exclude most
provisions of the Act.
Statutory Trusts
o This is another example of a trust that is established by the operation of law regardless of the
intention of the settlor.
o EG - trusts imposed under the Administration of Estates Act, the Construction Lien Act,
and the Income Tax Act
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
9 - Testamentary Trusts
o SIMPLE WILL = where a testator leaves all of their property to one bene.
o TRUST WILL (i.e., includes a Testamentary Trust) = where a trustee is designated by the will to
hold the legal title to a piece of property for the benefit of a cestui que trust.
o PERSONAL REPRESENTATIVE = acts in a similar manner / same obligations as a trustee, but
NOT considered by a court to be a “trustee” – they are an individual responsible for the
administration of an estate - either executor or the administrator.
o EXECUTOR = individual that is designated by the testator to serve in this capacity in the
actual will itself.
o ADMINISTRATOR = designated by a court to serve in this capacity when:
i. the executor is dead and obviously cannot fulfil their duties;
ii. the executor disclaims their role as an executor;
iii. an executor was not named in the will.
o Remember … per Strong v. Bird – an imperfect gift will only be perfected if certain conditions are
met…
o By making a valid will, the testator can show that they have done everything within their power
to transfer the property to the trustee
o IE – less risk of an incompletely constituted trust.
Valid Creation of a Testamentary Trust
o the formal requirements for the creation of a testamentary trust are the same as the requirements
for a will
1 – the formal, or attested will is a document which is normally:
a) Signed by the testator (see SLRA s. 7); and
b) Attested by TWO witnesses
2 - Must be in writing (though not necessarily on paper)
3 - Statutory rules re: creation of wills are found in the Succession Law Reform Act (pages 386 – 87).
SLRA s. 2 Power to dispose of property by will
A person may by will devise, bequeath or dispose of all property (whether acquired before
or after making his or her will) to which at the time of his or her death he or she is entitled
either at law or in equity, including,
(a) estates for another’s life, whether there is or is not a special occupant and whether
they are corporeal or incorporeal hereditaments;
(b) contingent, executory or other future interests in property, whether the testator is or is
not ascertained as the person or one of the persons in whom those interests may
respectively become vested, and whether he or she is entitled to them under the
instrument by which they were respectively created or under a disposition of them by deed
or will; and
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(c) rights of entry, whether for conditions broken or otherwise.
SLRA s. 3 Will to be in writing
A will is valid only when it is in writing.
SLRA s. 4 Execution
(1) Subject to sections 5 and 6, a will is not valid unless,
(a) at its end it is signed by the testator or by some other person in his or her presence
and by his or her direction;
(b) the testator makes or acknowledges the signature in the presence of two or more
attesting witnesses present at the same time; and
(c) two or more of the attesting witnesses subscribe the will in the presence of the
testator.
Idem
(2) Where witnesses are required by this section, no form of attestation is necessary.
WITNESSES: Courts have held that the witness must see or know what is written by the testator. As
long as they see that the testator has written something, the courts apply the presumption
that what was written by the testator was a signature. Furthermore, the testator must
physically see the witness sign the will. This raises the issue of defensive drafting. It is
important to take appropriate precautionary measures to anticipate and avoid any
problems that may arise from the interpretation of a will. Therefore, as a precautionary
measure, many lawyers will have both witnesses sign at the same time, so that they can
later testify to the fact.
SLRA s. 5 Will of member of forces on active service
(1) A person who is,
(a) a member of the Canadian Forces placed on active service under the National
Defence Act (Canada);
(b) a member of any other naval, land or air force while on active service; or
(c) a sailor when at sea or in the course of a voyage,
may make a will by a writing signed by him or her or by some other person in his or her
presence and by his or her direction without any further formality or any requirement of the
presence of or attestation or signature by a witness.
Certificate of active service
(2) For the purposes of this section, a certificate purporting to be signed by or on behalf of
an officer having custody of the records certifying that he or she has custody of the records
of the force in which a person was serving at the time the will was made, setting out that
the person was on active service at that time, is proof, in the absence of evidence to the
contrary, of that fact.
Where certificate not available
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(3) For the purposes of this section, if a certificate under subsection (2) is not available, a
member of a naval, land or air force is deemed to be on active service after he or she has
taken steps under the orders of a superior officer preparatory to serving with or being
attached to or seconded to a component of such a force that has been placed on active
service.
SLRA s. 6 Holograph wills
A testator may make a valid will wholly by his or her own handwriting and signature,
without formality, and without the presence, attestation or signature of a witness.
HOLOGRAPH: In order to be valid, the holograph will must have an animus testandi. It must
express a deliberate, or fixed and final intention. It cannot refer to a future
intention. The same requirements as those found for holograph wills also apply
to holograph codicils. However, it is not necessary for wills and codicils to be
in the same form.
SLRA s. 7 Position of signature
In so far as the position of the signature is concerned, a will, whether holograph or not, is
valid if the signature of the testator made either by him or her or the person signing for him
or her is placed at, after, following, under or beside or opposite to the end of the will so that
it is apparent on the face of the will that the testator intended to give effect by the signature
to the writing signed as his or her will.
Idem
(2) A will is not rendered invalid by the circumstance that,
(a) the signature does not follow or is not immediately after the end of the will;
(b) a blank space intervenes between the concluding words of the will and the signature;
(c) the signature,
(i) is placed among the words of a testimonium clause or of a clause of
attestation,
(ii) follows or is after or under a clause of attestation either with or without a blank
space intervening, or
(iii) follows or is after, under or beside the name of a subscribing witness;
(d) the signature is on a side, page or other portion of the paper or papers containing the
will on which no clause, paragraph or disposing part of the will is written above the
signature; or
(e) there appears to be sufficient space on or at the bottom of the preceding side, page or
other portion of the same paper on which the will is written to contain the signature.
Idem
(3) The generality of subsection (1) is not restricted by the enumeration of circumstances
set out in subsection (2), but a signature in conformity with section 4, 5 or 6 or this section
does not give effect to,
(a) a disposition or direction that is underneath the signature or that follows the signature;
or
(b) a disposition or direction inserted after the signature was made.
Testamentary vs. Inter Vivos Dispositions (NON EXAMINABLE)
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Will takes effect upon the death of a testator, however it may be revoked at any time prior.
If an instrument is found to be a will, all of the formal requirements of the Succession Law
Reform Act must be met.
If an instrument is designed to take effect immediately (i.e. during the grantor’s lifetime), then
this is not a will and as such, it does not have to satisfy the requirements that a will does in order
to render it valid.
Question: Some documents could resemble a will when in fact they could be considered an inter
vivos disposition. Consider the statement “I wish to keep my property until I die and then X can
have it.” Is this a will, or is it merely the creation of a life interest for oneself with the remainder
going to X?
Incorporation by Reference
Where a will makes reference to another document when making a particular disposition the
unattested, existing document will be incorporated into the will where:
(1) The unattested document is in existence at the time that the will is to be executed.
a. Onus on proving the time of this existence on those wishing to assert the validity of
the unattested document;
(2) The will must refer to an existing document; and
(3) The document must be described with sufficient certainty so that it may be identified.
a. Otherwise it will be a mere expression of testator’s wishes
Examples:
Q1 On January 1, 2006, S who has no will, draws up a memorandum in which she purports to
give all of her property on her death to B. The memorandum is not executed in conformity with
the Succession Law Reform Act. On July 1, 2006, S executes a will in conformity with the
requirements of the Succession Law Reform Act. The operative words of the will are: “I leave all
of my property in accordance with the provisions of my memorandum of January 1, 2006.” S
dies. The will and memorandum are found in an envelope in her desk. X would be entitled to S’s
property on intestacy. Advise B.
A1 Memorandum is effective even though it doesn’t conform to the act, since it has been incorporated
by reference in a valid will. The memorandum itself meets the three criteria and hence no questions arise
as to its incorporability into the will. The informality of the memorandum of January 1, is corrected by
the formalities complied with under the July 1 will that is properly entered into.
Secret and Half Secret Trusts
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Secret trust arises when property is left to a person (a legatee) under a will on the understanding
that they will hold the property as a trustee in favour of benes that are not named in the will. The
trustee’s promise can be express or implied by silence.
Patricia Johnson says the critical element is the acceptance of the trust by the trustee, not the
intention of the testator
“Fully secret trust” = those where a will is completely silent as to the existence of the trust.
it will be validly created IF there is (either expressely or by silence implied) acceptance
by the trustee, which thereby acts as inducement to the testator to leave the property to
the trustee (and if there is communication of objects BEFORE death) – intentions of the
testator (i.e., objects of the trust) are also necessary to EFFECT the trust
“Half secret trusts” = those established by a will which instruct the legatee to hold property upon
trust, but does not specify the terms of the trust or the bene.
Re: Boyes (1884) 26 Ch. D. 531:
FACTS:
T by will leaves all of his property to his solicitor, Carritt “absolutely.” having told Carritt
that he wanted him to hold as a trustee only, and that he would communicate the terms of the
trust to Carritt by letter. BUT T dies before communicating the terms to Carritt.
After T’s death, two letters were found among T’s belongings directing that the property,
except for 25 pounds, was to go to one Neil Brown.
o The letters were not witnessed in compliance with the U.K. Wills Act.
The persons entitled to T’s estate on intestacy sued Carritt for a declaration that they were
beneficially entitled to the property. Carritt in defence conceded that he was merely a trustee
of the property, but argued that he was obliged to carry out T’s wishes on the matter.
HELD:
Because the communication did not occur before T’s death (i.e., the letter were
found/communicated AFTER T died), there was no secret trust in favour of Neil Brown.
However, because Carritt had agreed to be a trustee, he did not take absolutely; therefore
there was a constructive trust in favour of the persons entitled on intestacy.
IE – there IS a trust – Carritt did hold the legal title (so NOT a resulting trust
where the property reverts to the testator b/c no trust was effected)
COMMENTARY:
Court required that the testator communicate the terms of the trust BEFORE the making of
the will was due to the fact that the testator has the right to revoke the will right up until their
death. If the communication is made before the will is made, then arguably the trustee can be
said to induce the will as a result of their undertaking to the trustee. Hence it would be
logical to conclude that communication of these intentions can theoretically occur at any time
up until the death of the testator.
Testator not allowed to rely on the Wills Act in order to advance own claim. Since Carritt
disclaims his equitable title, the Court does not wish to give him one as a result of the failure
to prove the testator’s instructions and so it thus imposes a constructive trust in favour of
those entitled on intestacy.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Secret Trusts: Counter to the SLRA since intention not expressed in the will?
Ottaway v. Norman [1972] Eng TEST for a Secret Trust
FACTS:
Ottaway verbally expresses intention that after he dies his common law wife (Hodges) should have
his house and after she dies that she should leave the house to his son William – Hodges agrees
verbally - HOWEVER, Ottaway leaves the house in fee simple to his wife
Hodges initially executes a will leaving the house to William as Ottaway intended, but after a number
of years and deterioration of the relationship between William and Hodges, she executes a will
leaving the house to her neighbours (the Normans) who she has been relying on for advice, etc and
leaving on a small amount of cash to William
William challenges this disposition arguing that there is a secret trust here to which Miss Hodges
acquiesced and that the law should impose a constructive trust on the bungalow in order to give effect
to the secret trust left by his father.
ISSUE:
Was a secret trust created in favour of William Ottaway?
HELD:
Equity will grant a remedy for those who claim an asset (“secondary donee”) held by another
(“primary donee”) on condition that it be held in trust for the bene / secondary donee
Blackwell v. Blackwell -- parol evidence is admissible to prove “fraud” in connection with a secret
trust.
o WHY? The gift is made on the faith of the trustee’s acceptance of the trust, and their refusal after
the death of the testator to give effect to it, would be a fraud on the part of the legatee.
The essential elements that must be proved to exist are:
1. The intention of the testator to subject the primary donee to an obligation in favour of the
secondary donee;
2. Communication of that intention to the primary donee; and
3. The acceptance of that obligation by the primary donee either expressly or by acquiescence.
(contrary to French v French) these elements can be in place EITHER before or after the will is made
Where a will’s terms (of gift) are absolute, clear evidence is needed before the court will assume that
the testator did not mean what they have said.
o IE - same standard of proof as required to rectify a written instrument, for there again a party is
saying that neither meant what they actually said.
HERE, Ottaway intended that Hodges be obliged to dispose of the bungalow in favour of William,
that Mr. Ottaway communicated that intention to Miss Hodges, and that Miss Hodges accepted that
obligation.
COMMENTARY:
analogy with Rochefoucould v. Boustead court says that trustee not allowed to use the Wills Act
in order to perpetuate a fraud and attempt to keep the property for themselves
Blackwell v. Blackwell 1929 Eng Half-Secret Trusts = valid (like Secret Trust)
FACTS:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
In order to provide for his ‘illegitimate’ children (without embarrassing his family), Blackwell asks
five acquaintances to serve as trustees and help provide for the children. The trustees agreed. The
testator then executes a codicil to his will. At the testator’s insistence, the solicitor was also added as
a trustee.
The codicil read:
This is a codicil to the last will of me, John Duncan Blackwell. I give and bequeath to my
friends, Mark Oliver, Arthur Ernest Harrison, Fred Wettern, Edward Wilson Barnett, and
William Peroy [the solicitor] the sum of twelve thousand pounds free of all duties upon trust
to invest the same as they in their uncontrolled discretion shall think fit to apply the income
and interest arising therefrom yearly and every year for the purpose indicated by me to
them will full power at any time to pay over the capital sum of eight thousand pounds to
such person or persons indicated by me as they think fit, and to pay the balance of four
thousand pounds to my trustees as part of my residuary estate and upon the same trusts
as are declared in my will and previous codicils.
Solicitor makes out a memorandum of the terms of the trust containing the names and address of the
benes and the aforementioned dispositions.
Testator dies and his will and four codicils were duly proven at Court.
The trustees were ready and willing to implement the terms of the trust until the testator’s widow and
son brought an action claiming that the trusts fail and that the trustees hold the twelve thousand
pounds as part of the residue of the estate.
P ARG:
o The terms of the trust are too vague to be enforced and that the solicitor’s memory is faulty and
not to be accepted.
ISSUE:
o Is this a valid half-secret trust?
HELD:
Buckmaster – where there is clear evidence that the primary bene undertook to act as a trustee for
the benefit of the secondary/final bene, they will not be allowed to suppress evidence of the trust
thereby destroying the whole object of its creation (in fraud of the intended final benes).
Viscount Simonds - For the prevention of fraud equity fastens on the conscience of trustee, a trust,
(which would otherwise be inoperative) that makes them do what the will itself does not express
o IE - it lets the trustee take (as they agreed) what the will gives them and makes them apply it; as
the court of conscience directs (in order to give effect to the wishes of the testator which would
not otherwise be effectual) – that is to the final intended bene
There is no reason that equity would forbid an honest trustee to give effect to their promise and
compel them to pay another trustee, about whom it is quite certain that the testator did not mean to
make them the object of this bounty?
The words “in trust” in the will prevent the trustee from taking beneficially AS WOULD an oral
declaration of trust
Testator cannot name a trustee and leave the purposes of the trust to be supplied afterward
Trustee cannot give testamentary validity to an unexecuted codicil by accepting an indefinite trust,
never communicated to them in the testator’s lifetime.
o WHY? To allow that would enable the testator to bypass the reqs of the Wills Act
Requirements of secret trust (to remove matter from under Wills Act):
o Communication of the purpose to the trustee AND acquiescence or promise on their part
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
what is enforced is not a trust imposed by the will, but one arising from the acceptance of the
legatee of a trust communicated to them by the testator, on the face of which acceptance of the
will was made or left unrevoked
o IE - If the evidence had merely established who were the persons and what were the purposes
indicated, it would in my opinion have been inadmissible, as to allow it would be to allow the
making of a will by parol.
It is the fact of the acceptance of the personal obligation which is essential, and the
rest of the evidence is merely for the purpose of ascertaining the nature of the obligation.
RATIO:
Half secret trusts are just as valid as secret trusts.
COMMENTARY
This is the present state of the law in Canada.
American perspective on Secret Trusts
Olliffe v. Wells (1881) 130 Mass. 221
FACTS:
Testatrix leaves the residue of her estate to a clergyman “to distribute the same in such
manner as in his discretion shall appear best calculated to carry out wishes which I have
expressed to him or may express to him.”
ARG:
Next of kin claimed that the residue was undisposed of and should be distributed on an
intestacy. The clergyman claimed that he had been orally informed of the objects the testatrix
wished to benefit and had agreed to distribute the residue accordingly.
ISSUE:
Is this a valid half secret trust?
HELD:
NO
As between a primary bene (the alleged trustee) and the final bene a secret trust may be valid
(where the necessary evidence is shown)
HOWEVER, between a primary bene and the heirs or next of kin, this is not the case since
the heirs are not excluded by the will itself.
Where the will indicates a trust but does not sufficiently define the trust, then the equitable
interest goes by way of a resulting trust, to the heirs or next of kin, as property of the
deceased not disposed of by their will.
RATIO:
Formal requirements for testamentary disposition must be met in order to deprive the heirs of
the equitable interest which accrues to them directly from the deceased
A trust not sufficiently declared on the face of the will therefore cannot be set up by extrinsic
evidence to defeat the rights of the heirs at law or next of kin.
Trustee & Residuary Legatee:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
If a person is both trustee under the will and the residuary legatee / heir ONLY THEN can they claim
under the Wills Act to defeat the interests of the other (alleged) intended beneficiares ll
HOWEVER, the principle of unjust enrichment or fraud on behalf of the trustee does not apply
where, on the face of the will, the trustee’s interest is fiduciary.
Timing of the Communication
Re: Boyes – in fully secret trusts the communication of the terms of the trust could occur any time up
until the death of the testator.
Re: Keen 1937 Eng – in half secret trusts the communication and acceptance must be prior to or
contemporaneous with the execution of the will.
Rochefoucould v. Boustead – in inter vivos trusts - the communication and acceptance of the trust must
be made prior to the conveyance.
The rationale is that T induced the transfer by accepting as trustee. If the conveyance had come first,
and S attempted to convey their wishes afterwards, it could not be said that T’s acceptance of the
secret trust had induced the transfer.
Note however that a written declaration by T accepting the terms of the trust after conveyance would
still be valid.
Precatory Words & Secret Trusts
Hayman v. Nicholl 1944 SCC
FACTS:
Nicholl leaves money held in a bank account to her daughter, Ina Sutherland in a codicil – the 4th
codicil to her will
Codicil says that Nicholl has given the funds to her daughter “in full confidence that she will dispose
of the same in accordance with the wishes that I have expressed to her.”
Sutherland uses the funds for herself
ARG:
Nicholl’s other children claim that the money was intended to be held in trust by Mrs. Sutherland for
their benefit – but can’t prove this at trial.
Sutherland passes away intestate, Nicholl’s surviving children claim that a resulting trust should exist
and that they as the residual legatees be entitled to any funds left over from their mother’s bank
account.
ISSUE:
Do the instructions contained in the codicil direct that Sutherland act as trustee in accordance with the
wishes expressed to her by her mother? Can the Court infer that a resulting trust is said to exist here?
HELD:
ARG 1 - To find for the other children would require that a trust should be assumed against her - that
she acquiesced to the terms of the wishes so expressed to her, and that it being impossible now to
ascertain the wishes of Mrs. Nicholl that there was a resulting trust in favour of the respondent.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o In the absence of evidence that a trust was imposed on Sutherland there is no basis to assume one
against her
ARG 2 - On the construction of the codicil itself, Sutherland became a trustee of the money and that
the terms of the trust not being available, that the same result should follow.
o the old rule as to precatory trusts no longer prevails and that a gift to A in “full confidence” that
they will do certain things does not as a general rule establish a trust.
Per trial judge, there is no sufficient evidence either of the fact of the communication of the wishes or
of what they were; a fortiori (latin for “with even stronger reason”) there is no evidence of the
acceptance by the daughter of an obligation to carry them out, and no ground has been suggested on
which a presumption of any of these matters could now be raised against the estate.
COMMENTARY:
Re: Keen adopted – no secret trust due to lack of evidence of the testatrix’s intentions.
o No imperative words - precatory words are prima facie evidence of not enough intention to create
a trust.
o HOWEVER, an imperative intention can be deduced from the circumstances.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Part 3: TRUSTS TAXATION (63-99)
A - Introduction
General
Federal Rates 2007:
15.5% on the first $37,178 of taxable income, +
22% on the next $37,179 of taxable income (on the portion of taxable income between $37,178
and $74,357), +
26% on the next $46,530 of taxable income (on the portion of taxable income between $74,357
and $120,887), +
29% of taxable income over $120,887.
Indexation :
Any upward movement of the Consumer Price Index (inflation) over the course of a year leads to an
automatic increase in the personal tax credits and tax brackets – both federally and provincially
Provincial Taxes:
Now levied as a percentage of annual income, instead of as a percentage of federal tax.
In Ontario, the top rate for 2007 is 11.16 percent.
o PLUS two provincial surtaxes that add a further 6.24 percent – applicable only to certain rate
brackets.
o Ontario in 2007, the top combined federal-provincial rate is:
Federal Rate 27.00%
Provincial Rate 11.16%
Provincial Surtaxes 6.24%
Total Combined Rate 46.40%
Post-1972 Inter Vivos Trusts
Post-1972 inter vivos trusts subject to a flat rate of federal tax at the top rate of 29%
AND subject to a flat rate of Ontario’s tax at the top rate of 11.16%.
o COMBINED federal-provincial flat rate in Ontario of 40.16%.
o SURTAXES (provincial) do not apply until the provincial tax has reached the requisite thresholds
so that a post-1972 inter vivos trust with a low income will avoid the provincial surtaxes.
o RESULT is that for a high-income settlor, the creation of an inter vivos trust may allow the settler
to avoid provincial surtaxes on income put into a low-enough-income trust that would otherwise
be subject to the surtaxes if it remained as part of the settlor’s taxable income.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Income Tax Act: Taxation of Trusts
Division B Subdivision k – Trusts and their Benes
104(1) Trust includes estate
104(2) Trust is an individual
NOTE: Multiple similar trusts taxed as one (this is designed to prevent the creation of multiple
testamentary trusts with the same benes in order to take advantage of low rates of tax)
104(3) REPEALED – denial of personal deductions to trust now covered by s.
122.1 which denies personal credits (which replaced deductions) to trusts
104(4) 21 year deemed disposition of capital property
104(6) Deduction of income payable to bene
-- Definition of “amount payable” in s. 104 (24)
-- Inclusion in bene’s income required by s. 104 (13)
104(13) Income payable to bene included in bene’s income
104(18) Income held for a minor is “payable” to a minor
104(24) Definition of “amount payable”
106(3) Distribution in satisfaction of income interest
107(2) Distribution in satisfaction of capital interest
107(4) Distribution of property in spouse trust to non-spouse
108(1) Definitions
Division E Subdivision 1 – Computation of Tax
117(2) Graduated (progressive) rates of tax for individuals
Brackets annually adjusted for inflation by s. 117.1
122(1) Flat rate of tax for inter vivos trust
122(1.1) Personal credits not available to trust
122(2) Flat rate inapplicable pre-1972 inter vivos trusts
Division B Subdivision f – General Rules re Income
74.1 (1) Attribution of property income on transfer to spouse
74.1 (2) Attribution of property income on transfer to minor
74.2 Attribution of capital gains on transfer to spouse
75 (2) Trust with reserve power of reservation or control
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Intro to Capital Gains
Capital gains, by nature, allow postponing realization of the gain in order to postpone paying tax on it
tKG or aKL = (KG – KL) x 1/2
s. 38(a) - tKG included in income at rate of 50%
s. 38(b) - KL (also at 50%) deducted from KG
s. 40(1)(a) - KG – capital gain = Proceeds of Disposition – Adjusted Cost Base
Proceeds of Disposition (POD):
(a) The sale price of the property; and
(b) The proceeds of expropriation
Adjusted Cost Base (ACB)
Cost of the property with adjustments made for incurring it
o see ITA s. 53 for list of incursions that may be included in the calculation of ACB
Capital Property includes:
(a) Any depreciable property – trusts rarely have these types of property and so we won’t be
looking at these
(b) Other property other than depreciable which will yield a capital gain or loss when sold
Specifics:
o Business inventory is taxed as income, not KG
o Life insurance policies and timber resource contracts are also not considered to be capital
properties
2 troubles with KG tax regime:
KG taxes are partially taxes on inflationary costs and so do not take inflation-adjusted values into
account – nominal increases only
Creates a social problem whereby people are reluctant to sell property since they wish to defer for as
long as possible, any taxation on the gains which in turn lowers society’s productivity.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
B - Taxation on creation of trust
Inter Vivos Trusts
EXAMPLE 1: S transfers capital property to T to hold in trust for B
1) Transfer = sale for full consideration to T
a. THEREFORE, S must recognize a capital gain if there is a difference between the ACB
and the POD.
b. EG - if S sells the property for $100 and the ACB is $60, tKG of $20 will result.
2) Transfer = gift of property to T (no consideration)
ITA s. 69(1)(b)(ii) = seller deemed to receive the proceeds equal to FMV of the property when
the trust is a gift.
NOTE: If purchase price is low and the purchaser is NOT arm’s length then s. 69(1)(b)(i) will
apply in order to deem the FMV of the property as the POD.
ITA s. 69(1)(c) recipient of property by gift, bequest or inheritance, is deemed to have acquired
the property at FMV.
Therefore, if FMV is $100 (even though T actually only paid $1) the Act will deem $100 as the
POD a taxable capital gain of $20 will result in this case.
EXAMPLE 2: S declares that from henceforth, they will hold the capital property in trust for B.
Clearly the Act does not contemplate this possibility. However, the tax consequences ought to be
considered the same. A court will almost certainly consider the situation the same.
Testamentary Trusts
Example:
D dies and leaves the capital property to their personal representative (PR). PR transfers to T to
hold in trust for B.
Initially as the property vests in the PR, it is the duty of the PR to pay the taxes. Note however that
the act draws no distinction between an estate and a trust. Both are taxed in the same manner.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Deemed Dispositions
ITA s. 70(5) - deems a disposition at FMV upon the death of the testator (i.e., in the year of death)
PURPOSE:
o The deemed disposition rules exist since the original owner D receives no proceeds from the
disposition even though the legal title to the capital property has changed.
EFFECT:
(a) Shall be deemed to have been disposed of individually at FMV; and
(b) Any person who acquires such property as a result of the testator’s death shall be deemed to have
acquired it a FMV
CONSEQUENCE:
o Any KG due to deemed dispositions are not taxed as part of the estate. They are found in
the terminal return of the taxpayer.
NOTE:
o The terminal taxation year is from January 1st until the date that the taxpayer dies.
o Distributions from estates are tax free.
Other Deemed Dispositions include:
Gifts -- Here there are no POD and hence, the Act imposes a deemed disposition under s. 69 (1) (c).
The donor is deemed to have disposed of and the donee received the capital property at FMV
Changes of Use -- ex. You decide to stop using your vehicle for business and start using it for
pleasure
Departure from Canada – There is a deemed disposition of all of your capital property when you
decide to permanently leave Canada
Trusts -- s. 104(4), the capital properties held in a trust are deemed to be disposed of at FMV after
21 years. The purpose of this section is to prevent the use of trusts to defer indefinitely the
recognition for tax purposes of gains accruing on capital property. Otherwise a trust could be used to
delay payment of the tax indefinitely.
Spousal Trusts
Spousal trusts are an exception to the deemed disposition rules of s. 70(5)
They are an example of the “roll-over” provisions of the Act.
Definition of a Spouse
The Same-Sex Partners Bill (S.C. 2000, c.12) changed the definition of spouse used throughout the act
and repealed the definition that appeared in s. 252 (4) of the Income Tax Act. As a result, the Income Tax
Act revised the definitions used throughout the act to refer to spouses and common – law partners.
Regardless of the definition though, there are still a number of instances that can undermine a spousal
trust that can be subject to the roll-over provisions. Consider the following examples:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Testamentary Roll Over – s. 70(6)
WHAT:
o Spouse can elect to have a spousal exemption from the deemed disposition rules of s. 79(5) and
instead have 70(6)(c) and (d) apply
IE – no deemed disposition at FMV, rather deemed disposition at ACB (or depreciated
capital cost if in defined depreciable property class)
RESULT: There is no KG for the spouse to pay taxes on – can defer the gain.
WHEN:
o PR must elect (via s. 70(6.2)) within 36 months of the property becoming indefeasibly vested (IE
– when legal title is transferred to the trustee) in the testamentary trust
36 month period to account for the possibility that trust KG may have been used to satisfy
the estate’s obligations first
HOW:
o ITA s. 70(6), - where any property of a taxpayer to which 79(5) (deemed disposition) would
apply is as a consequence of death transferred to:
a) the taxpayer’s spouse or common law partner; or
b) a trust, created by the taxpayer’s will, vested indefeasibly in the trust (meaning the legal title
was transferred to the trustee) and under which,
i) the taxpayer’s spouse or common-law partner who is resident in Canada is entitled to
receive all of the income of the trust that arises before the spouse’s or common-law
partner’s death, and
ii) no person except the spouse may, before the spouse’s or common-law partner’s
death receive or otherwise obtain the use of any income or capital of the trust
then…
c) paragraphs (5) (a) and (b) do not apply;
d) (i) depreciated capital cost if applicable, or (ii) The taxpayer is deemed to have disposed of the
property at the ACB. As such, the spouse or common-law partner is deemed to have acquired
the property at the ACB.
INCIDENTAL BENEFITS:
o Gives PR some flexibility in deciding upon the most advantageous course of action.
EG - May elect AGAINST a rollover where the testator had aKL in their terminal year.
NOTE:
o Can elect for only a portion of capital property – not an all or nothing option
Inter Vivos Roll-Over – s. 73(1)
s. 73 (1) (a) provides that the trust property is deemed, if the TP so elects WITHIN the taxation year
and only where both are Canadian residents, to be disposed of at the ACB if:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(i) where a trust is created by a taxpayer, and the taxpayer’s spouse or common-law partner is
entitled to receive all of the proceeds before the death of the spouse or common-law
partner; and
(ii) no person except the spouse or common-law partner may, before the death of the spouse
or common-law partner receive or otherwise obtain the use of any of the income or capital
of the trust
NOTES FOR BOTH TESTAMENTARY AND INTER VIVOS ROLL-OVERS:
For a spousal trust, there is a deemed disposition when the bene spouse dies. (see relevant
rollover section – either s. 70 or 73)
Examples
1) To T upon trust for my wife W for life, remainder to my child C
- Yes, this is the classic example of the spousal trust
2) To T upon trust for my husband H for life or until he should remarry, remainder to my child C
- NOT A SPOUSAL TRUST
- Husband’s interest is determinable.
- Smith (1975) holds that if a spouse’s interest is subject to a remarriage clause, then it does
not satisfy the requirements of a spousal trust.
i. Rationale: husband does not, potentially, receive all of the benefits. The trust then is
said to be tainted. It can only be rehabilitated if the remarriage clause is removed.
3) To T upon Trust for my husband H for life. T has the power to ENCROACH ON THE
CAPITAL during H’s life for the benefit of H.
- This does not offend the definition of a spousal trust. This is because all of the capital and
income are still going to H.
4) To T upon Trust for my wife W for life. T has the power to ENCROACH ON THE CAPITAL
during W’s life for the benefit of W or C.
- This defeats the definition of a spousal trust per Guarantee Trust (1972).
- BUT, Machaceck (1976) that states where a trust is inadvertently tainted, if C is of full age
and revokes their beneficial encroachment, then the tainting of the trust becomes corrected.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Alter Ego and Joint Spousal Trusts (NOT EXAMINABLE)
Rollovers are also available for two types of inter vivos trusts created after 1999. These include “alter
ego” trusts (a trust for oneself) and the “joint spousal” trust (a trust for oneself and one’s spouse or
common law partner). With the exception of the age 65 requirement, the rules for these trusts are simply
extensions of the inter vivos spousal trust rules. The main use of alter ego and joint spousal trusts is as a
substitute will in order to avoid the process of probate.
An alter ego trust is a trust created after 1999 by an individual taxpayer who is at least 65 years of age
under which the taxpayer is entitled to receive all of the income of the trust that arises before their death
and no person except the taxpayer may, before the taxpayer’s death, receive or otherwise obtain the use of
any of the income or capital of the trust. There is a tax deferred rollover on the transfer of property into
an alter ego trust and a deemed disposition upon the death of the taxpayer (s. 104 (4) (a) (iv)).
A joint spousal trust works much the same way except that the benes of the trust are the settlor and their
spouse or common-law partner. Once again there is a tax deferred rollover on the transfer of property
into a joint spousal trust and a deemed disposition of the property owned by a joint spousal trust on the
death of the surviving spouse or common-law partner (s. 104 (a) (iv) (b) and (c)).
C - Taxation of a trust’s income
Individual vs Trust
Trust different than Corporation:
Corporate income is double taxed (as income of the corp and as dividends to the owners),
No double taxation on income in a trust - bene pays tax on any income they receive (or are
entitled to receive) and the trust pays tax on any income it retains
Trust different than Individual
Individual is taxed on all income
Trust is not taxed on income paid out to the benes
s. 104(1) a trust is not in reality a separate entity, but that any reference to a trust or estate is to be
treated as a reference to a trustee or personal representative.
s. 104(2) trust is deemed to be a separate individual for income tax purposes. (and it is separate
from the trustee’s own personal tax liability)
Deemed Dispositions of Trust Property
IMPACT OF DEEMED DISPOSITION:
o Depends upon the type of property held.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
EG – stocks = turn over regularly so ACB is kind of kept up to date = minimal impact
EG – capital property held for a long time = greater impact
s. 104 (4) 21 year deemed disposition of the trust.
Rationale: To prevent indefinite postponement of KG tax
EXCEPTION: for Spousal Trusts
104(4) – Deemed disposition by Trust
a) where the trust
(i) is a trust created by the will of a taxpayer who died after Dec. 31, 1971
(ii) is a trust created after 1971; and
satisfies the requirements of a spousal trust, then the deemed disposition will occur on the
day the spouse dies.
a.1) where the spousal trust was created pre-1972 the date is the later of Jan 1, 1993 and the
date the spouse dies
-- To qualify, if TESTAMENTARY spousal trust = spouse alive on Jan 1, 1976
-- To qualify, if an INTER VIVOS spousal trust = spouse alive on May 26, 1976
b) With both spousal and non-spousal trusts
(i) 21 years after 1972; or
(ii) 21 years after the date of creation; and
(iii) 21 years after the spouse dies
c) 21 years after each deemed disposition there is another
EFFECT: With respect to spousal trusts:
Pre-1972 there is no disposition (regardless of death) before 1993
Post-1972 there is a disposition of spousal trusts which occurs on death
Examples
1) T dies in 1970, creating a spousal trust in his will.
(a) The spouse dies in 1983
The first deemed disposition occurs in 1993 (s. 104 (4) (a.1) (iv))
If the trust continues, the next deemed disposition will occur in 2014 (s. 104 (4) (c)) [21 years
after 1993], then in 2035, etc
(b) Suppose the spouse dies in the year 2007
Deemed disposition in the year 2007 (s. 104 (4) (a1) (i)) [the year the spouse dies]
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
The next deemed disposition is in 2028 (s. 104 (4) (b) (iii)) [21 years later], then 2049, etc
Income Splitting / Multiple Trusts
Historically, a TP’s creation of several smaller trusts that generated smaller incomes allowed
them to be taxed at a lower rate than trusts (or themselves!) with higher income
Currently, 4 trust income splitting deterrents in the ITA:
1) s. 104(2)
Where there are multiple trusts of the characteristics below, the trusts are not taxed as
individuals, rather the Minister has discretion to treat all of the trusts’ income and property as
belonging to one individual and to tax them all (or some of them) as property of a single trust
Available to the Minister in the case of multiple trusts where…
(a) substantially all of the property of the various trusts has been received by one
person, and
(b) the various trusts are conditioned so that the income thereof accrues or will
ultimately accrue to the same bene, or group, or class of benes,
NOTE:
o mainly applies to testamentary trusts – since inter vivos trusts are not affected by this
provision since they are taxed at the top rate of tax.
o Mitchell (1956)16 Tax A.B.C. 99 = this section does not apply where multiple
testamentary trusts established by the same testator, where each trust has a different
bene. In this case the taxpayer created a separate trust for each of his 4 children as a way
of getting around the rules against income splitting.
HOWEVER, MNR considers that “the same group or class of benes” can apply
to trusts for overlapping family benes, although the Minister may accept valid
non-tax reasons for multiple trusts.
2) Cannot double your deductions (credits) by creating a trust. Therefore you cannot claim as a
deduction the tax payable by a trust;
3) Attribution rules (Discussed below)
4) s. 122 (1) imposes a high flat rate of tax on inter vivos trusts created after June18, 1971. – largely
eliminates the tax advantage of creating separate trusts
Rates of Tax
s. 122 (2) Flat tax on inter vivos trusts does not apply to:
a) trusts created prior to June 18th, 1971,
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
d) trusts that have not received property by way of gift since June 18th, 1971 (although the Minister
of Finance has proposed that the graduated income tax rates no longer apply to trusts that have
received a contribution after June 22, 2000); and
e) those pre-1972 trusts that have not incurred any debt or obligation (this was another vehicle used
to avoid taxation be means of a sale in return for a promissory note).
EFFECT: Grandfather clause trusts created pre-1972 and that meet the conditions set out above
pay tax at graduated rates instead of the flat rate that post-1972 trusts pay
Testamentary trusts pay tax at the graduated rates as opposed to flat rate
o POLICY: Assumption that someone is not willing to die in order split income
However, property given post-1972 to a testamentary trust brings the trust under the income splitting
rules due to the definition of testamentary and inter vivos trusts.
Income Taxed to the Bene
Since a trust is treated as an individual for tax purposes it is taxable on the income that it earns
throughout the fiscal year.
s. 104(6)(a.2) = trust deducts from the amount of tax that it pays any amount that it pays (within 1
year) to the bene. (ie – declares and then deducts)
o s. 104(13) = whatever trust deducts from its own income (per s. 104(6)(a.2)) must be
reported by the bene as income
o HOWEVER, it is up to the trustee to decide whether payment is to be made to the bene
under the income or capital of the trust for tax purposes.
EXCEPTION: s. 104(13.1) and (13.2)
The ONLY income that will be taxed to the trust is either
(1) earned by the trust in a taxation year that is NOT paid or payable in the year to a bene or
(2) income subject to a designation under s. 104(13.1) or 104(13.2).
Designations allow (all or part of) income or KG that are paid or payable to benes to
be taxed in the trust (all or part of is in trustee’s discretion)
104 (13.1) allows income which is payable to a bene to be designated by the trustee
to be taxed in the trust.
104(13.2) allows capital gains that are payable to a bene to be designated to be taxed
in the trust.
IE – bene receives trust distributions and doesn’t pay tax on them
o POLICY: To allow a trust which has realized losses to take advantage of those
losses by paying the tax on the bene’s behalf
o EFFECT: Trust can split income between the trust and the bene which is
advantageous particularly in the case of a testamentary trust that might be in a
lower tax bracket than the bene.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o ROLLOVER: Don’t forget: To qualify for a rollover on death, all of the income
of a testamentary spousal trust must be paid or payable to the bene.
o As a result, this is a key income splitting opportunity for spouses who are the
benes of testamentary spousal trusts.
“PAYABLE” 104(24)
Income is payable in a taxation year (i.e. must be taxed somewhere) if it was paid in the taxation year
to the bene or the bene was entitled to enforce payment.
infant or minor bene unable to enforce payment income is still deemed to be payable to the
bene
where trustee has no discretion as to the payment of income income will automatically become
“payable” to the income bene as soon as it is earned by the trust.
Payment of expenses to 3P’s for bene’s benefit expenses incurred for the benefit of benes (by
3P’s who are reimbursed for those expenses) is considered income payable to that bene.
o Inc. tuition fees, medical expenses, clothing and holidays but not general household expenses.
Capital Gains (realized within the Trust) are Taxed to the Trust
tKG are income for tax purposes but are considered capital for trust accounting purposes.
This is important for trustees since certain trusts can name individuals either income or capital benes
(or both in some instances).
Capital Gains realized within the Trust
a KG earned by a trust is added to the capital of the trust (to eventually be paid to the Capital Bene
when the trust capital is to be distributed) = treated as ‘accumulating income’ and taxed as KG
within the trust
104(13.2) WHEN KG PAYABLE TO CAPITAL BENE, then the trust can designate and have the
KG taxed within the trust.
IF THERE IS A PREFERRED BENE AVAILABLE – then may be able to elect to have the KG
taxed in the bene’s hands.
Example:
T holds investments on trust for L for life who is entitled to the income proceeds, remainder to R. T
(in an exercise of trustee mgmt discretion) disposes of some investments for a $20 KG (POD = $100
and the ACB = $80)
Since L is Income Bene and not entitled to payment of KG, then the $20 KG is reinvested by T into the
trust holdings and $10 tKG claimed on the trust’s tax return.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Preferred Bene Election
an election to have “accumulating income” (ie - not paid or payable to a bene) to be taxed in the
hands of the Preferred Bene
IE – permits income splitting to Preferred Benes only
Eligibility Criteria for a Preferred Bene
1) mental or physical impairment (or the disability tax credit), OR
1a) dependent on another individual because of mental of physical infirmity. AND
Relational requirement:
(a) settlor of the trust,
(b) spouse or common law partner of the settlor, and
(c) child, grandchild, or great grandchild of the settlor or the spouse or common-law partner
of any such person.
NOTE: Pre-1996 preferred benes included family members – now family members can only received
the split income if the income is already paid/payable to them as benes
Flow-through Character of Income
GENERAL RULE INCOME FROM TRUST TO BENE = INCOME FROM PROPERTY
When income earned by the trust (whether income, KG or dividends) flows through to the bene
subdivision b, Division B, Part 1 of the ITA it is treated as income from property in the hands
of the bene – IE – loses it’s differentiation
EXCEPTIONS (WHERE INCOME RETAINS ITS CHARACTER):
1) Dividend income from Canadian corporations
Still benefits from preferential treatment under s. 104 (19) and (20)
2) KG (if designated by the Trustee as retaining its character)
Still benefits from preferential treatment under s. 104 (21) and 21.2
3) Foreign Source Income (if designated by the Trustee as retaining its character)
a. Allows the bene to claim the foreign tax credit s. 104 (22) and (22.1)
Tax Free Payments to Benes
Bene may be required to pay tax on accumulating income that they have not received where:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(1) It was payable to him or her in the year but was not actually paid, or
(2) Although it was not payable to him or her, it was the subject of a preferred bene election
THEREFORE, in either case, when the income is subsequently paid out, it is not taxable because tax
on the income has already been paid … even if the income is paid out to someone other the bene who
paid the tax while the income was accumulating in the trust (eg., b/c they died or were disqualified)
Accumulating Income that forms part of the Trust Capital
Income not paid/payable to a bene OR paid/payable but subject to a designation under s. 104 (13.1) or
(13.2) is taxed in the trust
This accumulating income becomes capital of the trust and will be distributed on a tax-
free basis to the Capital Bene b/c tax on the income has already been paid
The Attribution Rules – Spousal/Minor Income
RULE: APPLY ONLY TO INTER VIVOS TRUSTS SET UP FOR THE BENEFIT OF
SPOUSE/CLP OR PROSCRIBED MINOR
Income normally taxed to the trust or a bene is taxed to the settler in certain situations
Applies (in certain situations) where money is “given” OR “loaned”
POLICY:
To prevent income splitting among close family members.
RATIONALE:
Although legal title to the income has passed, it is likely that the Settlor is benefiting
from the income (which is legally in the hands of close family members)
s. 74.1(1) Transfers and loans to spouse or common-law partner
Where an individual has transferred or lent property … either directly or indirectly, by
means of a trust or by any other means whatever, to or for the benefit of a person who is
the individual's spouse or common- law partner or who has since become the individual's
spouse or common-law partner, any income or loss, as the case may be, of that person for
a taxation year from the property or from property substituted therefor, that relates to the
period in the year throughout which the individual is resident in Canada and that person is
the individual's spouse or common-law partner, shall be deemed to be income or a loss, as
the case may be, of the individual for the year and not of that person.
EFFECT: Where a spouse or CLP earns income via trust (WHETHER EFFECTED BY A
TRANSFER TO THE TRUST OR LOAN TO THE TRUST BY THE SETTLOR), that
income/loss is attributed to the living Settlor.
s. 74.1(2) Transfers and loans to minors
(2) Where an individual has transferred or lent property, either directly or indirectly, by
means of a trust or by any other means whatever, to or for the benefit of a person who was
under 18 years of age … and who
(a) does not deal with the individual at arm's length, or
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(b) is the niece or nephew of the individual,
any income or loss, as the case may be, of that person for a taxation year from the
property or from property substituted therefor, that relates to the period in the year
throughout which the individual is resident in Canada, shall be deemed to be income or a
loss, as the case may be, of the individual and not of that person unless that person has,
before the end of the year, attained the age of 18 years.
EFFECT: Where a minor who is EITHER not at arm’s length (eg., child, blood, etc) OR a
niece/nephew receives income via trust (whether via Settlor transfer to the trust OR loan),
that income is attributed to the living Settlor.
Example:
S grants L a life interest, with a remainder to R (where L is (1) spouse, or (2) proscribed minor)
S ==== T === L for Life === R
1) Income (other than KG) payable to L.
2) If L is the spouse of S., s. 74.1(1) applies.
2a) If L is a proscribed minor (and doesn’t attain 18 before taxation year-end), s. 74.1(2) applies.
RESULT = Any income that is given to L will be attributed to S. S will then become liable for the taxes
that are owed on the income.
Definition: Arm’s Length, s. 251
NOTE: For our purposes, definition of not at arm’s length includes:
o Children or other descendents
o Partners (spouse/CLP)
o brothers and sisters
o other members of the settlor’s immediate family.
Arm’s Length
(1) For the purposes of this Act,
(a) related persons shall be deemed not to deal with each other at arm’s length;
(b) a taxpayer and a personal trust (other than a trust described in any of paragraphs ( a) to
(e.1) of the definition "trust" in subsection 108(1)) are deemed not to deal with each other
at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer,
would be beneficially interested in the trust if subsection 248(25) were read without
reference to subclauses 248(25)(b)(iii)(A)(II) to (IV); and
(c) where paragraph (b) does not apply, it is a question of fact whether persons not related
to each other are at a particular time dealing with each other at arm’s length.
Definition of "related persons"
(2) For the purpose of this Act, "related persons", or persons related to each other, are
(a) individuals connected by blood relationship, marriage or common-law partnership or
adoption;
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(b) a corporation and
(i) a person who controls the corporation, if it is controlled by one person,
(ii) a person who is a member of a related group that controls the corporation, or
(iii) any person related to a person described in subparagraph 251(2)( b)(i) or
251(2)(b)(ii); and
(c) any two corporations
(i) if they are controlled by the same person or group of persons,
(ii) if each of the corporations is controlled by one person and the person who
controls one of the corporations is related to the person who controls the other
corporation,
(iii) if one of the corporations is controlled by one person and that person is
related to any member of a related group that controls the other corporation,
(iv) if one of the corporations is controlled by one person and that person is
related to each member of an unrelated group that controls the other corporation,
(v) if any member of a related group that controls one of the corporations is
related to each member of an unrelated group that controls the other corporation,
or
(vi) if each member of an unrelated group that controls one of the corporations is
related to at least one member of an unrelated group that controls the other
corporation.
Corporations related through a third corporation
(3) Where two corporations are related to the same corporation within the meaning of
subsection 251(2), they shall, for the purposes of subsections 251(1) and 251(2), be
deemed to be related to each other.
Relation where amalgamation or merger
(3.1) Where there has been an amalgamation or merger of two or more corporations and
the new corporation formed as a result of the amalgamation or merger and any
predecessor corporation would have been related immediately before the amalgamation
or merger if the new corporation were in existence at that time, and if the persons who
were the shareholders of the new corporation immediately after the amalgamation or
merger were the shareholders of the new corporation at that time, the new corporation
and any such predecessor corporation shall be deemed to have been related persons.
Amalgamation of related corporations
(3.2) Where there has been an amalgamation or merger of 2 or more corporations each of
which was related (otherwise than because of a right referred to in paragraph 251(5)( b)) to
each other immediately before the amalgamation or merger, the new corporation formed
as a result of the amalgamation or merger and each of the predecessor corporations is
deemed to have been related to each other.
Blood relationship, etc.
(6) For the purposes of this Act, persons are connected by
(a) blood relationship if one is the child or other descendant of the other or one is the
brother or sister of the other;
(b) marriage if one is married to the other or to a person who is so connected by blood
relationship to the other;
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(b.1) common-law partnership if one is in a common-law partnership with the other or with
a person who is connected by blood relationship to the other; and
(c) adoption if one has been adopted, either legally or in fact, as the child of the other or as
the child of a person who is so connected by blood relationship (otherwise than as a
brother or sister) to the other.
Definition: Extended meanings of certain relationships, s. 252
Extended meaning of "child"
(1) In this Act, words referring to a child of a taxpayer include
(a) a person of whom the taxpayer is the legal parent;
(b) a person who is wholly dependent on the taxpayer for support and of whom the
taxpayer has, or immediately before the person attained the age of 19 years had, in law or
in fact, the custody and control;
(c) a child of the taxpayer’s spouse or common-law partner; and
(d) [Repealed, 2005, c. 33, s. 12]
(e) a spouse or common-law partner of a child of the taxpayer.
Relationships
(2) In this Act, words referring to
(a) a parent of a taxpayer include a person
(i) whose child the taxpayer is,
(ii) whose child the taxpayer had previously been within the meaning of paragraph
252(1)(b), or
(iii) who is a parent of the taxpayer’s spouse or common-law partner;
(b) a brother of a taxpayer include a person who is
(i) the brother of the taxpayer’s spouse or common-law parter, or
(ii) the spouse or common-law partner of the taxpayer’s sister;
(c) a sister of a taxpayer include a person who is
(i) the sister of the taxpayer’s spouse or common-law partner, or
(ii) the spouse or common-law partner of the taxpayer’s brother;
(d) a grandparent of a taxpayer include a person who is
(i) the grandfather or grandmother of the taxpayer’s spouse or common-law
partner, or
(ii) the spouse or common-law partner of the taxpayer’s grandfather or
grandmother;
(e) an aunt or uncle of a taxpayer include the spouse or common-law partner of the
taxpayer’s aunt or uncle, as the case may be;
(f) a great-aunt or great-uncle of a taxpayer include the spouse or common-law partner of
the taxpayer’s great-aunt or great-uncle, as the case may be; and
(g) a niece or nephew of a taxpayer include the niece or nephew, as the case may be, of
the taxpayer’s spouse or common-law partner.
Extended meaning of "spouse" and "former spouse"
(3) For the purposes of paragraph 56(1)( b), section 56.1, paragraphs 60(b) and (j), section
60.1, subsections 70(6) and (6.1), 73(1) and (5) and 104(4), (5.1) and (5.4), the definition
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
"pre-1972 spousal trust" in subsection 108(1), subsection 146(16), subparagraph
146.3(2)(f)(iv), subsections 146.3(14), 147(19), 147.3(5) and (7) and 148(8.1) and (8.2),
the definition "small business property" in subsection 206(1), subparagraph 210( c)(ii) and
subsections 248(22) and (23), "spouse" and "former spouse" of a particular individual
include another individual who is a party to a void or voidable marriage with the particular
individual
The Attribution Rules – Spousal Capital Gains
s. 74.1 (1) and (2) apply only to income from property, not to KG (dispositions of property)
s. 74.2 attribution of KG in the case of spousal trusts.
if property is transferred or disposed of by the trust, and if any capital gain is payable to the
transferor’s spouse, then the capital gain will be attributed to the transferor.
o If transferred to the bene is it not the bene who pays the KG tax? vs where disposed of by the
trust the trust pays the KG tax?
RELATED MINORS NOT SUBJECT TO KG ATTRIBUTION RULE:
No attribution of KG on transfer to a related minor (only spousal attribution rule)
o WHY: too easy to avoid this rule - a minor bene could simply wait until he or she turned 18, and
the attribution rules would no longer apply.
Example
1) W transfers Blackacre to T to hold in trust for her husband H.
$100 in rental income.
THEREFORE, s. 74.1(1) will attribute this income to W.
2) Trust disposes of the property. POD = $1000, while the ACB = $800
tKG = (POD – ACB) x 50%
= (1000 – 800) x 50%
= $100
THEREFORE, s. 74.2(1) attributes the tKG of $100 to W’s income even though H is the bene
Attribution of Income gained through the Exercise of a Discretionary Trust (not examinable)
Where payments of income or capital gains are made to a spouse or related minor (in the case of income
only) in the exercise of a discretion conferred upon the trustee by the trust instrument, attribution will still
apply. Payments made pursuant to a discretion attract the same attribution consequences as payments
made pursuant to a duty.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Income Accumulating in a Trust
Pichosky v. Minister of National Revenue (1964)
RATIO:
Income accumulating in a trust for the ultimate benefit of a spouse or related minor is not subject to
attribution.
ITA s. 74.3 – codifies Pichosky
Trusts with Reserved Power of Revocation or Control
Revocable trusts common in the United States – they serve as a trial run in the case of testamentary
trusts. – IE - trust property is transferred to the trust and the settlor can monitor its progress.
o Upon settlor’s death, the remainder of the trust property is “poured” into the trust via the will.
o PURPOSE may be to avoid the expensive probate fees in some U.S. jurisdictions.
Revocable trusts NOT COMMON in Canada due to the income tax consequences of their creation.
Revocable trusts are governed by s. 75 (2) of the Income Tax Act which (APPLIES NO MATTER
WHO THE BENES ARE) reads as follows:
75. (2) Where, by a trust created in any manner whatever since 1934, property is held on
condition
(a) that it or property substituted therefor may
(i) revert to the person from whom the property or property for which it was
substituted was directly or indirectly received (in this subsection referred to as “the
person”), or
(ii) pass to persons to be determined by the person at a time subsequent to the
creation of the trust, or
(b) that, during the existence of the person, the property shall not be disposed of except
with the person’s consent or in accordance with the person’s direction,
any income or loss from the property or from property substituted for the property, and any
taxable capital gain or allowable capital loss from the disposition of the property or of
property substituted for the property, shall, during the existence of the person while the
person is resident in Canada, be deemed to be income or a loss, as the case may be,
or a taxable capital gain or allowable capital loss, as the case may be, of the person.
EFFECT: where a settlor establishes a trust held on condition of the power of revocation or control,
any income from this trust will be attributed back to the settlor.
Applicable Powers:
-- revoke the trust -- change the terms or benes -- direct or veto dispositions of trust
property -- grants themselves a reversionary interest in trust property.
CONSEQ: disincentive to the creation of revocable trusts or trusts in which the settlor retains
substantial control.
UNCERTAIN: Whether section will apply to the income of a trust of which the settlor is the trustee.
Professor Hogg states that it is prudent to avoid creating a trust where the settlor is the
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
sole trustee. Indeed, even if the settlor was just one of several trustees, if the trustees’
decisions must be unanimous, there is a risk that subsection 75 (2) would apply. In the
common case where the settlor does not want to be a trustee, it is good practice to have
two additional persons as trustees and for the three trustees to be empowered to act by a
majority.
RATIONALE: Since the settlor has not completely divested themselves of the trust property that they
ought not to be divested of the income tax consequences.
Moreover, the Minister of National Revenue has ruled that a revocable trust is different from a
trust with the power to recall a loan. Where a settlor has funded a trust, in whole or in part, by
loan, and the loan is secured by promissory note payable on demand, the settlor’s ownership of the
note gives him or her a power over the trust that is akin to the power of revocation. Since this
power is derived from the settlor’s position as creditor, rather than from the trust instrument, it is
possible that subsection 75 (2) does not apply, although no case has considered the point.
More recently, in the Howson (2006) decision, it was held that funds deposited to a family trust
were held to be a loan, so that s. 75 (2) did not apply since the loan is “not subject to reversion by
the terms of the trust. It returns to the lender by operation of the loan itself.”
D - Taxation on the termination of a trust
Trust ends when the trust property is distributed to the benes.
Often, to make the distribution equitable it is necessary to sell all or some of the trust property.
These sales are dispositions that will give rise to tKG or aKL.
o tKG or aKL = capital bene income UNLESS not paid/payable to the bene in that year, in which
case they are taxed as income of the trust (trust KG)
s. 106(3) - Property Transferred in Satisfaction of the Income Interest
Proceeds of disposition of income interest
(3) For greater certainty, where at any time any property of a trust has been distributed by
the trust to a taxpayer who was a bene under the trust in satisfaction of all or any part of
the taxpayer's income interest in the trust, the trust shall be deemed to have disposed of
the property for proceeds of disposition equal to the fair market value of the property at
that time.
EFFECT: Trust property transferred in specie to an income bene (as a substitute for income) in
satisfaction of their income interest is deemed to have disposed of by the trust at FMV
AND THEREFORE forces recognition of any accrued KG or KL (which is taxed to the
trust!).
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
PRACTICAL: In specie distributions to satisfy income interests are uncommon, but sometimes occur if
the trust is brought to an end prematurely (eg., during the lifetime of the life tenant if the
income bene and capital bene so agree to a division based on the value of their respective
interests).
s. 107(2) - Property Transferred in Satisfaction of the Capital Interest
Distribution by personal trust
(2) Subject to subsections (2.001), (2.002) and (4) to (5), where at any time a property of a
personal trust or a prescribed trust is distributed by the trust to a taxpayer who was a bene
under the trust and there is a resulting disposition of all or any part of the taxpayer's capital
interest in the trust,
(a) the trust shall be deemed to have disposed of the property for proceeds of disposition
equal to its cost amount to the trust immediately before that time;
(b) subject to subsection (2.2), the taxpayer is deemed to have acquired the property at a
cost equal to the total of its cost amount to the trust immediately before that time and the
specified percentage of the amount, if any, by which
….[ACB exceeds some % of ACB depending on the type of property]
(2.001) No rollover on election by a trust
(2.002) No rollover on election by a bene (for NON-RESIDENT trusts only)
EFFECT: Trust property transferred in specie to a capital bene is deemed to have been disposed of
by the trust at ACB, AND THEREFORE the property is rolled over to the capital bene
and the trust recognizes no KG or KL. T
Capital bene is deemed to acquire the property at its cost amount to the trust, plus an
additional amount of 100% if the property is capital or eligible capital property; or 50% in
every other case
- additional amount applies only where the capital bene purchases an interest
from a former bene OR inherited the interest on the death of the former bene (IE –
only to a successor bene, not the original bene)
- in these cases then the successor bene’s interest will have ACB = FMV at the
time of acquiring the bene interest (which is likely higher than the original /
trust’s ACB)
RESULT: in specie property is rolled over to a successor bene at the cost they
paid for (or the value at the time they acquired) the interest --- otherwise would
result in double taxation
USUAL CASE – where capital bene acquires their interest in the trust for no cost
then the additional amount will be inapplicable and the bene will acquire the property at
its cost amount to the trust (ACB)
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Example
(a) S grants Whiteacre and Blackacre to T to hold upon trust for L for life, remainder to R.
During L’s lifetime, L and R could (by agreement) invoke Saunders v. Vautier to terminate the
trust and agree on a division of the property
Assume they agree to do so and divide the property as follows:
o Whiteacre (in specie) to L
o Blackacre (in specie) to R
Result:
Blackacre 107(2) - since Blackacre is distributed in satisfaction of a capital interest, the trust is
deemed to have disposed of it at it’s cost amount (which in this case is the ACB), and R is
deemed to have acquired Blackacre at the trust’s ACB. IE – KG deferred until R sells Blackacre.
Whiteacre 106(3) – since Whiteacre is distributed in satisfaction of an income interest, the
trust is deemed to have disposed of it at FMV. IE – KG/KL paid by the trust.
(b) Assume that both properties have a fair market value of $100 000, and
1) Blackacre has an ACB = $40 000; while
2) Whiteacre has an ACB = $40 000.
Result:
R (recipient of Blackacre) faces a much larger future capital gain tax than does L (who gets
Whiteacre at FMV = $100,000)
Even if the trust has cash to make an equalizing payment to R, it will not be obvious how
much that payment should be, since the present values of the future tax liabilities inherent in
the two properties is not obvious.
THEREFORE, unless agreement between bene’s (and releases obtained from then) a specie
distribution in this situation is unsafe from the point of view of the trustees, who could be
liable for a failure to make an “equal” distribution.
SOLUTION: Sell the trust assets and making an equal distribution in cash.
o Of course, this is a disposition of the capital property resulting in recognition of the
accrued KG, thereby negating benefit of postponing tax via s. 107(2).
s. 107(2) of little benefit to Spousal / Joint spousal / Alter ego Trusts
s. 107(2) re: specie distribution applies to spousal trust, alter ego trust, and a joint spousal trust
However, where the spouse, CLP or settler bene dies (IE – when one of these trusts is finally
distributed), s. 104(4)(a) results in a deemed disposition of all capital property
THEREFORE, where assets distributed soon after the death of the bene, the effect of s. 107(2) is
minimized as a result of the s. 104(4)(a) deemed disposition of capital property
o IE – capital property unlikely to have accrued much gains between deemed disposition and in
specie final distribution
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
s. 107(4) Exception for Spousal Trusts Terminated Prematurely
Deemed disposition at FMV (ie – must apply s. 107(2.1) FMV, not 107(2) rollover), if:
1) The (spousal, joint spousal or alter ego) trust is terminated BEFORE the spouse, etc dies
2) Capital bene is someone other than the spouse or settlor bene,
POLICY:
o Necessary to prevent avoidance of s. 104(4)(a) deemed disposition on spouse’s, etc death by
prematurely terminating the spousal, etc trust, THEREBY diverting assets to other bene’s at ACB
instead of FMV and thereby allowing tax deferral
Review Problem
S after 1972 made an inter vivos gift of property to T to hold on trust to pay the income to L (S’s
Mother) for life, and on L’s death to pay the capital to S’s child (aged 13 in 2006). The trust
instrument gave T the power to retain income (instead of paying it to L), and any income so
retained was to be added to the capital (so that on the death of L, it would be paid to C).
2006,
$100 property income (paid to L)
$40 capital gain (retained)
2007
$100 property income (retained)
$40 capital gain of $40 (retained)
Explain who is liable to pay tax on the $140 receipts of:
2006 Tax Liability
Re: $100 property income paid to L
s. 104(6) permits the trust to deduct the $100 b/c it is payable in a year to a bene, in this case, to L.
L would be req’d to report, and pay tax on the $100 as income as a result of s. 104 (13).
The $100 would not be attributable to S since the money is being paid to his Mother.
Re: $40 capital gain retained by Trust:
L is not entitled to this gain since for trust accounting purposes; L is not entitled to capital gains.
Therefore, it is not paid or payable to L.
Therefore, $20 (1/2 of $40) is taxed to the trust. It is taxed at a flat rate of tax equal to the top personal
rate including all surtaxes (s. 122 (1)))
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
The $40 is not attributable to S since s. 74 (2) states that the attribution of capital gains does not include
minors. Moreover, the capital gains are being retained in the trust, therefore there is no attribution of the
capital gains to S. Recall that Pichosky v. M.N.R. held that income accumulating in a trust for the
ultimate benefit of a spouse or minor child is not subject to the attribution rules.
2007 Tax Liability
Re: $100 property income retained by trust
When the decision to retain the capital gains is exercised by the trustee, L no longer has an enforceable
right and as a result, s. 104 (6) and s. 104 (13) are not applicable. Since T has the power to make any
income part of the capital, L avoids paying any tax upon it since they no longer have any right to the
income nor it is payable to them.
As a result, the trust will have to report and pay taxes on the $100 at the top rate.
There is no attribution of the $100 to S since the income is being retained in the trust (moreover, the
income is not payable to a related minor either). S can rely upon the holding in Pichosky in order to avoid
paying tax on the $100.
Re: $40 Capital Gain retained by trust
In this case, the trust would have to report $20 as a taxable capital gain (1/2 of $40)
The attribution rules with respect to capital gains would have the same consequences for S as they did in
2006.
Taken together, the trust would thus have to report $120 ($100 in income + $20 as capital gains) as its
income for 2007 that would be taxed at the top rate.
Tax Planning with Trusts (NOT EXAMINABLE)
We will not be dealing with this topic during class but it is listed for the sake of completeness. Please see
pages 73 – 76.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Part 4: TRUST CHARACTERISTICS
A - The Trustee
Appointment, death, retirement and removal (NOT EXAMINABLE)
(a) Appointment
In most cases, the settlor will appoint trustees through the trust instrument itself. However, in
some cases it may be necessary to appoint new trustees.
The appointment of trustees can be governed by:
(i) Trust instrument itself, and
(ii) Trustee Act ss. 3 and 5.
(b) Death
(c) Retirement
(i) Trust Instrument
(ii) Trustee Act s. 3
(iii) Trustee Act s. 2
(iv) Inherent Jurisdiction of Court
(d) Removal:
(i) Trust Instrument
(ii) Trustee Act s. 3
(iii) Inherent Jurisdiction of Court
Trustee Act s. 2, 3, 4, 5
s. 2 Retirement of trustees
(1) Where there are more than two trustees, if one of them by deed declares a desire to be
discharged from the trust, and if the co-trustees and such other person, if any, as is
empowered to appoint trustees, consent by deed to the discharge of the trustee, and to the
vesting in the co-trustees alone of the trust property, then the trustee who desires to be
discharged shall be deemed to have retired from the trust, and is, by the deed, discharged
therefrom under this Act without any new trustee being appointed.
Application of section
(2) This section does not apply to executors or administrators.
s. 3 Appointment of New Trustees
Power of appointing new trustees
(1) Where a trustee dies or remains out of Ontario for more than twelve months, or desires
to be discharged from all or any of the trusts or powers reposed in or conferred on the
trustee, or refuses or is unfit to act therein, or is incapable of acting therein, or has been
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
convicted of an indictable offence or is bankrupt or insolvent, the person nominated for the
purpose of appointing new trustees by the instrument, if any, creating the trust, or if there
is no such person, or no such person able and willing to act, the surviving or continuing
trustees or trustee for the time being, or the personal representatives of the last surviving
or continuing trustee, may by writing appoint another person or other persons (whether or
not being the persons exercising the power) to be a trustee or trustees in the place of the
trustee dying, remaining out of Ontario, desiring to be discharged, refusing or being unfit or
incapable.
Survivorship
(2) Until the appointment of new trustees, the personal representatives or representative
for the time being of a sole trustee, or where there were two or more trustees, of the last
surviving or continuing trustee, are or is capable of exercising or performing any power or
trust that was given to or capable of being exercised by the sole or last surviving trustee.
s. 4 Authority of surviving trustee to appoint successor by will
(1) Subject to the terms of any instrument creating a trust, the sole trustee or the last
surviving or continuing trustee appointed for the administration of the trust may appoint by
will another person or other persons to be a trustee or trustees in the place of the sole or
surviving or continuing trustee after his or her death.
s. 5 Power of court to appoint new trustees
(1) The Superior Court of Justice may make an order for the appointment of a new trustee
or new trustees, either in substitution for or in addition to any existing trustee or trustees,
or although there is no existing trustee.
Duty of Fidelity to the Trust Instrument
Trust instrument, generally, overrides the Trustee Act and general law.
Codified in s. 67 and s. 68 of the Trustee Act which read as follows:
Trustee Act s. 67 & 68
s. 67 Powers, etc. under Act and trust instrument
The powers, rights and immunities conferred by this Act are in addition to those conferred
by the instrument creating the trust, and have effect subject to the terms thereof.
s. 68 Express terms of trust instrument to prevail
Nothing in this Act authorizes a trustee to do anything that the trustee is in express terms
forbidden to do, or to omit to do anything that the trustee is in express terms directed to do
by the instrument creating the trust.
Exceptions to the general principle include:
(a) Rule against Perpetuities
(b) Rule against Indestructibility;
(c) Rule against Accumulations;
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(d) Rule in Saunders v. Vautier
(e) Rules Restricting Restraints on Alienation;
(f) Query extent to which duties of loyalty and reasonable prudence can be displaced.
Duty of Loyalty / Fiduciary Duties to Benes
Breach of duty of loyalty leads to absolute liability – no need to show damages
Keech v. Sanford 1726 Eng No advantage for the trustee as individual
FACTS:
Part of property in a trust set up for an infant bene is the lease of profits of a market
Trustee seeks re-lease for the trust but Lessor (validly) refuses – then trustee procures the
lease for himself
Reps of the infant bene seek assignment of the lease and the profits from the trustee to the
trust – claim breach of trust
ISSUE:
Has the trustee breached a duty of loyalty to the bene?
HELD:
lease should be assigned to the infant bene, and that the trustee should be indemnified from
any covenants comprised in the lease, and an account of the profits made since the renewal.
REASONS:
the trustee should rather have seen the lease run out than to have the lease for himself.
trustee is the only person in all of mankind who might not have the lease – this rule must be
strictly applied
National Trust Co v. Osadchuk 1943 SCC No conflict of interest permitted PERIOD
FACTS:
National Trust is trustee for infant benes trust authorized to invest in first mortgages
NT in the course of its own business acquires 3x first mortgages which it then sells to the
trust (ie – sells to itself in the capacity as trustee)
the mortgagees default and the security backing them proves insufficient = loss for the trust
ISSUE:
Should the trustee be compelled to account for the losses to the benes?
HELD:
(Hudson) Quoting from English precedents:
a) The doctrine as to purchase by trustees, assignees and persons having a confidential
character, stands upon the proposition that the purchase is not permitted in any case, however
honest the circumstances; the general interests of justice requiring it to be destroyed in every
instance (Ex parte James)
IE – no matter the circumstances, a fiduciary cannot purchase something in
their individual capacity that relates to their capacity as trustee/fiduciary
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
b) A trustee is bound not to do anything which can place him in a position inconsistent with
the interests of the trust, or which can have a tendency to interfere with their duty in discharging it.
Neither the trustee nor their representative can be allowed to retain an advantaged acquired in
violation to this rule (Hamilton v. Wright)
IE – trustee cannot do anything which puts them in a conflict of interest with the trust
IE – trustee cannot retain an advantage they acquire as a result of the conflict of
interest
c) The rule is an inflexible one that must be applied inexorably by this Court which is not
entitled to hear evidence, or suggestion, or argument as to whether the principal did or did not
suffer injury in fact or by reason of the dealing of the agent; for the safety of mankind requires that
the agent shall be able to put their principal to the danger of such an inquiry as that (Parker v.
McKenna)
IE – evidence of intention, and whether actual damages suffered is irrelevant
HERE, mortgage monies came from NT (and NT was free to dispose of them in any
way they liked) – here where the bene’s are all children and there is no one to look out
for their interests there is no excuse for NT to have sold the mortgages into the trust.
Examples & Ratification
(1) Trustee has power to invest trust funds in corporate shares Corp A offers a $1000 fee to anyone who
procures the investment of $50 000 in A’s new share issue. T invests $50 000 of the trust funds in A’s
common shares and T is paid the fee of $1000.
Conflict of interest – duty to the bene conflicts with his personal interest
REMEDY:
Breach of trust and court could impose a constructive trust on the $1000.
(2) Same Facts as Example (1) but now suppose that Corporation A is unsuccessful, it goes into
liquidation, and the common shareholders receive 50 cents on the dollar. The trust loses $25000.
Conflict of interest – duty to the bene conflicts with his personal interest
REMEDY:
Breach of trust and court could impose a constructive trust on the $1000 AND hold the
trustee liable for the $25 000 loss as well.
(3) Same Facts as Example (1) but now suppose that Corporation A is successful, the value of the
common shares doubles, and T sells the trust’s share for $100 000.
Conflict of interest – duty to the bene conflicts with his personal interest
REMEDY:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Breach of trust and court could impose a constructive trust on the $1000 AND gain
would accrue to the trust (Trustee cannot be allowed to profit from the breach)
(4) Would it make any difference in any of the previous examples if the benes of the trust were all sui
juris, and all had given their consent to T in making the investment and accepting the fee?
Bene can give permission in advance, or RATIFY A BREACH OF TRUST if they are aware
that the Trustee’s behaviour constitutes a breach and must be fully informed of all of the
circumstances before giving their consent.
Note that if one bene instigates a breach of trust, then the Trustee can be indemnified for any
damages out of that bene’s share.
(5) Suppose that there were two benes who were sui juris, and one had consented while the other had not
Bene that agreed is barred from recovering damages in the event that they arise, while the bene
who did not give consent is free to recover.
(6) Trustee has to realize trust assets in order to make a distribution. One asset, a block of shares in a
private company, is hard to sell. T decides to do the trust a favour: he buys the shares for himself.
Conflict - T wishes to pay the lowest price for the shares but as trustee must seek the highest
If all of the benes are sui juris and approve of the sale, then the transaction would be acceptable.
Court has jurisdiction to approve such a purchase (see G.W. Hinde (1961) 3 Melb. U.L.R. 15;
Waters 630; Re Hourigan (1983) 14 E.T.R. 90 (Ont. H.C.) where permission was refused.
Duty of Care
General rule is that trustee adhere to the “prudent person of business in conducting their OWN
business” test
o Some feel it should be prudent person standard in the context of conducting SOMEONE ELSE’S
business
Must prove damages (as opposed to duty of loyalty where liability is absolute)
Speight v. Gaunt 1883 Eng HL Prudent man of business TEST
FACTS:
o Trustee employed a stockbroker of good repute to purchase stock of an authorized trust
investment
o Stockbroker sent trustee a “bought note” in the usual form indicating share purchase and was paid
the purchase price accordingly
o In fact (as discovered on the bankruptcy of the broker), the stockbroker had not purchased the
stock, and he appropriated the money himself. The trust funds were entirely lost. The benes
subsequently sue for breach of trust
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
ISSUE:
What is the standard of care that the trustee must satisfy?
HELD:
Trustee did NOT commit a breach of trust, as he had conducted “the business of the trust in
the same manner that an ordinary prudent man of business would conduct his own”
and “it never could be reasonable to make a trustee adopt further and better precautions than
an ordinary prudent man of business would adopt or to conduct business in any other way.”
RATIO:
Can use the services of others when doing so is in the usual course of business.
Learoyd v. Whiteley 1887 Eng
FACTS:
Trustee invests in a mortgage after being advised by competent appraisers that the property is
good security for the amount invested.
HOWEVER, the appraisers report was in fact based upon the supposition that the concern
was going, but the report did not state this, nor distinguish between the value of the land and
that of the buildings, machinery etc.
The trustees acted bona fide but acted upon the report without making further inquiries.
The security subsequently proves to be inadequate.
HELD:
valuation was not a report that a lender of ordinary prudence would have chosen to act upon
Though the general rule is “ordinarly prudent man of business conducting his own affairs”,
the trustee is not allowed the same discretion in investing money of the trust as if they were
dealing with their own funds.
o Duty of the trustee to confine themselves to the class of investments which are permitted
by the trust and to avoid all investments of that class which are attended with hazard.
o So long as the trustee acts within these limitations, the general rule already stated will
apply.
RATIO:
Ordinary course of business does not include relying on the bare assurance of others where
the valuing of real security is in question.
Cannot assume from a valuators report that the security is sufficient, in the absence of
detailed information which would enable them to form their own opinion
In order to avoid liability in such a case, must prove that the security was such that it
would have been accepted by a trustee of ordinary prudence, fully informed of its
character, and having in view the principles that I have already adverted.
Their actions would have been justified had they made the necessary inquiries, however since
they did not, they must be held liable.
Note also that Ontario has now permitted delegations by statute under s.27.1 of the Trustee Act. More on
this below.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Trust Company Conflicts
Sources of Investment Monies for Trust Companies
Equity
Shareholder Funds
Retained Earnings
o Property is held beneficially by the trust company. The risk of loss or gain is borne by
the trust company.
Debt
Depositor’s Funds
o Property is held beneficially by the trust company. The risk of loss or gain is borne by
the trust company.
Trusts
Estates
Trusts
Agency Accounts
o This property is not owned beneficially by the trust company. The risk of loss or gain is
borne by the bene.
Re: Brown [1944] 4 D.L.R. 419
FACTS:
Trust co intermingles money from different sources (legal at the time)
Trust co allocates a mortgage that it had acquired to the trust based on a trust co employee’s
IMPROPER (due to frozen ground conditions) valuation of the property
Subsequent appraisal for substantially lower amount.
Two other mortgages allocated to the trust as well
Action alleging:
1) Improperly invested money in certain mortgages;
2) Improper charges had been made against the estate for interest on overdrafts;
3) Payments were made for the estate when the trustee did not have such monies in hand; and
4) The compensation claimed was not “fair and reasonable” but rather was excessive
HELD:
Improperly valuated mortgage monies were from the general trust and so were NOT the
beneficial property of the trust company. The allocation of mortgages was the final step in
the transaction. Therefore, the company was never the owner of the mortgage.
The trust company was entitled to rely upon the report of their employee as to an appraisement of the
value of the land. However, being an employee of the trust company, the trust company itself is
responsible for the employee’s negligent appraisal.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Under the statute, the trust company, when mortgaging, was only permitted to advance monies up
advance monies up to half the amount of the valuation of the property. They are liable only for any
amount advance above the 50% of the valuation amount plus interest. Since no damages were suffered on
the other two mortgages, no damages will be assessed in this regard.
Question: How does this holding accord with the previous cases we have looked at?
Fales v. Permanent Trust Co 1976 SCC
FACTS:
Trust to Mrs. Wohlleben (wife) for life (interest bene), remainder to children (capital bene)
Trust required that all estate assets be sold (at the most advantageous time) and converted to
cash to be invested by the trustees who were the wife and Canada Permanent Trust
Part of trust property was Boyles Bros. shares
1966 - underwriter, Pemberton Securities Limited brings to Boyles Bros. a proposal to merge
with a construction company, Inspiration Limited (which had recently been taken over by
Power Corp - who it was presumed would take the necessary steps to turn things around)
o The underwriter also agreed to subscribe to a certain amount of the merged company’s
shares in order to maintain a high stock price.
o CPT approved the merger subject to the underwriter’s commitment. HOWEVER,
underwriter reneges on its agreement and merger proceeds as planned nonetheless even
though internal documents at CPT referred to the nature of the shares as speculative.
o Mrs. Wohlleben was advised of the final terms of the agreement but not of the internal
assessments done by the Trust company.
1967 - trust received an offer to purchase the shares for $21.50 (while par value was $25) -
The offer was referred to Mrs. Wohlleben without any sort of recommendation on how to
proceed so she declined the offer (seeing no reason to accept a below par value offer – would
mean a loss for the trust).
1969 - there was a brief appreciation of the share price (even though the merged co’s fortunes
had continued to decline).
o The trust company suggested to Mrs. Wohlleben that they might “unload a little”
however nothing progressed at this point.
1970 - A memorandum was drafted for Mrs. Wohlleben suggesting that the trust divest half
of the shares however the recommendation was never communicated to her and no further
action was taken.
Eventually, Power Corp lost patience and allowed Inspiration to declare bankruptcy thereby
rendering the shares worthless.
CLAIMS:
Wife sues CPT for breach of trust
CPT counterclaims for indemnity and contribution.
Wife’s defence is that her conduct s/b excused through the operation of s. 98 of the B.C.
Trustee Act which allows the court to excuse the conduct of a trustee who has breached the
trust but has acted honestly and reasonably and ought fairly to be excused for the breach. .
ISSUE:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Has Permanent Trust breached the standard of care? Can the trustees take advantage of s. 98
to grant them relief?
HELD:
Dickson – Judgment in favour of Wohlleben – counterclaim for C&I is dismissed
SOC required of a trustee is that of a man of ordinary prudence in managing his own affairs.
Standard does not vary depending upon whether he is or is not a professional trustee,
o HOWEVER, a professional trustee may not receive relief for technical breaches of trust
as readily as would an individual trustee.
IE – s. 98 will not be used to excuse professional trustee
CPT failed to meet its standard of care and diligence.
1 - It sat idly by and made no serious attempt to sell the shares.
2 - Senior officers were not consulted about the matter and it appears the estate was not
properly and regularly reviewed by CPT investment committee
3 – CPT failed in its duty to keep Mrs. Wohlleben informed of the financial difficulties of
Inspiration Company
4 – CPT had a duty to apply to the Court for directions EVEN IF they had made properly
supported recommendations to Wohlleben to sell the shares and she had refused
CPT not entitled to relief under (BC) Trustee Act s. 98 of the Act.
o The provision requires that the court consider whether:
the trustee was paid for its services or was a professional trustee
whether the breach was merely a technical one or a minor error in judgement,
whether the loss resulted from a general economic depression; and
whether the trustee’s conduct was reasonable.
In this case, the trust company’s actions were not reasonable.
Wohlleben acted honestly and reasonably in the circumstances since she has not been
exposed to much business experience and since she was not kept informed by her co-trustees.
o THEREFORE, excused under s. 98 of the Act.
o REMEDY:
Where a trustee is granted relief for a technical breach of trust, their co-trustees
are precluded from obtaining contribution and indemnity from them.
COMMENTARY:
Ontario has a similar provision under s. 35 of the Trustee Act. However, the act has
created a new exception … . See s. 35 found on page 440 of the casebook. See also ss. 26 -
28 on pages 437 – 439.
TRUSTEE ACT s. 35 (re: technical breach relief)
s. 35 Relief of trustees committing technical breach of trust
(1) If in any proceeding affecting a trustee or trust property it appears to the court that a
trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or
may be personally liable for any breach of trust whenever the transaction alleged or found
to be a breach of trust occurred, but has acted honestly and reasonably, and ought
fairly to be excused for the breach of trust, and for omitting to obtain the directions of the
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
court in the matter in which the trustee committed the breach, the court may relieve the
trustee either wholly or partly from personal liability for the same. R.S.O. 1990
Exception, investment loss
(2) Subsection (1) does not apply to liability for a loss to the trust arising from the
investment of trust property. 1998
EFFECT: Where there are trust losses due to trust investments trustees are NOT excused even if
they were acting honestly/reasonably.
CONSEQ: NO DIFFERENT STANDARDS APPLICABLE TO PROFESSIONAL TRUSTEE VS
LAY TRUSTEE
ISSUES: 1 – could pro trustee also be agent and thereby be held to the agent standard (below)
2–
Trustee’s Power of Investment
Rule Development
General Rules:
Trust instrument defines powers this definition prevails
Trust instrument silent historically speaking, trusts were generally confined to judicial and
later statutory lists of authorized investments.
Judicial / Statutory Authorized Investments:
Early = low risk (bonds and 1st mortgages) or, later, safe, interest bearing debt securities
Later = concerns about inflation led to an expansion into equity securities (
Recent = prudent person rule
o First adopted in Mass, US..
Harvard College v. Amory (1830) 9 Pick. 446, 461 US prudent person rule
That he shall conduct himself faithfully and exercise a sound discretion.
He is to observe how men of prudence, discretion and intelligence
manage their own affairs, not in regard to speculation, but in regard to
the permanent disposition of their funds, considering the probable
income as well as the probable safety of the capital to be invested.
Ontario Regime:
1984 - OLRC Report on the Law of Trusts recommends abandoning stat lists in favour of the
prudent person rule
1998 - Red Tape Reduction Act 1998 S.O. 1998 c. 18
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o Schedule B = repealed and replaced the lists found in ss. 26 and 27 of the Trustee Act
with a prudent person rule.
2003 - Trustee Act amendments allow limited delegation of investment decisions to agents
and imposed strict duties upon these agents to adhere to strict standards.
TRUSTEE ACT s. 26-28 (re: trust investments)
s. 26 Investments authorized by other Acts or regulations
If a provision of another Act or the regulations under another Act authorizes money or
other property to be invested in property in which a trustee is authorized to invest and the
provision came into force before section 16 of Schedule B of the Red Tape Reduction Act,
1998, the provision shall be deemed to authorize investment in the property in which a
trustee could invest immediately before the coming into force of section 16 of Schedule B
of the Red Tape Reduction Act, 1998.
EFFECT:
s. 27 Investment standards
(1) In investing trust property, a trustee must exercise the care, skill, diligence and
judgment that a prudent investor would exercise in making investments.
Authorized investments
(2) A trustee may invest trust property in any form of property in which a prudent investor
might invest.
Mutual, pooled and segregated funds
(3) Any rule of law that prohibits a trustee from delegating powers or duties does not
prevent the trustee from investing in mutual funds, pooled funds or segregated funds
under variable insurance contracts, and sections 27.1 and 27.2 do not apply to the
purchase of such funds.
Common trust funds
(4) If trust property is held by co-trustees and one of the co-trustees is a trust corporation
as defined in the Loan and Trust Corporations Act, any rule of law that prohibits a trustee
from delegating powers or duties does not prevent the co-trustees from investing in a
common trust fund, as defined in that Act, that is maintained by the trust corporation and
sections 27.1 and 27.2 do not apply.
Criteria
(5) A trustee must consider the following criteria in planning the investment of trust
property, in addition to any others that are relevant to the circumstances:
1. General economic conditions.
2. The possible effect of inflation or deflation.
3. The expected tax consequences of investment decisions or strategies.
4. The role that each investment or course of action plays within the overall trust portfolio.
5. The expected total return from income and the appreciation of capital.
6. Needs for liquidity, regularity of income and preservation or appreciation of capital.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
7. An asset’s special relationship or special value, if any, to the purposes of the trust or to
one or more of the benes.
Diversification
(6) A trustee must diversify the investment of trust property to an extent that is appropriate
to,
(a) the requirements of the trust; and
(b) general economic and investment market conditions.
Investment advice
(7) A trustee may obtain advice in relation to the investment of trust property.
Reliance on advice
(8) It is not a breach of trust for a trustee to rely on advice obtained under subsection (7) if
a prudent investor would rely on the advice under comparable circumstances.
Terms of trust
(9) This section and section 27.1 do not authorize or require a trustee to act in a manner
that is inconsistent with the terms of the trust.
s. 27.1(1) Trustee may delegate functions to agent (prudent investor standard)
(2) Investment plan or strategy (required before delegation)
(3) Agreement (required between agent and trustee requiring agent to follow investment
plan and report regularly)
(4) Trustee’s duty (of prudence in selecting, establishing terms and monitoring the agent)
s. 27.2(1) Duty of agent (care and (2) no further delegation allowed)
(3) Proceeding against agent (in the event of breach of duty)
s. 28 Protection from liability
A trustee is not liable for a loss to the trust arising from the investment of trust property if
the conduct of the trustee that led to the loss conformed to a plan or strategy for the
investment of the trust property, comprising reasonable assessments of risk and return,
that a prudent investor could adopt under comparable circumstances.
Capital or Income?
Q: How for non income tax purposes, one is to decide whether a particular piece of property is to be
classified as capital or income property for the purposes of the trust.
Re: Waters 1956 SCC Nature of the actual property = nature of the trust property
FACTS:
Trust holds shares in a company that decides to switch from dividend to dividend re-investment plan
ISSUE:
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Should the dividend-based shares form a part of the capital property or the income property of the
trust?
ARG:
Company’s intention was to release the accumulated earnings in a single transaction (instead via
dividends)
HELD:
Nature of the actual property determines nature of the trust property
o Land = possession OR rent income
o Money or debt = income or interest
o Common stock = dividend income
BUT where earnings are “capitalized”, they become CAPITAL
“if the transaction has not the elements of dividend and purchase, the shares, prima facie,
are not income”
“the moment form has changed the character of the earnings as assets, the intention
follows that change.”
The Unitrust
PURPOSE: method of avoiding problem of even handedness by making it so that the trustee
does not have to classify receipts and expenditures as income or capital.
METHOD: Trust instrument instructs that income bene receives a certain % of the value of
the trust every year AND when income bene interest ends remainder distributed to the capital bene
ADVANTAGES
o Provides a steady and predictable rate of return to the income bene
o Economic fluctuations can get smoothed out over time
o Trustee can invest with long term goals in mind.
DISADVANTAGES:
o Settlor must decide income bene’s %
o Requires annual asset valuation (probably done anyway) in order to distribute correct %
Re: accounting procedures - may be diff btwn trust “income” and tax “income”
o Trustee must take care not to violate the rule against accumulations.
TAXATION:
o Normal tax rules apply to unitrusts.
IE - income that is in the hands of the income bene is taxed to them, while any
accumulating income (including capital gains) is taxed in the hands of the trust.
Duty to be Even Handed
Key issue in exercising trutee discretion is to maintain a balance between income and capital benes
o Income maximization or long term capital gain?
o What should be done with non-productive trust property?
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
UK cases = even hand, BUT (subject to the trust instrument) non-productive trust
properties need not be converted in order to generate a higher rate of income return
Rationale: equity does not imposed a duty to convert property selected by the settler
Re: Smith [1971] 2 O.R. 541 Even hand requires consideration of even hand
FACTS:
Testator’s maintenance provisions for his wife are inadequate, so the son (who inherited Imperial Oil
shares) sets up a trust of the shares with his mother as life income bene and himself as capital bene
Trust instrument gives the trustee (who also happens to be agent of the son re: the shares) the power
to retain and invest the trust property, or to convert it to another use upon their discretion.
Eventually, shares split 4:1 resulting in large capital appreciation within the trust
Mother wants more income and contacts the trustee to ask the trust to diversity to other investments
that had a higher yield
o ARG: by not diversifying and producing more income for the income bene trust is breaching duty
to maintain even hand
o RESPONSE: Trustee replies that it must consult the settlor and report back – but it never reports
PRIORS:
TRIAL - Court removes and replaces the trustees citing a breach of trust
o Unless the instrument stated to the contrary trustee duty was to maintain even hand – by showing
deference to settler (ie – capital bene), there could be no continued confidence in the trustee re:
future good administration of the trust
ISSUE:
Has the trustee breached duty (a) Refusing to exercise its investment powers to produce a reasonable
return for the life tenant? or (b) Not exercising prudence and reasonable care by failing to diversify?
HELD:
Appeal dismissed – trial judge was right to hold that trustee was obliged to maintain even hand AND
that this duty was breached
Trustee needed to actively consider its respective obligations to both benes AND ONLY THEN
exercise its discretion not to see if it came to the conclusion that it did not need to do so in order
to be even handed
o No evidence, here, that the trustee put its mind to the question of what it should do to carry out
the obligations.
False interpretation of the trust instrument that it required the trustee to not sell the shares AND
EVEN THOUGH this was suggested by the income bene’s solicitor the trustee did not seek out legal
advice or apply to court for direction
COMMENTARY:
Prof Scane says good development for even handed principle – gives it more meaning – which means
more balance for benes
o Says trustee should exercise their discretion in an administrative, not dispositive manner
IE – to avoid changing the nature of the disposition, and instead simply administer the
trust by avoiding acting in a way that would shift wealth from one to the other
Prof Hogg says decision goes to far, rather only needed to hold the trustee guilty of not fairly
considering the request of the income bene (= same result)
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Re: Fleming 1973 ON Even hand + nature of asset at time of testator’s death
FACTS:
Trust to wife for life remainder to various charities
Property includes corp shares inc. a company for which the trustees are the directors
o Corp decides to sell some property
o Trustees uncertain whether (as corp directors) they should distribute the gain as dividend (ie –
income) or as pref share (ie – capital)
o Trustees/directors apply to court for direction
One company that the trust owns shares in decides for tax reasons to distribute surplus income in the
form of a dividend.
ISSUE:
Was this a suitable case for trustees to apply to court for direction?
What should the corp do – dividends or shares?
HELD:
Application for direction is not intended to relieve trustees from exercise of discretion which are
given to them by will and which they agreed to do
HOWEVER, special difficulties arise where a decision may have a significant impact on either the
income or capital bene the court is more likely to respond
HERE, court orders that corp should issue pref shares because
1 – issuing dividends would incur a tax which would reduce the assets of the estate (and so be unfair
to the capital bene)
2 – issuing dividends would transform what WAS capital at the date of testator’s death into income
Where trustee’s discretion/duty is being frustrated (vs. simply not exercising their duty) the court
will interfere
-HAAS - where the trust instrument is being frustrated (ie – deadlock makes trustee’s
unable to exercise discretion)
- SMITH – trustee not maintaining an even hand
- FALES – where trustee fails in their duty to the bene? Trust instrument?
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Control of Trustee Discretions by the Court
Prof Cullity - formerly, the only assistance the Court could give was through an administrative action
which was both cumbersome and expensive.
o See the cases of Re: Ripstein Estate [1929] 1 W.W.R. 788, and Re: Delaere Estate [1933] 2
W.W.R. 258 both give a useful review of the background of the statutory provisions.
Trustee Act s. 60 – Application to Court
(1) A trustee, guardian or personal representative may, without the institution of an action,
apply to the Superior Court of Justice for the opinion, advice or direction of the court on
any question respecting the management or administration of the trust property or the
assets of a ward or a testator or intestate.
Indemnity of trustee, etc., acting as advised
(2) The trustee, guardian or personal representative acting upon the opinion, advice or
direction given shall be deemed, so far as regards that person's responsibility, to have
discharged that person's duty as such trustee, guardian or personal representative, in the
subject-matter of the application, unless that person has been guilty of some fraud, wilful
concealment or misrepresentation in obtaining such opinion, advice or direction.
Ontario Rules of Civil Procedure s. 14.05:
APPLICATIONS — BY NOTICE OF APPLICATION
Notice of Application
14.05 (1) The originating process for the commencement of an application is a notice of
application (Form 14E, 68A or 73A) or an application for a certificate of appointment of an
estate trustee (Form 74.4, 74.5, 74.14, 74.15, 74.21, 74.24, 74.27 or 74.30).
Application under Statute
(2) A proceeding may be commenced by an application to the Superior Court of Justice or
to a judge of that court, if a statute so authorizes.
Application under Rules
(3) A proceeding may be brought by application where these rules authorize the
commencement of a proceeding by application or where the relief claimed is,
(a) the opinion, advice or direction of the court on a question affecting the rights of
a person in respect of the administration of the estate of a deceased person or the
execution of a trust;
(b) an order directing executors, administrators or trustees to do or abstain from
doing any particular act in respect of an estate or trust for which they are
responsible;
(c) the removal or replacement of one or more executors, administrators or
trustees, or the fixing of their compensation;
(d) the determination of rights that depend on the interpretation of a deed, will,
contract or other instrument, or on the interpretation of a statute, order in council,
regulation or municipal by-law or resolution;
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(e) the declaration of an interest in or charge on land, including the nature and
extent of the interest or charge or the boundaries of the land, or the settling of the
priority of interests or charges;
(f) the approval of an arrangement or compromise or the approval of a purchase,
sale, mortgage, lease or variation of trust;
(g) an injunction, mandatory order or declaration or the appointment of a receiver
or other consequential relief when ancillary to relief claimed in a proceeding properly
commenced by a notice of application;
(g.1) for a remedy under the Canadian Charter of Rights and Freedoms; or
(h) in respect of any matter where it is unlikely that there will be any material facts
in dispute.
Re: Boukydis (1927) 61 O.L.R. 561 TA s. 60 – don’t bother unless you try first!
FACTS:
Testator’s chosen trustees are replaced by Union Trust – all that is left to do is distribute the proceeds
of the sale of some remaining shares
At time of appointment minor bene is threatening to sue Union Trust due to their proposed method
and manner of liquidating
To avoid litigation Union Trust applies to court for direction on how to realize the assets
ISSUE:
Does s. 60 of the Trustee Act apply here?
HELD
Motion dismissed, figure it out for yourself...
Court shouldn’t interfere in the details of the management of trust estates --- testator chose and gave
discretion to trustees (and TA s. 8 transfers this to the new trustees) for them to exercise honestly –
court should not exercise the trustee’s discretion
o trustee who voluntarily accepts the position, must be prepared to assume and exercise the duties
of his office
o it is an abuse of the statutory power when it used used to transfer responsibility to the court
Especially important for trustee to do the work himself when the task is one “calling for
careful inquiry and the exercise of tact and discretion”.
Not discharging duties by a forced and ill-conceived realization of this stock
Not discharging duties by assuming and attitude of indifference and inactivity.
o It is expected to exercise diligence and intelligence in realization.
o Union Trust is a professional administrator and trustee - holds itself out as competent to
administer estates and it must assume the responsibility of carefully and prudently realizing
particularly when it knows that the attitude of the bene is “critical.” (of the trustee)
It receives the remuneration, and it must incur the responsibility and perform the services
for which it is to be paid.
It cannot shirk the full measure of responsibility in such matters as this by coming to the
Court with an expensive motion upon matters where common sense and business
prudence are the only safe guides.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Re: Haasz 1959 Cda Trustee disagree = court more likely to intervene
FACTS:
Testator empowers his trustees to “at their sole discretion” sell or retain as an asset any trust property.
Trustees split on whether to sell or retain (certain company shares which were not an authorized trust
investment – due to illiquidity)
ISSUE:
Are the trustees able to rely upon the Court’s discretion?
HELD:
By not agreeing on how to exercise their discretion (which is limited to the flip-side discretions to
simply sell or retain) that provision in the will (giving that discretion) remains inoperative.
o This inoperativity is contrary to the testator’s intentions (that the powers be exercised)
o THEREFORE, trustees under a duty to exercise one power or the other and as long as they don’t,
the benes may suffer.
o In these circumstances, where its assistance is invoked, the Court must intervene and
assume or compel the due execution of the trust.
After considering the facts of the case, Justice Morden directed that the trust property be
sold as this would be in the best interests of the bene.
Rights of the Trustee
Remuneration:
General rule (of no fiduciary profit) subject to the following exceptions:
(i) Under express provision in the trust instrument
(ii) With bene consent (assuming they are all sui juris and in agreement)
(iii) Under Statutory Power:
Public Guardian and Trustee Act R.S.O. 1990, c. P. 51 s. 8:
8(1) The Public Guardian and Trustee may charge fees for anything done by
the Public Guardian and Trustee under this or any other Act.
Fees
(1.1) The Public Guardian and Trustee may charge fees for services rendered
and things done by his or her employees and agents.
(iv) Under Court Order:
a. Inherent Jurisdiction (rarely needed)
b. Trustee Act s. 61 which states:
61.(1) A trustee, guardian or personal representative is entitled to such fair
and reasonable allowance for the care, pains and trouble, and the time
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
expended in and about the estate, as may be allowed by a judge of the
Superior Court of Justice.
NOTE: TA s. 61 = not confined to testamentary trusts only
Prof Cullity - despite the use of the word “estate” it is assumed that this provision is not
confined to testamentary trusts (see for ex. Re: Hamilton Harbour Commissioners (1929 –
30) 65 O.L.R. 149)
MUST MAKE APPLICATION TO COURT for remuneration under s. 61
Discretionary guidelines re: remuneration (SUBJECT TO THE TRUST INSTRUMENT)
Receipts of Capital 2½
Disbursements of Capital 2 ½%
Income Receipts 2 ½%
Income Disbursements 2 ½%
General Administration fee 0.4% per annum (Not always applicable)
NOTE: Tariffs given to the trustees in an aggregate form and trustee divide it amongst themselves
NOTE: Court will vary amount if it appears there were unnecessary transactions
Trustee Liability: Contribution and Indemnity
Joint and Several Liability
Trustee(s) is/are personally liable for breach of trust – each equally so regardless of their degree of
fault
Not participating / remaining inacative in decision making DOES NOT allow that trustee to escapte
liability Co-trustees are under a duty to act jointly and their decisions should be unanimous.
EXCEPTION:
o TA s. 35 gives court discretion to excuse a co-trustee’s conduct
o Trust instrument may contain an exculpatory clause in order to provide relief to a trustee.
RESULT:
o Bene can sue ANY trustee to recover the entire loss – no need to find the culpable one or sue each
one separately
o CONTRIBUTION Trustee who pays damages can seek contribution from co-trustees so that
they contribute equally
o INDEMNITY Where breach of trust committed in reliance on a solicitor trustee the court wil
order the solicitor-trustee to indemnify the lay trustees (Re: Partington 1887)
NOTE: Possible that there are other situations where one trustee would be held justified
in relying on the advice of their co-trustee, and would be held entitled to an indemnity for
breach of trust; but there do not seem to be any reported cases other than that of the
solicitor-trustee. --- IE – what about professional financial trustees and lay trustees?
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Re: Pauling Eng 1964 Indemnity from bene where valid consent to breach
Bene who consents or acquiesces to breach of trust cannot sue
To consent, bene must be:
o sui juris
o fully informed (have full knowledge of all material fact and law)
o not be under the undue influence of the trustee
NOTE:
o If multiple benes, the non-consenting ones can still sue the trustee, IN WHICH CASE the trustee
IS NOT INDEMNIFIED by the consenting bene – just that the consenting bene cannot recover /
the trustee is not liable for that bene’s % of the loss
Third Party Liability for Breach of Trust (NOT EXAMINABLE)
(a) Non-trustee who acts as a trustee;
(b) Non-trustee who knowingly assists a breach of trust;
(c) Non-trustee who knowingly receives property acquired in breach of trust.
For reference see:
Air Canada v. M & L Travel [1993] 3 S.C.R. 787
Gold v. Rosenberg [1997] 3 S.C.R. 767
Citadel General Assurance Co. v. Lloyd’s Bank [1997] 3 S.C.R. 805
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
B - The Bene
Power to Terminate the Trust
Saunders v. Vautier (1841) 4 Beav. 115; 49 E.R. 282 (V.C.).
FACTS:
Trust of shares of East India Company set up for infant bene, income to be accumulated until bene
reaches 25
Rep of infant bene (while still infant) petitions court for distribution for maintenance of infant bene
o Court agrees on the basis that the fund in question formed a part of the bene’s fortune.
ARGS:
Post-21 (age of majority) bene says that he as a vested interest and that since the accumulation is for
his benefit alone that he should be able to waive it and force the immediate transfer/distribution of the
Trust counsel says the interest does not vest until the bene turns 25 and as such, they have no right to
any trust property until then subject to the discretion of the trustee.
ISSUE:
Can the bene petition to bring a trust to an end if they are sui juris and have a vested interest?
HELD:
If the bene has an absolute indefeasible interest in the legacy he is not bound to wait, but may require
payment at the moment he is competent to issue a valid discharge.
COMMENT:
One of few cases that in fact overrides any contrary intention expressed in the trust instrument.
Vested or contingent:
o Court Vautier’s interest was vested, but with a superadded direction that payment to the bene
be postponed until 25
o Conforms to the earlier order made by the Court ordering that maintenance be paid to the bene –
IE – maintenance could only be paid out of a vested interest.
o EVEN IF CONTINGENT could still terminate with consent of other bene’s with an interest
(ie – those who would be entitled to shares if Vautier died before age 25)
Making the Trust “Unbreakable”
To avoid the rule in Saunders v. Vautier and provide for a trust where the enjoyment of the trust property
is postponed, then one must draft a trust with:
a) A gift that is contingent on attaining a certain age; with
b) A gift over to an infant or unascertained benes.
EXAMPLE: In trust to B provided that they attain the age of 25, and if they die before 25, then to B’s
issue then living, if no issue then living, to C.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
In this example there will always be:
1. non suijuris benes; (ie – minors)
2. unascertained benes; or
3. unborn benes
o Therefore, unless the benes could prove infertility (and thereby prevent unascertained
benes) then the trust is unbreakable
Eventually a trust for individuals must come to an end.
RAP = only enforces the time that an interest has to vest,
RAP + Saunders = helps to regulate the duration of a trust.
o Rule Against Indestructibility performs a similar function for trusts without an individual
bene.
Re: Smith [1928] Ch. 915 (Ch.D.) Variation on Saunders v. Vautier
FACTS:
Trust of income payments to wife and remaineder to any children that reach age 21.
Absolute discretion to trustee to select which individuals may benefit and vary the amounts according
to the trustee’s discretion.
Once all children reach age 21 wife and kids attempt to get trust distributed – Public Trustee disagrees
So, benes take out a mortgage from a finance company and assign their bene interest to the company.
Trustee applies to court for direction re: whether to pay the balance of the trust to the finance
company, or (notwithstanding the assignment) to apply all or any part of the trust property towards
the maintenance of the wife.
ISSUE:
Can the benes come together to alter the trust in this way?
HELD:
IF Trustee has discretion to apply whole or part to one bene = bene cannot demand the whole fund
o Rationale: whole fund not given to them, only as much as the trustee sees fit to let them have
IF Trustees has NO DISCRETION as to the amount of the fund to be applied (only discretion as to
the method of how the whole fund should be applied) = bene can demand the whole fund
IF Trustee has discretion to apply whole or part to one person, and the rest has to go to a second
person, then can treat the two people together as one person who can then demand the fund be
distributed.
o IE – HERE, benes are allowed to come together for the purposes of directing that the trustee pay
the income that arises from the trust to the finance company until the mortgage is discharged
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Differences with the United States
Many U.S. jurisdictions do not accept the rule in Saunders v. Vautier, but apply a different rule for
early trust termination that only allows termination where the settler has no further material purpose
to carry out.
Material purpose:
a. A direction to postpone payment to a bene; and
b. A discretionary trust.
IE - Both Saunders and Smith would have been decided differently in some U.S. jurisdictions.
POLICY REASONS:
Canada and England favour early vesting and wish to limit control by the dead of the past in favour
of the living.
U.S. favourS giving more effect to the original intentions of the settlor rather than favouring the
wishes of the benes.
Abolishing the Rule in Saunders v. Vautier
OLRC – think we should abolish the rule in Saunders and instead have a stat provision that requires
bene’s to apply to court if they want to have a trust terminated prematurely
Good:
May prevent more undue influence, immature bene’s blowing inheritances, etc
Bad:
Nothing really for courts to adjudicate since Benes are the best judge of their own interests
The Power to Vary the Trust
Chapman v. Chapman Eng 1954 Can’t vary trust where infant/unborn bene
where there are infant, unborn or unascertained benes cannot vary the trust (despite logical corollary
imposed by Saunders v Vautier)
Variation of Trusts Act (everywhere except US)
Jurisdiction of courts to vary trusts
1(1) Where any property is held on trusts arising under any will, settlement or other
disposition, the Superior Court of Justice may, if it thinks fit, by order approve on behalf of,
(a) any person having, directly or indirectly, an interest, whether vested or
contingent, under the trusts who by reason of infancy or other incapacity is
incapable of assenting;
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
(b) any person, whether ascertained or not, who may become entitled, directly or
indirectly, to an interest under the trusts as being at a future date or on the
happening of a future event a person of any specified description or a member of
any specified class of persons;
(c) any person unborn; or
(d) any person in respect of any interest of the person that may arise by reason of
any discretionary power given to anyone on the failure or determination of any
existing interest that has not failed or determined,
any arrangement, by whomsoever proposed and whether or not there is any other person
beneficially interested who is capable of assenting thereto, varying or revoking all or any of
the trusts or enlarging the powers of the trustees of managing or administering any of the
property subject to the trusts.
Benefit
(2) The court shall not approve an arrangement on behalf of any person coming within
clause (1) (a), (b) or (c) unless the carrying out thereof appears to be for the benefit of that
person.
NOTE: Court consent unnecessary if there’s a valid Power of Attorney for an incapacitated
person under s. 1(1)(a)
INTERP: Courts have traditionally given a very liberal interpretation to what it considers to be for
the benefit of the bene. It does not appear to be simply financial benefit.
Examples of variations approved by the Court include:
a) a power of encroachment;
b) alterations of dispositive provisions;
c) a widening of investment powers; and
d) a change in the provisions of a will appointing a successor
Procedure to have a court vary a trust:
1) Adult benes agree to variation (normally in negotiation with the Official Guardian),
application is made for consent of court
2) Application served on the Official Guardian of the unborn
3) If the Official Guardian consents to the application, the Court will normally grant it – if
they don’t consent, it’ll probably never get to court
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Power to Control the Trustee’s Discretions
3 types of trustee discretions:
(1) Discretion conferred by general law (for instance under the Trustee Act);
(2) Discretions conferred by the trust instrument itself; and
(3) A proprietary right to discretion. For instance, the ownership of shares confers the owner of the
legal title the power to vote at shareholder meetings.
Re: Brockbank [1948] Ch. 206 Trustee discretion = trustee discretion
FACTS:
Original Trust Testator appoints wife and solicitor as executors and trustees
o Income to wife for life unless re-married and remainder to children
o Provision also for fee for professional trustee services
Revised Trust = same, but son-in-law instead of wife as trustee
o No express power to appoint another trustee and as such, the trust was bound by s. 36 of the
English Trustee Act that allowed surviving or continuing trustees to appoint new trustees.
Son-in-law retires and names replacement trustee who eventually also wants to retire
At this time, the wife (now 83) and children wished that Lloyd’s Bank be named the new sole trustee,
but the outgoing trustee refuses to agree given that the bank’s fees (upon the distribution of the trust)
would impose an unnecessary charge on the trust property.
Wife and kids bring action seeking that the trustee appoint Lloyd’s Bank as replacement or that the
court replace the current with Lloyd’s
ISSUE:
If all of the benes concur, can they force a trustee to retire, compel their removal and direct the trustee
to appoint a replacement of the benes own choosing?
HELD:
Power to nominate new trustee is a discretionary power and would no longer exist if it could be
dictated by others
Benes have 2 choices:
1. Keep the trust on foot and let the trustee exercise his discretion, OR
2. Combine to bring the trust to an end
As long as the trust subsists, the trustee must be duly, properly and regularly appointed to the
office.
RATIO:
Trustee must be allowed to exercise their discretionary powers if one is to have a trust.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Butt v. Kelson [1952] Ch. 197 Contra Brockbank
FACTS:
The controlling Directors of a company whose shares form a trust are the trust’s trustees
Bene believes that the company is being mismanaged and wishes to use his powers in concert with
the other benes to compel the trustee / directors to disclose confidential corporate documents to them
so that they may inspect them and assess the directors’ performance.
Articles permit directors to give shareholders access to theses docs at their discretion or by resolution
Directors say benes only entitled to what normal shareholders would be entitled to
Bene claims that all of the trustees powers as directors are derived from the trust and as such, the bene
ought to be entitled to use their rights as a bene to compel the trustee’s to disclose the information he
requested. At trial, the Court held in favour of the bene.
ISSUE
Can the bene use their position to compel the trustees to disclose?
HELD
Prima facie problem is that if bene given disclosure they would get what a registered s/h would not
o This would prejudice the interests of the company and other benes who don’t want the disclosure
EG - such a bene could use this information to obtain confidential information while at
the same time carrying on a rival business.
P bene can request specific docs and if not met by valid objections by other benes or directors then
the directors should allow inspection
o HOWEVER, the bene cannot compel this disclosure – the directors powers ARE NOT HELD IN
TRUST FOR THE P BENE
o If other benes or directors do object, then P bene must apply to court for a determination
o As a result, the plaintiff was allowed to apply to the Court to see any documents that would
henceforth be refused to be disclosed by the directors.
RATIO:
Bene can attempt to control the discretion exercised by the trustee with respect to their own share of
the trust property so long as they do not affect the rights of other benes.
COMMENTARY:
Majority view is that Butt v Kelson is wrong and Brockbank is right re: discretion of trustee
A possible reconciliation of the two cases is to treat the bene’s directing power as confined to “those
[trustees’] powers incidental to ownership which would be [the bene’s] if the trust were terminated by
transfer of the trustee’s title to [the bene]” : Ford, “Unit Trusts” (1960) 23 Modern Law Review 129
at 141.
a. Butt v. Kelson power to vote shares was possessed by the trustee by virtue of his ownership
of the trust property.
b. Re: Brockbank power to appoint was held by the trustee by virtue of his office.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
The Power to Alienate a Beneficial Interest
Is it possible to assign an equitable interest to anyone else, and if so, what are the formalities required
The general rule is that an equitable interest can be assigned to another individual.
Formalities
Section 11 of the Statute of Frauds reads as follows:
Assignments of trusts to be in writing
11. All grants and assignments of a trust or confidence shall be in writing
signed by the party granting or assigning the same, or by his or her last
will or devise, or else are void and of no effect.
Restraints on Alienation
Settlors can attempt to prevent benes from alienating their interests
o Often because settlor fears that a reckless bene may eventually squander their interest.
We will look at some of the means by which settlors can restrict the alienation of a beneficial interest:
Direct Restraint (invalid)
Example:
S gives property to trustees upon trust to pay the income to L for life, L’s interest to be inalienable, then
to hold the capital for L’s children in equal shares (Cf. Brandon v. Robinson (1811), 18 Ves. 429, 34 E.R.
379 (not in casebook).
Re: Macleay 1875 Eng LIMITED Direct Restraint = Valid
FACTS:
Will says brother who inherits property must “never sells it outside of the family.”
PRIORS:
Trial – the term “family members” ought to refer to blood relations.
ARG:
You cannot give someone a gift in fee simple and then restrict the manner in which they can alienate
the property afterwards.
HELD
According to the old books, the test is whether the condition takes away the whole power of
alienation substantially: it is a question of substance, and not of mere form.
Allowed to restrict alienation via:
o prohibiting a particular class of individuals,
o restricting it to a particular time.
HERE, ALIENATION IS LIMITED AS TO:
o mode of alienation, because the only prohibition is against selling.
Which means can still lease, mortgage, or settle;
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
o class; he is never to sell it out of the family, but he may sell it to any one member of the family.
And known to be a large family
THEREFORE VALID - As a result, the condition in this case was held to be valid.
NOTE: In many jurisdictions of the United States, the direct restraint on alienation is valid. A trust
imposing such a restraint is known as a “spendthrift trust.” Of course, this is not surprising if one will
recall the lack of a Saunders v. Vautier rule in the U.S. which favours the wishes of the settlor over the
rights of the benes.
Divesting Condition Subsequent (invalid):
Example
S gives property to trustees upon trust to pay income to L for life, but [or provided however that] if he
attempts to alienate or become bankrupt, then to pay the income to S; upon the death of L, to hold the
capital for L’s children in equal shares
Here, an attempt to alienate results in the property being divested to somebody else. As we saw in
Macleay, a divesting condition subsequent followed by an attempt to alienate is held invalid.
Remember however that the striking down of a CS does not make the entire trust void.
Determinable Limitation (valid):
Example
S gives property to trustees upon trust to pay the income to L for life or until he attempts to alienate or
becomes bankrupt; if the interest determines in L’s lifetime then to pay the income to S; upon the death of
L to hold the capital for L’s children in equal shares
Re: Leach [1912] 2 Ch. 422 Determinable Limitation
FACTS:
Devise to pay the annual income for the P “until he shall assign, charge or otherwise dispose of the
same of some part thereof or become bankrupt or compound or make any arrangement with his
creditors, borrow money or do something whereby the said annual income or some part thereof
would become payable to or vested in some other person which of the events shall first happen.”
If the bene violated the terms of the trust, the trust wold accumulate income for the male heir of the
bene until they turned 21. Further provisions were made if the bene died without a male heir.
HELD:
P takes the property subject to a determinable limitation.
If any of the determining events happens the limited estate will determine/cease and he will have no
further interest in the premises and the trust to accumulate will arise.
If P dies without a determining event occurring, then it can never occur and his estate in fee simple
becomes absolute.
COMMENTARY:
Note, if the determinable limitation were struck down, then the whole interest would have been void.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
Protective Trust (valid):
Example
S gives property to trustees upon trust to pay the income to L for life or until he attempts to alienate or
becomes bankrupt; if the interest determines in L’s lifetime upon trust to pay the income to or for the
benefit of any of L, L’s wife and L’s children in the discretion of the trustees; upon the death of L to hold
the capital for L’s children in equal shares.
In this case, the attempt to alienate gives rise to a discretionary trust that arises for the benefit of L,
L’s Wife and L’s Children. These trusts are commonly used when the settlor wishes to have the trust
protected from creditors. Here, the trustees can pay money directly to L’s family so that the trustee in
bankruptcy cannot access the money. The settlor in this case gets to support their family safely and
also protects against L being a spendthrift.
Note: In some jurisdictions, there is a formula in Trustee Act governing formation of protective trust.
C - The Settlor
Does the settler have the right to revoke or vary the trust?
Generally, once a trust has been established, the settlor has no power to revoke the trust.
Rationale: This is in keeping with the idea that once the trust has been established, the settlor has
created a new proprietary interest that they cannot take back in the same manner as they do a gift.
Exception:
o The trust instrument itself can reserve for the settlor the power to revoke or vary the trust.
o Not common in Canada (though it is in the US) because ITA s. 75(2) causes any income of a
revocable trust to be attributable to the settlor thereby creating a tax incentive to not reserve a
power of revocation.
o GETTING AROUND ITA s. 75(2) Fund the trust via a loan repayable on demand (ie –
effectively revocable)
The “power or revocation” is derived from the settlor’s position as creditor rather than
through their position as settlor. (which is why is permitted FOR NOW)
Howson (2006) – CONFIRMED THE AVAILABILITY OF THE ‘LOAN REPAYABLE
ON DEMAND’ EXCEPTION
NOTE: Settlor can serve as a trustee and not have the provisions of s. 75 (2) apply.
Re: Knetchell [1952] 4 D.L.R. 763. No Power to Revoke where other benes
FACTS”
Settlor sets up trust to pay herself income during her lifetime and on her death, distribute the trust
property to the persons who would be entitled to her intestate estate.
It was also provided that she was to be entitled to direct a different distribution in her will.
While alive settler vested absolute discretion in trustees to encroach upon capital in an emergency for
her proper maintenance and support.
Trusts – Professor Kianieff – Fall 2007 – Jeremy Burke
At some point she tries to bring the arrangement to an end and petitions the court to do so as the sole
named bene.
HELD:
As a matter of course, the settlor does not have the power to revoke a trust. Here, cannot do so
because there are other benes who would have to assent.