Saturday, January 30, 2016

Alberta Court Orders Beneficiary of Registered Retirement Income Fund to Bear the Tax Burden on the Annuitant's Death

When the annuitant of an Registered Retirement Savings Plan or Registered Retirement Income Fund dies, taxes in respect of either type of  registered plan are generally borne by the deceased’s estate, rather than by the beneficiary of the registered plan. There are some exceptions, including significantly the ability to defer taxation if the proceeds are paid to the annuitant’s spouse (I have written about the taxation of registered plans in greater depth in a previous post). The tax rules may create unintended consequences when the annuitant names a beneficiary of the registered plan. If the proceeds of the registered plan are large, the effect may be to significantly deplete the deceased annuitant’s estate, thereby reducing the amount available to the beneficiaries of his or her will. If the annuitant is well advised, he or she may take the taxation into account when naming a beneficiary of a registered plan, but I suspect that all too often, the annuitant may not be aware of the impact of tax.

Mr. Justice Graesser of the Alberta Court of Queen’s Bench dealt with this issue in a unique way in a Morrison v. Morrison, 2015 ABQB 769. In a previous post, I wrote about his reasons for judgment in this case on the issue of whether the designated beneficiary of a Registered Retirement Income Fund was entitled to retain the proceeds or whether he held them in trust for his father, the annuitant’s estate.

I will repeat some of the key facts from my previous post, and add a few more relevant to this issue.

John Robert Morrison died on November 10, 2011 leaving four children surviving him. In his will, he divided his estate equally among his four children, except that $11,000 was to be deducted from his son Robert Morrison’s share and distributed equally among John Morrison’s grandchildren. Before his death, John Morrison sold his house, and distributed $25,000 to each of his children from the sale proceeds. John Morrison also designated his son Douglas Morrison as the beneficiary of his Registered Retirement Income Fund.  

If John Morrison intended that his son Douglas Morrison was entitled to the proceeds of the Registered Retirement Income Fund, and Mr Justice Graesser found on the evidence that he did, and if the estate bears the tax in respect of the proceeds, the estate would be depleted to the point where there would be insufficient funds from Robert Morrison’s one-quarter share of the estate to pay $11,000 to John Morrison’s grandchildren.

There was no direct evidence of whether John Morrison understood that the way the income tax provisions work, the tax on the Registered Retirement Income Fund proceeds is borne by the estate, but Mr. Justice Graesser inferred that he likely did not. If he did not, it would be unfair for Douglas Morrison to receive the benefit of the proceeds, without bearing the full burden of the taxes. Mr. Justice Graesser wrote:

[76]           However, the matter does not end there. There is the question of the tax paid on the RRIF. It is manifestly unfair that the Estate bear the burden of the tax while Douglas enjoys the benefit of the RRIF.
[77]           It is impossible to go into Mr. Morrison’s brain and determine his understanding of the implications to his estate of designating a non-spouse as beneficiary of the RRIF. That results in a tax liability to the estate, leaving the estate to pay the tax on the RRIF from its other assets. In this case, the tax on the RRIF has denuded the Estate to such an extent that it is unable to pay all of the specific bequests.
[78]           The only evidence I have of any understanding on Mr. Morrison’s part is in relation to the sale of his home, shortly before his death. None of the children suggest that he was in any way confused or lacking capacity at the time of the sale or the distribution of $25,000 to each of them.
[79]           In the absence of the tax on the RRIF being paid out of his estate, there was just enough left in his estate (after payment of debts and expenses) to create the $11,000 specified to be divided among his grandchildren.
[80]           It would seem highly unlikely that Mr. Morrison, by giving each of his children $25,000, intended to leave insufficient funds in his estate to satisfy the bequests to his grandchildren. That suggests to me, and I draw the inference, that Mr. Morrison was unaware of the tax consequences of designating his son as a beneficiary. He must have been under the impression or understanding that Douglas would bear any tax liability on the RRIF and no burden would fall on his estate.
[81]           This is another area that should be of particular concern to the investment community. I wonder how many investment advisors who give advice concerning beneficiary designations are aware of the tax consequences of the designation?
[82]           If Mr. Morrison had been aware that the RRIF would be taxable in his estate’s hands, it is unlikely that he would have given as much as he did to his children out of the sale proceeds of his house. If he had been aware of those consequences, I infer that he would have changed his will or changed the designation making the designation conditional on Douglas paying the tax.
[83]           I draw the inference and find on a balance of probabilities that whatever motivated Mr. Morrison to designate Douglas as beneficiary for the RRIF, he did not intend Douglas to be the beneficiary of the tax payable by his estate on the RRIF.
[84]           I thus find that Mr. Morrison either intended Douglas to be responsible for the tax on the RRIF and expected that the tax would be deducted from the RRIF when it was transferred or paid to Douglas, rather than left to be paid by the Estate, or that Mr. Morrison was mistaken about the tax treatment of his RRIF having designated Douglas as beneficiary based on the above intention and expectation.
[85]           In either circumstance, Douglas has received an unintended and unexpected benefit from the Estate.
Mr. Justice Graesser held that in these circumstances he had jurisdiction to provide a remedy to the unfairness of the tax falling on the estate based on equitable principles. He wrote at paragraphs 98 and 99:

[98]           The alternative approach, and the one which I adopt in this case, is to apply s 8 of the Judicature Act, RSA 2000 c J-2. That section provides:
(8)        The Court in the exercise of its jurisdiction in every proceeding pending before it has power to grant and shall grant, either absolutely or on any reasonable terms and conditions that seem just to the Court, all remedies whatsoever to which any of the parties to the proceeding may appear to be entitled in respect of any and every legal or equitable claim properly brought forward by them in the proceeding, so that as far as possible all matters in controversy between the parties can be completely determined and all multiplicity of legal proceedings concerning those matters avoided.
[99]           The application of s 8 entitles me to fashion a remedy with the effect that Douglas reimburse the Estate the full amount of the tax paid by the Estate on the RRIF. I have found that Mr. Morrison did not intend Douglas to receive the RRIF and leave the tax burden on his Estate. Tax was to follow the RRIF.
Mr. Justice Graesser found that Douglas Morrison would be unjustly enriched if he were not required to bear the tax burden, or alternatively that he should bear the tax based on misstate. He imposed a constructive trust on the proceeds of the Registered Retirement Income Fund to the extent of the estate’s liability for taxes in respect of those proceeds.

[104]      Probate law’s origins are in equity, so I do not find it inappropriate to consider equitable remedies where the common law is inadequate to remedy a wrong.
[105]      In these circumstances, I find that the tax paid by the Estate conferred a benefit in that same amount to Douglas. He has been unjustly enriched by the payment. While the Estate was under a legal obligation to pay the tax, it was under no legal obligation to Douglas to pay it for him.
[106]      It would be unjust for Douglas to retain the benefit. Principles of unjust enrichment justify a direction that Douglas reimburse the Estate for the tax it paid on his behalf.
[107]      An alternative approach using equitable principles and remedies is that the tax paid by the Estate resulted from Mr. Morrison’s mistaken understanding of the consequences of the beneficiary designation. Reimbursement by Douglas flows from equitable principles surrounding mistake.
[108]      Either approach results in a declaration of a constructive trust on the proceeds of the RRIF received by Douglas to the extent of the Estate’s payment to CRA on account of the RRIF.
[109]      Requiring reimbursement by Douglas will replenish the Estate to the amount intended by Mr. Morrison to be available for distribution, and prevents the manifest injustice of having an unintended tax consequence of a beneficiary designation frustrate the testator’s intentions.
[110]      I recognize that the approach I have taken here may be viewed as extraordinary. But that is what s 8 is for: creating an equitable remedy where the law would otherwise leave the injured party (here, the Estate and beneficiaries other than Douglas) with no adequate remedy.
Although this decision is not binding on British Columbia courts, the Supreme Court of British Columbia might find the reasoning persuasive if the Court infers from the facts that the annuitant did not recognize the tax consequences of naming a beneficiary to his or her registered plan. The British Columbia Law and Equity Act has a similar provision to section 8 of the Alberta Judicature Act. Secion 10 of the Law and Equity Act says:
Avoidance of multiplicity of proceedings
10  In the exercise of its jurisdiction in a cause or matter before it, the court must grant, either absolutely or on reasonable conditions that to it seem just, all remedies that any of the parties may appear to be entitled to in respect of any legal or equitable claim properly brought forward by them in the cause or matter so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of legal proceedings concerning any of those matters may be avoided.

Friday, January 22, 2016

Department of Finance Canada Considering Reversing Recent Changes to Taxation of Life Beneficiary Trusts

The Department of Finance is inviting comments in respect of proposed legislative changes to the taxation of trusts, including significantly for estate planning, a reversal of the very recent change in how life interest trusts are taxed.

As I wrote before in the context of alter ego and joint partner trusts, the Harper Government passed legislation last year that changed the way life trusts are taxed. These came into effect this year. Instead of taxing the trust on the deemed disposition of assets on the death of the life beneficiary in the trust, the Income Tax Act was amended so that the life beneficiary’s personal representative would declare the income in the life beneficiary’s return. It was unclear whether the tax would ultimately be borne by the life beneficiary’s estate or the trust.

If the tax is borne by the life beneficiary’s estate, this could create significant unfairness. Take for example, spouses who each have children from a previous marriage. The wife has significant assets, which she wishes invested on her death, with the income payable to her financially less well off husband, and the capital left to her children on his death. If she creates a trust for her husband’s life in her will, with the remaining capital going to her children on his death, then any taxes payable in respect of capital gains in the trust will be borne by the beneficiaries of her husband’s will (likely his children), but the benefit of the appreciation in capital will go to her own children. In some circumstances, this could have the effect of disinheriting the husband’s children.

Estate-planning professional organizations attempted to point out the problems to the previous Finance Minister, who did not seem too interested.

Fortunately, it does appear that the new government is listening. The Department of Finance Canada has drafted proposed legislation to tax the gains in the trust, except that in case of the death of a life beneficiary in 2016, an election will be available to tax the gains in either the trust or the life beneficiary’s estate. Here is what the Backgrounder says:

Spousal and common-law partner (and similar) trusts
The tax rules permit an individual to transfer, on a tax-deferred basis, capital property to a trust the primary beneficiary of which is the individual’s spouse or common-law partner. These trusts, and certain similar trusts, are subject to a deemed recognition of capital gains (and certain other income amounts) on the death of the trust’s primary beneficiary (i.e., the spouse or common-law partner beneficiary). For deaths before 2016, these income amounts are taxed in the trust. For deaths after 2015, these amounts are instead recognized as income in the hands of the primary beneficiary, although the trust would generally be assessed by the Canada Revenue Agency as though the trust were liable in the first instance for any resulting tax arising in the primary beneficiary’s final tax return.
The legislative proposals would modify the above tax treatment of spousal and common-law partner trusts and similar trusts, for deaths after 2015, by:

Subject to the election described below, taxing in the trust the income deemed to be recognized in the trust on the death of the primary beneficiary;
Permitting a testamentary spousal or common-law partner trust (that arose on and as a consequence of a death before 2017) to jointly elect with the graduated rate estate of the trust’s primary beneficiary to have taxed in the primary beneficiary’s final tax return the income of the trust for its taxation year in which the primary beneficiary dies; and
For purposes of computing the trust’s Charitable Donation Tax Credit in respect of a donation made by the trust within 90 days after the end of the calendar year in which the primary beneficiary dies, permitting the trust to allocate the donation to the trust’s taxation year in which the primary beneficiary dies.

In addition to this proposed change the Department of Finance Canada has requested comments in respect of two other proposed changes, one dealing with trust loss restriction events and the other estate donations.

Here is what the Backgrounder says:

Trust loss restriction events
The income tax rules contain restrictions on when losses incurred by a taxpayer may be recognized and used to offset the taxpayer’s own income. Losses realized by a taxpayer generally remain with that taxpayer for income tax purposes but may be carried forward or back to offset taxable income in other years within certain limits.
The ability of a corporation or trust to carry over its losses (and other tax attributes) may be constrained, under the loss restriction event rules, where the corporation or trust is subject to a significant change in ownership. For trusts, this typically involves cases where a beneficiary, or group of beneficiaries, acquires more than 50% of the beneficial interests in a trust. However, a trust that is an investment fund is not subject to a loss restriction event if certain conditions are met. 
The legislative proposals would modify the application of the trust loss restriction event rules to investment funds and other trusts, including by:

Ensuring that the investment fund definition applies in a manner that generally permits funds to establish whether they are in compliance with the definition without the need to track on an ongoing basis the valuations of entities in which they invest, while also introducing anti-avoidance rules to prevent trusts that directly or indirectly carry on a business from inappropriately claiming status as an investment fund;
Clarifying that an investment fund is not subject to a loss restriction event solely because of a redemption of its issued units; and
Expanding the list of trust tax filing obligations for which deferred filing is permitted where the trust is subject to a loss restriction event.
Estate donations
Donations made by an individual to a registered Canadian charity or other qualified donee are eligible for a Charitable Donation 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.
Trusts (including estates) are subject to the same rules for their donations. However, additional rules facilitate the tax treatment of donations made by the estate of an individual who dies after 2015. These rules, which apply to donations made by the individual’s estate while it is the individual’s graduated rate estate, permit the estate 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. In addition, if the property donated by the individual’s graduated rate estate is a publicly-listed security, or a unit of a mutual fund, that was owned by the individual immediately before the death, the capital gains on the property arising on the individual’s death are exempt from income tax. An individual’s estate may qualify as the individual’s graduated rate estate for only the first 36 months after the individual’s death.
The legislative proposals would modify the application of the above rules for donations made by an individual’s graduated rate estate by extending the rules to apply to donations made by the graduated rate estate, after it ceases to have that status because of expiry of the 36-month period, for up to 60 months after the individual’s death. Donations made by an individual’s former graduated rate estate would be eligible to be allocated among any of: the taxation year of the estate in which the donation is made or the last two taxation years of the individual. The individual’s year-of-death capital gains exemption would also be extended to these donations.

You can read the legislative proposals here, and the explanatory notes here.

To comment, write to Tax Policy Branch Finance by February 15, 2016, by email to, or by letter to:

Tax Policy Branch 
Department of Finance
90 Elgin Street
Ottawa, Ontario
K1A 0G5

Saturday, January 16, 2016

Should the Presumption of Resulting Trust Apply to Beneficiary Designations in Benefit Plans?

The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers.  When a transfer is challenged, the presumption allocates the legal burden of proof.  Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended....
This quote is taken from the Supreme Court of Canada decision in Pecore v. Pecore, 2007 SCC 17 at paragraph 24.

The presumption of resulting trust is most often applied to transfers of wealth that occur during the lifetime of the transferor. For example, a mother might gratuitously transfer the title to real estate to her daughter or perhaps into a joint tenancy with her daughter. In such circumstances, there is a presumption that the daughter holds the real estate in trust for her mother, and after her mother’s death, for her mother’s estate.  But the court may find that the mother intended to make a gift of the real estate or an interest in it to her daughter, in which case the presumption is rebutted and the daughter is entitled to keep her interest in the real estate.

As I have written before, the Supreme Court of British Columbia has held that the presumption of resulting trust also applies to the proceeds of a Registered Retirement Income Fund following the death of the annuitant. In Neufeld v. Neufeld, 2004 BCSC 25, the Supreme Court of British Columbia applied the presumption of resulting trust to hold that the annuitant’s brother held the proceeds in trust for her estate.

In a decision of the Alberta Court of Queen’s Bench released last month, Mr. Justice Graesser questioned, without deciding, whether the presumption should properly be applied to designated beneficiaries of Registered Retirement Income Funds and other plans under which the annuitant or owner may appoint a beneficiary on death. The case is Morrison Estate, 2015 ABQB 769 (Canlii).

John Robert Morrison died on November 10, 2011 leaving four children surviving him. In his will, he divided his estate equally among his four children, except that $11,000 was to be deducted from his son Robert Morrison’s share and distributed equally among John Morrison’s grandchildren. John Morrison designated his son Douglas Morrison as the beneficiary of his Registered Retirement Income Fund. As I will discuss in another post on this case, the usual rule is that the taxes on the Registered Retirement Income Fund on death comes out of the estate, which in this case would significantly deplete the estate.

One of John Morrison’s other children, Cameron Morrison, asked the Court to apply the presumption of resulting trust to the beneficiary designation, and declare that Douglas Morrison holds the proceeds of the Registered Retirement Income Fund in trust for their father’s estate to be distributed in accordance with the will.

In considering whether the presumption of resulting trust applies to a beneficiary designation in Alberta, Mr. Justice Graesser set out the problem as follows:
[18]           The results of this application could have significant impact on the investment and brokerage industry. There are undoubtedly millions of RRSPs, RRIFs and life insurance policies that have designated beneficiaries instead of the proceeds going to the owner’s estate.
[19]           I suspect that many owners, as well as many investment advisors and brokers, are unaware of the potential consequences of the Supreme Court’s decision in Pecore as it relates to beneficiary designations, as well as the income tax consequences of an RRIF or RRSP beneficiary being someone other than the owner’s spouse.
[20]           There has always been the potential issue of a resulting trust being imposed in the event of a gratuitous and unexplained beneficiary designation. Until Pecore, the presumption of advancement in favour of children generally prevented the potential application of resulting trusts in most family situations.
[21]           Since the decision in Pecore, however, there is the potential that any non-spousal designated beneficiary (whether under an RRSP, RRIF or life insurance policy) will be deemed to hold proceeds in trust for the donor’s estate unless he or she can prove that a gift was intended.
[22]           It is frequently said that hard cases make bad law, and there is certainly the potential for a hard case such as this to impact many other plan or policy owners and their designated beneficiaries.
Mr. Justice Graesser expressed doubt as to whether the presumption should be applied to designations of beneficiaries of benefit plans, reasoning that designating a beneficiary is more like a will, taking effect on death, and designations can usually be changed before death. This stands in contrast to gratuitous transfers that may confer an immediate property right on the transferee.

He wrote as follows:
[44]           Like designations of beneficiaries under insurance policies, there is a benefit to the owner of an RRSP or RRIF to be able to designate a beneficiary rather than have the plan go to his or her estate. That may be tax roll-over provisions relating to spousal beneficiaries and there may be an element of creditor-proofing if there is designated beneficiary rather than having the plan go to the owner’s estate.
[45]           I can frankly think of no sound policy reason why beneficiary designations under RRSPs, RRIFs and insurance policies should not be treated in a similar fashion to beneficiary designations under a will. None of these “gifts” take effect until the death of the owner of the plan or policy. With the exception of irrevocable beneficiaries under some life insurance policies, the owner is free to change beneficiaries during his or her lifetime, so long as he or she is of sound mind.
[46]           I recognize the historical concerns surrounding the formalities required of testamentary dispositions. The intent of formality was undoubtedly to attempt to add a level of assurance that the donor intended the consequences of his actions and was in fact the author of the testamentary disposition.
[47]           While such designations have been treated as inter vivos transactions and not testamentary transactions, they are certainly much closer to testamentary transactions than to inter vivos gifts such as transferring bank accounts, investment accounts or property into joint names. Such transactions cannot be unilaterally undone, unlike beneficiary designations. I note that RRSP beneficiary designations appear to be “testamentary dispositions” in Ontario as a result of Ontario’s Succession Law Reform Act, RSO 1990, c S.26 (see Amherst Crane Rentals v Perring, 2004 CanLII 18104 (ON CA), 2004 CanLII 18104 (ONCA)).
[48]           It may well be arguable that Alberta’s Wills and Succession Act accomplishes the same thing in s 71. I need not make that finding because of my ultimate conclusion.
[49]           Beneficiary designations are unlike joint ownership of bank accounts or investment accounts, which confer a present property interest. Beneficiary designations do not. Beneficiary designations are essentially powers of appointment conferred on the owner by the terms of the contract.
[50]           If there was some expectation that requiring formalities would ensure that the testator obtained appropriate advice before completing a will or codicil, that is entirely undone by the law respecting holograph wills.
[51]           I ask rhetorically, if a few handwritten notes on the back of a cigarette package signed by the testator is a valid testamentary instrument and not subject to the law relating to resulting trusts, why should a beneficiary designation signed and witnessed (presumably by a knowledgeable investment advisor) be treated differently?
[52]           This may be one of the unintended consequences of Pecore v Pecore and the abolition of the presumption of advancement in favour of able, adult children. I suspect, without knowing, that the vast majority of beneficiary designations under RRSPs, RRIFs and life insurance policies are spouses or adult interdependent partners or children.
[53]           In my view, Pecore and Kerr v Baranow should not be applied to beneficiary designations for RRIFs (and by inference RRSPs and life insurance policies). To apply Kerr v Baranow and Pecore v Pecore to RRSP, RRIF or life insurance beneficiary designations would, in my view, create untold uncertainties in what are likely hundreds of thousands if not millions of beneficiary designations in Canada.
Mr. Justice Graesser did not ultimate decide whether the presumption of resulting trust applies to the designation of a beneficiary designation in Alberta. He found sufficient evidence that John Morrison intended that Douglas Morrison keep the proceeds of the Registered Retirement Income Fund to rule in Douglas Morrison’s favour on this issue. He wrote:
[73]           On the evidence before me, I find that Douglas has established on a balance of probabilities that his father intended to give him the RRIF. I make that finding on the basis of several factors:
1)         The close relationship between Douglas and his father that existed at the time of the beneficiary designation;
2)         The assistance rendered to Mr. Morrison by Douglas in the time surrounding and immediately following Mrs. Morrison’s death; and
3)         The close temporal connection between the making of the will appointing Douglas and Heather joint alternate executors and the signing of the beneficiary designation in favour of Douglas only.
[74]           I recognize that this is a very thin finding. However, the balance of probabilities tips at 50.01%. In this case, there is slightly more evidence of an intention to favour Douglas than to have Douglas hold the RRIF as a resulting trust for the estate or his siblings.
[75]           Thus, Douglas is entitled to the RRIF.

Even if Justice Graesser had held that the presumption of resulting trust does not apply to a beneficiary designation, a decision of the Alberta Court of Queen’s Bench is not binding on British Columbia courts. In British Columbia, the only case I am aware of on point is the Neufeld decision which does apply the presumption of resulting trust to a beneficiary designation. But if this issue comes before the British Columbia Court of Appeal in the future, the Court could find Mr. Justice Graesser’s analysis persuasive. 

Sunday, January 03, 2016

McKendry v. McKendry

The presumption of resulting trust is a presumption that arises when someone gratuitously transfers property to another. The presumption is that the person making the transfer did not intend a gift, and the person receiving the property holds it in trust for the transferor. This presumption applies both to a transfer into the sole name of another or into a joint tenancy with another. Because it is a presumption, it is open to the person receiving the assets to prove that the transferor did intend a gift, in which case the presumption is rebutted.

The court will generally attempt to determine what the transferor’s actual intention was at the time of the transfer. If it cannot be determined then the presumption applies to most relationships, including a transfer from a parent to her adult child. Although the court may consider things that either the transferor or the recipient say or do after the date of the transfer in determining the transferor’s intent, the court will need to be satisfied that the evidence is sufficient to determine the transferor’s intention at the time of the transfer.

There are cases where the court finds that a parent has transferred property to a child intending to make a gift to the child, but the parent later changes her mind. In such a case the gift still stands, because it was completed at the time of the transfer.

But what if a parent transfers land into a joint tenancy with one of her children without intending to make a gift (or more precisely the court does not find that sufficient evidence of an intention to make a gift), and the parent later decides that she wishes the child to receive the land as a gift on her death by right of survivorship?

This is what occurred in McKendry v. McKendry, 2015 BCSC 2433.

When Mary Alice McKendry died on February 23, 2012, she left surviving her five children, a son and four daughters.  

Mary McKendry had transferred title to her home on W 48th Avenue in Vancouver into a joint tenancy with her son, John McKendry in 2008. At her death, the home was worth over $1.9 million. There were mortgages registered against the home, which John McKendry had used to finance the purchase of an investment property. Apart from the home, her estate was worth about $465,000.

Her last will, made on December 16. 2010 contained the following paragraph:

7.         I wish to advise my Trustee/s that I have registered my home civically known as [W. 48th] (hereinafter called the “Home”) in Joint Tenancy with my son, John Alexander McKendry.  My son shall receive the Home subject to the Mortgages registered against [the] Home and shall be responsible for payment of the Mortgages as he was the recipient of the mortgage proceeds.
In her will, she left the residue of her estate to her four daughters.

She also signed a letter at the time of her will, stating

I, Mary Alice McKendry, confirm that I wish to cancel any trust agreements or other documents imposing an obligation on my son to share the property I own at [W. 48th] with my other children.  I want my home to be my son’s property on my death absolutely – no strings attached.  I have made this decision after much consideration and I fully understand that this gives my son the majority of my assets.  My house constitutes the majority of my assets.

Following Mary McKendry’s death three her daughters claimed that their brother held his interest in the home in trust for their mother’s estate. He made a counterclaim, seeking to vary the will under the Wills Variation Act in the event that the court found that he held the home in trust for the estate.

At first glance, it might appear that John McKendry had a pretty strong case that he should be entitled to keep the home, and that he did not hold it in trust for his mother’s estate. She had transferred title, and she very clearly expressed in her will and her letter that it was her intention that he receive the home to the exclusion of her daughters.

But there is more to the facts (otherwise, this would be a rather dull post). On two occasions before making her last will, Mary McKendry had instructed lawyers to draw up trust declarations in respect of the home. The first declaration stated that her son held title in trust, and on her death he would receive a third, one of her daughters would receive a third, and the other three daughters would share a one third interest. She signed the declaration, but John McKendry did not. The second trust declaration made in February 2010 provided that on Mary McKendry’s death, each child would be entitled to an equal interest in the home. Again, Mary McKendry signed the trust declaration, but her son did not.

Madam Justice Adair, who heard the trial, found that John McKendry had not rebutted the presumption of resulting trust arising at the time of the transfer of title. In instructing lawyers to prepare, and in signing the trust declarations, Mary McKendry was dealing with the home on the basis that she was able to determine who would be entitled to the home on her death. This was evidence that she considered that she had not made a gift of an interest in the home when she transferred it into a joint tenancy with her son. Madam Justice Adair also found that John McKendry’s testimony did not rebut the presumption.

Madam Justice Adair found that Mary McKendry’s last will and the letter of December 16, 2010 did not reflect her intentions at the time of the transfer, but rather reflected a change in intentions after the transfer.

The next question is whether Mary McKendry gave her son the beneficial interest in the home by right of survivorship in December 2010 when she made her will and signed the letter. Madam Justice Adair held that the will and letter were insufficient to make a gift of the home to John McKendry. She reasoned as follows:

[137]     I will assume that, as of December 16, 2010, Mary intended to make a gift to John of the survivorship interest in W. 48th.  This is what she communicated to Ms. Richter [Mary McKendry’s lawyer who drafted the will] and it is reflected in the December 2010 Will and the December 16 Letter.  However, even if this assumption was correct, I do not agree with Ms. Ducey [John McKendry’s lawyer] that, in the circumstances, nothing more needed to be done to perfect the gift.  Rather, I agree with the submissions of Mr. Lee (for the plaintiffs) on this point.
[138]     Transfers of real property are governed by the Law and Equity Act, R.S.B.C. 1996, c. 253, and the Land Title Act, R.S.B.C. 1996, c. 250, Part 12.  Section 59(3) of the Law and Equity Act requires contracts respecting land to be in writing to be enforceable.
[139]     In order to make a valid gift, the donor must have done everything that (according to the nature of the property) was necessary to be done to transfer the property and make the transfer binding on the donor.  The court will not act to complete an incomplete gift, and a mere promise to make a gift is unenforceable.  See Kooner v. Kooner(1979), 100 D.L.R. (3d) 76 (B.C.S.C.), at pp. 79-80. 
[140]     In my opinion, the Form A transfer, signed by Mary on January 28, 2008, is not sufficient to perfect a gift of the survivorship interest in W. 48th to John, because (as I have found) Mary did not intend at that time to make such a gift to John.  Assuming that, as of December 2010, Mary did intend to make such a gift to John, she did not take the necessary steps to perfect the gift.  The statements in the December 2010 Will and the December 16 Letter are insufficient to create any legal obligation; they are (at best) mere promises to make a gift to John.  I agree with Mr.  Lee [the lawyer for the Plaintiff daughters] that, in order for Mary to make a valid gift to John of the survivorship interest in W. 48th, Mary would have been required to execute a written deed of gift under seal (obviating the need for consideration), confirming an immediate gift of the survivorship interest in W. 48th.  Short of this, there was no legally binding gift, and I so find.
[141]     In summary, I find that John has failed to discharge the burden on him to show that, on January 28, 2008, Mary intended to make an immediate gift to him of the survivorship interest in W. 48th.  If, on December 16, 2010, Mary intended to make such a gift, she failed to take the steps necessary to make a valid, legally binding gift.
[142]     The result is the plaintiffs are, accordingly, entitled to a declaration that John holds W. 48th in trust for Mary’s estate.

Madam Justice Adair then considered John McKindry’s claim to vary the will. She did vary the will, and awarded him a one-fifth share of the estate, from which the amount of the mortgage taken out for his benefit will be set off.

Saturday, December 12, 2015

Can a Former Spouse Bring a Family Law Claim to Divide Family Property Against the Estate of His or Her Deceased Former Spouse?

In a recent decision, Howland Estate v. Sikora, 2015 BCSC 2248, the Supreme Court of British Columbia held that a former spouse may bring a claim for the division of family property under the Family Law Act against the estate his deceased former spouse if the claim is filed within the limitation period set out in section 198 of the Family Law Act. In other words, a surviving spouse’s Family Law Act claim is not defeated by the death of the other spouse.

Martha Antoinette Howland and Kelvin Joseph Sikora lived together in a common law spouse relationship until their separation in August 2012. After separation, Ms. Howland started a lawsuit under the Partition of Property Act, seeking to have property they jointly owned sold. She died on March 2, 2013.  On May 5, 2013, Mr. Sikora filed a counterclaim seeking a division of family property under the Family Law Act.

Ms. Howland’s executor asked the court to dismiss the counterclaim. She argued that neither the deceased person nor the deceased person’s personal representative is a “spouse” or “former spouse” under the Family Law Act, and, therefore, the surviving former spouse, in this case Mr. Sikora, could not bring a Family Law Act claim following the deceased’s death.

Mr. Justice Harvey held that Mr. Sikora could proceed with his counterclaim. Mr. Sikora’s property rights crystallized under the Family Law Act on the date of separation. This stands in contrast the previous legislation in British Columbia, the Family Relations Act, pursuant to which there had to be a triggering event such as a separation agreement, divorce or a court declaration that there was no reasonable prospect of reconciliation before each former spouse acquired a property right to family assets held by the other.

Because Mr. Sikora’s property rights crystallized on the date of separation, he could proceed with a claim to a division of the family property pursuant to the Family Law Act, provided he did so within two years of the date of separation. This is the limitation period for a common law spouse to file a Family Law Act claim for the division of property.
Mr. Justice Harvey wrote at paragraphs 23 and 24:

[23]         Here, the action was commenced within that timeframe. Although the claimant was no longer alive when this occurred, she was alive when the respondent’s entitlement to an undivided half interest in the property arose upon separation. Therefore, this is unlike the situation where an order enforcing a personal obligation, such as spousal or child support, is sought against a deceased person. More importantly, nothing in s-s 198(2) stipulates that the action must be commenced against the other spouse. These features distinguish the present case from [British Columbia (Public Trustee) v]. Price [43 B.C.L.R. (2d) 368 (C.A.)].
[24]         For these reasons, I find that the respondent’s right to bring an action for property division under Part 5 of the FLA crystallized upon the coming into force of the FLA given their separation had occurred less than two years before the filing of the counterclaim.

Mr. Justice Harvey’s decision dovetails well with the provisions of the new (well, after a year and a half, relatively new) Wills, Estates and Succession Act, under which a person who ceases to be a spouse (usually on separation) loses the succession rights of a spouse. For example, a person who has ceased to be a spouse death may not make a claim to vary a will of a deceased former spouse, is not entitled to a share of the estate if the deceased died intestate, and unless there is a contrary intention appearing in the will, a gift by will to a spouse is revoked when he or she ceases to be a spouse.  The rationale for these provisions of the Wills, Estates and Succession Act is that the former spouse may pursue his or her claim under the Family Law Act, and should not be in a position to have both the family law rights of a former spouse, and the succession rights of a spouse.

If Mr. Justice Harvey had decided that a former spouse could not make a Family Law Act claim against the estate of the deceased former spouse, then the surviving former spouse who had not commenced a claim before the death of his or her formal spouse would be in the position of having lost his or her succession rights, but without any recourse to a share of family property under the Family Law Act, a result which in some cases would be most unjust.

There is one concern I have (actually I have several, but am only addressing one here) about the potential effects of the Family Law Act following the death of a former spouse. In the Howland Estate case, Ms. Howland and Mr. Sikora were common law rather than married spouses. The limitation period was two years from the date of separation. Although there can be disputes about when spouses separate, at some point it will usually be clear when the limitation period has expired. A personal representative may then be comfortable distributing the estate if no Family Law Act claim has been brought by the surviving former spouse. But the limitation period for a married spouse is different. The relevant section is 198(2) of the Family Law Act, which says:

(2) A spouse may start a proceeding for an order under Part 5 [Property Division] to divide property or family debt, Part 6 [Pension Division] to divide a pension, or Part 7 [Child and Spousal Support] for spousal support, no later than 2 years after,
(a) in the case of spouses who were married, the date
(i)   a judgment granting a divorce of the spouses is made, or
(ii)   an order is made declaring the marriage of the spouses to be a nullity, or
(b) in the case of spouses who were living in a marriage-like relationship, the date the spouses separated.

As I interpret this, the limitation does not begin to run in the case of married spouses until a divorce or order declaring the marriage to be a nullity. If a spouse dies without a divorce, or order declaring the marriage to be a nullity, and there is no separation agreement, the surviving spouse could conceivably commence a claim many years after separation, and even many years after death. There are various ways the deceased’s personal representative may be able to deal with this issue if he or she is aware of the potential claim, but I suspect there will be cases where a personal representative may distribute the estate without recognizing that a former married spouse may make a Family Law Act claim, especially if spouses had been separated for a long period of time before one of them dies. 

Increase in Tax Rate on Trusts

The Federal Minister of Finance has announced an increase in taxes for income in excess of $200,000 to 33% for federal income tax. Unfortunately, this will have the effect of further raising rates on income earned in a trust, including trusts created in wills. This will exacerbate the problem of taxing trusts including trusts earning modest investment income at what I would describe as a punitive tax rate.

As I have written before, the previous Conservative government implemented a significant change in the way testamentary trusts (those that arise on death, usually created in a will) are taxed. Up until this year graduated rates were available for income earned in testamentary trust. Beginning this year, graduated rates are available for an estate for up to 36 months, but income earned in the trust will be taxed at the highest marginal rate, unless it is paid to a beneficiary, in which case, the trust can deduct the income, and the beneficiary then includes the income in his or her tax return. Income earned in trusts that were not testamentary has been taxed at the highest rate for decades.

Although there is relief available from the top tax rate in some cases for testamentary trusts if a beneficiary is entitled to a disability tax credit, in other cases testamentary trusts created for socially beneficial estate planning are caught by this high tax rate. For example, a parent may create a trust for the benefit of her son, who has been addicted to drugs. She may be concerned that if she leaves an outright inheritance to him, that he may relapse, and use his inheritance to feed his addiction. Instead, she creates a trust for him, appointing another family member or friend as trustee, and gives the trustee the discretion to pay income or capital to him or for his benefit. Because income earned and taxed in the trust is taxed at the top rate, if the son relapses, the trustee will face the choice of either paying income to the son and risk that it will feed his addiction, or paying a high rate of tax on the income accumulated in the trust.

In addition to the 33% federal tax, trusts have to pay provincial taxes, which vary from province to province. In British Columbia, the combined top rate will be 47.7% in 2016, but in some other provinces the top rate may exceed 50%.

The Minister of Finance announced the new top rate in conjunction with a reduction of the rate of income tax in a lower income bracket from 22% federal tax to 20.5%. This reduction of course will benefit many tax payers, and will to some extent ameliorate the increase for those earning over $200,000 (they will pay more on the excess, but less on that part of their income that falls into a lower tax bracket. But there is no similar relief from tax for trusts, because all of the income is taxed at the top rate.   

Saturday, November 28, 2015

Lane Estate

There have now been several reported cases in British Columbia in which the courts have been asked to give effect to a document that does not meet the formal requirements for a valid will pursuant to section 58 of the Wills, Estates and Succession Act. This section allows the court to give effect to a document or other record as a will if the court is satisfied that it reflects the testamentary intentions of a deceased person.

I have written about the first reported case dealing with this issue in British Columbia, Estate of Young, 2015 BCSC 182, here, and another case Beck Estate, 2014 BCSC 676, here. In both these cases the courts gave effect to a document that did not comply with the formal requirements.

We now have a reported case in which the Supreme Court of British Columbia declined to give effect to any of the non-compliant documents the Court was asked to consider. The case is Lane Estate, 2015 BCSC 2162, a decision of Mr. Justice Pearlman.

Elda Lane made a will in 1994 in which she left the residue of her estate to be divided equally between her son, Warwick Lane, and her daughter, Deborah Alsop. She signed the will in the presence of two witness in accordance with the formal requirements for a valid will.

On her death on April 14, 2015, Ms. Lane’s main assets were her house and a bank account. The value of her estate was approximately $400,000.

Between April 14, 2012 and January 9, 2015 she made seven documents in which she purported to leave her house and her funds to her son (the words she used to describe the assets she was leaving to her son varied, such as house and bank account, house and money, house and everything).  Some were signed and some were not:

The April 14, 2012, October 21, 2012 and July 2013 notes are each signed at their end by the deceased.  On the May 3, 2014, November 3, 2014, December 15, 2014 and July 9, 2015 notes, the deceased wrote her name at the top of the note, and either signed "Mom" at the end of the note, or in the case of the November 3, 2014 note, left the end of the note unsigned.

Elda Lane told her son several times that she wanted to leave him her house and that she left a note in her house. He told her that if she wanted to change her will, she should see a lawyer, but she said that the note was “good enough.”

Mr. Justice Pearlman found that all of the notes were authentic, that she had capacity to make a will, and that there was no evidence of undue influence. He inferred that the relationship between Elda Lane and her daughter was “strained,” but that they were not “estranged.”

Applying the Estate of Young, and Beck Estate decisions as well as the Manitoba Court of Appeal decision in George v. Daily,[1997] M.J. No. 51, Mr. Justice Pearlman considered whether  the notes, or any of them, represented a deliberate and fixed or final intention of Ms. Lane’s testamentary intentions.

He considered the factors both for and against giving effect to the documents:
[44]         The factors that might support a finding that the notes represent the testamentary intention of the deceased are:
(a)          the deceased used the formal language of "I, Elda Lane leave ... to my son" in several of the notes;
(b)          some of the notes are signed at their end by the deceased;
(c)          the deceased told the petitioner she wanted him to have her house after she died and that she had left a note to that effect;
(d)          six of the notes contemplate a distribution of the estate by which the petitioner would receive all of the residue of the estate.  The October 21, 2012 note identifies the property to be left to the petitioner as including the deceased's principal assets, her house and the Scotiabank account.
[45]         I have excluded the April 14, 2012 note.  That note, written on the back of a Safeway receipt, states that the deceased is leaving her house to her son, and that she is leaving her son "in charge of my bank account ... with Scotia Bank."  In my view, the latter statement is as consistent with an expression of a wish by the deceased that the petitioner manage her finances as it is with an intention to make a bequest.  I find that the April 14, 2012 document is not a deliberate or fixed and final statement of the deceased's testamentary intention.
[46]         The factors that weigh against a finding that one or more of the notes represent the deceased's testamentary intentions are as follows:
(a)          each of the notes is written on the back of a receipt, grocery list, calendar, or other scrap paper, suggesting impermanence and informality rather than a fixed and final intention;
(b)          none of the notes were witnessed.  They all lack one of the fundamental hallmarks of formal validity;
(c)          there is no express revocation of the deceased's Will.  This case is distinguishable from Estate of Young where the document admitted to probate was generally consistent with the deceased's will;
(d)          none of the documents bear a title.  In Beck Estate, unlike this case, the deceased described the document in issue as a codicil to her last will.  She left instructions for the document to be read out by her lawyer.  She also left a copy with her executor.  Here, there is no evidence that the deceased either showed or provided copies of her notes to anyone else;
(e)          the deceased appears to have made the December 15, 2014 and  January 9, 2015 notes at times when she thought she might shortly die.  By suggesting that the gift was contingent upon her imminent death these notes may not represent an expression of the deceased's fixed and final testamentary intention;
(f)           some of the documents are in the form of personal notes addressed to the petitioner, a further departure from the formal requirements of a testamentary document.
[47]         In the particular circumstances of this case, I attach little weight to the deceased's apparent belief that her notes were effective to change her Will.  None of the notes explicitly state an intention to revoke her gift of one-half of the residue of the estate to Ms. Alsop.

He concluded that they did not represent Ms. Lane’s testamentary intentions.

[48]         After weighing all of these factors, I find on the balance of probabilities that the notes, whether considered individually or collectively, do not represent a deliberate and final expression of the deceased's testamentary intentions.  In making that determination, I give particular weight to the absence of any witnesses, the fact that all of the notes were made on scrap paper, the absence of any express revocation of the Will or the gift of one-half of the residue to Ms. Alsop, the lack of any evidence the deceased had any rational basis for disinheriting Ms. Alsop, and indeed the lack of any evidence that the deceased ever turned her mind to how the wishes she expressed in the notes would affect her earlier testamentary dispositions.

In the result, the residue of Elda Lane’s estate will be divided equally between her daughter in accordance with her 1994 will.