STEP

Title Research

Canada


3. Trusts in Common-Law Canada

a. Introduction

Although trust law in Canada as case law remains very similar to the law in England and Wales, legislation modifying case law no longer mirrors the approach or contents of trust legislation enacted in England. Trustee or trust acts in Canada are largely intended to extend powers to trustees, or to the court, as in England. Trusts created in, or governed by the law of, one common law province in Canada, would be recognised as valid in other common law jurisdictions in Canada, and the same applies when trusts are created in foreign common law jurisdictions or are governed by the law of such jurisdictions.

b. Most frequently used trusts

Trusts are used not only for personal estate planning in wills and inter vivos dispositions, but for various business and commercial ends. These uses concern:

  • investment, as with employee benefit trusts, mutual funds (unit trusts), and income trusts
  • security, as with syndicated mortgage funds, classic debenture trusts, and neutrally held assets to guarantee obligation performance, and
  • safe holding, as with assets moved for tax or accounting purposes off corporate books, and funds held for distribution further to settlement of class actions.

In common law Canada, non-charitable purpose trusts are created only by private acts. (Ontario, Alberta, British Columbia and the Yukon Territory have authorised such trusts to a limited extent in perpetuities legislation. However, there is no case law confirming that this perpetuity legislation validates the contemporary private purpose trust.)

c. Governing law

Unless the instrument provides otherwise, the law governing the will governs the testamentary trust. Generally, the law of the place where trustee decisions are made (i.e. the situs of the trust) governs inter vivos trusts, and is established when the trust is first settled. In all Canadian jurisdictions, the law of the situs governs, or will ultimately prevail, as to immovable assets in the trust fund. The testator’s or settlor’s choice of governing law will take effect subject only to what is lawful or not contrary to public policy.

Except for Ontario and Quebec, the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985 (Convention) has been ratified by Canada for all provinces and is in force. Ontario retains the case law, while Quebec has codified its own conflict of law rules, which in large part resemble the rules found in the Convention. The case law also continues to be in effect in the Yukon Territory, the Northwest Territories and Nunavut. The Convention applies only between a Canadian jurisdiction (or jurisdictions) and a foreign jurisdiction. Only in British Columbia and New Brunswick does provincial legislation create similar provision for trusts as between Canadian jurisdictions. A choice of law clause is always to be recommended, but particularly where the Convention has not been adopted or does not apply.

d. Creation of a trust

i. Valid constitution

Creation of a trust requires:

  • intention of the settlor to create a trust
  • identification of trust objects, beneficiaries (by name or class) or purposes, and the property interest to be taken by each object, and
  • specification of initial property that is to be subject to the trust.

As to land, provincial statutes usually require writing, but a trust of movables can be created orally. No registration is required of a trust. A trust may be created expressly or impliedly, but resulting trusts and constructive trusts, being remedial, arise by law.

ii. Duration and termination

Case law imposes no maximum duration on trusts, but case law in all Canadian jurisdictions, except Manitoba, requires that all beneficial interests created by the private trust must vest within a given period of time. Perpetuity legislation in each province following this rule permits validity to the trust instrument in several circumstances where the case law previously invalidated the entire instrument. This legislation normally authorises an instrument-chosen period of 80 years. Although a limitation that violates this rule would under the common law be struck out, such limitations can be varied under statutory authority in six Canadian jurisdictions so as to correct the violation. Most Canadian jurisdictions, with the exception of Ontario, have repealed the case law rule preventing the accumulation of income within a trust for more than a stated short period. Manitoba has no perpetuity rule.

In all jurisdictions, the settlor can provide for the time and manner of terminating the trust. Provided all the beneficiaries are ascertained, adult and capacitated, they can together prematurely terminate the trust (other than a pension trust) and recover the trust property (i.e. the rule in Saunders v Vautier). In Alberta and Manitoba, the rule has been modified to require court consent.

Under case law, trust beneficiaries are entitled to inspect the trustees’ up-to-date accounting at all reasonable times, and most Canadian jurisdictions reinforce this right by legislation. An accounting before the court will usually be undertaken before a registrar of the provincial or territorial superior court. Whether beneficiaries may have access to any trust documentation or information lies within the discretion of the court, but traditionally in Canada such access has not been denied to a vested or contingent beneficiary. In circumstances of an unusual nature, where the trustees decline to disclose information or seek an undertaking from the beneficiary not to disclose information provided, the court would require the trustees to demonstrate why this is necessary. Case law in Canada is not clear.

A beneficiary is not liable for a breach of trust by the trustees unless it was approved or condoned by the beneficiary, in which case the beneficiary will have no personal action for the breach, and the beneficiary’s trust property entitlement may be appropriated to meet an unsatisfied claimant’s judgment arising out of the breach. All the provinces except Newfoundland possess legislation empowering the court to consent to the variation or termination of trusts on behalf of persons who cannot consent for themselves. The legislation differs to a limited extent between provinces.

iv. Trustees

Any competent person may act as a trustee, but corporations are prohibited by provincial and territorial legislation from carrying on the business of trustee unless licensed. A corporation without licence can be an express trustee, provided it is not in business as such. The appointment and discharge of trustees is normally provided for by the trust instrument, but all provinces provide statutorily in default for appointment, retirement and removal of trustees. Statutory listing of permitted trustee investments, where the trust instrument does not authorise otherwise is found only in Quebec, where it exists as a provision for those trust creators who wish to adopt it. Modern portfolio investment, or in a few jurisdictions, prudent person investing, is the statutory rule in the absence of express provisions in the trust instrument.

Trustee remuneration is awarded by the courts pursuant to statute in each province. Where the document provides for a level of remuneration, a trustee can appeal to the court if the remuneration is limited to an unrealistic level. The trust instrument may confer fees that are higher than the statutory level.

Trustees are personally liable if they undertake obligations as trustees to third parties, unless the particular contract with the third party excludes personal liability. The third party can make claims against the trust property only if the trust instrument permits that, or the third party is subrogated to the trustee’s position and the trustee has right of indemnification out of the trust property. The instrument may provide that the trustee is to be liable only for dishonesty or acting other than in good faith.

v. Protectors

The settlor of a domestic trust can appoint a beneficiary or third party to appoint or supervise trustees or have other administrative powers, but for tax reasons this is generally not done with a trust of Canadian-sited assets. There is also no Canadian law on the appointment, discharge, powers, duties or liabilities of protectors. The instrument must provide these.

vi. Role of public trustee or guardian

Each Canadian jurisdiction appoints a trustee or guardian to protect the interests of persons resident in the jurisdiction who are not legally competent. Legislation and practice differ as to powers and authorities of the office, but in general any court application involving the interest of an incompetent person must be served on the jurisdiction’s officer. The officer usually acts as a trustee where no other trustee is available.

e. Trust administration

Trust administration is subject to the jurisdiction of the provincial or territorial superior court in the jurisdiction. Trustees are required to pass their accounts periodically before the registrar of that superior court, although the general practice in some provinces is to have beneficiaries waive the requirement. A trustee can apply to the superior court for direction on any issue of law, construction or administration. Otherwise, trustees are free to administer trusts in accordance with the instrument.


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