Mazur v. Berg

In 2000, the British Columbia Legislative Assembly changed the definition of “spouse” in the Estate Administration Act and the Wills Variation Act (as well as other statutes) to allow common law spouses to have similar rights on death as married spouses. For example, a spouse who was living in a marriage-like relationship with the deceased for at least two year at the time of the deceased death, can now apply to court to vary the deceased’s will pursuant to the Wills Variation Act.

There are now quite a few disputes over whether a person claiming to be a spouse was living in a marriage-like relationship with the deceased. The most recent decision is Mazur v. Berg, 2009 BCSC 1770.

Caroline Mazur applied to vary the will of Victor Fennell, who died on June 20, 1988. In his will, Mr. Fennell left his estate to his only child, Jesse Berg. The value of the estate was about $300,000.

Ms. Mazur and Mr. Fennell began their romantic relationship in September 2002. They each had a residence on Hornby Island, B.C. Except for when Mr. Fennell was working in Port Alberni, they spent most of their time together at one or the other’s residence. Friends and acquaintances considered them to be a couple. They celebrated holidays together. They worked together on their properties. Mr. Fennell became close to Ms. Mazur’s son. Mr. Fennell proposed marriage to Ms. Mazur, and gave her a ring. When Mr. Fennell became ill as result of Hepatitis C, Ms. Mazur cared for him, and went to medical appointments with him.

Mr. Berg argued that his father and Ms. Mazur were not living in a marriage-like relationship. Each had their own residence. They kept their property and finances separate. When Mr. Berg bought some real estate, he took the title in his sole name. Ms. Mazur had limited access to his bank accounts. Ms. Mazur put her status as “single” on her tax returns. During an appeal for disability benefits, Mr. Fennell introduced Ms. Mazur as his “neighbour.”

In holding that Ms. Mazur and Mr. Fennell lived in a marriage-like relationship for almost 6 years, Madam Justice Adair applied the British Columbia Court of Appeal decision in Austin v. Goerz, 2007 BCCA 586. She wrote:

It is clear from Austin v. Goerz that financial dependence is not a necessary aspect of a “marriage-like relationship.” How the parties arranged their financial affairs is but one factor to be considered. As the court also observed the presence or absence of any particular factor cannot be determinative, since there is no checklist of characteristics that will inevitable be found in all marriages.

Madam Justice Adair held that Mr. Fennell did not make adequate provision in his will for Ms. Mazur. He had both a legal obligation (the obligation of spousal support) and a moral obligation to Ms. Mazur, while he had a moral obligation to Mr. Berg. She varied Mr. Fennell’s will to leave 55 percent of the estate to Ms. Mazur, and 45 percent to Mr. Berg.

Wills Variation Act: Competing Claims of a Child and Grandchildren

In November 2006, Mrs. Carol Sue Smith was diagnosed with cancer. She was married to Arthur Smith. She had an adult son Douglas Smith, and two five-year old grandchildren (Douglas Smith’s children).

At the time she was diagnosed with cancer, she held her house and other assets in a joint tenancy with her husband, such that on her death those assets would pass to him as the surviving joint tenant. Her husband was, at that time, also the named beneficiary of her Registered Retirement Savings Plan that held over $200,000.

Carol Smith decided she wanted to leave an inheritance to her grandchildren. She signed a will on July 9, 2007, creating a trust with the residue of her estate for her grandchildren. The terms of the trust allowed her trustees to use the funds for the benefit of the grandchildren until they attained the age of 30, at which time they would receive what remained in their trusts. She named her husband, her sister and her son as the trustees.

In order for there to be some assets to go into the trust, she changed the beneficiary of the Registered Retirement Savings Plans to her estate, and also had some jointly owned mutual funds transferred into her sole name.

After her death on July 15, 2009, Douglas Smith renounced his position as a trustee, and brought a claim to vary his mother’s will under British Columbia’s Wills Variation Act. At trial, his mother’s estate was worth about $230,000, without taken into account taxes (which I suspect might be substantial given that most of the assets consisted of a registered retirement saving plan), executor’s fees and expenses and legal costs.

Douglas Smith argued that he had been disinherited by his mother. She had a moral obligation to him. He was providing for his children, and her objectives would be met by varying the will to leave the entire estate to him.

Douglas Smith’s circumstances were that he earned about $60,000 per year, but his wife had health problems. They owned a home in Richmond, B.C. with a substantial mortgage.

In Smith v. Smith, 2009 BCSC 1737, Mr. Justice Williams found that Douglas Smith was a loving and respectful son and a good provider for his family. Religion was important to Douglas Smith, while his mother had a more secular view. The will indicated that Carol Smith wanted the trustees to prefer secular over religious educational and cultural pursuits. There were some differences between them, but these were minor. There were no serious disputes. Mr. Justice Williams found that Carol Smith did not have a rational and valid reason for disinheriting her son.

But Mr. Justice Williams did not agree that the will should be varied to leave the entire estate to Douglas Smith. Carol Smith’s desire to set up a trust for her grandchildren should also be recognized.

Accordingly, Mr. Justice Williams varied the will to provide one-half of the estate to Douglas Smith, with the other half held in trust for his two children.

Supreme Court of California, San Francisco

I took this photograph of the headquarters of the Supreme Court of California, in San Francisco, during my summer holidays with my sons last August.

Garron Family Trust v. The Queen

The Canadian Government taxes trusts resident in Canada. How can you tell where a trust is resident? Sometimes it is easy, but sometimes it is not.

The Tax Court of Canada released a significant decision concerning the residence of a trust in September. The case is Garron Family Trust v. The Queen, 2009 TCC 450. This case involves some fairly complex tax, estate and corporate planning. I will simplify it a bit to summarize the decision.

Myron Garron and Andrew Dunin built a very successful business manufacturing components for motor vehicles. They and other family members held interests either directly or through a holding company in a company called PMPL Holdings Inc. (which I will refer to as PMPL). PMPL, in turn, held shares in companies engaged in the active business.

In 1998, Mr. Garron and Mr. Dunin arranged for PMPL to be restructured. They received business valuation advice that the shares of PMPL were worth $50,000,000. These shares were exchanged for other new preferred shares that had a fixed value of $50,000,000 (they could be redeemed by PMPL for that amount). New common shares were then issued to two new holding companies, both incorporated in Ontario. The new common shares were arguably not worth much when they were issued, because all of PMPL’s value at the time was in the preferred shares (worth $50,000,000). But, the new common shares owned by the newly incorporated holding companies would increase in value with any increase in PMPL’s value. In other words, the common shares were growth shares. The preferred shares were frozen shares.

The shares of each of the new holding companies were owned by a trust. One trust, called Fundy, owned the shares of one new holding company. The other trust, called Summersby, owned the shares of the other new holding company. The beneficiaries of Summersby are Mr. Dunin, his wife, children and other descendants. The beneficiaries of Fundy are Mr. Garron, his wife, children and other descendants.

The trustee of each of the trusts is St. Michael Trust Corp., which is a company incorporated in Barbados. The shares of St. Michael Trust Corp. were initially owned by an accounting firm in Barbados.

In 2000, the trusts sold their shares in the new holding companies as part of a sale of PMPL and its subsidiary business to a New York firm, Oak Hill Capital Partners, L.P. The sale was for over $500,000,000. On the sale of the new holding companies’ shares, the shares increased in value by something in the neighbourhood of $450,000,000.

I am not sure how much federal and provincial income tax you would pay on a capital gain of $450,000,000 in Canada. It is not something with which I have ever had to concern myself. It would depend in part on what province you were in. I imagine the tax would be in the range of $90,000,000 to $100,000,000 or thereabouts, but I will let an accountant figure that out.

Whatever the amount of capital gains tax payable, Her Majesty the Queen took an interest in receiving those taxes for Canada. Well, at least Canada Revenue Agency did anyway.

But you will recall that the trustee of each of these two trusts was a corporation in Barbados. Canada and Barbados have a tax treaty. It has the title of “Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital.” I think I might just call it the Tax Treaty.

The Tax Treaty provided that each country would only tax its own residents on capital gains on the sale of assets (with some exceptions). The trustee and ultimately the beneficiaries of each trust would prefer that the gain on the sale of the shares be taxed by Barbados than by Canada. This is because apparently Barbados doesn’t tax capital gains on the sale of shares.

The trustee of both trusts argued that because the trustee was a corporation resident in Barbados, the trusts were residents of Barbados. Therefore, under the Tax Treaty, Canada had agreed not to tax the trusts. The trustee found support in its position from an earlier Tax Court of Canada decision Thibodeau Family Trust v. The Queen, 78 DTC 6376, in which the Court held that the residence of the trust for tax purposes was the place where the majority of the trustees were resident.

But Canada Revenue Agency begged to differ. It argued that the real management and control of the trusts were in Canada, rather than Barbados.

In order to decide the case, Judge Woods first considered the tests for determining residency of a trust in respect of the Income Tax Act. She held that the appropriate test was similar to the test for determining the residency of a corporation: where is the central management and control of the trust. She rejected the argument that the residency of the trustee by itself determined the residence of the trust.

Judge Woods based her decision on a number of factors, which she found indicated that the central management and control of the trusts was Canada, rather than Barbados. She found that the role of the trustee was to sign legal documents for the trust and provide some administrative services, rather than to make important decision for the trust. The facts she considered include the following:

1. The terms of each trust provided for a protector, who had the power to remove and replace the trustee of the trust. Mr. Dunin and his wife, in turn, had the power to remove the protector of the Summersby trust, while Mr. Garron and his wife had the power to remove the protector of the Fundy trust. Indirectly, each family had the ability to remove the trustee of its trust.

2. The trustee’s internal memorandum indicated that the trustee expected to play a limited role in the trusts transactions and defer to Mr. Dunin and Mr. Garron.

3. The trustee appeared to have a limited role in making investment decisions. The trustee used Mr. Dunin’s and Mr. Garron’s advisors. The investment advisors in turn were given discretion in making investments by the trustee, allowing the investment advisors to take direction from Mr. Dunin and Mr. Garron.

4. Judge Woods found that there was little documentation indicating that the trustee played a large role in managing the trusts. The documentation that was provided indicated that the trustee had a limited role.

5. The trustee was at the time of the sale of the shares owned by an accounting firm, and did not have specialized expertise in managing trusts.

The result is that the trusts will have to pay capitals taxes in Canada on the gains of approximately $450,000,000 on the sale of the shares of the holding companies.

Judge Woods appears to have based her decision on the totality of these and other factors, rather than on any one consideration alone. The decision demonstrates that if you want to set up an offshore trust to take advantage of tax laws in another country, the trustee will need to exercise real management and control of the trust. It can’t just look good on paper.

This case likely also applies to determinations of the residency of trusts within Canada. For example, there may be tax advantages to having a trust resident in Alberta rather than British Columbia or Ontario. If there is a dispute about whether a trust is resident in one province or another, the court could look at where the central management and control is exercised.

[Since I wrote this post, both the Federal Court of Appeal and the Supreme Court of Canada have upheld Judge Woods's decision. See my post on the Supreme Court of Canada decision here.]

Interrogatories In the New B.C. Supreme Court Rules

As I wrote in an earlier post, the new rules of civil procedure in British Columbia will come into effect on July 1, 2010.

One of the changes will be to restrict the use of written interrogatories.

Under the old rules, Rule 29 allowed any party to serve written questions on another party to the lawsuit. The party asked to answer the interrogatories could object to specific questions, or bring an application to court to strike the interrogatories if they were “not necessary for disposing fairly of the action or that the costs of answering would be unreasonable….”

Under the new Rule 7-3, if a party wishes to examine another by written interrogatories he or she must first get the other party’s agreement or apply to court to allow the interrogatories.

This rule change is unfortunate, and will have the opposite effect of what is intended. Instead of reducing the costs of lawsuits, in many cases it will increase the costs.

I have used interrogatories frequently in Wills Variation Act cases, where the financial circumstances of the person making the claim and of the defendants is usually quite relevant to the case. By submitting questions concerning a party’s financial circumstances in writing, the other party has an opportunity to go through his or her records, and review the questions and answers with his or her lawyer, to make sure the responses are accurate. This is much more effective than asking the same questions during oral examinations, where the other party often does not know the answers off-the-top of his or her head.

Furthermore, as often as not, another party to a lawsuit lives in another part of Canada. It is not uncommon in Wills Variation Act cases for other parties to live all over the world. In some cases, written interrogatories can be an inexpensive substitute for paying for them to come to British Columbia to answer questions in oral examinations for discovery.

Under the new rules, if another party does not agree to answer interrogatories, you may be able to get a court order allowing interrogatories (especially when used to elicit information from someone who lives far away), but it is an extra step, which adds to the expense.