Sunday, September 14, 2014

Kimberly Wallis Speaking About Rectification at Okanagan Wills and Trusts CBA Section Meeting

My partner Kim Wallis will be speaking this Wednesday, September 17, 2014, on the topic of rectification including the new provision, section 59, in the Wills, Estates and Succession Act on rectification of wills, to the Okanagan Wills and Trusts section of the Canadian Bar Association. The meeting is open to members of the Canadian Bar Association, B.C. Branch.

Wednesday, September 10, 2014

Test of Incapability in New Statutory Property Guardianship Regulation

In my post last week, I wrote about the new statutory property guardianship legislation and regulation coming into effect on December 1, 2014, under which the Public Guardian and Trustee may be appointed a statutory property guardian for a person who is not capable of managing his or her own financial affairs. I wrote specifically about the procedures for determining whether a certificate of incapability should be issued and the Public Guardian and Trustee appointed in respect of someone who may not be capable of making financial decisions.

One welcome change is the introduction of a test of incapability in the new Statutory Property Guardianship Regulation. It is set out in section 9:

Test of Incapability 
9 (1) An adult is incapable of managing the adult's financial affairs if, in the opinion of a qualified health care provider, any of the following apply:
(a) the adult cannot understand the nature of the adult's financial affairs including the approximate value of the adult's business and property and the obligations owed to the adult's dependants, if any; 
(b) the adult cannot understand the decisions that must be made or actions that must be taken for the reasonable management of the adult's financial affairs; 
(c) the adult cannot understand the risks and benefits of making or failing to make particular decisions, or taking or failing to take particular actions in respect of the adult's financial affairs; 
(d) the adult cannot understand that the information. referred to in this subsection applies to the adult;
(e) the adult cannot demonstrate that hear she is able to implement, or to direct others to implement, the decisions or actions referred to in paragraph (b). 
(2) For the purposes of section 34 of the Act, a qualified health care provider must consider the changes, if any, in the adult's incapability since the previous assessment and the adult's understanding of those changes. 
Although this provision does not directly apply to applications for the appointment of a committee under the Patients Property Act, the above criteria could be applied to an application for an order declaring a person incapable of managing his or her affairs under that Act. A lawyer asking for a physician's opinion on capacity could ask the physician to address those criteria. This may provide more nuanced and clearer evidence to assist the court in making a determination of capacity under the Patients Property Act.

Saturday, August 30, 2014

New Statutory Property Guardianship Legislation and Regulation Coming into Effect December 1, 2014

There are some significant changes coming into effect on December 1, 2014 to British Columbia’s adult guardianship legislation. The changes will primarily effect both how the Public Guardian and Trustee is appointed to manage the property of persons who are considered to be incapable of managing their financial affairs, and the rights of those persons.

Currently, the Public Guardian and Trustee may be appointed to manage the financial affairs of a person who is incapable either through a certificate under the Mental Health Act, or through a court application under the Patients Property Act.

Effective December 1, 2014, the process by which the Public Guardian and Trustee may be appointed by certificate under the Mental Health Act will be replaced by provisions in Part 2.1 of the Adult Guardianship Act, and the Statutory Property Guardianship Regulation.

The new process appears to provide more procedural protections and more transparency when the Public Guardian and Trustee assumes responsibility for a person’s (or to use the language of the new provisions, the “adult’s”) financial-decision making. In this post I will outline the new process.

The Public Guardian and Trustee will become the "statutory property guardian" when a “health authority designate” issues a certificate of incapability.  Before the health authority designate may issue a certificate an assessment must be completed consisting of two components: a medical component consisting of a physician’s medical assessment, which looks at the medial diagnosis and prognosis, and a functional component, which may be conducted by a physician or other health care provider, such as a nurse, or social worker, and which consists of an evaluation of the adult’s understanding and ability to manage his or her finances.  

Unless there is a risk of serious physical or mental harm or significant damage or loss to the adult’s property, the person responsible for each component must inform the adult of the purpose of the assessment, that the adult may have someone else present, and after the assessment is completed, the adult must be offered a copy of the assessment report.

Once the assessment is completed, if the health authority designate considers it appropriate to issue a certificate of incapability then he or she must give the adult, and the adult’s spouse or other near relative notice of his or her intent to issue the certificate, and the adult, spouse or near relative must be given at least 10 days to respond.

If after considering any responses, the health authority designate decides to issue a certificate of incapability, the Public Guardian and Trustee must give notice to the adult that she has been appointed as the adult’s statutory property guardian, and the adult may within 40 days of receipt of the notice request a second assessment.

If after the second assessment, the health care provider responsible for the second assessment considers the adult to be incapable, then the adult may apply to the Supreme Court of British Columbia for review of the determination.

It should be noted that an assessment that an adult is incapable of managing his or her financial affairs will not necessarily lead to a certificate of incapability. If, for example, if the health authority designate is aware that the adult has made an enduring power of attorney, and the person appointed is both willing to act and is complying with the duties, then the health authority designate should not issue a certificate.

I plan to write some future posts on the new legislation and regulation including the criteria for determining if a person is incapable, and the process for terminating a certificate of incapability.

Sunday, August 24, 2014

Can You Revoke a Quebec Notarial Will by Destroying a True Copy?

A notary in Quebec always retains the original of a notarial will and registers it under the Quebec Civil Code. Despite the usual rule in British Columbia that an executor must probate the original will, an exception is made for Quebec notarial wills, in which case, under section 36(1) of the Evidence Act, you may probate a copy that is certified by a notary as a true copy of the original. I have written about this before.

Under British Columbia law, one of the ways to revoke a will is to destroy the original. This is set out in section 55 (1) (c) of the Wills Estates and Succession Act, and was set out in section 14(1) (d) of the now repealed Wills Act.

This raises an interesting question. Under British Columbia law, can the maker of a Quebec notarial will revoke it by destroying a certified true copy of it?

John David Christian made a notarial will when he lived in Quebec in 1991. In it, he appointed Lorraine Leigh Morton, with whom he was living in a marriage-like relationship, as his executor and the beneficiary of his estate. The Quebec notary retained the original and gave Mr. Christian three certified copies.

Mr. Christian and Ms. Morton moved to British Columbia, and Mr. Christian became domiciled here.

In 2009, Mr. Christian and Ms. Morton separated and following mediation agreed on the division of their assets.

Mr. Christian died on December 29th, 2011, and he did not have any of the certified copies of the 1991 Quebec will or any new will among his possessions.

Ms. Morton received another certified true copy of the original will from a Quebec notary and applied to probate the copy in British Columbia. Mr. Christian’s mother, who would be entitled to the estate if her son died without a will, filed a caveat to oppose the application for probate.

There was evidence from both his family law lawyer and another lawyer that following his separation from Ms. Morton, Mr. Christian wished to change his will so that Ms. Morton would not be a beneficiary. He told his girlfriend that he had ripped up the will that left everything to Ms. Morton and pointed to the recycling basket, which had some ripped paper.

Mr. Justice Johnson, in Morton v. Christian, 2014 BCSC 1303, accepted the evidence of the lawyers and Mr. Christian’s girlfriend, but found it insufficient to prove that Mr. Christian in fact destroyed any or all of the certified true copies of the notarial will in his possession. But even if Mr. Christian had destroyed the true copies, doing so, would not, under British Columbia law revoke the notarial will. To revoke a will by destruction, it is necessary to destroy the original will, which is not possible with a Quebec notarial will, which remains in the possession of the notary.

In reaching his decision Mr. Justice Johnson considered section 36 of the Evidence Act allowing a certified copy of the notarial will to be admitted into probate, but held that it did not follow that it was sufficient to destroy a certified copy of a Quebec notorial will to revoke it.

Because the original is in the possession of the notary, destroying a certified copy is at best a symbolic destruction which is insufficient to revoke a will. Mr. Justice Johnson wrote at paragraph 57:

[57]         If I had found the contrary, tearing a copy of a notarial will, knowing that the original is safely lodged with a notary, appears to me to be no more effective than the “symbolical” steps referred to in Cheese v. Lovejoy (1877), 2 P.D. 251 (C.A.):
It is quite clear that a symbolical burning will not do, a symbolical tearing will not do, nor will a symbolical destruction. There must be the act as well as the intention. As it was put by Dr. Deane in the court below, “All the destroying in the world without the intention will not revoke a will, nor all the intention in the world without destroying: there must be the two.

Accordingly, if you have made a Quebec notarial will and wish to revoke it, under British Columbia law, it is not sufficient to tear up a certified copy. The best way to revoke it is to make a new will.

Wednesday, August 06, 2014

Changes to Canadian Charitable Donation Tax Credits for Charitable Gifts on Death

In the 2014 Budget, the Federal Government has proposed changes to the treatment of charitable gifts in wills or beneficiary designations. Essentially, if you include a gift to a charity in your will, under the new tax law, the gift will  be considered to have been made from your estate after your death, rather than immediately before your death. Your executor will then be permitted to allocate the tax credits among the year in which the executor pays or transfers the gift to the charity, an earlier taxation year for the estate, and the last two years of your life.

In many cases, the tax credits may be best applied to the terminal return to offset capital gains arising from the deemed disposition of property at death and other taxes, as may be done under the current rules, but in some cases the changes will provide welcome tax relief if there are significant tax liabilities for an estate after death.

The catch is that the funds or other property must be transferred to the charity within 36 months of death for the tax credits to be available in the last two years of the deceased's life.

The new rules will come into effect in 2016.

Here is the relevant excerpt from 2014 Federal Budget:

Estate Donations 
Donations made by an individual to a registered Canadian charity or other qualified donee are eligible for a Charitable Donations Tax Credit (CDTC). Subject to certain limits, a CDTC in respect of the eligible amount of the donation may be applied against the individual’s income tax otherwise payable. The eligible amount is generally the fair market value of the donated property at the time that the donation is made (subject to any reduction required under the income tax rules). The individual may claim a CDTC for the year in which the donation is made or for any of the five following years. 
Where an individual makes a donation by will, the donation is treated for income tax purposes as having been made by the individual immediately before the individual’s death. Similar provisions apply where an individual designates, under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Tax-Free Savings Account (TFSA) or life insurance policy, a qualified donee as the recipient upon the individual’s death of the proceeds of the plan or policy. Under these circumstances, the CDTC available may be applied against only the individual’s income tax otherwise payable.

On the other hand, a CDTC available in respect of a donation made by an individual’s estate may be applied against only the estate’s income tax otherwise payable. 
Budget 2014 proposes to provide more flexibility in the tax treatment of charitable donations made in the context of a death that occurs after 2015. Donations made by will and designation donations will no longer be deemed to be made by an individual immediately before the individual’s death. Instead, these donations will be deemed to have been made by the estate, at the time at which the property that is the subject of the donation is transferred to a qualified donee. 
In addition, the trustee of the individual’s estate will have the flexibility to allocate the available donation among any of: the taxation year of the estate in which the donation is made; an earlier taxation year of the estate; or the last two taxation years of the individual. The current limits that apply in determining the total donations that are creditable in a year will continue to apply. A qualifying donation will be a donation effected by a transfer, within the first 36 months after the individual’s death, of property to a qualified donee. In the case of a transfer from an RRSP, RRIF, TFSA or insurer, the existing rules for determining eligible property for designation donations will apply. In any other case, the donated property will be required to have been acquired by the estate on and as a consequence of the death (or to have been substituted for such property). 
An estate will continue to be able to claim a CDTC in respect of other donations in the year in which the donation is made or in any of the five following years.  
This measure will apply to the 2016 and subsequent taxation years. 

Monday, August 04, 2014

Should Professional Trustees be Held to a Higher Standard?

In view of the complexity and time that may be required to administer an estate or act as trustee of a trust, it sometimes makes good sense to appoint a professional trustee to act as executor of a will or as a trustee in a trust (for simplicity I will refer to executors, administrators of estates and trustees of trusts as “trustees” although there are some technical differences in their roles). Trust companies are in the business of acting as trustees, have systems in place for doing so, employ experienced personnel, and hold themselves out as experts. They of course charge for their work. Some lawyers and other professionals also act as trustees as part of their business.

British Columbia law currently does not make a distinction between the standard of care owed by a family member acting as a trustee, perhaps acting gratuitously, and that of a trust company, perhaps charging over a hundred thousand dollars for its services, to the beneficiaries of the trust if it is alleged that the trustee has been negligent in the trustee’s handling of the trust assets resulting in a loss.

As I wrote in  previous post, the Supreme Court of Canada said in Fales v. CanadaPermanent Trust Co., [1977] 2 S.C.R. 302, that “[t]raditionally, the standard of care and diligence required of a trustee in administering a trust is that of a man of ordinary prudence in managing his own affairs (Learoyd v. Whiteley[2], at p. 733;Underhill's Law of Trusts and Trustees, 12th ed., art. 49; Restatement of the Law on Trusts, 2nd ed., para. 174) and traditionally the standard has applied equally to professional [sic] and non-profes­sional trustees.”

It should be noted that section 96 of the Trustee Act does allow the court to relieve a trustee from personal liability for a breach of trust if the trustee “has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach,” and as happened in Fales, the court may use this provision to relieve a family member or other trustee who is not a professional trustee from liability while holding the professional trustee responsible to pay for any breach of the duty of care. In Fales, the Supreme Court of Canada relieved the will-maker’s widow from liability, while holding the professional co-trustee liable for loss occurring as a result of the trustees failing to sell the shares of a company within a reasonable time.

But the effect of section 96, while allowing the court to relieve a non-professional cotrustee of liability, does not raise the standard of the professional trustee to any higher level than the "man of ordinary prudence."

The will-maker, or settlor of a trust, appointing both a family member and a professional trustee to act as co-trustees can also relax the standard of care for a non-professional trustee in a will or trust, while holding the professional trustee to the standard of “a man of ordinary prudence,” but I suspect this is rarely done.

One of the recommendations the Uniform Law Conference of Canada, in its Uniform Trustee Act which may form the basis of new legislation in British Columbia to replace the current Trustee Act, is to hold professional trustees to a higher standard of care.

Section 26 of the Uniform Trustee Act says:
Duty of care
26 (1) In the administration of a trust, a trustee must act in good faith and in accordance with the following:
 (a) the terms of the trust;
 (b) the best interests of the objects of the trust;
 (c) this Act.
(2) Subject to section 31, in the performance of a duty or the exercise of a power, whether the duty or power arises by operation of law or the trust instrument, a trustee must exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person.
(3) Despite subsection (2) but subject to section 31, if, because of a trustee’s profession, occupation or business, the trustee possesses or ought to possess a particular degree of care, diligence and skill that is relevant to the administration of the trust and is greater than that which a person of ordinary prudence would exercise in dealing with the property of another person, the trustee must exercise that greater degree of care, diligence and skill in the administration of the trust.

The commentary to section 26(3) is as follows:

Subsection (3) constitutes a change from the present law, which applies the same standard of care to all trustees, regardless of the degree of skill or knowledge they have or profess to have. Professional trustees managing trusts for a fee are common today. Professional trustees hold themselves out to the public as having particular skills to carry out estate and trust administration for remuneration. Subsection (3) requires these trustees, subject to the provision of this Act respecting the standard of care regarding the investment of trust property, to be held to a standard of care corresponding to the degree of knowledge or skills they bring, or ought to bring, to the task of trusteeship. The same criterion applies to trustees of commercial and business trusts. The duty to exercise special skills and knowledge under subsection (3) applies to trustees who have or should have them, regardless of whether they hold themselves out to the public as having them.

Similarly, with respect to the standard of care of a trustee in making investments, section 31 of the Uniform Trustee Act provides:

Standard of care
31 (1) In investing trust property, a trustee must exercise the care, diligence and skill that a prudent investor would exercise in making investments.
(2) Despite subsection (1), if, because of a trustee’s profession, occupation or business, the trustee possesses or ought to possess a particular degree of care, diligence and skill that is relevant to the investment of trust property and is greater than that which a prudent investor would exercise in making investments, the trustee must exercise that greater degree of care, diligence and skill in investing trust property.

Saturday, July 19, 2014

Trustees' Duty to Diversify Investments

The British Columbia Court of Appeal removed a trustee for lending all of the trust funds in one trust to a related trust, finding that the investment was an improvident one. In reaching its decision in Miles v.Vince, 2014 BCCA 289, the Court of Appeal found that it is implicit in a trustee’s duty to exercise the care, skill, diligence and judgement of a prudent investor that the trustee diversify investments held in a trust.

William Vince settled two trusts, one of which he named the William Vince Family Trust, and the other, the Vince Insurance Trust. He settled the family trust in 2006 while he was healthy, and he transferred the shares of three companies, each of which owned real estate on Main Street in Vancouver. He settled the insurance trust after he was diagnosed with cancer, and that trust received the proceeds of his life insurance policy of over $2 million following his death in June 2008.

The terms of the family trust gave the trustee the discretion to make income and capital payments to Mr. Vince’s three children. The terms of the insurance trusts also gave the trustee discretion to make income and capital payments, but both his widow, Cynthia Miles, and his three children were the beneficiaries of the insurance trust. Both trusts provided that on a division date, 80 years after the creation of the trust or such earlier date as the trustee decides, the capital would be divided among the three children.

Mr. Vince’s sister, Marilynn Vince, became the trustee of both trusts.

 Ms. Vince as trustee of the family trust endeavoured to carry out her brother’s vision to develop the Main Street properties. She commissioned a report to determine the best way to maximize the best use of the properties, incorporated a non-profit housing society, and arranged financing from B.C. Housing of $5,550,000 to purchase another property and develop the Main Street properties.

She also lent funds from the insurance trust to the family trust to help finance the development. The initial loan was for $1,170,000, but there were further loans, and with accrued interest, the amount owing from the family trust to the insurance trust was $2,135,485 as at December 31, 2012.

The main security for the loan from the insurance trust consisted of second mortgages in the Main Street properties. But under the terms of the mortgages, the insurance trust could only enforce them if B.C. Housing, which held first mortgages consented, or if B.C. Housing commenced foreclosure. Furthermore, the Provincial Rental Housing Authority had an option to purchase the properties, and if it exercised the option, the Insurance Trust would have to deliver a discharge of its mortgage without requiring payment.

From 2008 to 2012, the trustee made payments to Ms. Miles and paid expenses for her and the children from the Insurance Trust, but then stopped.

Ms. Miles applied to the Supreme Court of British Columbia to remove Ms. Vince as trustee of the insurance trust, but her application was dismissed.

She appealed to the Court of Appeal.

Madam Justice Levine for the Court of Appeal wrote the reasons for judgment removing Ms. Vince. In doing so, she considered the different purposes of the two trusts. When he settled the family trust, Mr. Vince intended to create social housing and develop the Main Street properties. But he settled the insurance trust at a time when he was ill with cancer, and he intended the insurance trust to provide for his widow and children following his death.

She held that by putting all of insurance trust assets into an illiquid real estate development, she endangered the insurance trust assets, and Ms. Vince did not meet the standard of a prudent investor.

Although the Trustee Act does not expressly require a trustee to diversify the trust assets, Madam Justice Levine adopted Professor Donovan Waters’ analysis of the prudent investor standard set out in the Trustee Act in Waters’ Law of Trusts in Canada, 4th ed., as follows:

[61]         Professor Waters notes (at 1008) that in 1997 the Uniform Law Conference of Canada promulgated the Uniform Trustee Investment Act, 1997, which imposed an obligation for trustees to diversify investments and provided a list of factors which a trustee may consider in making investment decisions.
 [62]         He describes the “prudent investor” standard as used in the B.C. Trustee Act, (at 1018):

The reference to the “prudent investor” is intended to bring into the picture the requirements of modern portfolio theory, which teaches that one must first decide what is the level of appropriate level of risk, and then seek to maximize the return within that constraint.
 [63]         He points out that diversification is implicit in the prudent investor standard, based on modern portfolio theory (at 1019-1020):

It is true that in some jurisdictions, particularly those retaining the prudent man standard, there is room for argument as to whether the trustee has the duty to diversify. The new prudent investor standard, based on modern portfolio theory, leaves less room for argument; diversity is inherent in modern portfolio theory. Even so, the circumstances of a trust might be inconsistent with diversification. For example, if a trustee expected to hold property only for a few weeks, it might not be prudent to expose the assets to the volatility which inheres in equity investments.
 [64]         Unlike other jurisdictions in Canada, B.C.’s Trustee Act does not expressly impose a duty on trustees to diversify investments in accordance with modern portfolio theory (see The Trustee Act, 2009. S.S. 2009, c. T-23.01 s. 26; Trustee Act, R.S.O. 1990, c. T. 23 s. 27(6); Trustee Act, R.S.N.S. 1989, c. 479 s. 3B; Trustee Act, R.S.P.E.I. 1988, c. T-8 s. 3.1).
[65]         As Professor Waters suggests, however, the “prudent investor” standard implicitly brings modern portfolio theory into play, and thus requires the trustee to assess the level of appropriate risk and whether diversification is required.

Madam Justice Levine also found that in making the loan, Ms. Vince put herself as in a conflict of interest as trustee for both trusts. The loan was now in default, but if Ms. Vince as trustee of the insurance trust demanded payment of the loan, it would put the development in jeopardy.

Furthermore, Ms. Vince as trustee had a duty to maintain an even hand between income and capital beneficiaries. The real estate development had potential for significant profit for the capital beneficiaries, but was not generating income for the income beneficiaries.

The Court has both an inherit jurisdiction and power under section 31 of the Trustee Act to remove and replace a trustee. Madam Justice Levine considered previous decisions in which the courts have exercised their discretion to do so if the trustee has failed to protect the beneficiaries’ interests or jeopardized the trust assets.

Madam Justice Levine summarized her reasons for removing Ms. Vince as follows:

[87]         In this case, the respondent, in her capacity as the trustee of the Insurance Trust, failed to protect the interests of all of the beneficiaries of that trust. By investing all of the trust property in the Loan, she put the trust property at risk, put herself in a conflict of interest, and failed to act with an even hand among the beneficiaries. Her continuation as trustee jeopardizes the proper and efficient administration of the trust.