Dissection of a Family Trust

Transcription

1 Dissection of a Family Trust Timothy G. Youdan Partner, Davies Ward Phillips & Vineberg LLP Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 1

2 21 YEARS RULE AND HOW TO DEAL WITH IT Do Nothing Has advantage that enables trust to continue according to its terms so that objectives envisaged for the trust can continue to be achieved. Where no significant gains at deemed disposition date, easy decision to make. Where trust property consists of portfolio of marketable securities, doing nothing may be the right decision even if significant gains. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 2

3 Distribution to Beneficiaries ITA s. 107(2) Where Non-Resident Beneficiaries ITA s. 107(5) and s.107(2.1) Distribution to Canadian Corporation Trust may include corporation with shares owned by individual beneficiaries as beneficiary. Consider whether s.107(2) applies where corporation not described as beneficiary, trust includes power to distribute "for the benefit of" one or more individual beneficiaries, and distribution is made to corporation shareholders of which are such individuals. Is the corporation "a taxpayer who was a beneficiary under the trust" for purposes of s.107(2)? Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 3

4 Addition of Beneficiaries Pursuant to power in trust instrument. Generally will not cause new trust to be created. But CRA positions that may be disposition of existing beneficiaries' interest. But criticism of CRA positions. See Youdan (2005) 24 ETPJ 141 at ; Waters (2012) 31 ETPJ 173 at ; Roth, Step Canada 15 th National Conference (June 11, 2013), "Adding and Deleting a Beneficiary to a Trust"; Roth and Goldberg, LSUC 17 th Annual Estates and Trusts Summit (Nov. 4, 2014) at Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 4

5 Where trust instrument includes class of corporate beneficiaries, CRA position that incorporation of new corporate beneficiary will not give rise to disposition by existing beneficiaries: Eg. CRA document no (January 1, 1998). Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 5

6 Assignment of Beneficiary's Interest Consider assignment of non-resident beneficiary's interest to a Canadian corporation. But discretionary interest ordinarily cannot be assigned, See Hancock & Youll (2012) 31 ETPJ 156. Consider whether discretionary interest may be "crystallized" by trustee decision and then assigned. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 6

7 Subsections 75(2) and 107(4.1) These provisions may preclude rollover distribution under s.107(2). See Roth & Youdan, "Subsection 75(2): Is CRA's Interpretation Appropriate" 2010 Canadian Tax Foundation Annual Conference. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 7

8 Vesting Indefeasibly Certain trusts are excluded from definition of trust for purposes of application of 21-year rule by 108(1) "trust" (a) (g). Such excluded trusts include: "(g) a trust all interests in which, at that time, have vested indefeasibly, other than... (iv) a trust that is at that time resident in Canada where the total fair market value at that time of all interests in the trust held at that time by beneficiaries under the trust who at that time are non-resident is more than 20% of the total fair market value at that time of all interests in the trust held at that time by beneficiaries under the trust, Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 8

9 (v) a trust under the terms of which, at that time, all or part of a person's interest in the trust is to be terminated with reference to a period of time (including a period of time determined with reference to the person's death), otherwise than as a consequence of terms of the trust under which an interest in the trust is to be terminated as a consequence of a distribution to the person (or the person's estate) of property of the trust if the fair market value of the property to be distributed is required to be commensurate with the fair market value of that interest immediately before the distribution,..." Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 9

10 ITA does not define meaning of vested indefeasibly. The meaning was considered in The Queen v Boger Estate, 91 DTC 5506, aff'd 93 DTC 5276 (FCA) in context of ITA s.70(6). Based on this case, interest will be vested indefeasibly where: (a) beneficiary or beneficiaries entitled to the interest are ascertained; (b) the interests are not subject to any condition precedent; and (c) the interests are not subject to termination upon occurrence of any future event. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 10

11 Interests may be indefeasibly vested even if trustees have discretion as to distribution. Such discretion may be indefeasibly vested even if trustees have discretion as to distribution. Such discretion may affect the timing of enjoyment of the property but that does not affect position that no condition attached to vesting of interest. See CRA document no CRA has stated that it will consider external agreements as well as the instrument creating the interest in question: Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 11

12 "the determination of whether or not property has vested indefeasibly in a particular person is a question of fact which can only be made following a review of all the relevant information, including the will and any agreements which may have an impact on the manner in which the person deals with the property...[a]ny limitation or condition subsequently set out in the terms of a shareholders agreement would be considered as 'a condition subsequent or a determinable limitation set out in the grant'." CRA document no (January 25, 1994) However, the reasoning in Boger does not provide any basis for CRA's position that the determination whether an interest has vested indefeasibly can be affected by the terms of a third party agreement. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 12

13 The rules dealing with excluded trusts determine whether the trust is excluded from the 21-year rule at any particular time. Therefore, a trust may be subject to the rule at its inception but then, prior to the applicable deemed disposition date, circumstances may have occurred which cause the trust to be excluded. Such circumstances may include an exercise of discretion by the trustees. Necessary to review terms of trust to determine whether power to make all interests vested indefeasibly. The typical power in a discretionary trust to "apply for the benefit" of individual beneficiaries should be sufficient. Double tax issues may arise but should be possible to manage. Truster (2009) 28 ETPJ 188 Rule in Saunders v Vautier will ordinarily apply to indefeasibly vested trusts. The Rule effectively abolished in Alberta, Manitoba and Nova Scotia since court approval is required for termination of a trust even when the Rule would otherwise apply. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 13

14 Variation of Trusts Variation of terms of trust under applicable provincial variation of trusts legislation can be considered in order to make changes to facilitate 21 years planning: e.g.: add corporate beneficiaries; Include power to distribute capital; Include power to vest indefeasibly; Include power to allocate "phantom income" Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 14

15 Variation of Trusts Consider whether tax implications to variation: Whether change sufficiently fundamental as to create new trust so that disposition of property from old trust to new trust. Whether changes result in disposition of any beneficiaries' interests. Where rule in Saunders v Vautier applies, variation by agreement of all relevant parties may enable trust to be varied. J. Nitikman (2015) 35 ETPJ 1 D. Waters (2014) 33 ETPJ 78 Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 15

16 Rectification/Rescission Rectification may be available to undo the application of 75(2) and 107(4.1). McPeake v Canada [2012] BCSC 132 Kanji v Attorney General of Canada [2013] ONSC 781 Canada v Brogan [2014] ONSC 6354 In some circumstances, rescission may be the appropriate remedy. Re Pallen Trust [2015] BCCA 222 Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 16

17 FAMILY LAW ISSUES (with focus on Ontario Family Law Act) Definition of Property Wide definition of "property" in s.4(1): Opening general words: "property" means any interest, present or future, vested or contingent, in real or property..." Also expressly stated to include: "(a) property over which a spouse has, alone or in conjunction with another person, a power of appointment exercisable in favour of himself or herself, Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 17

18 (b) property disposed of by a spouse but over which the spouse has, alone or in conjunction with another person, a power to revoke the disposition or a power to consume or dispose of the property, and (c) in the case of a spouse's rights under a pension plan that have vested, the spouse's interest in the plan including contributions made by other persons;". paragraphs (a) and (b) have potentially broad effect. They do not provide that the power in question is deemed to be property; rather they provide, in effect, that the property of the spouse includes the property over which the spouse has the applicable power. See Mudronja v Mudronja [2014] ONSC 6217 Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 18

19 Cf. Grosse v Grosse [2015] SKCA 68 The FLA does not include any express reference to trusts but clearly trust interests are ordinarily included in the general definition of property and paragraphs (a) and (b) may apply to trusts. Although discretionary trusts are often involved in family law matters, still no clear body of caselaw determining how discretionary interests should be treated. May be relevant in determining: deductions for value of property owned on the date of marriage (definition of "net family property" in s.4(1)), value of property owned on the valuation date (definition of "net family property" in s.4(1)), and Value or property owned the valuation date (definition of "net family property" is s.4(1)), and Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 19

20 value of exclusion: "1. Property, other than a matrimonial home, that was acquired by gift as inheritance from a third person after the date of the marriage." and "2. Income from property referred to in paragraph 1, if the donor testator has expressly stated that it is to be excluded from the spouse's net family property." Interest as discretionary beneficiary should normally be considered "property" for purposes of FLA. The property is the right to be considered as a discretionary beneficiary and the right to have the trust duly administered. The fact that such rights are not transferable does not mean that they are not property. Transferability is a common characteristic of property but it is not indispensable. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 20

21 The fact that discretionary interests do not have a market value does not mean that they do not have value for the purposes of the FLA. The value is the value to the holder of the interest. In principle, that value will depend on the likelihood of the discretion being exercised in favour of the particular beneficiary and the value of the property that would be transferred pursuant to such discretion. In some cases, this may be determined quite readily on the basis of past history and other evidence relating to the likelihood of the way in which the discretion would be exercised; in other cases, it will involve a good deal of guess-work. The expert evidence that can appropriately be given is limited and should be restricted to matters truly within the expertise of experts, such as the value of the property owned by the trust and life expectancies of beneficiaries. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 21

22 Cases: Sagl V Sagl (1997) 31 RFL (4th) 405 (Ont Gen Div), supp. reasons 35 RFL (4 th ) 107: Court valued husband's interest on basis of pro rata division among all existing beneficiaries. Le Van and Le Van (2006) 82 or (3d) 1 (Sup Ct), aff'd. (2008)90 OR(3d) 1 (CA). Court adopted a valuation that applied a discount rate equivalent to that applied to minority shareholdings. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 22

23 Howe v Howe [2014] ONSC 2649 Husband's father created a trust in 1991 before the marriage for the benefit of his 6 children. It was wound up shortly after the separation and shares worth $3.2m were distributed to the husband. J.A. Ramsay J. held that the husband's interest was not property for the purposes of the FLA: "For the purposes equalization [sic] of property under the Family Law Act, property means 'any interest, present or future, vested or contingent, in real or personal property'. This is a broad definition of property, but it is not without limits: Lowe v Lowe, [2006] O.J. No 132(CA). The family trust in question was designed to limit the parents' assets for the purposes of tax to amounts earned before 1991 and to allow the business to grow from that date for the benefit of the six children, but still under the control of the parents and their Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 23

24 successors as trustees. It was not designed for any purpose associated with the marriage of the applicant or his siblings. Whatever might happen, the applicant had no legal or practical right to the assets held by the trust until they were distributed, which occurred after the end of the marriage. I conclude that the husband had no present or future vested or contingent interest until after the marriage ended. The value of the trust was not property and should not be included in his net family property." Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 24

25 Tremblay v Tremblay [2016] ONSC 588 The husband and the wife were beneficiaries of a trust created on the occasion of a freeze of the husband's father's company. The husband was one of three trustees, along with his parents and had power to appoint additional trustees. K. Phillips J. held: (a) The position of the beneficiary of a discretionary trust was properly described as a right to be considered but this was characterized as a "mere expectancy". (b) The proprietary character of the husband's interest was stated to turn on the degree to which he, as beneficiary, could control the trustees, and his degree of control was held to be sufficent for "the holdings of the [Trust] to be considered property in the context of section 4 of the Family Law Act." Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 25

26 (c) The interest was to be valued on a "value to owner" basis: "That is, what would the [husband] pay to not lose the interest, discretionary though it is? I find that he would pay a dollar for a dollar and I assign value to the [Trust] commensurate with its full adjusted net book value..." (d) Although the husband's interest came to him by way of gift, it was nonetheless held that its interest was not excluded since the finding that his interest amounted to property "does not equate to a finding of ownership" for the purposes of section 4(3) of the Family Law Act. Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 26

27 Interest in Trust Owning Home FLA s.18: "(1) Every property in which a person has an interest and that is or, if the spouses have separated, was at the time of separation ordinarily occupied by the person and his or her spouse as their family residence is their matrimonial home. (2) The ownership of a share or shares, or of an interest in a share or shares, of a corporation entitling the owner to occupy a housing unit owned by the corporation shall be deemed to be an interest in the unit for the purposes of subsection 18(1)." Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 27

28 Debora v Debora (2006) 83 OR(3d) 81 Cottage owned by wholly-owned corporation of husband was held to be matrimonial home. Spencer v Riesberry [2012] ONCA houses held in trust created by mother of wife. Beneficiaries were mother and the four children. Wife occupied one of the houses as family home with husband. Trustees were mother and two of her children, including the wife. Held that wife did not have interest in matrimonial home within section 18(1). Society of Trust and Estate Practitioners (Canada) 18 th National Conference Page 28