Trust issues and NFP

If a person has an interest in a Trust does it form part of their NFP?

To recap, 1n 1994, John White did an estate freeze. The result of the freeze was that he held $300,001 Class A preferred shares, with a fixed value of $1.00 each, in John White Family Holdings Ltd., and the John and Ann White Family Trust held ten common shares in Holdings.

Holdings, in turn, held 100 common shares of the operating company, Cottages Ltd., two mortgage receivables and four properties.

Through his ownership of the preferred shares in Holdings, John White retained control of the corporation.

At the date of separation, January 2, 2008, Mr. White’s financial expert valued Holdings at $658,256, allocated $300,001 to the preferred shares and $358,255 to the common shares. Ann White takes the position that the entire DOS value of Holdings should be included in Mr. White’s NFP.

While Ms. White’s counsel raises issues that significantly muddy the waters, such as issues about assets not being transferred into the Trust, the real issue seems to be whether Mr. White’s control of Holdings somehow results in his having a property interest in the Trust for Family Law Act purposes.

In my opinion, Ms. White’s position is based on a fundamental misconception about trust law about the relationship between the trustee and the beneficiary of a trust, and about the relationship between Mr. White’s position as the controlling shareholder in Holdings and his position as a non-beneficiary trustee of the Trust.

Mr. White was a trustee but not a beneficiary of the Trust. He and the other trustees held legal title to the assets held on trust. By the very nature of a trust, he (and the other trustees) did not have a beneficial interest in the trust property.

Mr. White’s control of Holding through ownership of the preferred shares also did not give him a beneficial interest in the trust property.

If Holdings had bought back the common shares from the Trust, they would then form part of Mr. White’s NFP. At the DOS, the common shares were still held by the Trust; or, properly speaking, by the trustees in trust for the children. (The trustees were Mr. White, Ms White and a third party.) The fact that Mr. White might have been able to have Holdings buy the common shares, if the other trustees agreed doesn’t mean they formed part of his NFP. Of course, he would not have done that, because it would undo the estate freeze and defeat the purpose of carrying it out.

Cases considering Sagl v. Sagl

You suggested that I look at family law cases with respect to trusts and property, such as the cases considering Sagl v. Sagl (1997), 31 R.F.L. (4th) 405, [1997] O.J. No. 2837 (Gen. Div.). There is an important distinguishing factor between Sagl v. Sagl and the White case: the information provided to me is that Mr. White was the settlor of the trust and one of the three trustees, but he was not a beneficiary. The beneficiaries of the trust, at the time when it was established and at the date of separation, were the children of John and Ann White.

In Sagl, in contrast to the White case, Mr. Sagl was a beneficiary of the trust. The issues in Sagl were whether the entire value of the trust should be included in his NFP (the court answered “no”) and how to value his interest in the trust.

Ms. White’s counsel may be alleging that the Trust was a sham when it was set up, or that a legitimately established trust was misused, when he says that assets were not transferred into the Trust. If that is what he means, it is not clear, and there doesn’t seem to be any foundation for alleging that the trust was a sham or that it was misused. Anyway, the Trust has been dissolved and you have not advised that any issues were raised at the time.

In following up the cases that consider Sagl and in running other search queries, I have not found any cases that even raise the issue of whether a person who controls a company has, by virtue of that fact, a property interest for FLA purposes in a trust that holds common shares of the company, where the person is not a beneficiary of the trust.

Putting it more simply:

Mr. White controlled Holdings;

The Trust held all the common shares of Holdings;

Mr. White was not a beneficiary of the Trust;

I found no cases discussing whether someone in Mr. White’s position would have a property interest for FLA purposes in the Trust.

There is ample case law confirming that the beneficiary of a trust has a property interest for FLA purposes. Black v. Black, [1988] O.J. No. 1975, 18 R.F.L. (3d) 303 (H.C.J.); Brinkos v. Brinkos, [1989] O.J. No. 1140, 20 R.F.L. (3d) 445; and many others. I have never seen a case where a non-beneficiary of a trust was found to have a property interest in the trust for FLA purposes.

In Spencer v. Riesberry, 2012 ONCA 418, 114 O.R. (3d) 375, 17 R.F.L. (7th) 94, 2012 CarswellOnt 7589, the Court of Appeal upheld the trial decision[2] that the parties’ residence was not a matrimonial home within the meaning of s. 18(1) of the FLA. The residence was held on a trust of which the wife’s mother was the settlor and the wife and her sister were the trustees. The wife was also one of the beneficiaries of the trust. The trial judge held, and the Court of Appeal confirmed, that a beneficiary of a trust does not have a property interest in any specific trust asset unless the trust deed so provides or the asset is distributed from the trust.

At paragraphs 45 to 55, the court discusses the duties and powers of the wife as a trustee and addresses the appellant husband’s argument that the court should not enforce the separate entities of trustee and beneficiary. See, I particular, paragraphs 52 to 55:

Second, to ignore or conflate the separate roles of trustee and beneficiary would be contrary to the fundamental nature of a trust and would render the trust unworkable.

A trust is a form of property holding. It is not a legal entity or person. A trust does not hold title to property nor can it. It is the trustee who holds legal title to the trust property.

A trust is also a type of relationship, namely, the fiduciary relationship that exists between trustee and beneficiary. The foundation of the trust relationship is the separation of roles between the trustee and beneficiary with the trustee being the legal owner of the trust property and the beneficiary being the equitable owner of the trust property. The trustee holds legal title to the trust property so that it can manage, invest and dispose of the trust property solely for the benefit of the beneficiaries. A trust can only exist when there is a separation between legal ownership in the trustee and equitable ownership in the beneficiaries.

If the court were to ignore or conflate the separate entities, it would destroy the foundation of the trust relationship. Put another way, absent the separate entities, there is no trust relationship and, therefore, no trust. That is not the case when the corporate veil is pierced. In that situation, the corporation as a separate legal entity remains — it is simply that the court can look through the veil, in very limited circumstances, to attribute ownership to the corporation’s alter ego.

Mr. White was a trustee but not a beneficiary of the Trust. His legal title (along with the other trustees) to the assets held on trust did not give him a beneficial interest in the trust property. His control of Holding through ownership of the preferred shares also did not give him a beneficial interest in the trust property.

Maryelle Symons

Barrister  & Solicitor