Cottrell v. Cottrell

 When assisting clients in creating trusts to benefit their children, I am sometimes asked about potential claims that a child’s spouse might make to trust assets if there is a breakdown of the child’s marriage or marriage-like relationship. Typically, the parent is concerned that if she puts assets into a trust to benefit her children, the trusts in fact benefit the children and not future ex-spouses of any child. I can’t give a definitive answer to that question, but a recent decision provides some comfort to parents creating trusts for their children, provided that the trust does not give the child the right to distributions or control of the trust. The case is Cottrell v. Cottrell, 2022 BCSC 1607.

Robert and Patricia Muster contributed all of the funds to two trusts: the Robert and Patricia Muster Family Trust and the Muster Joint Partner Trust. They were created in 2010 and 2011 respectively. The beneficiaries were Robert and Patricia Munster, their son, and their daughter Joanne Cottrell. The trusts are described in the decision as discretionary trusts in which the beneficiaries received distributions only at the discretion of the trustees.  (I suspect from the name, that there were restrictions in the Joint Partner Trust such that during the lifetimes of Robert and Patricia, all of the income was payable to them, and no one else would be entitled to capital until the last of them to die.) The Family trust held shares in a company, Muster Management Inc., and the Joint Partner Trust held investments.

When a trust is completely discretionary, no beneficiary has any particular entitlement until the trustees decide, and there is no certainty that the beneficiary will receive anything.

Robert and Patricia Muster were the original trustees of both trusts, but when Patricia Muster died in 2012, Joanne Cottrell and her brother became co-trustees with their father. Decisions required a majority vote. There was evidence that neither Joanne Cottrell or her brother were active in the management of the trusts and trust assets, and that their father considered that the assets of the trusts were his property during his lifetime.

Unfortunately, Mrs.  Cottrell’s marriage to Paul Cottrell broke down. Following their separation, she ceased to be a trustee of the trusts. In the litigation over the division of their property, Paul Cottrell claimed an interest in the trusts.

The way the Family Law Act (the “FLA”) in British Columbia works there is included family property, in which spouses share an interest on separation, and excluded family property, in which they do not. Because all of the funds in the trusts were contributed by Mr. and Mrs. Muster, and not by Joanne, her interest in the trust property is excluded. This is set out in section 85(1)(f):

85(1) The following is excluded from family property:

            …

(f) a spouse’s beneficial interest in property held in a discretionary trust

(i) to which the spouse did not contribute, and

(ii) that is settled by a person other than the spouse....

However, the increase in value of a spouse’s interest in excluded property during the marriage is included property, subject to a claim by the other spouse. This is set out in s. 84(2)(g) of the FLA:

84(2) Without limiting subsection (1), family property includes the following:

…

(g) the amount by which the value of excluded property has increased since the later of the date

(i) the relationship between the spouses began, or

(ii) the excluded property was acquired.

Paul Cottrell acknowledged that the assets settled on the trusts were not included family property, but he argued that the assets increased in value, and he is entitled to a portion of that increase, reflecting Joanne Cottrell’s interest in the trusts.

The contrary argument is that because the trusts were discretionary, Joanne has no property interest in the trust assets, she cannot compel any distributions to her, and her interest could be defeated such that she might not receive any distributions in the future.

Mr. Justice Brongers held in favour of Joanne Cottrell on this issue. He wrote:

[42]         Accordingly, the fundamental question to be determined is whether Joanne’s beneficial interest in the discretionary Muster Trusts has increased in value since Joanne acquired her interest on September 14, 2010 (in the case of the Family Trust) and on January 5, 2011 (in the case of the Partner Trust). Given that Paul is the party asserting a claim in respect of this alleged family property, which Joanne opposes, it is Paul that bears the burden of establishing that there has been such an increase in value.

[43]         On my assessment of the evidence presented, I am not satisfied that Paul has met this burden. In particular, I agree with the submissions of Joanne’s counsel that the uncertain nature of Joanne’s contingent beneficial interest in the Muster Trusts is such that it cannot be said that, at the time of the trial, there has been an “increase in value” of this interest. This uncertainty stems from the fact that Joanne has never had the actual or even an apparent ability to compel a distribution of the Muster Trusts, and has no reliable assurance regarding the specific extent to which she may receive such a distribution in the future. In these circumstances, the Court cannot find that Joanne’s beneficial interest in the property held in the Muster Trusts is greater now than it was when the trusts were settled. In the absence of such a finding, there is no “increase in value of excluded property” to which a s. 84(2)(g) FLA claim can be asserted. Paul’s request for a remedy in relation to such a claim must therefore be dismissed.

[44]         I have reached this conclusion notwithstanding Paul’s attempt to value Joanne’s interest in the Muster Trusts. Leaving aside my significant concerns about its reliability given the limited scope of the evidence tendered and the lack of a valuation opinion from a qualified expert assessor, Paul’s estimate relates to the property held in the discretionary trusts, not to Joanne’s beneficial interest in that property. As such, even if I had been inclined to accept his estimated values of the trust assets, they do not show that there has been an actual increase in the value of Joanne’s beneficial interest in these assets, which is all that can be claimed pursuant to ss. 84(2)(g) and 85(1)(f) of the FLA.

Doe this mean that a separated spouse will never have a FLA claim to an interest in a discretionary trust? I would not go that far. Key factors in this case were 

1.  that Joanne Cottrell did not contribute any of the assets to the trusts,
2. her interest was purely discretionary,
3. she was never the sole trustee or in a position to require distributions be made to her, and
4. in practice, she appears to have had little or no influence on the management of the trust and decisions about distribution. 

a.      One can envision cases in which, on reading the trust documents, the beneficiary appears to have no control, but in practice the beneficiary is the one making the decisions. In such circumstances, the outcome may be different if a separated spouse makes a family law claim.  

Mr.  Justice Brongers was careful to qualify his decision:

[47]         Before completing my consideration of this issue, however, I wish to be clear that my finding that Paul has not established that there has been an increase in value of Joanne’s beneficial interest in the Muster Trusts should not be taken as a conclusion of law that it is impossible to make a family property claim in respect of a spouse’s beneficial interest in a discretionary trust under the FLA. My finding is based on the evidence presented in this case, particularly the terms of the Muster Trusts instruments, as well as Mr. Muster and Joanne’s testimony about their intentions and expectations regarding these trusts. That evidence does not justify a conclusion that Paul is entitled to a remedy in relation to Joanne’s beneficial interest in the Muster Trusts. A different conclusion could well be reached in another case involving different trusts, trustees, beneficiaries, and spouses.

Ghag v. Ghag

Last month, I wrote that the courts in British Columbia are reluctant to interfere with a trustees discretion when the trust instrument gives the trustee a wide discretion to make distributions to beneficiaries.  I used the case of Re Zaleschuk as an illustration of the deference courts often show to the exercise of a discretion. But,  as you will see below, there are limits to a court's deference to trustees, especially when the trustees prefer their own interest.

In Ghag v. Ghag, 2021 BCCA 106, Madam Justice Griffin set out the principles as follows:

[47]         A trustee’s exercise of wide discretion under the express terms of a trust will rarely be interfered with by a court. Nevertheless, there are grounds that may justify the court’s interference in the exercise of a trustee’s discretion. As summarized by Professor Waters, the court may interfere in the exercise of discretion by a trustee where:

a)    the decision is so unreasonable that no honest or fair‑dealing trustee could have come to that decision;

b)    the trustees have taken into account considerations which are irrelevant to the discretionary decision they had to make; or

c)     the trustees, in having done nothing, cannot show that they gave proper consideration to whether they ought to exercise the discretion.

(Donovan W.M. Waters, Mark R. Gillen & Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th ed (Toronto: Carswell, 2012))

Sukie Ghag settled a family trust for the benefit of his wife, Charmaine, and his four children, after he was diagnosed with brain cancer. 100 Class A common shares of Abby Pharmacy Ltd. were held in the trust. He appointed his son Brendan as trustee and Charmaine as the alternate trustee. The terms of the trust included the provision:

… The Trustee shall exercise the powers and discretions given to him in what he deems to be the best interests, whether monetary or otherwise, of the Beneficiaries, whether or not such exercise may have the effect of conferring an advantage on any one or more of the Beneficiaries at the expense of the other Beneficiaries ….

 [emphasis in decision.]

Brendan Ghag took $100,000 out of the trust bank account, and he distributed 55 Class A common voting shares to himself, 15 Class A shares to each of the other children, and none to Charmaine. He also caused the company to allot 150 Class B common voting shares, ranking equally with the Class A shares, to himself.

Charmaine Ghag and the other three children brought a petition to remove him as trustee and appoint Charmaine, for an accounting, and for an order voiding the transfer and allotment of shares.

While consenting at the hearing of the petition to his removal as trustee, and to an accounting, Brendan alleged that the share transactions were in furtherance to a secret agreement he had with his father. He claimed that his father intended for him to receive control of the company in a tax-efficient way, and for his mother to receive no interest in the shares or voting rights.

In the Supreme Court, at 2021 BCSC 815, Mr. Justice Tammen heard the petition and granted the relief sought including declaring the transfer and issuance of shares void. He found that by acting in accordance with the alleged secret agreement, Brendan

took into consideration irrelevant and inappropriate considerations in exercising his discretion as trustee.  In addition, his decision to apportion the majority of the trust assets to himself and to exclude entirely one of the named beneficiaries is one that no even‑handed, fair minded trustee could have made in the exercise of his discretion.

The Court of Appeal upheld Mr. Justice Tammen’s decision. 

Chung v. Chung

When a trustee or other fiduciary profits from a breach of their obligations, the court may award the profits to beneficiaries. This discourages trustees from wrongdoing,  and is referred to as disgorgement. The principle is illustrated by a British Columbia Supreme Court decision earlier this year.

In Chung v. Chung, 2022 BCSC 1592, Mr.  Justice Taylor imposed a constructive trust over the fiduciary’s residence and order him to pay occupational rent to the plaintiff in order to disgorge the benefit the fiduciary received through his breach of trust.

The plaintiff, Jae Chung, and the defendant Won Chung were brothers. They invested in two apartment buildings in the west end of Vancouver. The titles were held in two nominee companies, which were subject to bare trust agreements proportionate to the brothers’ respective interests. Won Chung managed the properties, while the plaintiff was a more passive investor. Won Chung refinanced the apartment buildings, Jae Chung also signing the necessary documents, but Won Chung deposited $1,664,966 in his personal account, without his brother’s knowledge. He later put the proceeds into GICs.

Subsequently, Won Chung cashed in 1,581,860 of the GICs and applied the funds to the purchase of a residence on South West Marine Drive (the “Marine Drive Property”) in 2014.  The total purchase price including GST was a little more $1,682,306, the difference made up in cash. Jae Wong was not aware of the use of funds until later.

After Jae Chung sued, the brothers entered into a partial settlement agreement which required certain accountings, but left open Jae Chung’s disgorgement, tracing and constructive trust claims in respect of the Marine Drive Property.

Jae Chung sought a 45% interest over the Marine Drive Property through a remedial constructive trust, representing his 45% equitable interest in the mortgage proceeds. Won Chung argued that Jae Chung’s remedy was limited to a return of his share of the funds improperly taken plus interest. He argued on the basis of Hallett’s Estate, (1880) 13 Ch D 696 (Eng. C.A.), that because he mixed his own funds with the trust funds the remedy is limited to a lien for the amount of funds taken in breach of trust.

Given the increase in value of Vancouver real estate, the difference is significant. The Marine Drive Property was appraised at $3,600.000 in 2021.

Mr. Justice Taylor rejected the argument that Jae Chung was limited to the amount of funds wrongfully appropriated, noting that Hallett’s Estate has been rejected by courts in both England and British Columbia. An award limited to the amount of funds plus interest would not further the goal of discouraging breaches of fiduciary duties. He wrote:

[77]         Further, it is my view that an award of interest only, as asserted by the defendants, would not serve the necessary prophylactic purpose in this context. If I were to grant the remedy sought by the defendants, it would have the effect of allowing Won to benefit from his breach of trust, since the more than doubling in market value of the Marine Drive Property (of just under $2 million) clearly substantially exceeds the value of any notional interest payments over that same period, with the result that Won would benefit from his breach of trust. Such a result is inconsistent with the policy objective of the disgorgement remedy, which is to deter faithless fiduciaries.

The trial judge applied the reasoning in Soulos v.Korkontzilas, 1997 CanLII 346, in holding that the criteria for a remedial constructive trust had been met imposed a constructive trust to the extent of a 45% interest in the Marine Drive Property.

Wong Chung argued that funds he used for renovations should be taken into consideration, but Mr. Justice Taylor did not find sufficient evidence that the renovations enhanced the value of the Marine Drive Property.

Mr.  Justice Taylor also found that Jae Chung was entitled to occupational rent equal to 45% of the rental value of the house less 45% of Wong Chung’s expenditures on utilities, insurance and property, for a total award of $128,314.

Re Zaleschuk

 

Discretionary trusts are often drafted broadly permitting the trustees “absolute and uncontrolled discretion.” This may be so, even when the will maker or settlor had in mind creating a benefit for one beneficiary. Courts are reluctant to interfere with the trustee’s discretion in such cases, as long as the trustee is acting reasonably and in good faith.

In a recent case, Re Zaleschuk, 2022 BCSC 943, Justice A. Ross declined to remove trustees who had refused various requests for funds made by a beneficiary’s mother on behalf of the beneficiary. After Kenneth Zaleschuk (“Kenneth Sr.”) was diagnosed with cancer in 2014, he settled a trust for his son, Kenneth Jr., a young adult who had a learning disability and was unable to live independently. Kenneth Sr. was the initial trustee, and named his sisters as his successor trustees. His sisters became the trustees following Kenneth Sr.’s death in 2015.

Kenneth Jr. lived with his mother Marina Zaleschuck. She and Kenneth Sr. and divorced and there was evidence from Kenneth Sr.’s lawyer and financial advisor that in settling the trust, Kenneth Sr. was concerned about protecting the funds from his former spouse, and making sure there were sufficient funds for his son for life.

The trustees refused several requests from Marina for funds for Kenneth Jr. including funds for a motorized scooter, glasses, massage and acupuncture treatments, a new phone, a new laptop, travel expenses for a trip to Europe and a new headboard.

A petition was filed for Kenneth Jr. to remove his aunts as trustees and replace them with his mother. Although the petition was brought in his name, the trustees alleged that the litigation was being driven by his mother who had a power of attorney for him.

The trustees had provided funds totaling about $26,000 for Kenneth Jr. including travel expenses for trips with his sister, Marie, glasses and a helmet. They provided reasons for denying Marina’s requests including that she did not follow the procedure they put in place for requests, that they considered that some expenses were for items he did not need or, in the case of the scooter, potentially dangerous, and that some of the expenses were potentially covered under his disability benefits. They were willing to step aside as trustees provided that a professional trustee was appointed, but opposed Marina becoming the trustee.

In declining to remove the trustees, Justice Ross found that they were acting properly within the scope of their discretion. Justice Ross wrote:

[80]         Despite the criticisms leveled by the petitioner, I note that:

a)    the Trustees have released Trust funds to the benefit of Kenneth Jr. for travel and other items;

b)    they have considered and rejected other expenditures on the basis that they were not in Kenneth Jr.’s best interests (e.g., the motorized scooter) or they were unsure whether the Province may be reimbursing the expense;

c)     their actions have resulted in the capital increasing by more than $200,000 since 2015.

[81]         Although complaints have been leveled regarding the decisions of the current Trustees, I accept their submission that the Trust Deed imbues them with the full discretion to decide whether to pay amounts out of the Trust. On that point I accept this overarching submission of the Trustees:

They are exercising their discretion (as provided in the provisions of the Trust Deed) to make sure that there are sufficient funds to care for Kenneth Jr. for the rest of his life. At present, Kenneth Jr. lives with his mother and his regular expenses are covered by his disability benefits paid by the Province. At some point in the future, he will not be able to rely on living with his mother. The Trustees are administering the Trust in a fashion that will best ensure that there are funds available for his care in his later years. The Trustees submit that the Trust Document provides them with the full discretion to make those decisions.

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. 

Land Owner Transparency Reports Must Be Filed By November 30, 2021

[After I wrote this post, the deadline was extended to November 30, 2022.]

Registered owners of land held in trust and corporations and partnerships that own land in British Columbia have until November 30, 2021 to file a report with the Land Owner Transparency Registry. This is a requirement under the Land Owner Transparency Act. There are draconian penalties for failing to comply. Unfortunately, I am finding that most people are unaware of the requirement, and the British Columbia Government has done a poor job explaining the legislation. But there is some information available online here.

If you are holding land in trust, you may have to file a report, but there are some exemptions, such as land held in a trust that qualifies under the Income Tax Act as an alter ego or joint spousal trust. There is also an exemption for testamentary trusts (trusts created in a will). 

If you are a trustee holding land, or if you have company or are in a partnership that owns land, please consult with your lawyer.

West Vancouver (District) v. British Columbia (Attorney General)

 

You might own a unique piece of land that you want preserved for the public well after your death. Perhaps there is a heritage building on the land, or perhaps you value the land because of its natural beauty. You could look at leaving the land the municipality or regional district in which the land is located. If so, I am guessing you probably don’t want the municipality to sell the land to the highest bidder to use the land for the construction of massive buildings. Accordingly, you might but conditions on the use of the land through imposing a trust.  In contrast to most trusts, a charitable trust can continue forever. Think about it: if the municipality accepts the land, you may be able to require that as trustee the municipality must preserver it in natural state a thousand years from now.

It is good policy to allow people to create trusts imposing conditions on the use of the land when leaving it to a municipality. By allowing people to impose conditions on the use of the land, people are encouraged to gift land to the public for worthwhile activities. The municipality does not have to accept the gift of land if the conditions are too onerous, but if it does accept the land, then it should honour the terms of the trust.

The difficulty is that something that makes good sense now, might be less beneficial in changing circumstances in even twenty years from now, let alone a hundred or a thousand. Municipalities are governed by elected councils who try to carry out the interests of the community in changing circumstances. They may consider, for example, that it would be better to sell the land, and use the funds to purchase other lands as a park, or perhaps something quite different such as providing low-cost housing.  How does the law balance the competing interests of honouring commitments to the person who gave the land to the municipality and the changing needs of the community?

Charitable trust law in British Columbia employs a couple of different methods that allow some flexibility in limited circumstances. One is called “cy-près,” which means as near as possible. If the purpose of the trust has become impossible or impracticable, the trustees of a charitable trust may apply to court to allow the trust to be varied so that it may be used for some other, but similar, purpose. For example, if trust were created solely to fund research to prevent small pox, and there are still funds left after small pox was eradicated, the trustee could apply to court to vary the trust so that the funds could be used for research to eradicate some other infectious disease.

Impossibility or impracticability is a fairly tough threshold to meet, and rightly so. There is another tool for varying charitable trust, and this the court’s power to make an administrative scheme. The court may vary the trust to provide a better means to achieving the purposes of the trust. On the one hand the threshold is not as high as for cy-près, but on the other it must be consistent with the purposes of the settlor or will-maker who created the trust. I previously wrote about The Sidney and North SaanichMemorial Park Society v. British Columbia (Attorney General) in which Madam Justice Dardi applied the administrative scheme-making power to allow the Park Society to change the terms of the trust to provide more flexibility in leasing land it owned, in generating revenue form the lands, and in the application of funds from expropriated lands, in order to better carry out the purposes of the trust.

The cy-près and administrative scheme-making powers are common law tools to provide some flexibility. Additionally, British Columbia has legislation allowing municipalities, regional districts and certain other organizations to apply to court to vary trusts, ant it is to the legislation to which I will turn.

In her will, Clara Brissenden left 2.4 acres of land with a house on it to the District of West Vancouver (the “District”) “to be used and maintained by it for public park purposes and I express the wish that in developing the said Amended Lots as a public park the trees and natural growth be preserved as far as may be practical.” Ms. Brissenden died in 1990, and the District accepted the land. The District rented out the house to a caretaker and named it Brissenden Park, but did not develop any of the land as a park until 2018. The park was a neighbourhood park with a fairly small amount of traffic. A trail counter at one entrance in 2019 indicated an average amount of visitors of 6 per day.

In 2017 the Council of the District resolved to try to change the terms of the trust for the property to allow it to subdivide the property and keep the northern half as a park, and to sell the southern half, and then use the sale proceeds to purchase waterfront properties to add to another busier park on the waterfront. The plan the District Council ultimately adopted would see the sale of 43 percent of the land, which would be subdivided into three residential lots, each with a covenant protecting the trees on the northern 10 feet. The District would name the two properties it intended to purchase with the sale proceeds “Brissenden Waterfront Park.”

The District petitioned the court to allow it to vary the trust to facilitate its plan to sell a portion of the Brissenden Park to allow the purchase of waterfront land. Carrying out the terms of the trust clearly did not meet the threshold of impossibility or impracticability in order to apply cy-près. The District sought to vary the trust by asking the court to apply its administrative scheme power and it also relied on section 184(2) and (3) of the Community Charter which says:

(2) If, in the opinion of a council, the terms or trusts imposed by a donor, settlor, transferor or will-maker are no longer in the best interests of the municipality, the council may apply to the Supreme Court for an order under subsection (3).

(3) On an application under subsection (2), the Supreme Court may vary the terms or trusts as the court considers will better further both the intention of the donor, settlor, transferor or will-maker and the best interests of the municipality.

The Attorney General of British Columbia was named as the respondent in the petition. The Attorney General, who has a responsibility to enforce charitable purpose trusts, opposed the application.

Justice Edelmann, in West Vancouver (District), v. British Columbia (Attorney General), declined to apply the scheme-making power to this trust. He found that Ms. Brissenden’s specific intention was to preserve the specific property Ms. Brissenden left to the District rather than a broader purpose of contributing to public parks. The District’s proposal would alter the purpose of the trust. He wrote:

[54]       The District’s application before me turns on the characterization of the plan and whether the very specific directions from Ms. Brissenden in her will should be considered the object or charitable purpose of the trust, or whether they are merely administrative in nature.

[55]       As set out above, in my view both the will itself as well as the context of its drafting indicate that the purpose of the trust was to preserve the Brissenden Property, with its trees and natural growth if practical, for use by the community as a park. It is clear from the terms of Ms. Brissenden’s will that she felt the Brissenden Property itself, and in particular the mature trees on the Brissenden Property, had an inherent value for the community that warranted protection. The representatives of the District around the time of the gift appear to have explicitly agreed with that assessment. The proposed plan would be contrary to this direction from Ms. Brissenden, as a significant portion of the trees and natural growth would be removed for development, and the proposed “Brissenden Waterfront Park” would appear to have neither mature trees nor substantial natural growth. I do not find that the direction to preserve the trees and natural growth is a mere administrative matter, and in my view, it is much more appropriately characterized as part of the charitable purpose of the trust.

Justice Edelmann then considered whether he should vary the trust under section 184 of the Community Charter. He found that the legislation was intended to modify the common law and “allow greater flexibility in varying trusts for which the municipality is the trustee.” The wording of the legislation implies that there must also be a change in circumstances since the trust came into effect.

The legislation balances the intention of the settlor or will-maker on the one hand, and the best interests of the municipality. Justice Edelmann wrote:

[99]       I agree with the District’s submission that the clause read in context implies a conflict between the intention of the settlor and the best interests of the municipality. There are at least two indications of this. First, if the variation independently furthered the “intention of the settlor”, there would not appear to be any impediment to its implementation by the municipality as trustee under existing trust mechanisms. Secondly, an application can come before the court only in circumstances where the municipality is of the opinion there is a conflict between the “terms or trusts” and the best interests of the municipality.

[100]    The question of whether the variation is one “the court considers will better further both” the intention of the settlor and the best interests of the municipality would therefore indicate an assessment of both elements together rather than independently. Ultimately, this Court must consider the impact of the proposed variation for both the intention of the settlor and the interests of the municipality. 

Mr. Justice Edelmann held that it was appropriate to vary the terms of the trust to allow the District to sell part of the property and use the proceeds to purchase the waterfront property for parkland. Although the plan did not reflect Ms. Brissenden’s specific intention for the property to become a park, her “intentions can be framed more broadly in terms of development of park space in which residents of the District will have access to more natural environment.” The plan was consistent with her broader charitable purpose.

He also agreed that the plan was in the best interests of the District.

[112]    A substantial amount of documentation was placed before the Court indicating that the current proposal was developed following extensive consideration and consultation by the District. There is no dispute that the waterfront parks surrounding the Argyle properties are regularly used by many thousands of residents of the District. The parks in question are a destination for visitors from the surrounding region and beyond. As noted earlier in these reasons, I accept that the proposed plan takes into consideration the multiple factors that converge in managing a park system for a large urban community. It is a well-documented plan that has been subject to extensive study and consultation, taking into consideration the other park space available to residents in the various parts of the District. I accept that the proposed plan is in the best interests of the District and its residents.

Circumstances had changed since Ms. Brissenden and her husband Pearly Brissenden (who died before her) had discussed leaving the property to the District. Justice Edelmann noted:

[117]    I accept that there have been relevant changes in the circumstances since the time when the District had discussions with the Brissendens about donating their property. In addition to the substantial increase in the cost of acquiring waterfront property, which has limited the ability of the District to pursue the Argyle Acquisition Policy, there have also been significant changes in the population of the District that would inevitably impact the usage of the park system. It is in the context of the current circumstances that the District is of the opinion that strict adherence to the terms of the trust are no longer in its best interest.

Justice Edelmann was alive to the risk that allowing trusts to be varied could discourage gifts of property to municipalities. He noted a distinction between a chilling effect for a specific municipality if it does not abide by the terms of trusts set out by those gifting property to it, and a broader chilling effect if the court allows the trusts to be varied too readily. He wrote:

[120]    In my view there is an important distinction to be made between the broader chilling effects of a low threshold for s. 184(3) variation, such that it would discourage charitable gifts to any municipality in trust, and the chilling effect in relation to the specific municipality before the court. In my view, the petitioning municipality is in a position to consider the chilling effect of the variation it is seeking on the future gifts it might receive in trust, and deference should be afforded to that assessment.

[121]    With regard to the broader chilling effect, there is presumably some risk inherent in varying the terms of a trust in a manner that deviates from settled law such that potential donors may consider the terms of their gifts less secure. However, if the legislature’s intention to expand the scope of possible variations is to be given effect, that inherent risk cannot be an impediment to any variation outside of existing trust law principles. The court should seek to strike an appropriate balance in demonstrating respect for the terms and trusts established by the settlor in the context of an expanded scope for variation.  

Enforcing a Judgment Against a Beneficiary of a Trust Against Lands Held in the Trust

 

Can a judgment against a beneficiary of a trust be registered and enforced against land held in the trust? As illustrated by the decision in Clarke v. Braich, 2021 BCSC 121, in British Columbia the answer depends on the nature of the beneficiary’s interest in the trust. If the beneficiary does not yet have the right to the property held in trust, then a judgment may not be registered against the land.

Kenny Braich is both a trustee and beneficiary of a trust that had been settled by his mother, Surjeet Singh. The terms of the trust are that during Ms. Singh’s lifetime, all of the income was payable to her, and no one else was entitled to any of the capital until her death. This is a popular estate-planning tool, often referred to as an “alter-ego trust.” The trust assets, which included four parcels of land (the "Trust Lands"), are to be distributed in accordance with a deed of appointment that she signed. The deed of appointment provides for a “Final Distribution Date,” which was the date of her death, and a “Division Date,” three years later. During the period between the Final Division Date and the Distribution Date, the trustees have the power to distribute income from the trust property to the capital beneficiaries. The trustees and the capital beneficiaries are Kenny Braich and his brother, Bobby Braich. The deed of appointment provides that on the Division Date, the trust property will be divided equally between the Braich brothers, but if either of them dies before that date, his share will go to his children, or if he does not have any children, to his brother.

Ms. Singh died on July 11, 2019. Accordingly, that date was the Final Distribution Date, and the Division Date will be July 11, 2022.

Scott Clarke obtained a judgment against Kenny Braich and registered the judgment against the Trust Lands. Registering a judgment against real estate is a useful way of enforcing a judgment. The judgment takes priority over future registrations such as transfers and mortgages, and the creditor may also apply to court to have the property sold to satisfy the judgment. Kenny Braich brought an application to court to discharge the registration from the title to the Trust Lands.

Madam Justice Baker granted Mr. Braich’s application to discharge the registration. Although Kenny Braich is a beneficiary of the trust, he does not have a beneficial interest in the trust property, specifically the Trust Lands. This distinction is important. A beneficiary of a trust may have a personal claim against trustees if they don’t comply with their duties as trustees, but the beneficiary does not necessarily have a claim to the property held in trust. A personal claim against trustees is referred to as a claim “in personam.”

The reason Kenny Braich does not have a beneficial interest in the Trust Lands is that if he dies before the Division Date, the trust property that he would receive if he were then alive, will go to other beneficiaries, that is his children or his brother. It is only on the Division Date that we will know for sure if he will receive the Trust Lands, and until then, he is only entitled to receive income.

His creditors can have no greater rights to the Trust Lands than he.

Madam Justice Baker wrote at paragraphs 50 and 51:

[50]         Kenny Braich is in no different position than the residual legatee in the case of Hollebone [v. Paterson, (1982), 42 B.C.L.R. 132].  Until the Division Date, his interest in the Trust is strictly in personam. He has no rights against the Trust Lands before the Division Date, and neither do his creditors.

[51]         As such, I do not agree with Mr. Clarke when he argues he is entitled to register his judgment against the Trust Lands pursuant to COEA [Court Order Enforcement Act] s . 86.  Until the Division Date, Kenny Braich does not have a beneficial interest in the Trust property, which includes the Trust Lands, against which Mr. Clarke is entitled to register his judgment.

Madam Justice Baker ordered the registration discharged. If Mr. Clarke wishes to enforce the judgment against the Trust Lands, he will have to wait until July 11, 2022.

 

Pirani v. Pirani

[The Supreme Court of British Columbia decision discussed below has been overturned by the Court of Appeal, reported at 2022 BCCA 65.]

In a family trust, the trustees may be given the discretion to determine if and when to make payments to beneficiaries. The trustees may be given the power to decide to distribute the trust assets to any one or more of the beneficiaries, to the exclusion of others. Often the discretion is set out in very broad terms, such as “absolute and unfettered discretion.” In most cases, when trustees are given such powers, courts will not interfere with their decisions. However, the powers of trustees are not unlimited. They have a duty of loyalty to the beneficiaries, and in some cases the court may interfere with the trustees’ decisions if not made in good faith or in a conflict of interest. This is illustrated by the recent decision of the Supreme Court of British Columbia in Pirani v. Pirani, 2020 BCSC 974.

During the reign of Ida Amin, four brothers immigrated to Canada. There names were Mohammed Aly Pirani, Madatali Pirani, Pyarali Pirani and Haider Pirani. Only Haider Pirani is still alive. The Pirani brothers established a successful business through family owned companies owning and operating hotels in Canada and in the United States. The two main companies were Pirani Enterprises and Piramco Investments Ltd. In 1993, they arranged an estate freeze of their companies. An estate freeze involves exchanging shares that increase in value with the company for other shares that have a fixed value. New shares are then issued for a nominal amount of money. These new shares are initially worth only the nominal value, but if the company grows, the new shares will become worth more. Often the new shares are either distributed to other family members or held in a family trust, often for the next generations. This is what the four Pirani brothers did.

Each brother had a holding company that held the new growth shares in two family companies. The shares in each holding company were held in four separate family trusts, one set up for the children and grandchildren of each brother.

One of the trusts was created by Mohammed Aly Pirani. In the decision, this trust is referred to as the “MAP Trust.” Mr. Mohammed Pirani was one of the initial trustees of this trust, together with his wife, and his brother Haider Pirani. After Mohammed Pirani’s death, his nephew Mustaq Pirani became a trustee. Mohammed Pirani’s wife also died, but no other trustee was appointed. This trust held shares in a holding company 438702 B.C. Ltd. (“702”) The beneficiaries of the trust were his children Mehboob Pirani (referred to in the decision as Meb), Fareed Pirani, and Arshad Pirani, as well as his grandchildren, Meb’s son Imran Pirani, and Fareed’s daughters Sheliza Pirani and Zaida Pirani. You may notice that the trustees are not beneficiaries.

One of the other trusts is referred to as the Madatali Trust which held shares in another holding company, 438703 (“703”). The trustees were initially Madatali Pirani, Haider Pirani and Meb Pirani. When Madatali died, no new trustee was appointed. The beneficiaries of this trust were Madatali Pirani’s three children, Mustaq Pirani, Bashir Pirani and Najma. You will notice again that the trustees are not beneficiaries. You may also notice that Meb Pirani is a beneficiary of MAP Trust, and a trustee of the Madatali Trust, while Mustaq Pirani is a trustee of the MAP Trust and a beneficiary of the Madatali Trust.

Although the terms of the trusts provided for a termination after 80 years, in each case the trust deed allowed the trustees to terminate the trusts earlier if they considered it advisable to preserve the capital of the trusts because of taxation. Under the Income Tax Act, Canada, the trusts would be subject to a deemed disposition of the trusts assets 21 years after the trust was settled, which would have resulted in significant taxes on the shares of the holding companies. But if the trusts were rolled out of the trusts to the beneficiaries before the 21^st anniversary, the tax would be avoided (or really deferred until the beneficiaries sold the shares or died.

The trustees of each of each of the four trusts, including the MAP Trust and the Madatali Trust decided to wind-up the trusts by distributing the shares before the 21^st anniversary. 

In winding-up the MAP Trust, the trustees, Haider and Mustaq as the trustees decided to give Meb voting control over the holding company 702, and 45% of the equity, while giving Fareed and Arshad 20% of the equity each, and Meb’s son, Imran, 15% of the equity. There was a twist in the plan. The trustees decided to do another estate freeze, essentially freezing the value of the shares distributed to the beneficiaries, and creating new growth shares, all of which were distributed to Meb.  The effect was that Meb would have voting control over 702 and all of the future growth in value. Before implementing the plan, the trustees removed Fareed and Arshad as directors of 702. Directors’ resolutions would be required to create new shares and implement the estate freeze.

The trustees of the other trusts followed a similar plan in respect of the shares of the holding companies held in each trust. In the case of the Madatali Trust, the trustees gave Mustaq the voting control and growth shares. In each case, growth shares were given to those beneficiaries most active in the businesses.

To implement an estate freeze it is necessary to value the company shares. The value of the new freeze shares issued in exchange for the old growth shares needs to be determined.  An appraisal firm, Duff & Phelps were hired to appraise the shares. However, the valuation was based on the values of various real estate holdings owned by Pirani Enterprises and Piramco Investments Ltd. These valuations of real estate were not based on professional appraisals, but were estimates made by Mustaq Pirani, which Madam Justice Sharma found were unreliable, and likely too low. The effect of a low valuation would be to undervalue the freeze shares, with the effect that the new growth shares would be worth more than a nominal value at the time of the freeze.

Fareed Pirani, Arshad Pirani, Sheliza Pirani and Zaida Pirani, all beneficiaries of the MAP Trust sued Haider Pirani, Mustaq Pirani, who were the trustees, Meb Pirani and Imran Pirani, who were beneficiaries, and the holding company 702. They alleged the following:

a)    The MAP Trustees committed breach of trust and breach of fiduciary duty, and breached the applicable standard of care. The breaches arose from the MAP Trustees’ acting with mala fides, for an improper purpose while in a conflict of interest.

b)    The Defendants are liable for conspiracy, knowing assistance and knowing receipt.

c)     The MAP Trustees colluded with Meb to deliberately injure the plaintiffs. They acted in concert to deprive the plaintiffs of their entitlement to a share of the Family Business in a manner that was deliberate, high-handed and self-interested causing the plaintiffs to suffer loss and damage.

d)    702 and Meb are liable for oppression and breach of fiduciary duty because of their removal of Fareed and Arshad as directors and the creation of the class D shares.

I am going to focus on the allegations that the MAP Trustees committed breaches of their fiduciary duties, or in other words, their duties of loyalty to the beneficiaries, and that Meb knowingly assisted in the breach of fiduciary duties. 

The defendants denied the allegations. The claims were advanced by beneficiaries of the MAP Trust, and the defendants focused their defence on the terms of the trust, which as noted gave the trustees the discretion to wind-up the trust, and gave them a broad discretion on how to distribute the shares. The trustees of the MAP Trust, Haider and Mustaq were not beneficiaries of that trust, and they argued that they had no conflict of interest.

However, Madam Justice Sharma took a broader approach, and considered the overlapping roles of the trustees and directors of the holding companies. The trustees of the four trusts addressed the winding-up of the trusts before the 21- year deemed disposition in concert. They went further than distributing the shares by implementing new estate-freezes and determined the direction of the family business, without properly considering the interests of the other beneficiaries.

She wrote at paragraphs 281, 284 and 285:

[281]     It is important to analyze their conduct in context. It is materially significant that despite the existence of separate trusts and Numbered Companies, the Defendants created and implemented a plan that dealt with four trusts together. They chose to act collectively to address the 21 Year Rule.

[282]     The trustees decided to implement an estate freeze for the purpose of differentiating the type of shares they wanted to bestow amongst the beneficiaries of each trust. Although I make no finding on this, the quality and independence of a valuation of trust assets may have carried less significance if the trustees knew they would be equally dividing all trust assets. However, that was not the case. I add that Meb and Mustaq acknowledged that obtaining a fair and independent valuation of trust assets was vital to the process of winding up the trusts.

[283]     By no later than May 2013, the trustees of each trust had decided what percentage of the frozen value would be distributed to which beneficiaries. They had also decided upon whom they would confer the control and all future growth of each of the Numbered Companies: for 702 that person was Meb, and for 703 that person was Mustaq.

[284]     In my view, one cannot separate out the Defendants’ decision (as directors in the Family Business) to restructure the Numbered Companies, from their distribution decisions as trustees, which conferred all future growth in each company to only specific pre-determined beneficiaries.

[285]     To the extent the Defendants assert their decisions as trustees was somehow isolated from their decisions about the corporate reorganization, I do not find the evidence supports that conclusion. Specifically, Meb’s insistence that he had “no involvement” in the MAP Trustees’ decision to allocate to him all the future growth in 702 rings hollow on the facts of this case. The Defendants collectively made decisions about the running and future operations of the Family Business.

The Court found that the trustees placed themselves in a conflict of interest and breached their duties of loyalty to the beneficiaries, by failing to act in good faith. They did not consult with other beneficiaries, despite advice from one of their trust lawyers to do so. As set out in the reasons for judgment:

[194]     The Defendants received advice about options to address the 21 Year Rule, but also how to go about choosing one of the options. They were strongly advised to inform and seek the view of all adult beneficiaries before decisions were finalized. Why? Because legally their duty as trustees required them to approach the complex task of winding up of the trust and make decisions only in the best interests of all beneficiaries. I note they were also advised to do this to maintain family harmony (see above, para. 180), but this does not detract from the legal foundation for this advice.

[195]     Given the overlapping roles within the Family Business and family trusts, they needed to do something to address the existing conflicts. They were obliged to ensure their judgment was not swayed by self interest, or indeed anything not consistent with the best interests of all beneficiaries. They did not follow any of the advice they received from Mr. Fish at the outset. It is difficult to conclude how they discharged their fiduciary obligations without following that sound legal advice.

Madam Justice Sharma was critical of the manner in which the shares were valued for the purpose of the new estate freezes. She wrote:

[295]     Thus, Meb and Mustaq had a personal financial interest that favoured an underestimation of trust assets. That conflict was not imposed upon them. Instead, it was created by the Defendants’ joint decision to confer on Meb and Mustaq all future growth in their family’s Numbered Company. The vehicle of that distribution was the distribution of trust funds, but the decision to give themselves all future growth was made at the beginning of the process. Indeed, the decision not to equally share future growth amongst all the beneficiaries was why they had to create new classes of shares in the Numbered Companies before the distribution of trust funds.

[296]     The plaintiffs adduced evidence that seriously questioned the accuracy of Mustaq’s estimates. That evidence strongly suggests that for the SeaTac Property and the properties in North Vancouver, the value he gave to Duff & Phelps was grossly low. The Defendants failed to counter that evidence.

[297]     More troubling, on that very, issue both Meb and Mustaq mislead the Court (see above, paras. 77-88). I conclude, from that lack of evidence and that testimony, that it is more probable than not that both Meb and Mustaq believed the figures supplied by Mustaq were inaccurately low. Given their roles as directors they knew the impact of the corporate restructure. Therefore, they understood how an undervaluation would benefit them as compared to beneficiaries who were to receive only a portion of the trusts’ frozen value. They did nothing about that. That conduct is dishonest, not in good faith and a blatant breach of their fiduciary duties.

She concluded with respect to the breach of fiduciary duties at paragraph 346:

a)    I am satisfied that the plaintiffs established Haider and Mustaq were in a prima facie conflict as the MAP Trustees because of their overlapping roles. They failed to persuade me that they conducted themselves in good faith and with honesty in the face of that conflict. I conclude that Mustaq’s duty of loyalty was impaired by his self-interest. I conclude Haider and Mustaq breached their fiduciary duties to the plaintiffs. 

b)    I am persuaded that the evidence establish that Meb knowingly assisted Mustaq and Haider in their breach of their fiduciary duties. I also conclude his conduct was not in good faith because he was guided by his self-interest.

c)     With regard to the process of winding up of the family trusts and the steps taken to restructure the Numbered Companies, the Defendants acted collectively. I conclude they all were in a prima facie conflict from the outset of the process. Mustaq and Meb failed to persuade me that in light of that, they adhered to their duty of loyalty to all beneficiaries. I conclude their actions and decisions were influenced by their self-interest and their conduct was not in good faith throughout that process.  

She ordered that Meb and Mustaq give up what they gained by breaching their duties, by order the disgorgement of some of the shares that they received, as well as disgorgement of some of the shares Imran received from his father.

Williamson v. Williamson

In British Columbia, a separated spouse may make a claim to his spouse’s interest in a trust. In some cases, the claim will be successful, but in others, property held in trust may be insulated from family law claims. The law is quite nuanced. This is illustrated by the case of Williamson v.Williamson, 2020 BCSC 108.

Diane Williamson was a trustee and a beneficiary of a family trust. The property held in trust consisted of an interest in a farm business that had been in her family for generations. The other beneficiaries were her spouse, Robert Williamson and their children. The trust was a discretionary trust in which the trustee had the power to decide if and when to make distributions to any one or more of the beneficiaries. No beneficiary had any entitlement to the property held in trust unless and until the trustee decided to make a distribution to that beneficiary.

On the breakdown of the marriage, Mr. Williamson pursued a family law claim against Ms. Williamson, including a claim to a division of her interest in the trust property.

Ms. Williamson’s father, Lorne Jack was a co-trustee and a “protector” of the trust. As the protector, he had certain powers including the power to remove and replace a trustee and to add beneficiaries.

   

The lawyer for the trustees gave written notice that the Ms. Williamson would be removed as trustee and her mother appointed as a beneficiary. Mr. Jack intended to make a distribution before the 21^st anniversary of the trust and Ms. Williamson would not likely receive any of the trust property. The significance of the distribution before the 21^st anniversary is that if the property were still held in trust, there would be a significant amount of tax payable because there would have been a deemed disposition of the property under the Income Tax Act, Canada.

Mr. Williamson asked the court to grant an order essentially restraining Mr. Jack from distributing the property held in trust. Mr. Williamson wished to preserve the property in trust in order to pursue is family law claim to an interest in the trust property.

“Family property,” divisible under the Family Law Act may include a beneficial interest in property held in trust, including in some circumstances property held in a discretionary trust. Section 84 (3) provides that

“…family property includes that part of trust property contributed by a spouse to a trust in which

(a)        the spouse is a beneficiary, and has a vested interest in that part of the trust property that is not subject to divestment,

(b)        the spouse has a power to transfer to himself or herself that part of the trust property, or

(c)        the spouse has a power to terminate the trust and, on termination, that part of the trust property reverts to the spouse.”

If one spouse contributes property to a discretionary trust and retains the ability to distribute the property to herself, then the other spouse may have an interest in the property on the breakdown of the spousal relationship (unless excluded on some other basis).

On the other hand, section 85 (1) excludes interest in property held in a discretionary trust in certain circumstances:

Excluded Property

85.(1) The following is excluded from family property:
...
(f)         a spouse’s beneficial interest in property held in a discretionary trust

(i)         to which the spouse did not contribute, and
(ii)        that is settled by a person other than the spouse;

In Williamson, Mr. Justice Punnett found that the trust property was excluded property. Ms. Williamson had not contributed the farm property, which had been in her family for generations.

Mr. Jack, who said he wanted to preserve the farm operation as a family business, acted consistently with his powers under the terms of the trust agreement.

Mr. Justice Punnett dismissed the application for restraining orders, with the result that Mr. Jack was entitled to add his wife as a beneficiary and distribute all of the trust property to the exclusion of Ms. Williamson.

Volovsek v. Donaldson

The provisions of the Wills, Estates and Succession Act (the “WESA”) allowing a spouse or child to apply to vary a will if the will-maker has not made adequate provision for the spouse or child may be avoided by the will maker settling a trust during his lifetime, and holding significant assets in the trust. The relevant sections in Part 4, Division 6 of the WESA do not apply to assets held in trust. Claims that transfers of assets into a trust to avoid a wills variation claim offend the Fraudulent Conveyance Act have not been successful (although I would argue that in some circumstances it may be open to successfully challenge a trust on the basis of the Fraudulent Conveyance Act, but that’s for another post).

In a recent decision, Volovsek v. Donaldson, 2019 BCSC 1820, the plaintiff’s lawyers came up with a creative argument in an unsuccessful attempt to challenge a trust.

Yasmine Volovsek and Fernand Joseph Boisvenu were in a relationship from 1989 until Mr. Boisvenu’s death in March 2015. In 2014 he settled a trust, which held most of his assets, and he also made a will. Under the will and trust, he provided Ms. Volovsek about $1 million. The total value of his assets, including those he held in trust, was about $8 million. The other beneficiaries were relatives and a friend.

Ms. Volovsek alleged that they were in a marriage-like relationship. If so, she would be able to apply to vary his will, and if they had separated during his lifetime, she could have made a claim to a share of the assets pursuant to the Family Law Act.

She alleged that she was financially dependant on him, and he owed her a fiduciary duty, or in other words a high duty of loyalty, which included a duty to tell her of his estate plan so she could take steps to protect her interest including separating from him and making a family law claim. Mr. Justice Myers set out her argument at paragraph 144:

[144]   Ms. Volovsek argues that the fiduciary duties were owed because (quoting from her written argument):

a)         they were spouses; b) he encouraged and asked Ms. Volovsek to be completely financially dependent on him from the beginning of the relationship and she gave up education and job opportunities to be self-sufficient in reliance on these promises; c) he promised to her multiple times that she would be well provided for from his estate ("there's $5 million in the bank and no Japanese, do you want to see my will?"); and (d) based upon these statements and their relationship, Ms. Volovsek stayed and took care of Mr. Boisvenu when he was sick instead of separating from him upon the [Ms. F.] affair to crystallize her family property claim.

The reference to “no Japanese” was a reference to Ms. F. with whom he also had a relationship.

Although Mr. Justice Myers found that Ms. Volovsek and Mr. Boisvenu did not have a marriage-like relationship, he considered the argument that Mr. Boisvenu had a fiduciary duty to Ms. Volovsek on the assumption that they were in a marriage-like relationship.

There are certain relationships which the courts have recognized as fiduciary relationships such as a trustee-beneficiary, lawyer-client, director-corporation. He rejected the argument that a spousal relationship should fall into a similar category when one spouse is financially dependant on the other. Mr. Justice Myers wrote:

[147]   In my view, the proposed category is not appropriate.  First, it is not simply a type of relationship (as, for example, solicitor-client); rather, it adds an additional quality to the relationship, i.e. financial dependence.

[148]   Moreover, but for the qualification of the relationship having to involve financial dependence, it would engage every spousal relationship.  Yet as the courts have recognised, and as discussed in Mother 1, there is no set type of spousal relationship.  Although, Ms. Volovsek's counsel submitted that, "If it looks like a duck, walks like a duck and quacks like a duck, then it is a duck", there is no defined "duck".

In cases that do not fall within a category recognized by the courts as inherently fiduciary, the courts may still find on the particular facts that one person owed the other fiduciary duties. This is referred to as ad hoc fiduciary duties. Mr. Justice Myers summarized the law:

[157]   In Elder Advocates of Alberta Society v. Alberta, 2011 SCC 24 and PIPSC, the court set out the requirements to establish an ad hoc fiduciary duty.  A plaintiff must show that:

a)              the alleged fiduciary has expressly or impliedly undertaken to act in the best interest of the plaintiff;

b)              the alleged fiduciary has scope for the exercise of some discretion or power;

c)               the alleged fiduciary can unilaterally exercise that power or discretion so as to affect the plaintiff's legal or practical interests;

d)              the plaintiff is peculiarly vulnerable to or at the mercy of the alleged fiduciary holding.

He found on that facts that there Mr. Boisvenu did not undertake to act in Ms. Volovsek’s best interest. Statements made by him to her that he would leave assets to her were not ones that she could reasonably rely on. One statement was a vague statement that she was in his will, and the other two indicating that she would get most of his wealth were made when he in a medical emergency. Mr. Justice Myers did not accept her evidence that Mr. Boisvenu asked her to quite work.

Mr. Boisvenu kept his assets separate, and maintained an independent lifestyle. Mr. Justice Myers distinguished the facts from circumstances in which a couple build a business together, or one spouse stays at home to raise the children.

Might the argument that there is a fiduciary duty owed by one spouse to another be successful in a different case? Perhaps, although the types of circumstances in which I think it might be successful could also give rise to other claims such as unjust enrichment or proprietary estoppel.

Minor Beneficiaries

Yes, I know the title is ambiguous. I don’t mean beneficiaries who receive a small share of an estate, but rather those who are under the age of majority in British Columbia, which is a person under the age of 19. If a minor is entitled to an inheritance and no trustee has been appointed for her, those funds must be paid to the Public Guardian and Trustee of British Columbia. This happens most frequently when a minor’s parent dies without a will. It may also apply in the case where a minor is left an inheritance by will, but the will does not have a clause appointing a trustee to hold the inheritance for the minor.

Section 153 (1) of the Wills, Estates and Succession Act says:

153 (1)Subject to subsections (2) and (3), if

(a)a minor is a beneficiary or an intestate successor, and

(b)there is no trustee or no trust created for the minor's interest in the estate,

the personal representative, on distribution of the estate, must pay or transfer the minor's interest in the estate to the Public Guardian and Trustee in trust for the minor.

In a recent decision, British Columbia (Public Guardian andTrustee) v. Child 3, 2019 BCCA 171, the Court of Appeal held that it was an error for a Supreme Court of British Columbia judge to order an administrator of the estate of a person who died without a will to order interim distributions directly to a minor’s parent to reimburse her for the child’s expenses and for funds she borrowed to pay expenses. Madam Justice Fisher wrote:

[8]             The language of s. 153(1) is unambiguous. It requires the administrators to pay any distribution of Mr. Yuan’s estate to the PGT on behalf of the minor beneficiaries, as there is no trustee in place.

[9]             There is good reason for this requirement. The PGT is the only trustee for these minor beneficiaries. As the PGT submitted before the chambers judge, it would not be truly acting as trustee if the distribution went directly to Mother 3. For example, in respect of past expenses, the PGT submitted that Mother 3 would be entitled to reimbursement for funds she used to pay Child 3’s expenses but not for funds she borrowed from others; in that case, the PGT would ensure that funds legitimately borrowed for Child 3’s expenses would be repaid to the lenders directly. Given the state of the materials in the record, it is difficult to understand the judge’s outright rejection of the PGT’s submissions.

[10]         It is also difficult to understand the judge’s failure to put his mind to s. 153 of WESA. Ordering specific funds to be paid to Mother 3 for specified purposes is insufficient, in my view, as it is the trustee’s duty to act in the best interests of Child 3 to ensure that the distributions are appropriate for his needs. I agree with the PGT’s submission that the judge’s order created a situation in which the interim distribution of Child 3’s interest was made without an assurance that the funds would be used in a manner consistent with the overall value of his interest in the estate (which is currently uncertain) or his projected needs.

Professionally drafted wills usually contain an “infant’s clause,” which provides that the executor or hold funds in trust for any minor beneficiaries. Alternatively, a will-make may appoint other trustees for minor beneficiaries in the will. Section 153(1) does not apply if a trustee is appointed in the will.

The court may also appoint a trustee for a minor beneficiary. Section 153 (3) provides:

(3) Subsection (1) does not apply if, before distribution of the assets of the estate, the court, on application and with notice to the Public Guardian and Trustee, appoints a trustee to hold and administer the minor's interest in the estate until the minor reaches 19 years of age.

The Family Law Act also has provisions for the appointment of a trustee for minors, which are not limited to inheritance, but may apply anytime a minor is entitled to property. This is set out in section 179:

179 (1) Subject to subsection (2), the Supreme Court on application may appoint one or more persons as trustees over

(a)particular property to which the child is entitled, including any property derived from the property or from the disposition of the property, or

(b)all property to which the child is entitled at the time the order is made and to which the child becomes entitled while the order is in effect, except property

(i)identified in the order, or
(ii)over which a trustee already has authority.

(2)The Supreme Court may appoint a trustee only if satisfied that it is in the best interests of the child to do so, on consideration of all of the following:

(a)the apparent ability of the proposed trustee to administer the property;

(b)the merits of the proposed trustee's plan for administering the property;

(c)the views of the child, unless it would be inappropriate to consider them;

(d)the personal relationship between the proposed trustee and the child;

(e)the wishes of the child's guardians;

(f)the written comments of the Public Guardian and Trustee;

(g)the potential benefits and risks of appointing the proposed trustee to administer the property compared to other available options for administering the property;

(h)if the Supreme Court is considering making an order under subsection (1) (b), that the interests of the child are likely better served by an order made under that subsection than by an order made under subsection (1) (a).

(3) An order made under this section to appoint a trustee may do one or more of the following:

(a)require the trustee to deliver the trustee's accounts at specified intervals for the examination and approval of the court;

(b)limit the duration of the trusteeship;

(c)specify or limit the types of investment in which the trustee may invest the property;

(d)provide for compensation of the trustee including, without limitation, setting rates and specifying when the compensation may be taken;

(e)require the trustee to give security in any form the court directs;

(f)make any other order the court considers appropriate.

(4)Except as provided for in an order made under this section, the Trustee Act applies to the trustee and the trust.

I should note also that a small amount, currently up to $10,000, may be paid to a child’s guardian with parental responsibilities without a court order. This is set out in section 178 of the Family Law Act.