Sunday, January 26, 2014

Tony and Mignon Fenton Trust

Anthony Michael Jewell Fenton wanted to help “the infirm elderly in need of home care in the Municipality of Oak Bay, British Columbia.” In his will, he directed that a substantial part of his wealth be held in a trust, to be known as the Tony and Mignon Fenton Trust. The terms of the trust provided that the capital be held in perpetuity, and he gave his trustee discretion to make payments out of the income to individuals and organizations that would benefit the infirm elderly in need of home care in Oak Bay.

He suggested in his will that the Trustee reinvest some of the income to protect the capital against erosion by inflation, and suggested that the Trustee consider registering the trust as a charitable foundation with Canada Revenue Agency. His will did not allow the trustee to spend any of the capital.

Mr. Fenton died in October 2007. His trustee, the Bank of Nova Scotia Trust Company, made transfers funds of over $2 million from his estate to the Tony and Mignon Fenton Trust, and also registered the trust as a private foundation.

But the trustee encountered a significant problem. As a registered private foundation, the Tony and Mignon Fenton Trust is required to distribute annually at least 3.5% of the average market value of its investments in the preceding 24-month period. If a private foundation fails to meet this disbursement quota, it can be de-registered as a charity, which has devastating tax consequences. The problem is that the trust was not generating enough income to meet its disbursement quota, and given current rates of interest, and dividend returns, it is unlikely that the trust could generate 3.5% income without impairing its long-term capital growth to protect the capital from inflation. The will did not permit the trustees to pay out capital, even though the capital was increasing in value.

The trustee applied to the Supreme Court of British Columbia for an order allowing the trustee to use capital to meet the disbursement quota.

In Fenton Estate, 2014 BCSC 39, Mr. Justice Johnston held that he could grant the order the trustee requested allowing the trustee to use sufficient capital to meet the trust’s disbursement quota in any year where the income was insufficient. The Supreme Court of British Columbia has an inherent jurisdiction to create a scheme for a charitable trust if the purposes of the trust have become impossible or impracticable. The scheme should be as close as possible to the original purposes. This is called cy-pres.

Mr. Justice Johnson found that it was appropriate in this case for the Court to authorize the trustee to use capital to meet the disbursement quota when the income is insufficient. He wrote at paragraphs 46 and 47:

[46]         I find that the objects and purposes of the Tony and Mignon Fenton Trust have become impossible or impracticable to attain as a result of the combination of low returns on investment, the requirement that the trust meet a 3.5% disbursement quota, and the testamentary instruction to distribute income only. That the testator did not foresee the low rate of return on capital can be seen from his instruction to add unspent income to capital.
[47]         This finding is sufficient to permit the court to order that the trustees may encroach on capital gains in any year when it is necessary to add some part of capital gains to income in order to meet the disbursement quota and avoid falling into arrears on that quota.

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