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 of parliament or a legislature. (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 (either expressly or implicitly) provides
otherwise, and subject to legislation if applicable, the law
governing a will generally governs most aspects of a testamentary
trust, but jurisprudence suggests that matters of administration
may be governed by the law of the place of administration.
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.
Iii. Beneficiaries
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 likely require the trustees to
demonstrate why this is necessary. However, 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,
but that does not automatically affect the trustee's liability to
third parties.
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. There is 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.