McPeake v. Canada (Attorney General)

If a trust agreement does not accurately reflect the intentions of the parties creating the trust, the trustees may make an application to court to rectify the trust. The power to rectify a trust may be used to save the parties from significant taxes that they would otherwise have to pay. Taxpayers sometimes employ trusts to arrange their affairs to minimize income tax. Provided it is not a sham or done to hide property or income, the use of trusts to minimize income tax is legal in Canada. But transferring property to a trust can be tricky: if it is not set up just right, the terms of the trust may run afoul tax provisions that can result in a big and unexpected tax bill.

Barry McPeake owned one-fifth of the shares in a software development company in the 1990s. After receiving tax advice, he transferred his shares in the company to a family trust, of which he, his wife, and a legal advisor were the trustees. Members of his family were the beneficiaries of the trust. The purpose of the trust was to avoid tax if the shares were sold. Growth in the value of the shares could be allocated to the beneficiaries, who could then each use a capital gains exemption, which at that time was $500,000 on qualifying shares. The effect was that instead of there only being one $500,000 exemption available to Mr. McPeake when the shares were sold, there would be several $500,000 exemptions, significantly reducing capital gains tax.

The software development company was sold to Microsoft in 1999. Mr. McPeake’s family trust received $3,950,000 for its shares.

Canada Customs and Revenue Agency assessed Mr. McPeake for income tax on income and capital gains in respect of the shares after he transferred the shares to his family trust. The reason was that the terms of the trust document was caught by section 75(2) of the Income Tax Act, which is one of several sections containing rules that attribute income to someone who has transferred property.

In a nutshell, if after you transfer property to a trust, the terms of the trust permit the property to revert to you, or allow you to determine who the property can pass to, or if your consent is required to dispose of the property, income and capital gains are attributed back to you during your lifetime. The section says:

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.

Canada Customs and Revenue Agency identified several ways in which the trust was caught by section 75 (2), some of which were fixed in a rectification proceeding in 2009, which Canada Customs and Revenue Agency did not oppose. But problems remained after the 2009 rectification. The terms of the trust required that the trustees must make decisions unanimously, which means that Mr. McPeake would have to consent to any disposal of the trust property. McPeake could also become the sole trustee, which would enable him to determine beneficiaries after the creation of the trust.

The trustees applied to the Supreme Court of British Columbia to rectify the trust document to rectify those provisions that triggered attribution under section 75(2) in McPeake v. Canada (Attorney General), 2012 BCSC 132. This time the government opposed the rectification.

In her decision, Madam Justice Dorgan neatly summarized British Columbia law on rectification as follows:

[16] Rectification is an equitable remedy that courts may apply to various legal documents that stand as instruments expressing intended legal relations. Rectifiable documents can include contracts (Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, 1 S.C.R. 678 (“Performance Industries”)), land deeds (771225 Ontario Inc. v. Bramco Holdings Co. (1994), 17 O.R. (3d) 571 (Gen. Div.) (“Bramco SC”)), documents relating to corporate transactions (Juliar v. Canada (Attorney General) (1999), 46 O.R. (3d) 104 (Sup. Ct.) (“Juliar SC”)), and trust deeds (Rose v. Rose (2006), 81 O.R. (3d) 349 (Sup. Ct.)). Rectification does not change the intended legal relation: it would not, for example, change the essence of the agreement between contracting parties. Rather, rectification changes an instrument’s mistaken expression of that intention. Rectification is restorative, not “retroactive”: “[Rectification] is to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other” (Performance Industries, para. 31). Since rectification restores a truth to an instrument’s expression, it acts, in time, from the point of instrument formation forward.

[17] The party seeking rectification bears the onus. For the court to exercise its equitable jurisdiction to rectify a document, a petitioner must satisfy the court that the request to rectify merely aligns the document with the true intentions underlying it, and that the aspects to be rectified are mistakes that obstruct the true intentions behind the document’s formation. Long before Binnie J. discussed rectification in Performance Industries, Vice-Chancellor W. M. James wrote in Mackenzie v. Coulson, (1869) L.R. 8 Eq. 368 at 375, “Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of contracts.”

[18] As set out in Bank of Montreal v. Vancouver Professional Soccer Ltd. (1987), 15 B.C.L.R. (2d) 34 (C.A.) at 36 - 37 (“Bank of Montreal”) by McLachlin J.A. as she then was, a petitioner for rectification of any document must establish:

1. that the written instrument does not reflect the true agreement of the parties; and
2. that the parties shared a common continuing intention up to the time of signature that the provision in question stand as agreed rather than as reflected in the instrument.
See: Joscelyne v. Nissen, [1970] 2 Q.B. 86 at 98 - 99, [1970] 2 W.L.R. 509, [1970] 1 All E.R. 1213 (C.A.); Frederick E. Rose (London) Ltd. v. William H. Pim Junior & Co., (1953), 2 Q.B. 450 at 451, [1953] 3 W.L.R. 497, [1953] 2 All E.R. 739 (C.A.).

The intention underlying the document must be more than a general intention. Exactly what constitutes sufficient specificity of intention varies by context.

In this case, Madam Justice Dorgan found that Mr. McPeake and the other parties to the trust had a sufficiently specific intention in creating the trust of maximizing capital gains exemptions on the shares of the company for the court to rectify the trust document to correspond with that intention. Accordingly, she ordered the trust document rectified so that the income and capital gains would not be attributed back to Mr. McPeake.

Canadian Centre for Elder Law Announces 2012 Canadian Conference on Elder Law

The Canadian Centre for Elder Law has announced that it is holding the 2012 Canadian Conference on Elder Law on November 16 and 17 in Vancouver, B.C. According to the press release:

The Canadian Centre for Elder Law is pleased to announce the 2012 Canadian Conference on Elder Law is taking place November 16 to 17, 2012. This is the sixth elder law conference hosted by the CCEL, and for 2012 the Conference returns to beautiful downtown Vancouver, British Columbia. We hope you will join experts, academics, lawyers and advocates from across the globe to advance the discussion of elder law issues.

Over the years this inter-disciplinary event has been a site for discussion of issues of interest to practitioners working in law, policy, government, policing and justice, health care, finance, education and front line advocacy. The theme for this year's conference is "Advocacy and Aging: From Storytelling to Systemic Change."

The conference pre-day, the World Study Group, will be held November 15, 2012. The World Study Group offers scholars an opportunity to share their research and ideas with academics from around the world.

Domicile

The laws governing the estate of a person who has died can vary considerable from country to country, and in Canada, even from province to province. For example, in British Columbia, an independent adult child can apply to court under the Wills Variation Act to vary the will of her parent if the parent did not make adequate provision for her. Many other provinces don’t have legislation permitting and independent adult child to vary a parent’s will. It may make a big different to a child wishing to bring a claim whether the law of British Columbia will apply or the law of another province will apply to her parent’s estate.

Sometimes this is fairly straightforward. If the person who died lived in British Columbia all of his life and all of his real estate is located in British Columbia, then British Columbia law will apply.

But in an age where people move all around the world it is not always so simple. Some people may have two or more homes they live in for part of the year. Or they may spend only a short time in a new province before their death.

The law of place where someone is “domiciled” at death will often determine what law governs the administration of that person’s estate (other than interests in real estate which is governed by the law in the jurisdiction where the real estate is located).

Domicile can be an elusive concept as is demonstrated in the decision of the Alberta Court of Appeal in Foote v. Foote Estate, 2011 ABCA 1.

Eldon Foote lived in Alberta for the first 43 years of his life. He built an international business distributing the cleaning product Swipe. In the early 1970s, he bought a large property in Norfolk Island, an Australian protectorate with favourable tax laws, and he moved there.

In 1999, Mr. Foote bought a condominium in Victoria, British Columbia, and spent the summers of 2001, 2002, and 2003 at his Victoria condominium. He and his wife made some plans to sell the Norfolk Island residence to move to Victoria.

In April of 2004, he was diagnosed with cancer, and went returned to Edmonton, Alberta for cancer treatment, where he died in May 2004.

At his death, his estate was worth approximately $130 million. He had three wills dealing with assets in different jurisdictions. He left some of his assets to his wife, his six children, and other family members, but he left most of his wealth to two charities: the Edmonton Community Foundation and the Lord Mayor of Melbourne’s Charitable Fund.

All of the parties agreed that Mr. Foote had established his domicile in Norfolk Island in the 1970s.

Mr. Foote’s children argued Mr. Foote changed his domicile to British Columbia before his death, and that the law of British Columbia governs the administration of his estate. His widow argued that he had abandoned his domicile in Norfolk Island but had not established a new domicile. Accordingly, she argued, his domicile reverted to his domicile of origin, Alberta. She argued that the law of Alberta governed the administration of his estate. The charities argued that Norfolk Island remained Mr. Foote’s domicile at his death, and the administration of his estate was domiciled in that jurisdiction.

The parties’ motives for adopting the positions they did are not apparent from the judgment. Presumably, British Columbia law would be favourable to the children, Alberta law favourable to the widow, and Norfolk Island law favourable to the charities.

The Alberta Court of Appeal in its Memorandum for Judgment explained the concepts of domicile of origin and domicile of choice as follows:

[19] The concept of domicile is relevant to the law governing a person’s status and property. For purposes of this appeal, the relevant point is that the domicile of a deceased person determines the law that will govern estate administration. A person will always have one, and only one, domicile at any point in his or her life. A person begins with a domicile of origin, generally the place where he or she was born. No one disputes that Mr. Foote’s domicile of origin is Alberta, where he was born and lived for the first 43 years of his life, and where he attended university, embarked on the practice of law, married and had five children.

[20] One’s domicile of origin can be displaced by a “domicile of choice”, a place where a person has chosen to live. The classic description of domicile of choice is found in Udny v. Udny (1886), L.R. 1 Sc. & Div. 441:

Domicile of choice is a conclusion or inference which the law derives from the fact of a man fixing voluntarily his sole or chief residence in a particular place, with an intention of continuing to reside there for an unlimited time. ... There must be a residence freely chosen, and not prescribed or dictated by any external necessity, such as the duties of office, the demands of creditors, or the relief from illness; and it must be residence fixed not for a limited period or particular purpose, but general and indefinite in its future contemplation.

The Court of Appeal described how a domicile may change:

[22] The acquisition of a domicile of choice involves two factors: “the acquisition of residence in fact in a new place and the intention of permanently settling there ... in the sense of making that place [one’s] principal residence indefinitely”: Trottier v. Rajotte, [1940] S.C.R. 203 at 206, 1 D.L.R. 433.

….

[25] The following rule is set out in Dicey, Morris and Collins on The Conflict of Laws, 14th ed. (London: Sweet & Maxwell, 2006) at 151:

Rule 13 - (1) A person abandons a domicile of choice in a country by ceasing to reside there and by ceasing to intend to reside there permanently or indefinitely, and not otherwise.

[26] The test for loss of domicile of choice is two-fold: it requires an intention to cease to reside in a place coupled with acts that end one’s residence. It is described in Dicey as follows:

A domicile of choice is lost when both the residence and the intention which must exist for its acquisition are given up. It is not lost merely by giving up the residence nor merely by giving up the intention.

[27] Castel & Walker, in their Canadian Conflict of Laws at s. 4.8, 6th ed. (Markham, Ont.: LexisNexis Butterworths, 2005), describe the process of abandonment of a domicile of choice as “the converse of its acquisition”. They also note the dual nature of the test. To paraphrase, for Mr. Foote to have abandoned his domicile of choice on Norfolk Island, it would be necessary for him to cease to reside there and also to cease to have the intention to return to Norfolk Island as his permanent home. “Absence without the intention of abandonment is of no effect, nor is intention without any actual change of residence”: Castel & Walker at s. 4.8.

The Court of Appeal upheld the trial judge’s decision that Norfolk Island remained Mr. Foote’s domicile on death. The trial judge had found that Mr. Foote planned to change his primary residence to British Columbia at some point, but his plans were provisional. He had not taken any steps to appraise or market his considerable home and property in Norfolk Island. He would not likely have changed his residence without tax planning. He began to receive tax advice in 2002, but had not taken any steps to implement it. The trial judge found that the intention to change his residence to British Columbia, and the preliminary steps Mr. Foote had taken, were insufficient to displace Norfolk Island as his domicile of choice.

Accordingly, the laws of Norfolk Island will govern the administration of Mr. Foote’s estate.

Elder and Guardianship Mediation

The Canadian Centre for Elder Law has published its report on Elder and Guardianship Mediation. As set out in the Executive Summary:

The Elder and Guardianship Mediation report is the first comprehensive study of elder and guardianship mediation in Canada, bringing together various material that should be considered in the determination of how to move forward with the development of elder and guardianship mediation in BC. The report compares the experience with voluntary and mandatory mediation of aging-related and guardianship matters in Canada (with a particular focus on BC) and selected US states where court-connected guardianship mediation programs exist. The practical and ethical issues that confront mediators handling cases involving older persons and persons with diminished mental capacity are analyzed with a view to formulating best practices. Recommendations stated in the report are based on the results of the consultations and research, and represent a high degree of consensus among the many experts and sources consulted in terms of best practice and what is needed to create a viable elder and guardianship mediation program in a jurisdiction.

The report includes several components: an outline of the overarching legal context,clarification of the meaning of the concept of elder and guardianship mediation; background on elder mediation in Canada; a comparative analysis of select US court-annexed guardianship mediation programs; and a discussion of ethical issues that arise in the context of mediating at that place where age and mental capacity intersect.

You may read the report here.

British Columbia Law Institute’s Recommended Practices for Wills Practitioners Relating to Potential Undue Influence: A Guide

The British Columbia Law Institute has published “Recommended Practices for Wills Practitioners Relating to Potential Undue Influence: A Guide.”

The impetus for this Guide is a change to the legislation in British Columbia that will come into effect when the new Wills, Estates and Succession Act is brought into force. Section 52 of the new Act will shift the burden of proof when a claim is made that a will has been procured by undue influence in some circumstances. Under the common law in British Columbia, the burden of proof was on the person alleging that the will was procured by undue influence. When the new legislation comes into effect, if the challenger can establish that the person whom is alleged to have procured the will or a provision in the will by undue influence was in “a position where the potential for dependence or domination of the will-maker was present,” then the onus will be on the person defending the will from the allegation of undue influence to establish “that the person in the position where the potential for dependence or domination of the will-maker was present did not exercise undue influence over the will-maker with respect to the will or the provision of it that is challenged.”

As set out in the Executive Summary, the aim of the Guide is to:

• raise awareness of undue influence as a potential cause of estate litigation and invalidity of a will; 

• assist will drafters to recognize red flags of undue influence;

• enable will drafters to interact tactfully but effectively with will-makers to elicit information necessary for them to properly assess the will-makers’ individual situations and ability to act independently; and

• insulate wills they prepare against successful challenges based on undue influence.

The Guide is divided into five chapters. Chapter I sets out the background including a discussion of practitioners’ responsibilities of vigilance in respect of undue influence. Chapter II contains a summary of the law of undue influence, including leading authorities in British Columbia as well as other jurisdictions. Chapter III has a discussion of how undue influence operates in fact, and includes models developed by psychologists and other researchers to describe the dynamics of undue influence. Chapter III also sets out three undue influence scenarios as illustrations of the kinds of fact patterns practitioners may encounter. Chapter IV outlines various “red flags” to assist practitioners in identifying when further inquiry into the potential for undue influence may be warranted. Chapter V provides recommended practices in screening for undue influence.

Chapter IV of the Guide identifies an extensive list of “red flags,” which are subdivided into categories relating to:

“Someone in whom the will-maker invests significant trust and confidence is – or is connected to – a beneficiary”

“Physical, psychological and behavioural characteristics of the will-maker”

“Isolation resulting in dependence on another person to meet physical, emotional, financial, and other needs”

“Circumstances relating to the making of the will and the terms of the will”

“Characteristics of influencer in testator’s family or circle of acquaintances”

“One’s ‘gut feeling’ that undue influence is going on.”

The authors of the Guide indicate that a single “red flag,” may not be significant. The likelihood of undue influence increases with the number of risk factors.

Chapter V sets out the basic rule that the will-maker should be interviewed alone, without any interested parties present, and explanations that a practitioner may give to a person who accompanies the will-maker to the appointment on why the practitioner needs to meet alone with the will-maker. This is followed by a discussion of open-ended questions the practitioner may ask if “red flags” are present, as well as some specific questions probing the relationship between the will-maker and others who may be in a position where there is the potential for dependence or dominance, and probing whether the will-maker may be a victim in other contexts. The report contains a discussion of obtaining information from third parties, including the will-maker’s physician, and the types of notes and records the practitioner should make and keep irrespective of whether the practitioner drafts a will, or declines to do so.

The Guide concludes that if the index of suspicion of undue influence remains high after the practitioner has done a reasonable investigation, the practitioner should decline to draft the will.

The Guide was prepared by a multi-disciplinary project committee comprised of professionals from the fields of medicine and social work, as well as notaries public and lawyers. The project committee was chaired by D. Peter Ramsay Q.C. and the project manager was Greg Blue Q.C.

I had the privilege of being a member of the committee.

What Records Must an Attorney Keep When Acting Under An Enduring Power of Attorney in British Columbia?

If you are acting as an attorney under an enduring power of attorney in British Columbia you are now required under the Power of Attorney Act, and the Power of Attorney Regulation to keep financial records in respect of the person who appointed you. I previously wrote about an attorney’s duties under changes to the legislation that came into effect on September 1, 2011, here.

The Regulation sets out the types of records you need to keep if you are acting under an enduring power of attorney:

Records of attorneys
2 (1) An attorney acting under an enduring power of attorney must make a reasonable effort to determine the adult's property and liabilities as of the date on which the attorney first exercises authority on the adult's behalf, and maintain a list of that property and those liabilities.

(2) An attorney acting under an enduring power of attorney must keep the following records in relation to the period for which the attorney is acting:

(a) a current list of the adult's property and liabilities, including an estimate of their value if it is reasonable to do so;
(b) accounts and other records respecting the exercise of the attorney's authority under the enduring power of attorney;
(c) all invoices, bank statements and other records necessary to create full accounts respecting the receipt or disbursement, on behalf of the adult, of capital or income.

I have three comments.

First, this section setting out the records you must keep if acting under a power of attorney only applies to enduring powers of attorney. An enduring power of attorney is a power of attorney that continues to have effect while, or comes into effect when, the person for whom you are acting is incapable. If you have a power of attorney that is not “enduring,” one that ceases to be effective if the person who appointed you becomes incapable, then you are not required to keep all of these records.

Second, the fact that someone, perhaps one of your parents, has made an enduring power of attorney appointing you as his attorney does not trigger the record-keeping requirements. It is only when you start to act under the enduring power of attorney that you need to keep all of these records. Enduring powers of attorney are planning tools, made in case the person granting the power of attorney later becomes incapable of making his or her own financial decisions. It is often never necessary to use them, or it may only become necessary many years after they are made. But once you begin to using the enduring power of attorney, for example, by doing banking transactions for your parent, you must keep all of the records required in Section 2 of the Regulation.

Third, the Regulation does not require that the person who appointed the attorney is incapable to trigger the record-keeping requirements. The records must be made and kept whenever the attorney uses the power of attorney. For example, suppose your mother grants you an enduring power of attorney, and then, while still perfectly capable, goes to Asia on a vacation when her house is being sold. She asked you to sign the real estate documents for her as her attorney under the enduring power of attorney. If you sign for her the record-keeping requirements are triggered, even though you are only doing a specific transaction, at her request, while she is fully capacitated. In those circumstances, it would make sense for your mother, before she goes to Asia, to sign a second power of attorney that is not an enduring power of attorney. The second power of attorney would grant you the power to sign the documents needed to sell and transfer title to her house. You would then not use the enduring power of attorney, thereby avoiding the need to keep the records of all of your mother’s assets in order to assist her in selling her house.

2011 CLawBies

Steve Mathews of Stem Legal has announced the winners of the 2011 CLawBies, which is short for Canadian Law Blogs Awards. The winner of the best Canadian Law Blog was Erik Magraken's B.C. Injury Law Blog.

Although, alas, Rule of Law did not win an award, it was one of the runners up in the category of Best Practitioner Blog. The winners in that category were Employment & Human Rights Law in Canada, James Gannon's IP Blog; and Youth and Work.

Thank you to Kieran Moore publisher of Employment Law Canada blog, and Nate Russell at The Stream for nominating Rule of Law.

Check out the winners and runners up here. You will discover some great legal blogs.