Changes to Taxation of Alter Ego and Joint Partner Trusts

There are a number of significant changes to Canadian tax law that will have a significant impact on estate planning. I have written about the elimination of graduation income rates for testamentary trusts, including a post here. That change, though most unwelcome, at least doesn’t come as a surprise, in view of the previous consultation by the Minister of Finance and that it was announced in the 2014 Budget. One change that does come as a surprise is that the Government is making a significant change to how alter ego and joint partner trusts are taxed, a change that could cause some significant unforeseen consequences to estate plans.

I wrote some time ago about the use of alter ego and joint partner trusts. An alter ego trust is a trust settled by a Canadian resident who is at least 65 years old. Under the terms of the alter ego trust, all of the income must be payable to the settlor during his or her lifetime, and only the settlor may have access to capital during his or her life. Then on the settlor’s death, the trust property may be distributed to other beneficiaries as set out in the trust documents. The advantages include that the settlor may transfer appreciated assets into the trust without triggering capital gains or other income tax, and such tax may be deferred until the death of the settlor. Alter ego trusts may avoid or minimize probate fees (because the trust is not probated), maximize privacy, and may in some circumstances be used to protect assets against claims in British Columbia under wills variation legislation.

Joint partner trusts are similar, except that the income must be paid to either or both the settlor and his or her spouse or common-law partner (as those terms are defined under the Income Tax Act (Canada), but for simplicity, I will refer to both as “spouses”), during their joint lives, and capital may be distributed to either or both spouses, until the death of the surviving spouse, at which time the trust property may be distributed as set out in the trust documents.

Under the current tax rules, the alter ego trust is deemed to have disposed of all of its assets immediately after the date of death of the settlor. The effect of this is that any capital gains or other taxes are taxed in the alter ego trust, at the top income tax rate. Although paid out of the trust, the incidence of the tax ultimately falls on the beneficiaries of the trust by reducing the trust property. In some cases, using an alter ego trusts results in a higher overall tax than if the assets had just remained as part of the settlor’s estate, because of the high tax rate in the trust, as opposed to the graduated rates available in the settlor’s year of death in respect of taxes triggered by the deemed disposition of those of the settlor’s assets that are not in a trust. Furthermore, capital losses in the trust cannot be used to offset gains of property that are not in the trust, and vice versa.

Similarly, for a joint partner trust, the deemed disposition occurs immediately after the death of the last to die of the spouses, and as with the alter ego trust, the tax is paid out of the trust property at the top tax rate, and not the marginal rate available to either of the spouses.

Under the changes that are coming into effect in 2016, the taxes arising from the deemed disposition of trust property at the death of the settlor in an alter ego trust will be treated as the settlor’s income in the settlor’s year of death and payable out of the settlor’s estate. If there are insufficient funds in the estate, then the Canada Revenue Agency may collect the tax out of the trust property.

In a joint partner trust, the taxes arising from the deemed disposition of the trust property on the death of the last of the spouses to die will be treated as the income of the last of the spouses to die and will be payable out of his or her estate, unless there are insufficient funds, in which case Canada Revenue Agency may collect the tax out of the trust property.

In some cases, this may reduce the overall tax burden of the estate and the trust. This is because the graduated tax rates should apply to income from the deemed disposition death including the disposition of assets in the trust which would under current rules be taxed at the top rate. Furthermore, tax losses and credits available in the deceased terminal return should be available to reduce gains and taxes that would otherwise be payable in the trust. Similarly, losses in the trust may be available to offset gains on property owned by the deceased.

There may be some advantages under the new rules. But no, the Government was not doing us a favour. There is a significant downside to the changes.

Under the current rules, the taxes in respect of the deemed disposition of trust property is ultimately borne by the beneficiaries of the trust, while under the new rules, it will be borne by the beneficiaries of the estate of the settlor of an alter ego trust, or the estate of the last of the spouses to die, in the case of a joint partner trust.

Consider this example of how it might work. Jim and Janet are married, and each comes into the marriage with his or her own assets, and each has two children. Janet owns a cottage and a large portfolio of investments, and she transfers both into a joint partner trust “the Janet Joint Partner Trust.” Under the terms of the trust, income is payable to either or both of Janet and Jim while they are both alive, and then if Jim outlives Janet, he will continue to receive income, and have use of the cottage during his lifetime. Janet has set up the trust so that on his death, the trust property goes to her own children. Jim has a similar estate plan. His will provides income from his, more modest property, to Janet if she outlives him, but on her death, his property goes to his own children. Janet dies first. Under the current rules, on Jim’s death any capital gains on the Janet Joint Partner Trust property are paid out of the trust, reducing the property that will go to Janet’s children. Any capital gains tax on Jim’s own property is payable out of his estate, reducing the amount that his children will receive. But if Jim dies in 2016 or later, then the taxes in respect of both the Janet Joint Partner Trust property and Jim’s own property will be payable out of Jim’s estate, which means that the incidence of the tax will fall entirely on Jim’s children. Janet’s children would only bear part of the tax if Jim’s estate was insufficient to pay the full amount of tax, in which case, Jim’s children will have been completely disinherited as a result to the changes in tax law.

Going forward, at least estate planners will be cognizant of the changes, and can consider the impact of tax when creating trusts. But the new rules will also apply to trusts that are already in existence, and were planned on the basis of the rules that imposed tax on the trust. In some cases, these cannot be changed to adapt to the new rules, in which cases the result will be that the Government of Canada will have distorted estate plans, including carefully thought out plans intended to balance the interests of spouses and children in blended families.

It’s Time for the Court of Appeal to Revisit its Formulation of "Rational and Valid Reasons" in Wills Variation Cases

The Wills, Estates and Succession Act allows a will maker’s spouse or child to apply to court to vary a will if adequate provision has not been made for the spouse or child, in which case if the court finds that adequate provision has not been made, the court may make such provision as the court thinks adequate, just and equitable in the circumstances.

The wills variation provisions are in Division 6, Part 4 of the Wills, Estates and Succession Act, but were until recently in the Wills Variation Act, and all of the cases I refer to were decided under the Wills Variation Act. The change in legislation does not affect the analysis.

Applying wills variation legislation is difficult because the courts are required to find a balance between the purposes of the legislation in recognizing that a will maker usually has legal or moral obligations to his or her spouse and children, while respecting the right of a will-maker to make his or her own decisions about who will inherit his or her property.

The legislation allows the court to consider evidence of the will-maker’s reasons for making the provisions he or she did in the will. In striving to find a balance, the British Columbia Court of Appeal has formulated a principle that if the will-maker’s reasons are rational and valid, then unless the spouse or child can show financial need, the will should not be varied.

The Court of Appeal expressed this principle in Bell v. Roy, (1993), 75 B.C.L.R. (2d) 213. Mr. Justice Goldie wrote at paragraph 38:

…that the weight to be given evidence of the testator's reasons is affected by its accuracy and not by morally acceptable or unacceptable content. I do not say the legislature swept away any objectively determined moral duty. I do say, however, that the actual intentions of the testator are to be given an effect which is largely denied by reliance upon the notionally objective reasonable testator.

In a later case, Kelly v. Baker (1996), 15 E.T.R. (2d) 219 (C.A.), the Court expressed the principle as follows:

The law does not require that the reason expressed by the testator in her will, or elsewhere, for disinheriting the appellant be justifiable.  It is sufficient if there were valid and rational reasons at the time of her death - valid in the sense of being based on fact; rational in the sense that there is a logical connection between the reasons and the act of disinheritance.

The idea that the court should take into consideration a will-maker’s reasons, and if rational and valid should give effect to those reasons strikes me as a reasonable way to balance the competing purposes of the wills variation legislation. The difficulty with the way the Court of Appeal has formulated this principle in Bell and Kelly is the notion that that the reasons need not be “justifiable.”

It is difficult to find cases where the courts have found that reasons for disinheriting a spouse or child to be based on fact and logically connected to the disinheritance but not justifiable, but one can imagine such a fact situation. For example, a mother and her only child, a son, have a falling out when the son is in his early twenties. He marries, but does not invite his mother to the wedding. She is heartbroken, changes her will to disinherit him, and expresses her reasons including that he did not invite her to his wedding. They reconcile and for the following 40 years have a close relationship. He takes care of her in her final years, when she is sick and frail. She never changes her will. Her reasons are based on fact and logically connected with disinheriting her son, but the reasons are not justifiable. Would a court really refuse to vary the will in those circumstances?

The formulation of the principle in Bell and in Kelly has been criticized by Supreme Court of British Columbia judges on several occasions.

Mr. Justice Truscott in Rampling v. Nootebos, 2003 BCSC 787 wrote:

[46]        I confess that I have always had difficulty in understanding the distinction that is sought to be made by these comments.  The New Oxford Dictionary of English defines “justifiable” as “able to be shown to be right or reasonable; defensible”.

[47]        On this definition, if the testator does not have to show that his or her reasons for disinheriting are justifiable, then there is to be no consideration of whether they are right or reasonable or defensible.

Madam Justice Ballance in McBride v. Voth, 2010 BCSC 443 (a case I wrote about here), pointed out the inconsistency between giving effect to a will-maker’s reasons when those reasons are not justifiable and the objective approach of determining whether a will-maker has met his or her legal and moral obligations articulated by the Supreme Court of Canada, in Tataryn v.Tataryn, [1994] 2 S.C.R. 807. She concluded her analysis as follows:

[141]     One cannot quarrel with the outcomes in Bell and Kelly in light of their particular facts.  The thorny issue is that the model of inquiry endorsed by Bell and followed in Kelly effectively precludes an assessment of whether the testator’s reasons are objectively justifiable from the standpoint of the contemporary judicious parent of Tataryn.  In Tataryn, McLachlin J. made passing mention of Bell as an example of a case where a testator’s moral duty was seen to be negated.  Notably, she did not say nor delve into whether the proposition espoused by Goldie J.A. to negate that moral duty was sound.  If the decisions of Bell and Kelly mean that the applicable test is whether a testator has valid (i.e. factually true) and rational (i.e. logically connected to the disinheritance) reasons for disinheriting a child, even where the reasons are unworthy of an objectively judicious parent based on contemporary standards, then they are difficult to reconcile with the fundamental precepts of Tataryn and the search for contemporary justice in the circumstances.  

[142]     For the most part, the apparent incompatibility between Bell and Kelly on the one hand, and Tataryn on the other, has not been squarely confronted by this Court (an exception is found in Hammond v. Hammond (1995), 7 B.C.L.R. (3d) 25, 7 E.T.R. (2d) 280 (S.C.)).  I would respectfully observe that there appears to be a growing trend in the authorities decided in the aftermath of Kelly to favour rejection of objectively insufficient reasons on the pretence that they are simply not rational.

Other Supreme Court of British Columbia decisions have adopted Madam Justice Ballance’s analysis. For example, in Schipper v. De Lange, 2010 BCSC 1067, Mr. Justice Verhoeven wrote at paragraph 18 that the “sufficiency of the reasons may be taken as part of the question of whether the reasons of the testator are rational." He formulated this issue at parpargh 20 as follows:

In relation to that issue, are Mrs. Schipper’s reasons for making the disposition set out in her will:

a.       Rational in the sense of being logically connected to the disposition set out in the will;

b.       Rational in the sense that they based upon actual fact; and

c.       Rational in the sense that they are objectively sufficient?

Unfortunately, the Court of Appeal, in a later decision, Hall v. Hall, 2011 BCCA 354, restated the formulation from Bell and Kelly, without any consideration of whether that formulation is consistent with Tataryn. Madam Justice Neilson wrote at paragraph 43:

To succeed in his challenge to her will, Tony must establish these reasons were false or unwarranted: Bell v. Roy Estate (1993), 75 B.C.L.R. (2d) 213 (C.A.) at para. 36. In considering that proposition, it is not necessary to find the reasons were justifiable. It is enough if they were factually valid, and rational in the sense of having a logical connection to the act of disinheritance: Kelly v. Baker (1996), 82 B.C.A.C.150 at para. 58.

Most recently, in Hancock v. Hancock, 2014 BCSC 2398, Madam Justice Dardi added her voice to concerns about the formulation in Bell and Kelly. She wrote at paragraphs 53 through 56:

[53]         In McBride, Madam Justice Ballance observed that it is difficult to reconcile the analytical framework endorsed in Bell and Kelly with the fundamental principles of Tataryn, that a testator’s moral duty must be assessed objectively from a standpoint of what a judicious parent would do in the circumstances, by reference to contemporary community standards. Notably, McLachlin J., as she then was, cited Bell as an example of a case where a testator’s moral duty was seen to be negated, but she did not clarify whether the propositions formulated by Goldie J.A. were sound.

[54]         The analytical approach and commentary in various authorities from this Court, decided subsequent to McBride, underscore the uncertainty regarding the apparent incompatibility between the analytical framework articulated in Bell and Kelly, on the one hand, and Tataryn on the other. This question has engendered significant judicial commentary: Brown v. Ferguson, 2010 BCSC 1890 at para. 115; LeVierge v. Whieldon, 2010 BCSC 1462; Schipper v. De Lange, 2010 BCSC 1067; Holvenstot v. Holvenstot, 2012 BCSC 923; McEwan v. McEwan, 2014 BCSC 916.

[55]         Notably, however, in Hall v. Hall, 2011 BCCA 354, the Court of Appeal applied the analytical approach endorsed in Kelly, without any critical commentary. As is the case with Kelly and Bell, it is difficult, in light of the particular facts, to challenge the result in Hall. However, based on comments in the more recent jurisprudence from the Court of Appeal in Scott-Polson v. Lupkoski, 2013 BCCA 428, I respectfully observe that it may be an unsettled question in this province as to whether the formulation of the analytical approach applied in Kelly can be reconciled with the core principles of Tataryn. In Scott-Polson, Madam Justice Newbury, in obiter dicta, remarked at para. 43:

[43]      … The legally significant finding in terms of the trial judge’s reasoning, however, was that the explanation given in her will was “valid and rational” (see para. 76), or “genuine and valid” (see para. 83). I agree with the trial judge’s comment at para. 84 that this was a “relevant circumstance”. Given this, and given the fact that the plaintiffs did not pursue their cross appeal, it is not necessary for us to consider whether it is in law determinative of what a fair and judicious parent would have thought appropriate. (See McBride v. Voth, supra, at paras. 135-42.) That issue, if it is seen as one, must await another day.

[56]         In my respectful view, there are sound reasons for raising the question of whether the analytical approach endorsed in Kelly is reconcilable with Tataryn. This is particularly apparent in the absence of circumstances where a claimant was clearly estranged from the will-maker. However, in the final analysis, this Court, in compliance with the principle of stare decisis, must continue to apply the analytical framework articulated in Kelly and Bell.

I hope that, at the next opportunity, the B.C. Court of Appeal consider Madam Justice Ballance’s analysis in McBride, and include reasons squarely confronting the question of whether the court should give effect to a will maker’s reasons if they are not objectively sufficient.

Zeligs v. Janes

Contests between siblings following the death of a parent over houses and bank accounts that were held jointly between the parent and one of the parent’s children are all too common. What happens is that a parent who was the sole owner her own house or bank or investment account transfers the house or account into a joint tenancy with one of her children. After death, the child takes the title by right of survivorship, but the other child or children protest. One issue that may arise is whether the parent intended a gift to the child taking an interest in the title, or whether that child holds the house or account in trust for the now deceased parent’s estate. Sometimes, another child (or other beneficiary of the parent’s will) argues that the child benefiting from the joint tenancy exercised undue influence over the parent, or that there is a presumption of undue influence that has not been rebutted.

Zeligs v. Janes, 2015 BCSC 7 is such a case, but with an interesting twist. The result ultimately turned on whether a joint tenancy was severed by the child on title before the parent died.

Dorothy Burnett lived to be 103. When she died, on April 9, 2010, she had two daughters, Barbara Zeligs, and Diana Janes.

Following the death of her husband in 1990, Ms. Burnett lived independently in her house on Knox Road in Vancouver, until July, 2001 when her daughter Diana Janes and Ms. Janes’ husband moved into the Knox Road property to assist her. Ms. Burnett wrote the following note:

July 10, 2001

I Doroty Burnett - wish to stay in my home 1757 Knox Road as long as I live & to make sure I can I asked Diana Janes to move in and stay with me as long as I live, and to be fair to Diana I made her joint owner as long as I live & full owner when I die.

Dorothy Burnett

In 2002, Ms. Burnett met with a lawyer, and transferred the title to her house, which was by far her most valuable asset, into a joint tenancy with her daughter Ms. Janes.

Ms. Burnett’s health declined, and in 2008 she moved into a long-term care facility. Ms. Janes sold the Knox Road property for $2.7 million in January 2010. By that time, Ms. Burnett was incapable of managing her own affairs, and Ms. Janes signed on Ms. Burnett’s behalf using an enduring power of attorney. She initially deposited the net sale proceeds of a little under $1.8 million (after paying off mortgages that had been placed on the title) into a joint bank account, joint with her mother.

But on the day she deposited the funds into the joint account, Ms. Janes took about $700,000 out of the joint account to buy a house, the title to which was registered in her name and that of her husband. Later, while her mother was still alive, she took out the balance of the sale proceeds from the joint account and for investments in her sole name.

Ms. Burnett’s last will, which she signed in 2003, left the residue of her estate to be divided equally between her two daughters.

Barbara Zeligs died after her mother. Ms. Zeligs’ husband, Joseph Zeligs, as her executor claimed that the proceeds of the sale of the Knox Road property belong to Ms.Burnett’s estate, and pursuant to Ms. Burnett’s will, Ms. Zelig’s estate is entitled to half.

There were three main grounds for the challenge. I mentioned two of them at the outset. There is a presumption that when one person transfers title to property gratuitously into the name of another (including into a joint tenancy) the transfer is not a gift, but the person receiving an interest in the title gratuitously, holds the title in trust (known as a resulting trust) for the transferor during her lifetime, and for her estate after death. Mr. Zeligs alleged that the transfer was not a gift, and Ms. Janes received an interest in the title and ultimately the proceeds of sale, subject to a resulting trust for her mother’s estate.

Mr. Zeligs also alleged that because of Ms. Burnett’s age, health problems and dependency on Ms. Janes, there is a presumption that Ms. Janes procured an interest in the by the exercise of undue influence. Where the presumption of undue influence arises, it is not necessary to prove that the beneficiary of the transfer actually exercised undue influence. Rather the burden shifts to the person receiving a benefit to show that it was given voluntarily, often by showing that the person conferring the benefit received independent advice.

Mr. Justice Steeves agreed with Mr. Zeligs that both the presumption of resulting trust and a presumption of undue influence applied to the transfer of the Knox Road property into a joint tenancy, but found that Ms. Janes had rebutted both presumptions. Key evidence included that July 10, 2001 note in which Ms. Burnett expressed her intention that Ms. Janes would be a joint owner during Ms. Burnett’s lifetime and sole owner after her death, and the evidence of Edward Bowes, the lawyer who handled the transfer of the title into the joint tenancy. Mr. Bowes acted for Ms. Burnett, met with her alone, and gave her legal advice. Mr. Bowes considered that she was mentally competent and acting voluntarily when she signed the transfer.

Given Mr. Justice Steeves findings, had the title to the Knox Road house remained in the joint tenancy until Ms. Burnett’s death, Ms. Janes would be entitled to the whole interest in the property by right of survivorship. The nature of a joint tenancy is such that, if one of two owners die, the interest of the first to die comes to an end, and the survivor holds title solely to the exclusion of the estate of deceased former joint owner. This is contrasted with a tenancy in common, where if one co-owner dies, her interest forms part of her estate, to be distributed to the beneficiaries of her will.

It is possible to change a joint tenancy into a tenancy in common, by severing the joint tenancy.

This brings us to the next ground asserted on behalf of Mr. Zeligs, and the one that is key to Mr. Justice Steeve’s decision.

Mr. Zeligs argued that the joint tenancy was severed either when the house was mortgaged (the proceeds of which were used to benefit Ms. Janes and her husband), when it was sold, or when Ms. Janes removed the proceeds from the joint account.

To hold property in a joint tenancy, there must be the four unities of interest, title, time and possession. Either or both joint tenants may sever the joint tenancies by ending the four unities. Mr. Justice Steeves set out the law as follows:

[162]     Beginning with first principles, it is axiomatic that four “unities” must exist before there is a joint tenancy and these describe the “need for virtually perfect equality” as between joint tenants. Any act that destroys one of the unities will bring the joint tenancy to an end. (A. J. McClean, “Severance of Joint Tenancies” (1979) 57 The Canadian Bar Review, 5; Bruce Ziff, Principles of Property Law, 5th ed. (Toronto: Thomson Reuters Canada Ltd., 2010), at pp. 336 and 342).

[163]     First there must be a unity of interest whereby the holdings of each tenant must be equal in nature, extent and duration. The second unity is that the holdings of each tenant must arise from the same instrument or act. This is the unity of title. Third, there is the unity of time that requires that the interests of the joint tenants arise at the same time. Finally, there is the unity of possession which requires that the rights of the tenants relate to the same property (Ziff, at p. 336; citing Sir William Blackstone, Commentaries on the Laws of England, vol. 2 (Chicago: Univ. of Chicago Press, 1979), ed 1979, at pp.180-2).

[164]     The parties agree that the specific test for determining whether a joint tenancy has been severed is set out in Williams v. Hensman (1861), 70 E.R. 862 (applied in Hansen Estate v. Hansen, 2012 ONCA 112). The statement of Vice-Chancellor Wood is often quoted and it refers to what are called the three “Rules” (Williams at 867, cited in Hansen Estate at para. 32):

A joint-tenancy may be severed in three ways: in the first place, an act of any one of the persons interested operating upon his own share may create a severance as to that share. The right of each joint-tenant is a right by survivorship only in the event of no severance having taken place of the share which … is claimed under the jus accrescendi. Each one is at liberty to dispose of his own interest in such manner as to sever it from the joint fund--losing, of course, at the same time, his own right of survivorship. Secondly, a joint-tenancy may be severed by mutual agreement. And, in the third place, there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common. When the severance depends on an inference of this kind without any express act of severance, it will not suffice to rely on an intention, with respect to the particular share, declared only behind the backs of the other persons interested. You must find in this class of cases a course of dealing by which the shares of all the parties to the contest have been effected, as happened in the cases of Wilson v. Bell [(1843), 5 Ir. Eq. R. 501 (Eng. Eq. Exch.)] and Jackson v. Jackson [(1804), 9 Ves. 591 (Eng. Chancellor)]. …

[emphasis added by Ontario Court of Appeal in Hansen Estate]

In this case, Mr. Justice Steeves found that registering a mortgage did not sever the joint tenancy. In British Columbia, a mortgage is a charge on title, rather than a transfer of title. Nor did selling the Knox Road property and placing the sale proceeds into a joint account sever the joint tenancy. Because Ms. Janes transferred the funds into a joint account, the character of the joint tenancy did not change.

But, when Ms. Janes took the funds out of the joint account, she severed the joint tenancy. By taking the funds and using them to buy a house with her husband, and making investments in her own name, she destroyed the unity of possession. As set out by Mr. Justice Steeves:

[187]     By way of a conclusion, I find that the funds from the sale of the Knox Road property continued to be a joint asset owned by Dorothy and Diana from the point of sale and included the time they were in the joint account of Dorothy and Diana. However, once they were withdrawn from the joint account for the sole benefit of the defendants, to the exclusion of Dorothy, the unity of possession was destroyed and the joint tenancy was severed.

Accordingly, Ms. Burnett’s estate is entitled to half of the sale proceeds of the Knox Road property, to be distributed in accordance with her will (half to Ms. Janes and half to Ms. Zelig’s estate). If Ms. Janes had left the sale proceeds in the joint account until her mother’s death, she would have been entitled to all of the proceeds as the surviving joint tenant.

Pasadena Courthouse

I took this photograph of the Superior Court of California, County of Los Angeles, Pasadena Court last March.

Fraud on the Power: TLC The Land Conservancy of British Columbia v. The University of British Columbia

In her will, dated February 15, 2007, Jessie Binning, expressed the hope that her home, designed by her late husband, architect and artist, Bertram Charles Binning, would be preserved as a historic site.  Specifically, her will provided:

(i)         the lands and buildings at 2968 Mathers Crescent, West Vancouver, British Columbia, … which my late husband, B.C. BINNING and I used as our residence (the “Residence”), have been designated a National Heritage Site and have been listed on the heritage inventory of West Vancouver, British Columbia;

(ii)        it is my hope that the Residence and historic household furnishings will be preserved for historical purposes;

(iii)       if my Trustees decide it is feasible and practical to do so, to establish a foundation or other organization, society, association or corporation (the “Entity”), as my Trustees decide, and to transfer any interest (the “Property”) I have in the Residence, along with those household furnishings selected by my Trustees, to the Entity to hold, maintain and use the Property and those household furnishings for those purposes it decides are desirable;

(iv)       if the Property is transferred to the Entity and, due to unforeseen circumstances, the Entity decides it is no longer feasible or practical to retain the Property and it subsequently sells the Property, it is my hope that it will give the net sale proceeds to the B.C. BINNING MEMORIAL FELLOWSHIP FUND, administered by THE UNIVERSITY OF BRITISH COLUMBIA, for the purpose of creating additional scholarships to be awarded by it each year from the income earned by those proceeds;

(v)        if my Trustees decide not to retain the Property and historic household furnishings, the Trustees will sell the Property, and sell or otherwise dispose of those household furnishings, and give the net sale proceeds to the B.C. BINNING MEMORIAL FELLOWSHIP FUND, for the purpose of creating additional scholarships to be awarded by it each year from the income earned by those proceeds;

She also provided in her will that if the Entity were established, the residue of her estate would be divided equally between the Entity and the B.C.Binning Memorial Fellowship Fund, or if the Entity were not established it would go to the Fellowship Fund.

Mrs. Binning died in May 2007.

Her executors and trustees sought to give effect to Mrs. Binning’s hope that the residence, or the Binning House as it is known, would be preserved for historic purposes. The practical difficulty they faced was that after various bequests were paid out of her estate there was no residue left to pay to a new Entity to maintain the Binning House.

A more practical alternative would be to donate Binning House to an established entity to maintain, such as the TLC The Land Conservancy of British Columbia, which I will refer to as TLC. The problem is that the will did not give the executors and trustees the authority to do so.

After receiving legal advice from their lawyers, the executors and trustees decided to incorporate a non profit society. They then transferred title to the Binning House to the new society, which in turn, immediately transferred the title to the TLC. The new society also executed a deed of gift giving TLC the residence “for the purpose of restoring, developing and preserving the Binning House, formerly the home of B.C. Binning, for historical purposes with a view to educating the public and commemorating the site”.

In this way, the executors and trustees sought to both follow the letter of the will, by setting up a new entity and transferring the Binning House to the new entity, while finding a more practical manner of giving effect to Mrs. Binning’s hope to preserve the historic residence. Clever. Perhaps, too clever?

Unfortunately, TLC has had some significant financial problems in recent years, and has sought protection under the federal Companies’ Creditors Arrangement Act. When TLC received an offer to purchase the Binning House for $1.6 million to a collector of Bertram Binning’s art, it applied to court for approval of the sale, with the proceeds to be used to assist with TLC’s restructuring.

The University of British Columbia did not oppose the sale, but took the position that the proceeds should be paid to UBC for the B.C. Binning Memorial Fellowship Fund. UBC argued that executors and trustees acted outside of the scope of their authority in transferring the Binning House to TLC indirectly through the new society.

UBC was unsuccessful in the Supreme Court of British Columbia, and appealed to the British Columbia Court of Appeal.

In reasons released earlier this week, in TLC The LandConservancy of British Columbia, v. The University of British Columbia, 2014 BCCA 473, the Court of Appeal found that the executors and trustees had committed a fraud on their powers under the will by transferring the Binning House to the TLC through the new society. Despite the strong term “fraud,” this does not mean that they acted dishonestly, but rather that what they did was beyond the scope of their powers under the will. Mr. Justice Tysoe explained what a fraud on the power is at paragraphs 42 and 43:

[42]         In order to succeed in having the transfer of the Binning House declared void, UBC had the onus of proving that the transfer was a fraud on the power contained in the Will authorizing the Trustees to transfer it.  The phrase “fraud on a power” is a term of art, and it does not connote fraud in the usual sense of dishonesty.  This is explained by Geraint Thomas in Thomas on Powers, 2d ed. (Oxford: Oxford University Press, 2012) at para. 9.03:

The doctrine of fraud on a power is not founded upon a state of conscience imputed to the donee in equity.  Dishonesty of some kind is often present, but it is not essential.  Indeed, the donee’s intention or motive may be perfectly honest.  Thus, the doctrine may apply where the donee honestly believes that, by his exercise of the power, he is disposing of the property in a more beneficial manner, or in a way which is consonant with what he believes would have been the real wish of the donor of the power …
[Footnotes omitted.]

[43]         The parties are agreed, as they were before the chambers judge, that the two basic elements of a fraud on a power are as set out in Thomas on Powers at para. 9.02:

 (a)      “a disposition beyond the scope of the power by the donee, whose position is referable to the terms, express or implied, of the instrument creating the power;” and

 (b)      “a deliberate breach of the implied obligation not to exercise that power for an ulterior purpose”.

Mr. Justice Tysoe found that the will required that the executors and trustees would need to determine whether it was practical and feasible not only to establish the Entity and transfer the Binning House to it, but also that it was practical and feasible for the Entity to hold, maintain and use it. But in this case the executors and trustees knew it would not be feasible for the society they incorporated to retain the Binning House in view of the fact that there was no cash available to do so.

Although the executors and trustees transferred the Binning House to a new Entity, the purpose of doing so was so that the Binning House would end up with TLC, which was not an “object of the power,” or in other words, a beneficiary of Mrs. Binning’s will. Although the executors and trustees acted in good faith, they had an ulterior purpose when they incorporated the new society and transferred the Binning House to it. In this sense, they exercised their powers fraudulently.

Mr. Justice Tysoe wrote at paragraph 67:

The Trustees had received legal advice from the Estate Lawyers that the Binning House could not be transferred directly to TLC or, in other words, TLC was not a proper object of the power given to them under the Will.  The Trustees then set out to do indirectly that which they knew could not be done directly.  They transferred the Binning House to the New Society with the intention that the New Society would immediately transfer it to a non-object, TLC.  The Trustees deliberately used the power in the Will for the purpose of benefiting a non-object.  They used it for an ulterior purpose.

 The Court of Appeal ordered TLC to transfer the Binning House back to Mrs. Binning’s estate. The result is that when it is sold, the net proceeds will go to UBC for the B.C. Binning Memorial Fellowship Fund.

Re Mulgave School Foundation

If you make a large gift to a charity, you may have a specific purpose in mind, such as buying equipment for a hospital, building a new church, or funding scholarships in the Faculty of Engineering. Whatever you have in mind, consider whether you wish to make your gift to charity conditional on the funds being used for the specific purpose, or whether you want to give the charity some flexibility.

The advantage of making the gift conditional is that the charity will be required to use the gift for the purpose you have specified. The disadvantage is that the charity will lose flexibility in using the funds in accordance with its needs, which may change over time.

This point is illustrated by a Supreme Court of British Columbia decision, Re Mulgrave School Foundation, 2014 BCSC 1900.

Bjorn and Rochelle Moller, and Donald Kirkwood and Penny Levitt gave substantial gifts to the Mulgave School Foundation. When they made their contributions, the conditions of the gifs as set out in endowment letters were that the funds were to be used to create an endowment, and the income used for scholarships for students. The Foundation was set up to provide scholarships and bursaries as well as operating grants for the Mulgave School.

In 2011, after the gifts were made, the Mulgave School, the Mulgave School began a fundraising campaign to buy land and build a Seniors School. If the Mulgave School could use the funds given to them by the Mollers, Mr. Kirkwood, and Ms. Levitt to fund the new building, the Mulgave School would save an estimated $200,000 in borrowing costs.

The Mulgave School Foundation applied to court for an order permitting the Foundation to apply the donations to the construction of the new school. All four of the donors agreed to the order sought allowing the funds they had donated to be used for the construction.

The application was opposed by the Attorney General of British Columbia.

Mr. Justice Masuhara held that the Foundation could not use the funds for the construction of the Senior School. The Charitable Purposes Preservation Act requires a charity that is given funds for a “discrete purpose” use those funds for that purpose.

He considered section 3(4) of the Charitable Purposes Preservation Act, which provides that if a charity is unwilling or unable to use funds for the discrete purpose, the Court

may make whatever orders, including arrangements, it considers appropriate, including transferring the property to a new charity, so that the property is kept, administered and used to
(a)        advance the discrete purpose, or
(b)        advance another charitable purpose that the court considers is consistent with the discrete purpose.

Mr. Justice Masuhara also considered the common law doctrine of cy-pres, which allows the Court to apply donated funds in a different manner if the purpose for which they were provide is “impossible” or “impractical.”

In this case, there was no evidence that the Foundation was unwilling or unable to use the funds for an endowment to funds scholarships, nor that the original purpose was impossible or impractical.

Although the donors were in agreement with the proposal to use the funds they donated for the construction they had not retained any power to change the purpose of the donations. Once they donated the funds, they had no further control.

In dismissing the application, Mr. Justice Masuhara wrote:

[32]         Unfortunately, as laudable as the Foundation’s initiative and intent is, the petitioner has not met the necessary conditions to obtain the relief sought. 

Milne Estate v. Milne

Separation Agreements or court orders following marriage breakdown may include a clause requiring one former spouse to maintain a life insurance policy on his or her life, naming the other as the beneficiary. Life insurance is a good way to either secure spousal or child support payments, or to replace the payments, in case the former spouse required to pay support dies. But what happens if, contrary to the agreement or court order, the party required to maintain the life insurance cancels the policy or changes the beneficiary?

The Supreme Court of British Columbia recently considered this issue in Milne Estate v. Milne 2014 BCSC 2112. Following the breakdown of their relationship, Scott Milne agreed to maintain his $500,000 life insurance with Sherry Milne as the beneficiary for so long as he was required to pay child or spousal support to Ms. Milne. Mr. and Ms. Milne agreed to include this term in a consent court order. In breach of the order, Mr. Milne changed the beneficiary to his new partner, Albertina Vincente. Mr. Milne died on August 4, 2013, while still obligated to pay child support to Ms. Milne for their son.

Ms. Milne claimed that she was entitled to the insurance proceeds because Mr. Milne was in breach of the consent order. If she wasn’t entitled to the proceeds, then she claimed that she was entitled to the $500,000 she would have received if Mr. Milne had not changed the beneficiary out of his estate.

Madam Justice Fleming held that Ms.Vincente was entitled to retain the insurance proceeds, but that Ms. Milne was entitled to receive the $500,000 from Mr. Milne’s estate.

In denying Ms. Milne’s claim to the insurance proceeds, Madam Justice Fleming rejected her argument that because Mr. Milne was in breach of the consent order when he made Ms. Vincente his beneficiary, it would be against good conscience for Ms. Vincente to retain the proceeds, and that the court may impose a remedial constructive trust on the proceeds in favour of Ms. Milne.

Madam Justice Fleming found that the conditions set out by the Supreme Court of Canada in Soulos v. Korkontzilas, [1997] 2 S.C.R. 217, for a court to impose a constructive trust on the basis that it would be against good conscience to allow a party to retain property were not met. Those conditions are set out by Madam Justice McLachlin (now Chief Justice) at paragraph 45 of the judgment:

(1)   The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;

(2)   The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;

(3)   The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties and;

(4)   There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.

Madam Justice Fleming found that Mr. Milne’s relationship with Ms. Milne following the consent order was not of such a nature that the law imposes a high duty of loyalty on Mr. Milne to protect Ms. Milne. He was not a trustee or other fiduciary. That being the case, there was no basis for the Court to impose a good conscience constructive trust on the insurance proceeds.

Ms. Milne was successful in her claim against Mr. Milne’s estate, and Madam Justice Fleming awarded her $500,000 out of the estate to compensate her for Mr. Milne’s breach of the consent court order.

Although the reasons for judgment do not state the value of Mr. Milne’s estate, it appears that there will likely be substantial assets for Ms. Milne to recover the $500,000 judgement. But in other circumstances, a former spouse relying on support payments or life insurance proceeds in lieu of support if the payor former spouse dies, could be left with nothing if the courts will not impose a constructive trust on insurance proceeds. This will happen if the former spouse whose obligation it was to keep the other former spouse as the beneficiary dies leaving little or no estate from which to pay any judgement for failing to maintain the life insurance beneficiary designation. This may occur even if the now deceased had substantial assets, but structured his or her affairs so that they pass outside of the estate, such as by holding a residence and investment accounts in joint tenancies with a new partner.

Madam Justice Fleming was careful to leave open the possibility that the court might find that a separated or divorced spouse may have fiduciary duties to the other, but she found that the facts in this case did not warrant such a finding.

This decision is consistent with the Court of Appeal decision in Ladner v. Wolfson, 2011 BCCA 370, which Madam Justice Fleming applied in reaching her decision. But are British Columbia courts taking too narrow of a view when a constructive trust is available as a remedy?

The context in which the remedy of constructive trust s most often applied is unjust enrichment, which involves one party being enriched to another’s detriment, without any requirement that the enriched party had fiduciary duties to the other. In a case where there are insufficient assets in the estate to compensate the former spouse for the deceased’s wrongful conduct in changing a beneficiary of the life insurance, it seems to me that as between the wronged former spouse and the new beneficiary, the equities favour the former spouse. Settlements are the product of negotiations and trade-offs. Almost invariably the spouse for whose benefit the life insurance is to be maintained has given up something in return, while the proceeds are likely to be a pure gift to the new beneficiary. It may be that the former spouse has a claim in unjust enrichment, but even if not, surely the law is flexible enough for the courts to impose a constructive trust in these cases by analogy to both unjust enrichment and good conscience constructive trusts.

In practice, a separated spouse might own the life insurance on the other’s life and pay the premiums so that she or he can ensure that the life insurance is maintained for her or his benefit. Any spousal support or division of property could be adjusted to reflect the costs of the insurance.