Collins Family Trust

 In a decision released June 17, 2022, Canada (Attorney General) v. Collins Family Trust, a majority of the Supreme Court of Canada held that taxpayers could not rely on equitable recission of transactions to avoid unintended tax consequences. The decision involved two different, but similar transactions. I will refer to just one of them, the Colins Family Trust.

After receiving professional tax and legal advice, Todd Collins, the principal of a company called Rite-Way Metals Ltd. (the “operating company”) undertook some transactions in order to move assets out of the operating company and into a trust in order to protect the assets from future creditors of the operating company. Based on his advice, the was structured in a way that would not (or so they thought) trigger any tax.

It is not really necessary to understand the mechanics of the tax planning to follow the principles in this case, but I will do my best to set them out in a general way. Mr. Collins incorporated a holding company and created the Collins Family Trust. The holding company bought shares in the operating company, which it then sold to the Trust in exchange for a promissory note. The operating company then declared dividends on the shares held in the Trust, and these were used to repay the promissory note. The tax planning hinged on an attribution rule in the Income Tax Act, which attributes income earned in a trust to a person, including a company, that has contributed property to the trust in certain circumstances. The idea was that the dividends paid to the trust would be attributed to the holding company, which in turn could claim a deduction of the income as inter-corporate dividends.

This planning was consistent with Canada Revenue Agency’s own interpretation of the attribution rule, s. 75(2), at the time these transactions were carried out. The Canada Revenue Agency’s position had been that the attribution rule applied to a sale of property to a trust, as well as a gift of property to a trust. However, in another decision made after these transactions, Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162, aff’d 2012 FCA 207, [2014] 1 F.C.R. 379, the Tax Court of Canada held that the attribution rule did not apply to a sale of property, as opposed to a gift. The court held that the attribution rule only applied to the settlor of the trust.

As a result, Canada Revenue Agency reassessed the Trust’s income tax return on the basis that the income was taxed in the trust, which could not take advantage of the deduction available to the holding company.

The trustee of the Trust applied to the Supreme Court of British Columbia to rescind the transactions on the basis that they were made on a mistake of the tax law. The Supreme Court of British Columbia held that the Trust was able to rescind the transactions (2019 BCSC 1030), and the Court of Appeal agreed (2020 BCCA 196). The Attorney General of Canada appealed to the Supreme Court of Canada.

Justice Brown for the majority held that rescission was not available in these circumstances. In doing so, he applied two previous decisions in which the Supreme Court of Canada held that the taxpayers involved were not permitted to rectify documents to avoid the unexpected tax consequences of the transactions,  (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 (S.C.C.) and Jean Coutu Group (PJC) Inc. v. Canada(Attorney General), 2016 SCC 55 (S.C.C.) (I wrote a post about Fairmont here.)

Rectification and rescission are related, but distinct, concepts. A court may rectify an agreement where the parties have reached an agreement, but in error the document does not reflect the agreement. It may also be applied to wills and trusts, if the documents to not reflect the will-maker or settlors intentions. Rescission, on the other hand, allows the court to undue the transaction if it is based on a mistake of fact or law that underpins the transaction. Rectification involves modifying documents, while rescission sets them aside.

Both rectification and rescissions are based on equitable principles. As set out by Justice Brown for the majority at paragraph 11:

Generally speaking, a court of equity may grant relief where it would be unconscionable or unfair to allow the common law to operate in favour of the party seeking enforcement of the transaction. But there is nothing unconscionable or unfair in the ordinary operation of tax statutes to transactions freely agreed upon.

The reasoning is that taxpayers are permitted to structures their affairs in a manner that reduces the tax they might otherwise have had to pay under a different structure, but conversely, if they choose to structure their affairs in a manner that results in increased taxation, it is not unfair or unconscionable to hold them to arrangements that they had freely entered into.

Justice Brown summarized the principles applicable to both rectification and rescission in the tax context as follows:

[16]                         From Fairmont Hotels and Jean Coutu, taken together, I draw the following interrelated principles relevant to deciding this appeal:

(a)      Tax consequences do not flow from contracting parties’ motivations or objectives. Rather, they flow from the freely chosen legal relationships, as established by their transactions (Jean Coutu, at para. 41; Fairmont Hotels, at para. 24).

(b)      While a taxpayer should not be denied a sought‑after fiscal objective which they should achieve on the ordinary operation of a tax statute, this proposition also cuts the other way: taxpayers should not be judicially accorded a benefit denied by that same ordinary statutory operation, based solely on what they would have done had they known better (Fairmont Hotels, at para. 23, citing Shell Canada, at para. 45; Jean Coutu, at para. 41).

(c)      The proper inquiry is no more into the “windfall” for the public treasury when a taxpayer loses a benefit than it is into the “windfall” for a taxpayer when it secures a benefit. The inquiry, rather, is into what the taxpayer agreed to do (Fairmont Hotels, at para. 24).

(d)      A court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability (Fairmont Hotels, at para. 3; Jean Coutu, at para. 41).

In these circumstances, where the tax consequences were “a direct result of the ordinary operation of the [Income Tax] Act respecting transactions freely undertaken…,” equitable rescission is not available.

Justice Côté dissented. The tax planning was based on a widely held understanding among tax advisors, and was shared by the Canada Revenue Agency. The planning was not based on ignorance or a “misprediction.” It was not aggressive tax planning. Canada Revenue Agency exercised a discretion to reassess the Trust at the same time it was appealing the Sommerer decision arguing that attribution rule did apply. It was unfair for Canada Revenue Agency to reassess the return in these circumstances, and rescission should be available.

It will not be much consolation to the trustee and beneficiaries of the Collins Family Trust, but I prefer the dissent. 

Finance Minster Morneau's Changes to Principal Residence Exemptions Create More Impediments to Good Estate Planning

On October 3, 2016, Finance Minster Morneau announced changes to the principal residence exemption which will in some circumstances create hardship for beneficiaries of trusts. The principal residence exemption allows you to shelter your principal residence from capital gains on the sale, provided you and the residence meet the necessary criteria under the Income Tax Act, Canada.

The change to the principal residence exemption that has garnered the most publicity, and which does not particularly concern me, is the requirement that the sale of a principal residence be reported on the seller’s tax return.

The changes that do concern me from an estate-planning perspective are the new restrictions on the ability to claim the principal residence exemption in a trust where a beneficiary is using the residence as a principal residence. It will only be available in certain circumstances for certain kinds of trusts, such as  an alter ego or joint partner trust, a testamentary trust that qualifies as a disability trust for a disabled beneficiary, and a trust created for a minor child if both of the minor child’s parents have died.

Here is part of the explanatory notes from the Department of Finance:

In the case where the taxpayer is a personal trust, a property does not qualify as the trust's principal residence for a taxation year unless the requirements in paragraph (c.1) of the definition are met. That paragraph includes the requirements that the trust designate, in prescribed form, the property as the trust's principal residence for the taxation year and that the designation identify each individual who in the taxation year is a specified beneficiary of the trust for the year. For this purpose, a specified beneficiary of a trust for a taxation year is an individual who in the taxation year is beneficially interested in the trust and who (or whose spouse or common-law partner, former spouse or common-law partner or child) ordinarily inhabits the housing unit in the taxation year.

Paragraph (c.1) is amended to introduce additional requirements in order for a property to qualify as a trust's principal residence for a taxation year that begins after 2016.  In general terms, these requirements are that the trust be an eligible trust one of whose beneficiaries (the "eligible beneficiary") is resident in Canada in the year and a specified beneficiary of the trust for the year. In addition, where the trust acquires the property on or after Announcement Date, the trust's terms must provide the eligible beneficiary with a right to use and enjoy the housing unit as a residence throughout the period in the year that the trust owns the property. Eligible trusts fall into three categories, although a trust may qualify as an eligible trust under more than one of the categories:

In the first case, an eligible trust is an alter ego trust, spousal or common-law partner trust, joint spousal or common-law partner trust, or certain trusts for the exclusive benefit of the settlor during the settlor's lifetime. In this case, the eligible beneficiary is the individual whose death (at any time after the start of the year) determines a day for the trust under subsection 104(4).  In effect, the eligible beneficiary must be, depending upon the type of trust, the trust's settlor, or the spouse or common-law partner or former spouse or common-law partner of the settlor. A joint spousal or common-law partner trust may have more than one eligible beneficiary for a taxation year.

In the second case, an eligible trust is a testamentary trust that is a qualified disability trust for the taxation year. In this case, the trust's eligible beneficiary must be an electing beneficiary under the trust for the year who is a spouse or common-law partner, former spouse or common-law partner or a child of the trust's settlor. The trust may have more than one eligible beneficiary for a taxation year.

In the final case, an eligible trust is a trust (inter vivos or testamentary) the settlor of which died before the start of the year. In this case, the eligible beneficiary must be a minor child of the settlor whose parents (i.e., the settlor and the other parent) are deceased before the start of the year. The trust may have more than one eligible beneficiary for a taxation year.

Here are a few examples of situations where the trust will not be able to claim a principal residence exemption.

1. A parent creates a trust during the parent’s lifetime for a child with a disability, and the trust holds the child’s residence. Because the trust is not testamentary (not created by a will, or otherwise arising as a consequence of the parent’s death), the residence will not be eligible for the principal residence exemption. Worst, because of the deemed disposition of assets in a trust every 21 years, the child could lose her residence if there are no other funds available to pay the tax.
2. Even if a trust described above were created by a will, it might not qualify if there is another trust in respect of the child that has already been designated as a qualified disability trust.
3. A parent creates a trust in his or her will for a child who has had drug addiction problems in order to provide for the child, but also protect the child in case of a relapse. The trustee purchases a residence for the child but holds it in the trust in order to retain control. The residence will not qualify for the principal residence exemption.
4. A parent, who was divorce from the other parent, leaves her residence to her minor child. The other parent lives with the minor child in the residence, thereby allowing the child who has lost a parent to remain in the same home. The residence will not qualify.

As far as I am aware the Minister of Finance did not consult with estate-planning professional organizations.  In previous posts, I criticized the Harper Government for some of its tax changes relating to estates and trusts, but it seems the assault on trusts, and good estate planning continue under the Liberal Government. 

New Requirement that Bare Trusts be Disclosed on Property Transfer Tax Returns

The Government of British Columbia has amended the Property Transfer Tax Return to require more information on the purchase of land, effective June 10, 2016. The requirement that a purchaser who is not a Canadian citizen or permanent resident identify his or her citizenship has received some press coverage. Although I don’t like it at all, I am writing about another change: the requirement that the person taking title disclose whether he or she, or it (if a corporation) holds the title in a bare trust.

The question on the Property Transfer Tax Return is “Is this a transfer of a bare trust?” I am not sure how one transfers a bare trust, but the question is intended to elicit whether the person acquiring title will hold title as a bare trustee. To hold land in a bare trust means that although you have title, you hold it for someone else, who is the true owner. Because the title holder has no management powers and is subject to the direction of the true owner, the title holder is an agent of the owner (rather than a trustee in the sense I often write about with significant powers and responsibilities).

If the answer to the question is “yes,” then the Return has a number of other questions. As set out in the Land Title & Survey Authority website here, if the transfer is to register a bare trust,

... an additional page will be created to enter information for the Settlors and Beneficiaries.
Select whether they are an Individual, Corporation or Other.

If Individual is selected, answer Yes or No to the question “On the date of registration, are you a Canadian citizen or a permanent resident as defined in the Immigration and Refugee Protection Act (Canada)?”

Select the country of citizenship. If there is more than one country of citizenship, select all that apply using the “ADD” button.

The address for each of the Settlors and Beneficiaries must be filled in.

If Company is selected, an additional page will be created. Fill in the “Total number of directors”

Fill in the names of all directors, their country of citizenship (all that applies) and address.

I am not clear on why the Government is collecting information on bare trusts. It may be intended to ensure that the Government is able to collect information on the whether the true owners are not Canadian citizens or permanent resident. Otherwise, someone who is neither a  permanent resident or Canadian could avoid disclosing his or her citizenship by using a permanent resident or Canadian citizen as a bare trustee.

Alternatively, the Government may also be considering whether bare trusts are being used to avoid paying property transfer tax. I came across a story on CTV with the headline “Real estate loophole lets wealthy buyers save millions in taxes.” The story was about how people can avoid paying property transfer tax by having a company hold bare title. Instead of transferring title to the land, the land stays in the company, but the control of the company is transferred to the purchaser.

The fact is, though, that anytime a company owns land (whether as the true owner or as a bare trustee), and someone buys the shares of the company rather than the land from the company, title to the land does not change hands, and there is no property transfer tax payable.

If the motive for adding information about bare trust to the Return is related to “loss” of revenue through the use of bare trusts, then I doubt it will be very helpful to the Government. As set out above, it is only when the title is transferred that purchaser is required to file the Return. If a bare trust is used to avoid the property transfer tax, the provincial Government will not know about the subsequent sale. Nor, is it necessary to file a Return, if after purchasing land, the owner later decides to declare that the owner holds title as a bare trustee. I don’t know what mechanism the Government could use to even gather information about changes in beneficial ownership without a change in title, let alone tax those changes. Such a mechanism would no doubt be intrusive and difficult to enforce.

I do use bare trusts to avoid property transfer tax, but in a different context. If I have a client who wishes to transfer real estate into a trust for estate planning, then we have to consider whether to register the trust with the Land Title Office. In some cases, there is an exemption available from property transfer tax. For example, if the property meets the requirements of the Property Transfer Tax Act for a principal residence (which are different from the Income Tax Act, Canada requirements), and if the trustee is a “related individual,” for example a spouse or child, then the land can be transferred to the trustee without paying property transfer tax. But there are plenty of traps for the unwary. For example, if my client wishes to be the trustee of her own trust, and we transfer title to her as trustee, property transfer tax is triggered even if it is her principal residence. Why? Under the legislation, she is not a “related individual” to herself.

When property transfer tax will be triggered by transferring title to the trustee, one option is for the owner, who is settling the trust, to sign a bare trust agreement declaring herself a bare trustee for the trustee of the trust. Some might see this as a loophole from tax. But consider the fact that in most of the trusts created for estate planning, for practical purposes little changes for the person settling the trust. Often she is the sole beneficiary during her lifetime, and it’s only upon her death that her beneficiaries, often children and grandchildren benefit. It is different from a sale of land to an unrelated purchaser, but in many cases, this type of estate planning is caught by the legislation.

Instead of making the Property Transfer Tax Return more intrusive, it would be preferable to scrap the property transfer tax, which is becoming more complex, likely increases the cost of real estate, and collect revenue from some other source. This will involve raising other taxes, but next to probate fees, the property transfer tax is probably the most flawed tax British Columbia has. 

Federal Budget Confirms that the Department of Finance is Reversing 2015 Changes to Taxation of Life Beneficiary Trusts

In yesterday's 2016 Federal Budget, the Minister of Finance confirmed that the Department of Finance, Canada will reverse the recent changes to the way certain life beneficiary trusts are taxed on the death of the life beneficiary. 

In 2015, the previous Government changed the way that life beneficiary trusts are taxed. Instead of taxing the trust on the deemed disposition of assets on the death of the life beneficiary in the trust, the Income Tax Act was amended so that the life beneficiary’s personal representative would declare the income in the life beneficiary’s return. It was unclear whether the tax would ultimately be borne by the life beneficiary’s estate or the trust. These came into effect this year.

Earlier this year, Department of Finance Canada has drafted proposed legislation to tax the gains in the trust, except that in case of the death of a life beneficiary in 2016, an election will be available to tax the gains in either the trust or the life beneficiary’s estate.

You have to look carefully to find it, but there is a short statement in Tax Measures: Supplementary Information confirming that the Government intends to proceed with the proposed legislation:

Budget 2016 confirms the Government’s intention to proceed with the following tax and related measures that were announced in the current session of Parliament but have not yet been legislated:

***

legislative proposals on the income tax rules for certain trusts and their beneficiaries (draft legislative proposals were released for comment on January 15, 2016).

I wrote about some of the potential problems with the 2015 changes here, the Department of Finance Canada's draft legislation here, and the Canadian Bar Association, Wills, Estates and Trust Section's response here.

Canadian Bar Association Wills, Estates and Trusts Section's Response to Department of Finance Consultation on Life Beneficiary Trusts

I wish I could come up with a more succinct and catchier title.

In my January 22, 2016 post, I wrote about the Department of Finance's consultation on a proposal to reverse recent changes to the Income Tax Act dealing with who is taxed on the death of a life beneficiary of certain trusts, including spousal trusts. I have described the problem in my earlier post, but suffice it to say that the recent changes would likely wreak havoc on many estate plans.

The Canadian Bar Association Wills, Estates and Trusts section has responded to the Department of Finance, welcoming the proposal to reverse the recent changes, and suggesting further amendments to enhance charitable donations. The letter includes the following:

We wish to express our appreciation for the Department’s responsive engagement on these issues, including your November 16, 2015 correspondence to the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, the Conference for Advanced Life Underwriting, and STEP Canada.

The amendments to the income taxation of trusts and estates in the Economic Action Plan 2014 Act, No. 2, SC 2014, c. 39 raised both technical and substantive concerns in the wills, estates and trusts community, particularly with subsection 104(13.4) of the Income Tax Act. The CBA Section welcomes the changes proposed to subsection 104(13.4). They address many of the issues raised by the profession and will be helpful to Canadian taxpayers who otherwise would have been negatively affected by the amendments.

Although outside the scope of the current consultation, the CBA Section would encourage the Department to further consider the following issues:

1. Allowing a distribution of capital from a life interest trust to a beneficiary that is a registered charity or other qualified donee in satisfaction of its capital interest in that trust to qualify for a donation tax credit.

2. Allowing a donation made by a life interest trust after the death of the life beneficiary to have the same flexibility for use of the donation credit as donations made by a graduated rate estate.

The complete letter is available on the CBA website here.

Alberta Court Orders Beneficiary of Registered Retirement Income Fund to Bear the Tax Burden on the Annuitant's Death

When the annuitant of an Registered Retirement Savings Plan or Registered Retirement Income Fund dies, taxes in respect of either type of  registered plan are generally borne by the deceased’s estate, rather than by the beneficiary of the registered plan. There are some exceptions, including significantly the ability to defer taxation if the proceeds are paid to the annuitant’s spouse (I have written about the taxation of registered plans in greater depth in a previous post). The tax rules may create unintended consequences when the annuitant names a beneficiary of the registered plan. If the proceeds of the registered plan are large, the effect may be to significantly deplete the deceased annuitant’s estate, thereby reducing the amount available to the beneficiaries of his or her will. If the annuitant is well advised, he or she may take the taxation into account when naming a beneficiary of a registered plan, but I suspect that all too often, the annuitant may not be aware of the impact of tax.

Mr. Justice Graesser of the Alberta Court of Queen’s Bench dealt with this issue in a unique way in a Morrison v. Morrison, 2015 ABQB 769. In a previous post, I wrote about his reasons for judgment in this case on the issue of whether the designated beneficiary of a Registered Retirement Income Fund was entitled to retain the proceeds or whether he held them in trust for his father, the annuitant’s estate.

I will repeat some of the key facts from my previous post, and add a few more relevant to this issue.

John Robert Morrison died on November 10, 2011 leaving four children surviving him. In his will, he divided his estate equally among his four children, except that $11,000 was to be deducted from his son Robert Morrison’s share and distributed equally among John Morrison’s grandchildren. Before his death, John Morrison sold his house, and distributed $25,000 to each of his children from the sale proceeds. John Morrison also designated his son Douglas Morrison as the beneficiary of his Registered Retirement Income Fund.  

If John Morrison intended that his son Douglas Morrison was entitled to the proceeds of the Registered Retirement Income Fund, and Mr Justice Graesser found on the evidence that he did, and if the estate bears the tax in respect of the proceeds, the estate would be depleted to the point where there would be insufficient funds from Robert Morrison’s one-quarter share of the estate to pay $11,000 to John Morrison’s grandchildren.

There was no direct evidence of whether John Morrison understood that the way the income tax provisions work, the tax on the Registered Retirement Income Fund proceeds is borne by the estate, but Mr. Justice Graesser inferred that he likely did not. If he did not, it would be unfair for Douglas Morrison to receive the benefit of the proceeds, without bearing the full burden of the taxes. Mr. Justice Graesser wrote:

[76]           However, the matter does not end there. There is the question of the tax paid on the RRIF. It is manifestly unfair that the Estate bear the burden of the tax while Douglas enjoys the benefit of the RRIF.

[77]           It is impossible to go into Mr. Morrison’s brain and determine his understanding of the implications to his estate of designating a non-spouse as beneficiary of the RRIF. That results in a tax liability to the estate, leaving the estate to pay the tax on the RRIF from its other assets. In this case, the tax on the RRIF has denuded the Estate to such an extent that it is unable to pay all of the specific bequests.

[78]           The only evidence I have of any understanding on Mr. Morrison’s part is in relation to the sale of his home, shortly before his death. None of the children suggest that he was in any way confused or lacking capacity at the time of the sale or the distribution of $25,000 to each of them.

[79]           In the absence of the tax on the RRIF being paid out of his estate, there was just enough left in his estate (after payment of debts and expenses) to create the $11,000 specified to be divided among his grandchildren.

[80]           It would seem highly unlikely that Mr. Morrison, by giving each of his children $25,000, intended to leave insufficient funds in his estate to satisfy the bequests to his grandchildren. That suggests to me, and I draw the inference, that Mr. Morrison was unaware of the tax consequences of designating his son as a beneficiary. He must have been under the impression or understanding that Douglas would bear any tax liability on the RRIF and no burden would fall on his estate.

[81]           This is another area that should be of particular concern to the investment community. I wonder how many investment advisors who give advice concerning beneficiary designations are aware of the tax consequences of the designation?

[82]           If Mr. Morrison had been aware that the RRIF would be taxable in his estate’s hands, it is unlikely that he would have given as much as he did to his children out of the sale proceeds of his house. If he had been aware of those consequences, I infer that he would have changed his will or changed the designation making the designation conditional on Douglas paying the tax.

[83]           I draw the inference and find on a balance of probabilities that whatever motivated Mr. Morrison to designate Douglas as beneficiary for the RRIF, he did not intend Douglas to be the beneficiary of the tax payable by his estate on the RRIF.

[84]           I thus find that Mr. Morrison either intended Douglas to be responsible for the tax on the RRIF and expected that the tax would be deducted from the RRIF when it was transferred or paid to Douglas, rather than left to be paid by the Estate, or that Mr. Morrison was mistaken about the tax treatment of his RRIF having designated Douglas as beneficiary based on the above intention and expectation.

[85]           In either circumstance, Douglas has received an unintended and unexpected benefit from the Estate.

Mr. Justice Graesser held that in these circumstances he had jurisdiction to provide a remedy to the unfairness of the tax falling on the estate based on equitable principles. He wrote at paragraphs 98 and 99:

[98]           The alternative approach, and the one which I adopt in this case, is to apply s 8 of the Judicature Act, RSA 2000 c J-2. That section provides:

(8)        The Court in the exercise of its jurisdiction in every proceeding pending before it has power to grant and shall grant, either absolutely or on any reasonable terms and conditions that seem just to the Court, all remedies whatsoever to which any of the parties to the proceeding may appear to be entitled in respect of any and every legal or equitable claim properly brought forward by them in the proceeding, so that as far as possible all matters in controversy between the parties can be completely determined and all multiplicity of legal proceedings concerning those matters avoided.

[99]           The application of s 8 entitles me to fashion a remedy with the effect that Douglas reimburse the Estate the full amount of the tax paid by the Estate on the RRIF. I have found that Mr. Morrison did not intend Douglas to receive the RRIF and leave the tax burden on his Estate. Tax was to follow the RRIF.

Mr. Justice Graesser found that Douglas Morrison would be unjustly enriched if he were not required to bear the tax burden, or alternatively that he should bear the tax based on misstate. He imposed a constructive trust on the proceeds of the Registered Retirement Income Fund to the extent of the estate’s liability for taxes in respect of those proceeds.

[104]      Probate law’s origins are in equity, so I do not find it inappropriate to consider equitable remedies where the common law is inadequate to remedy a wrong.

[105]      In these circumstances, I find that the tax paid by the Estate conferred a benefit in that same amount to Douglas. He has been unjustly enriched by the payment. While the Estate was under a legal obligation to pay the tax, it was under no legal obligation to Douglas to pay it for him.

[106]      It would be unjust for Douglas to retain the benefit. Principles of unjust enrichment justify a direction that Douglas reimburse the Estate for the tax it paid on his behalf.

[107]      An alternative approach using equitable principles and remedies is that the tax paid by the Estate resulted from Mr. Morrison’s mistaken understanding of the consequences of the beneficiary designation. Reimbursement by Douglas flows from equitable principles surrounding mistake.

[108]      Either approach results in a declaration of a constructive trust on the proceeds of the RRIF received by Douglas to the extent of the Estate’s payment to CRA on account of the RRIF.

[109]      Requiring reimbursement by Douglas will replenish the Estate to the amount intended by Mr. Morrison to be available for distribution, and prevents the manifest injustice of having an unintended tax consequence of a beneficiary designation frustrate the testator’s intentions.

[110]      I recognize that the approach I have taken here may be viewed as extraordinary. But that is what s 8 is for: creating an equitable remedy where the law would otherwise leave the injured party (here, the Estate and beneficiaries other than Douglas) with no adequate remedy.

Although this decision is not binding on British Columbia courts, the Supreme Court of British Columbia might find the reasoning persuasive if the Court infers from the facts that the annuitant did not recognize the tax consequences of naming a beneficiary to his or her registered plan. The British Columbia Law and Equity Act has a similar provision to section 8 of the Alberta Judicature Act. Secion 10 of the Law and Equity Act says:

Avoidance of multiplicity of proceedings

10  In the exercise of its jurisdiction in a cause or matter before it, the court must grant, either absolutely or on reasonable conditions that to it seem just, all remedies that any of the parties may appear to be entitled to in respect of any legal or equitable claim properly brought forward by them in the cause or matter so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of legal proceedings concerning any of those matters may be avoided.

Department of Finance Canada Considering Reversing Recent Changes to Taxation of Life Beneficiary Trusts

The Department of Finance is inviting comments in respect of proposed legislative changes to the taxation of trusts, including significantly for estate planning, a reversal of the very recent change in how life interest trusts are taxed.

As I wrote before in the context of alter ego and joint partner trusts, the Harper Government passed legislation last year that changed the way life trusts are taxed. These came into effect this year. Instead of taxing the trust on the deemed disposition of assets on the death of the life beneficiary in the trust, the Income Tax Act was amended so that the life beneficiary’s personal representative would declare the income in the life beneficiary’s return. It was unclear whether the tax would ultimately be borne by the life beneficiary’s estate or the trust.

If the tax is borne by the life beneficiary’s estate, this could create significant unfairness. Take for example, spouses who each have children from a previous marriage. The wife has significant assets, which she wishes invested on her death, with the income payable to her financially less well off husband, and the capital left to her children on his death. If she creates a trust for her husband’s life in her will, with the remaining capital going to her children on his death, then any taxes payable in respect of capital gains in the trust will be borne by the beneficiaries of her husband’s will (likely his children), but the benefit of the appreciation in capital will go to her own children. In some circumstances, this could have the effect of disinheriting the husband’s children.

Estate-planning professional organizations attempted to point out the problems to the previous Finance Minister, who did not seem too interested.

Fortunately, it does appear that the new government is listening. The Department of Finance Canada has drafted proposed legislation to tax the gains in the trust, except that in case of the death of a life beneficiary in 2016, an election will be available to tax the gains in either the trust or the life beneficiary’s estate. Here is what the Backgrounder says:

Spousal and common-law partner (and similar) trusts

The tax rules permit an individual to transfer, on a tax-deferred basis, capital property to a trust the primary beneficiary of which is the individual’s spouse or common-law partner. These trusts, and certain similar trusts, are subject to a deemed recognition of capital gains (and certain other income amounts) on the death of the trust’s primary beneficiary (i.e., the spouse or common-law partner beneficiary). For deaths before 2016, these income amounts are taxed in the trust. For deaths after 2015, these amounts are instead recognized as income in the hands of the primary beneficiary, although the trust would generally be assessed by the Canada Revenue Agency as though the trust were liable in the first instance for any resulting tax arising in the primary beneficiary’s final tax return.

The legislative proposals would modify the above tax treatment of spousal and common-law partner trusts and similar trusts, for deaths after 2015, by:

Subject to the election described below, taxing in the trust the income deemed to be recognized in the trust on the death of the primary beneficiary;

Permitting a testamentary spousal or common-law partner trust (that arose on and as a consequence of a death before 2017) to jointly elect with the graduated rate estate of the trust’s primary beneficiary to have taxed in the primary beneficiary’s final tax return the income of the trust for its taxation year in which the primary beneficiary dies; and

For purposes of computing the trust’s Charitable Donation Tax Credit in respect of a donation made by the trust within 90 days after the end of the calendar year in which the primary beneficiary dies, permitting the trust to allocate the donation to the trust’s taxation year in which the primary beneficiary dies.

In addition to this proposed change the Department of Finance Canada has requested comments in respect of two other proposed changes, one dealing with trust loss restriction events and the other estate donations.

Here is what the Backgrounder says:

Trust loss restriction events

The income tax rules contain restrictions on when losses incurred by a taxpayer may be recognized and used to offset the taxpayer’s own income. Losses realized by a taxpayer generally remain with that taxpayer for income tax purposes but may be carried forward or back to offset taxable income in other years within certain limits.

The ability of a corporation or trust to carry over its losses (and other tax attributes) may be constrained, under the loss restriction event rules, where the corporation or trust is subject to a significant change in ownership. For trusts, this typically involves cases where a beneficiary, or group of beneficiaries, acquires more than 50% of the beneficial interests in a trust. However, a trust that is an investment fund is not subject to a loss restriction event if certain conditions are met. 

The legislative proposals would modify the application of the trust loss restriction event rules to investment funds and other trusts, including by:

Ensuring that the investment fund definition applies in a manner that generally permits funds to establish whether they are in compliance with the definition without the need to track on an ongoing basis the valuations of entities in which they invest, while also introducing anti-avoidance rules to prevent trusts that directly or indirectly carry on a business from inappropriately claiming status as an investment fund;

Clarifying that an investment fund is not subject to a loss restriction event solely because of a redemption of its issued units; and

Expanding the list of trust tax filing obligations for which deferred filing is permitted where the trust is subject to a loss restriction event.

Estate donations

Donations made by an individual to a registered Canadian charity or other qualified donee are eligible for a Charitable Donation Tax Credit (CDTC). Subject to certain limits, a CDTC in respect of the eligible amount of the donation may be applied against the individual’s income tax otherwise payable. The eligible amount is generally the fair market value of the donated property at the time that the donation is made (subject to any reduction required under the income tax rules). The individual may claim a CDTC for the year in which the donation is made or for any of the five following years.

Trusts (including estates) are subject to the same rules for their donations. However, additional rules facilitate the tax treatment of donations made by the estate of an individual who dies after 2015. These rules, which apply to donations made by the individual’s estate while it is the individual’s graduated rate estate, permit the estate to allocate the available donation among any of: the taxation year of the estate in which the donation is made; an earlier taxation year of the estate; or the last two taxation years of the individual. In addition, if the property donated by the individual’s graduated rate estate is a publicly-listed security, or a unit of a mutual fund, that was owned by the individual immediately before the death, the capital gains on the property arising on the individual’s death are exempt from income tax. An individual’s estate may qualify as the individual’s graduated rate estate for only the first 36 months after the individual’s death.

The legislative proposals would modify the application of the above rules for donations made by an individual’s graduated rate estate by extending the rules to apply to donations made by the graduated rate estate, after it ceases to have that status because of expiry of the 36-month period, for up to 60 months after the individual’s death. Donations made by an individual’s former graduated rate estate would be eligible to be allocated among any of: the taxation year of the estate in which the donation is made or the last two taxation years of the individual. The individual’s year-of-death capital gains exemption would also be extended to these donations.

You can read the legislative proposals here, and the explanatory notes here.

To comment, write to Tax Policy Branch Finance by February 15, 2016, by email to fin.trusts-fiducies.fin@canada.ca, or by letter to:

Tax Policy Branch 
Department of Finance
90 Elgin Street
Ottawa, Ontario
K1A 0G5

Increase in Tax Rate on Trusts

The Federal Minister of Finance has announced an increase in taxes for income in excess of $200,000 to 33% for federal income tax. Unfortunately, this will have the effect of further raising rates on income earned in a trust, including trusts created in wills. This will exacerbate the problem of taxing trusts including trusts earning modest investment income at what I would describe as a punitive tax rate.

As I have written before, the previous Conservative government implemented a significant change in the way testamentary trusts (those that arise on death, usually created in a will) are taxed. Up until this year graduated rates were available for income earned in testamentary trust. Beginning this year, graduated rates are available for an estate for up to 36 months, but income earned in the trust will be taxed at the highest marginal rate, unless it is paid to a beneficiary, in which case, the trust can deduct the income, and the beneficiary then includes the income in his or her tax return. Income earned in trusts that were not testamentary has been taxed at the highest rate for decades.

Although there is relief available from the top tax rate in some cases for testamentary trusts if a beneficiary is entitled to a disability tax credit, in other cases testamentary trusts created for socially beneficial estate planning are caught by this high tax rate. For example, a parent may create a trust for the benefit of her son, who has been addicted to drugs. She may be concerned that if she leaves an outright inheritance to him, that he may relapse, and use his inheritance to feed his addiction. Instead, she creates a trust for him, appointing another family member or friend as trustee, and gives the trustee the discretion to pay income or capital to him or for his benefit. Because income earned and taxed in the trust is taxed at the top rate, if the son relapses, the trustee will face the choice of either paying income to the son and risk that it will feed his addiction, or paying a high rate of tax on the income accumulated in the trust.

In addition to the 33% federal tax, trusts have to pay provincial taxes, which vary from province to province. In British Columbia, the combined top rate will be 47.7% in 2016, but in some other provinces the top rate may exceed 50%.

The Minister of Finance announced the new top rate in conjunction with a reduction of the rate of income tax in a lower income bracket from 22% federal tax to 20.5%. This reduction of course will benefit many tax payers, and will to some extent ameliorate the increase for those earning over $200,000 (they will pay more on the excess, but less on that part of their income that falls into a lower tax bracket. But there is no similar relief from tax for trusts, because all of the income is taxed at the top rate.   

2015 Federal Budget Contains Changes to Tax Free Savings Accounts and Registered Retirement Income Funds

The 2015 Canadian Federal Government’s Budget released on April 21, 2015 does not appear to contain any changes that will have an impact on trusts or estate-planning (perhaps mercifully given the problems created by the 2014 Budget). There are a couple of changes that will affect retirement savings.

First, the Government has increased the amount that you may put into a Tax Free Savings Account (“TFSA”), from $5,500 per year to $10,000 per year effective January 1, 2015. The Budget has a nice summary of how TFSAs work.

Available since January 1, 2009, the TFSA is a flexible, registered general-purpose  savings vehicle that allows Canadian residents aged 18 or older to earn tax-free investment income, including interest, dividends and capital gains. TFSAs can include a wide range of investment options such as mutual funds, Guaranteed Investment Certificates, publicly traded shares and bonds. Contributions to a TFSA are not tax deductible, but investment income earned in a TFSA and withdrawals from it are tax-free. Unused TFSA contribution room is carried forward and the amount of withdrawals from a TFSA can be re-contributed in future years.

TFSAs differ from Registered Retirement Savings Plans (“RRSPs”) in a few key ways. Unlike RRSPs, there is no tax deduction available when you contribute to a TFSA. But TFSAs can be withdrawn without tax, while you pay tax on RRSPs when you withdraw funds from them. With both TFSAs and RRSPs, funds can grow inside the plan without tax.

Generally, if you are in a low tax bracket, it probably makes more sense (and cents) to contribute the up to the maximum permitted in a TFSA in priority to RRSP contributions, especially if you think you may later end up in a higher tax bracket. TFSAs are also a better vehicle for saving for things other than retirement, such as buying a home.

But if you are in a high tax bracket, RRSPs may be preferable because you get the tax break when you contribute. The benefits of RRSPs are enhanced if you expect to be in a lower tax bracket in retirement.

Another key difference between RRSPs and TFSAs is that with an RRSP when you reach the age of 71, you have to either withdraw the funds from an RRSP, buy and annuity, or convert the RRSP to a Registered Retirement Income Fund (“RRIF”). In contrast, you can retain and continue to contribute to a TFSA until death.

I suspect the most common approach to RRSPs at 71 is to convert an RRSP into a RRIF. With a RIFF you are required to withdraw a minimum percentage each year, the percentage increasing with age. You may take out more than the minimum, but you pay tax on the withdrawals.

This brings me to the second change in the 2015 Budget. The Government has reduced the percentages that you have to take out of a RRIF each year, the effect of which is to allow you to defer tax longer. Here is a description from the 2015 Budget (tables omitted):

The basic purpose of the tax deferral provided on savings in RPPs and RRSPs is to encourage and assist Canadians to accumulate savings over their working careers inorder to meet their retirement income needs. Consistent with this purpose, savings inRPPs and RRSPs must be converted into a retirement income vehicle by age 71. Inparticular, an RRSP must be converted to a RRIF by the end of the year in whichthe RRSP holder reaches 71 years of age, and a minimum amount must be withdrawn from the RRIF annually beginning the year after it is established (alternatively, the RRSP savings may be used to purchase an annuity). This treatment ensures that the tax-deferred RRSP/RRIF savings serve their intended retirement income purpose.

A formula is used to determine the required minimum amount a person mustwithdraw each year from a RRIF. The formula is based on a percentage factormultiplied by the value of the assets in the RRIF. The percentage factors (the RRIFfactors) are based on a particular rate of return and indexing assumption. Currently, a senior is required to withdraw 7.38 per cent of their RRIF in the year they are age71 at the start of the year. The RRIF factor increases each year until age 94 when the percentage that seniors are required to withdraw annually is capped at 20 per cent.

The existing RRIF factors have been in place since 1992. Economic Action Plan2015 proposes to adjust the RRIF minimum withdrawal factors that apply in respectof ages 71 to 94 to better reflect more recent long-term historical real rates of  returnand expected inflation. As a result, the new RRIF factors will be substantially lower than the existing factors. The new RRIF factors will range from 5.28 per cent at age 71 to 18.79 per cent at age 94. The percentage that seniors will be required to withdraw from their RRIF will remain capped at 20 per cent at age 95 and above. Table A5.2 in Annex 5 shows the existing and proposed new RRIF factors.

By permitting more capital preservation, the new factors will help reduce the risk ofoutliving one’s savings, while ensuring that the tax deferral provided on RRSP/RRIF savings continues to serve a retirement income purpose. For example, the new RRIF factors will permit close to 50 per cent more capital to be preserved to age 90, compared to the existing factors (Table 4.1.2).

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.

Dempsey v. British Columbia

British Columbia's Property Transfer Tax Act is an incoherent, and at times absurd, taxation statute. Apart from the dubious economic and social policy of a tax that adds to the cost of housing in the province with the least affordable housing in Canada, there is little rhyme or reason to the types of transactions that are taxed, and those that are exempt.

In very broad strokes, the Property Transfer Tax Act taxes transfers of real estate based on the value of the property, with the first $200,000 of the fair market value taxed at one per cent and the value above $200,000 at two per cent. In many cases the tax will reflect the sale price of real estate between a buyer and seller of a piece of real estate.

But title to real estate may also be changed in circumstances other than a sale, for example as a gift between family members, or to a trustee as part of an estate plan. The Property Transfer Tax Act does have a variety of exemptions from the tax, including some that facilitate transfers between family members either as gifts or for estate planning. The problem is that these exemptions are tightly pigeon holed, and unless a transfer falls squarely within a pigeon hole, the transferee in a non-market transaction may be caught by a significant tax. The narrowness of the exemptions demonstrates little understanding of the nuances of estate planning on the part of the legislators.

The provisions considered in the recent decision of the Supreme Court of British Columbia in Dempsey v. British Columbia, 2014 BCSC 1977, illustrate my point. I should say at the outset that I do not take issue with the reasoning of the Court in this decision, but rather with the absurdity of the legislation when viewed in light of the facts of this case.

Ms. Rita Dempsey settled a trust, which held title to her residence in Victoria. She was also the trustee and a beneficiary of the trust. She later resigned as trustee, replaced by her daughter. She transferred title to the residence from her name to her daughter’s name as trustee. The transfer was exempt under section 14(4) (q) as a transfer from one trustee to another without a change of beneficiaries. 

Later Ms. Dempsey’s daughter as trustee transferred the residence into Ms. Dempsey’s name as beneficiary of the trust. The decision does not set out the reasons for the transfer, but there are many good reasons why a trustee might transfer the title out of the trust to a beneficiary including perhaps to facilitate a change in the estate plan or to allow the residence to qualify for a deferral of property taxes. Whatever the reason for the transfer in this case, no funds change hands, and Ms. Dempsey continues to live in the residence that is now again in her name, but no longer in trust.

Unfortunately, and unfairly, the Government of British Columbia seized the opportunity to charge Ms. Dempsey $7300 in property transfer tax.

Ms. Dempsey through her lawyer argues that this transaction falls within an exemption, section 14(3)(b) which says:

14 (3) If a taxable transaction entitles the transferee, on compliance with the Land Title Act, to registration in a land title office, that transferee is exempt from the payment of tax if the taxable transaction is a transfer within any of the following descriptions:
…

(b) a transfer from a transferor who is not a trustee referred to in paragraph (c), (d) or (e), to a transferee who is a related individual, if the land transferred has been the principal residence of either the transferor for a continuous period of at least 6 months immediately before the date of transfer or of the transferee for that period;

If the section appears to you to be confusing, that is because it is.

If the trust had not been registered, and the transfer had simply been from Ms. Dempsey’s daughter to Ms. Dempsey, the transfer would have been exempt as a transfer of a principal residence to a related individual. (As an aside, be careful with these terms, as a principal residence under this statute is not the same thing as a principal residence under the Income Tax Act, Canada.)

But Ms. Dempsey was on title as a trustee, so the question was how to interpret the phrase “not a trustee referred to in paragraph (c), (d) or (e)….” Those subsections are themselves exemptions, with (c) an exemption for certain transfers of property from the trust of an estate or trust to beneficiary who is a related individual to the will maker, (d) an exemption for certain transfers of property from a trustee to a beneficiary if the beneficiary is a related individual to the settlor of the trust, and (e) another exemption for certain transfers from a trustee to a beneficiary of a trust who is a related individual of the settlor.

Section (d), for example, exempts,

(d) a transfer from a transferor who is a trustee of a trust that is settled during the lifetime of the settlor and who is registered in that capacity under the Land Title Act as the trustee of the land transferred, if

(i)     the transferee is a beneficiary of the trust,
(ii)    the transferee beneficiary is a related individual of the settlor of the trust, and
(iii)  the land transferred is a recreational residence or was the principal residence of either the settlor for a continuous period of at least 6 months immediately before the date of transfer or of the transferee beneficiary for that period;

Ms. Dempsey argued that because the transaction did not meet all of the criteria in any of the three subsections (c ), (d) or (e), her daughter was not a trustee referred to in those subsections, and accordingly, the trustee exception to the exemption did not apply. The Province argued that only words in each of those sections describing a trustee applied. For example, in (d) the words “a trustee of a trust that is settled during the lifetime of the settlor and who is registered in that capacity under the Land Title Act as the trustee of the land transferred” are to be read into the definition of trustee in 14(3)(b), but not the rest of the subsection set out in (i), (ii) and (iii).

Madam Justice Gray held that the Province of British Columbia’s interpretation is correct, and accordingly, the transaction is subject to the property transfer tax. 

She wrote at paragraph 46:

[46]         I am left with the lingering question of why this kind of transaction would be taxed, but in my view I must apply the words of the statute if they are clear and unambiguous. In my view, they are clear and unambiguous.

Ms. Dempsey was both the settlor of the trust, and the beneficiary. You might wonder why this transfer is not exempt under subsection 14(3)(d). Very simply, under the Property Transfer Tax Act, Ms. Dempsey is not related to herself.

Supreme Court of Canada Strikes down British Columbia’s Court Hearing Fees!

I don’t use exclamation marks often. This may be the first one in my blog. But I am very pleased with the decision of the Supreme Court of Canada released this morning in The Trial Lawyers Association of BritishColumbia v. British Columbia (Attorney General), 2014 SCC 59, holding that British Columbia’s court hearing fees are unconstitutional by effectively denying access to people to superior courts, contrary to section 96 of the Constitution Act, 1867.

Chief Justice McLachlin, writing for the majority, held that although the province may impose hearing fees under section 92 (14) of the Constitution Act, 1867, those fees must not impinge on the core jurisdiction of superior courts by effectively barring access. She wrote at paragraphs 35 and 36:

[35]                          Here, the legislation at issue bars access to the superior courts in yet another way ― by imposing hearing fees that prevent some individuals from having their private and public law disputes resolved by the courts of superior jurisdiction ― the hallmark of what superior courts exist to do. As in MacMillan Bloedel, a segment of society is effectively denied the ability to bring their matter before the superior court.

 [36]                          It follows that the province’s power to impose hearing fees cannot deny people the right to have their disputes resolved in the superior courts.  To do so would be to impermissibly impinge on s. 96  of the Constitution Act, 1867 .  Rather, the province’s powers under s. 92(14)  must be exercised in a manner that is consistent with the right of individuals to bring their cases to the superior courts and have them resolved there.

The Chief Justice of Canada also considered the underlying values implicit in our constitution of the rule of law:

[38]                          While this suffices to resolve the fundamental issue of principle in this appeal, the connection betweens. 96  and access to justice is further supported by considerations relating to the rule of law. This Court affirmed that access to the courts is essential to the rule of law in B.C.G.E.U. v. British Columbia (Attorney General), [1988] 2 S.C.R. 214.  As Dickson C.J. put it, “[t]here cannot be a rule of law without access, otherwise the rule of law is replaced by a rule of men and women who decide who shall and who shall not have access to justice” (p. 230).  The Court adopted, at p. 230, the B.C. Court of Appeal’s statement of the law ((1985), 20 D.L.R. (4th) 399, at p. 406):

   . . . access to the courts is under the rule of law one of the foundational pillars protecting the rights and freedoms of our citizens.  . . . Any action that interferes with such access by any person or groups of persons will rally the court’s powers to ensure the citizen of his or her day in court.  Here, the action causing interference happens to be picketing.  As we have already indicated, interference from whatever source falls into the same category.  [Emphasis added.]

As stated more recently in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, per Karakatsanis J., “without an accessible public forum for the adjudication of disputes, the rule of law is threatened and the development of the common law undermined” (para. 26). 

[39]                          The s. 96  judicial function and the rule of law are inextricably intertwined. As Lamer C.J. stated inMacMillan Bloedel, “[i]n the constitutional arrangements passed on to us by the British and recognized by the preamble to the Constitution Act, 1867 , the provincial superior courts are the foundation of the rule of law itself” (para. 37). The very rationale for the provision is said to be “the maintenance of the rule of law through the protection of the judicial role”: Provincial Judges Reference, at para. 88. As access to justice is fundamental to the rule of law, and the rule of law is fostered by the continued existence of the s. 96  courts, it is only natural that s. 96  provide some degree of constitutional protection for access to justice.

[40]                          In the context of legislation which effectively denies people the right to take their cases to court, concerns about the maintenance of the rule of law are not abstract or theoretical. If people cannot challenge government actions in court, individuals cannot hold the state to account ― the government will be, or be seen to be, above the law.  If people cannot bring legitimate issues to court, the creation and maintenance of positive laws will be hampered, as laws will not be given effect.  And the balance between the state’s power to make and enforce laws and the courts’ responsibility to rule on citizen challenges to them may be skewed: Christie v. British Columbia (Attorney General), 2005 BCCA 631, 262 D.L.R. (4th) 51, at paras. 68-9, per Newbury J.A.

The majority rejected the remedy of the British Columbia Court of Appeal to give discretion to the court to relieve those who are “in need” as well those who are “indigent” or “impoverished” from payment of the fees. The Chief Justice wrote:

[66]                          “Reading in” is a remedy sparingly used, and available only where it is clear that the legislature, faced with a ruling of unconstitutionality, would have made the change proposed:  Schachter v. Canada, [1992] 2 S.C.R. 679.  I am not satisfied that this condition is met here.  The legislature or Lieutenant Governor in Council has a number of options, from abandoning or modifying the hearing fee to changing the exemption provision.  Moreover, any expansion of the exemption provision will be at odds with the legislative objective of deterring use of the courts.  “Reading in” to cure the constitutional defect of the hearing fee scheme would defeat the purpose of the legislation.

[67]                          I would also note that modifying the exemption as suggested by the Court of Appeal might still not cure the problem; it is not clear that the term “or in need” will cover all litigants who cannot afford the hearing fee and other provisions might be required in order to avoid the onerous or undignified process of proving that one falls within the exception.

Mr. Justice Cromwell, while concurring in the result, did so on narrower grounds, holding that the fees exceeding the regulation powers of the Court Rules Act by defeating the common law rights of access to the courts.

Mr. Justice Rothstein dissented, and would have upheld the constitutionality of the fees.

The Supreme Court of Canada restored Mr. Justice McEwan’s decision in the Supreme Court of British Columbia, and the majority decision largely adopted his reasoning. His decision is an eloquent statement of the underlying principles of our democratic society. As I quoted in my previous post on his decision:

[346]     There are several fundamental concepts embedded in these observations. A society that is governed by democratic principles is a society governed by the rule of law, the principle that the law applies to every person including the government and its agents. The right to vote is an incident of citizenship, and the laws consequent upon the exercise of that franchise apply to everyone within the jurisdiction of Parliament or the pertinent legislature. The courts operate in “functional symbiosis” with the legislative branches of government in fulfilling the purposes of democracy. Self-government clearly implies a process that begins with the law as it is or as it has been made by legislatures and includes the elaborations of the courts. Those elaborations, even in mundane matters, inform and enrich the law. As Resnick and Curtis note, the court is a public forum in which individuals may call the powerful, including governments, to account, compelling them to meet as equals. In the courts, cases are determined without regard to the distributions of power or wealth and influence that otherwise prevail in society. For this reason each case must be given the attention it requires, however small it may appear to be. The law is replete with examples of apparently inconsequential disputes which led to major changes or developments in the law, the most famous of which is arguably Donoghue v. Stevenson, [1932] A.C. 562.

 [347]     Seen in this light, a court whose most frequent litigant controls and limits its availability to those who seek its assistance or protection is a court whose essence as a forum within the continuum of democratic lawmaking is compromised. The court is a forum in which minority rights, the values of inclusiveness, equality and citizen participation, and the constitutional commitment to the inherent worth and dignity of the individual, spoken of in Sauvé, are publicly advanced and vindicated. To the extent that government imposes limitations to deter or prevent litigants from seeking recourse to the courts, it undermines a fundamental premise of civil society: that there will be a place for everyone for the peaceful resolution of contentious issues according to law. To the extent the government imposes limitations on those who seek redress against government itself, it undermines its own accountability and legitimacy, and the rule of law itself. This is how the court is a core functional attribute of democracy. The Supreme Court’s observation in Sauvé that there is “no place” for the theory that elected representatives may disenfranchise a segment of the population in a democracy built on principle of inclusiveness, equality and citizen participation, must logically apply to legislation having the effect of depriving people of the means of vindicating their rights through the courts.

I recommend reading his complete decision here.

I wrote about the Supreme Court of British Columbia decision here, and the Court of Appeal decision here.