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ss 74.3: Transfer/ Loan of property to a trust and distribution by trust to beneficiary Attribution of income and capital gains to spouse beneficiary Income (but not capital gains) to non arms length minor, minor niece/nephew beneficiary ss 74.5(7): guarantee ss 56(4.1): Loan to trust Beneficiary 18 or older Purpose test 5
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Anytime shares are transferred to a corporation must consider application of this rule Applies to s.85 transfers Applies to s.86 reorganizations s.84(9) where a shareholder disposes of a share as a result of the redemption, cancellation, acquisition of the shares by the corporation, shareholder is deemed to have disposed of the share to the corporation Therefore, exchange of shares considered to be a transfer for purposes of s. 74.4(2) Transferor is deemed to have received income inclusion Equal to prescribed percentage of outstanding amount of property transferred regardless of whether income earned by designated person Designated person of a transferor Spouse Non arm s length minor Minor niece, nephew Specified shareholder Person who holds at least 10% of the shares of any class of the corporation If specified shareholder is beneficiary of a trust & has a fixed interest, deemed to own proportionate share of the shares owned by the trust If specified shareholder is beneficiary of a discretionary trust, deemed to own each share the trust owns In case of transfer of property outstanding amount equals fair market value of 7
property at time of transfer less fair market value of consideration received other than excluded consideration (debt, shares, right to receive debt or shares) Actual income received will reduce amount of deemed income 7
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Condition Creating a Reversion revocable trust If settlor or transferor has ability to reacquire the property Repayment of loan reversion Reversion by operation of law OK Determination, consent, direction by/of Settlor or Transferor If sole trustee If one of two trustees If has ability to select beneficiaries and veto distributions and investment decisions If more than two trustees but unanimity required for decision or majority decisions but must form part of majority 10
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In Re Lucking s Will Trusts [1967] 3 All ER 726 (Ch.D.) Estate held majority of issued shares of private co. that ran active business Trustees retained services of person to run business Later discovered that person borrowed significant amount from co Co. unable to recover money because person had declared bankruptcy by time of action Trustees held liable to beneficiaries for negligence in not supervising activities of individual Some authors believe that directors must vote as they do as trustees. But a trustee who acts as nominee director may be in violation of duty to corporation if s/he fetters his/her decisionmaking power by acting only in accordance with the instructions of the other trustees. Re Fleming: conversion of income and capital deals with maintaining even hand between beneficiaries. Fiduciaries cannot do as directors what they are prohibited from doing as trustees. 19
On one hand, can a trust instrument validly restrict a director from operating as fully as corporate law permits? On the other hand, if corporate director acts to the full extent of corporate powers, can s/he be liable for breach of trust? 20
E.g. when voting shares, trustee is governed by trust law principles; but in managing business as director, governed by corporate law principles. Butt v. Kelson [1952] 1 Ch. 197 Powers held by trustees qua shareholders must be exercised in accordance with trust principles Beneficiaries have right to compel trustees to use their powers in the best interests of the beneficiaries but do not have right to regard directors powers as forming part of trust estate Trustees qua directors: first obligation to corporation but cannot ignore that they are trustees: have fiduciary obligation to trust beneficiaries too; if conflict of interest, duty to corporation prevails 21
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Penman: Trial decision found Appellant and her 2 co trustees (nephews) personally liable for funds which were removed from the trust. Trust was created by Appellant s late brother and sister in law for benefit of their grandchildren. Appellant argued that at all times she acted honestly, reasonably and in good faith. Relied on advice of her nephew, an Alberta lawyer. Duped by her 2 nephews who wrongfully used the funds for their own purpose. Application J rejected arguments: she had signed director s resolution authorizing co trustee to invest trust funds in the exercise of his unfettered discretion and failed to follow up with any inquiries. Also held she abdicated her duties entirely, by improperly delegating all her powers, duties and authority as a co trustee to her two nephews. Not dishonest, but failure to make inquiries re investments = willful neglect and default. CA found no basis to interfere with result unless relief under law or trust instrument. S. 35 of Trustee Act requires trustee to act honestly and reasonably and ought reasonably to be excused for breach. But does not apply to loss from investment of trust property. 26
Not entitled to protection from exculpatory clause: improperly delegated powers, therefore not functioning as a trustee, therefore not falling under protection of trust. 26
Steven Thompson Family Trust: Passing of accounts by initial trustee accountant who resigned amid allegations of conflicts of interest by the beneficiaries. Successor trustees hired the same accountant as their agent to help administer trust. Admitted they were not involved in day to day operation of trust. Paid compensation to accountant. Trust instrument expressly allowed trustees to engage agents and pay them from trust. Contained exculpatory clause providing trustees to be indemnified for any liabilities arising from mistakes made in good faith & exercise of due care & diligence. Unfair to deny effect of exculpatory clause; also unfair to benes to deny any recourse. Approach: balance interests of settlor and court s jurisdiction to protect benes & intent of trust. Decision to retain accountant was bad; not standard of reasonably prudent business person. Therefore not entitled to protection of exculpatory clause. Steven Thompson Family Trust suggests that exculpatory clause can potentially offer protection to trustee. Court must balance settlor s freedom to protect trustee with court s jurisdiction to protect beneficiaries. Penman suggests that if the loss arises from the trustee breaching of his or her duties as trustee (in that case, improperly delegating duty or power), then balancing act does not apply and trustee cannot look to trust instrument for protection. 27
The two most recent significant cases in Ontario demonstrate a trend to judicial deference when reviewing exercises of discretion by trustees of family trusts, even in situations where the exercise of the trustees discretion has had the effect of completely excluding a beneficiary from receipt of trust assets Martin v. Banting (2001) 37 E.T.R. (2d) 270 (O.S.C.J.) aff d (2001) O.J. No 510 (O.C.A.) Edell v. Sitzer (2001) 55 O.R. (3d) 198 (O.S.C.J.) 28
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