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Variation of Trusts

A trustee of an inter vivos or testamentary trust is required to carry out his or her duties in accordance with the provisions of the trust document, applicable legislation as well as the principles of common law. A trustee has no authority to vary the terms of a trust unless the trust document itself permits the trustee to vary same. Should a trustee vary the terms of a trust without authority, he or she would be in breach of his or her fiduciary duties.

In Ontario there are several ways to vary a trust: if allowed by the terms of the trust instrument; if all the beneficiaries entitled to share absolutely in the trust are sui juris and agree, the beneficiaries can demand the trust to be terminated and the trust property distributed to them in such proportions as they agree;[1] by court application pursuant to the court’s inherent jurisdiction to supervise the administration of trusts, but the basis on which they would do so are very constrained;[2] pursuant to the Charities Accounting Act;[3] or by court application under the Variation of Trusts Act (the “Act”). [4]

Variation of Trusts Act (the “Act”)

I will focus on this method of varying a trust and the test for court approval.

The Act only contains two provisions. The Act states that where a property is held in trust, a court may approve on behalf of (a) adults incapable of consenting; (b) minors incapable of consenting; (c) unascertained and unborn persons who may become entitled to benefit from the trust; and (d) persons with a discretionary interest, any arrangement, by whomsoever proposed and whether or not there is any other person beneficially interested who is capable of assenting thereto, varying or revoking all or any of the trusts or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts.[5] The Act further states that the court shall not approve an arrangement on behalf of any person coming within clause (1) (a), (b) or (c) unless the carrying out thereof appears to be for the benefit of that person.[6]

When reviewing the Act, it is clear that the language is discretionary, and while it prohibits the court from approving a variation that does not provide a benefit for the incapacitated beneficiaries, there is nothing mandating a Court to approve a variation if a benefit is provided. The Act seems to have expanded on the rule in Sanders v Vautier by allowing the court to consent to a variation on behalf of beneficiaries who are not adults, do not have legal capacity, or who are unborn, or on behalf of unascertained contingent interests. However, it does not empower the court to avoid the rule in Sanders v Vautier and vary a trust in which all the beneficiaries are of full legal capacity and together have the beneficial interest in the trust property.[7]

The Test for Court Approval:

Court applications under the variation of trust legislation are typically chambers applications that don’t normally result in reported written reasons for making, or refusing to make, an order under the legislation. However, there are some reported decisions that provide guidance on the interpretation of the legislation.[8]

In Re: Irving, the Court suggested that it should consider three things when considering whether to approve a variation:

  1. Does the proposed variation keep alive the basic intention of the testator (settlor)?
  2. Is there a benefit to be obtained on behalf of infants and of all persons who are or may become interested under the trusts of the will?
  3. Is the benefit to be obtained on behalf of those for whom the court is acting such that a prudent adult motivated by intelligent self-interest and sustained consideration of the expectations and risks and the proposal made, would be likely to accept? [9]

Concerning the first question, case law has developed since Re Irving, and courts have questioned whether a variation must stay true to the testator’s intention to meet the test for approval considering that the rule in Sanders v. Vautier applies regardless of the intention of the settlor.[10] Furthermore, the Act itself contains no reference to the intention of the testator.

Concerning the second question, it has been held that the court must measure the benefit from the starting point of the entitlement.[11]

Concerning the third question, it has been held that the benefit must be not just a group benefit but a benefit for every member of the class as an individual.  The variation has to provide a reasonable bargain on behalf of the infant or unborn person that an adult would be prepared to make.

In Finnell v. Schumacher Estate, the Ontario Court of Appeal overturned the application judge’s approval of a proposed variation on the basis that the applicant had failed to provide adequate evidence of a sufficient benefit to each non-sui juris beneficiary. Even if the incapacitated beneficiaries benefitted (or certain of them did) as a group, this was not enough. The Court must find that there is a sufficient benefit for each and every beneficiary on behalf of whom the Court is asked to consent. [12]The Court of Appeal denied approval of the proposed Deed of Arrangement, but its decision was without prejudice to the estate trustees coming forward with an alternate Deed of Arrangement for approval.

Must the Benefit be Financial in Order to Satisfy the requirements of the Act?

There seems to be two schools of thought, on the one hand, some accept that a non-financial benefit is considered a benefit for the purposes of satisfy the Act, and on the other, financial benefits should be the only consideration.[13]

In Re Zekelman,[14] the court held that in determining the sufficiency of a benefit for purposes of Variation of Trusts, the court could also consider a non- financial benefit. The benefit approved by the court in that case included certain tax savings and “family harmony”. The avoidance of family dissension was also recognized as a benefit for variation of trust purposes in Lafortune v. Lafortune Estate.[15] However, the weight of jurisprudence suggests, that although the court may consider non-financial benefits, financial considerations should be the court’s primary concern. Non-financial benefits, by themselves are not sufficient.[16]

Takeaway

It is important when commencing any court application to vary the terms of a trust, to review the trust Deed, the tax implications involved if any, to negotiate and obtain the approval of all the sui juris beneficiaries, the Children’s lawyer for the unborn and unascertained beneficiaries, as well as the Public Guardian and Trustee for the incapable beneficiary. Ultimately, approval is at the court’s discretion.

[1] Saunders v. Vautier, (1841) Cr. & Ph. 240, 41 E.R. 482, In order to invoke this method the following criteria must be met: a) all of the beneficiaries of the trust must be sui juris (i.e., mentally competent and over the legal age of majority; b) all of the beneficiaries must consent; and c) The interests of the beneficiaries must be vested and indefeasible.

[2] Donovan W.M Waters,Q.C., Mark R. Gillen, & Lionel D.Smith, Water’s Law of trusts in Canada, 4th ed. (Toronto, Carswell, 2012) at 1235-1256

[3] Charities Accounting Act, R.S.O. 1990, c. C10, section 13 of the Act allows parties to obtain a court order on the consent of the Public Guardian and Trustee for matters such as varying the objects of the charitable trust or expanding investment powers where no discretion is provided in the trust deed.

[4] Variation of Trusts Act, R.S.O. 1990, c. V.1 (the “Act”)

[5] Ibid, at section 1.(1) (a),(b),(c) &(d)

[6] Supra note 6, at section 2.

[7] Mark Gillen, Law of Trusts, 3rd ed, Ch7 (Variation of Trust Legislation), 7-13

[8] Mark Gillen, Law of Trusts, 3rd ed, Ch7 (Variation of Trust Legislation), 7-16

[9] Re Irving (1975), 11 O.R. (2d) 443 (H.C)

[10] Finnell v. Schumacher Estate, 74 O.R. (2d) 583 (Ont. C.A.), 1990 CANLII 6766 (ONCA) (“Schumacher Estate”), Primo Poloniato Grandchildren’s Trust (Trustee of) v. Browne, [2012] O.J. NO. 5772 (C.A.), 2012 ONCA 862 (CANLII

[11] Mark Gillen, Law of Trusts, 3rd ed, Ch7 (Variation of Trust Legislation), 7-17

[12] Schumacher Estate, ibid

[13] The court recognized a benefit to children in the form of increased wealth in their parents’ hands in Ridalls v. Co-operative Trust Co. of Canada (1983), 24 Sask. R. 16, 14 E.T.R. 157 (Sask. Q.B.); Re Kovish (1985), 18 E.T.R. 133 (B.C. S.C.); Re Henderson Estate (1991), 77 Man. R. (2d) 91 (Man. Q.B.); and May v. May (1994), (sub nom. May v. May Estate), 96 Man. R. (2d) 268, [1995] 1 W.W.R. 70 (Man. Q.B.) (although in the last case there was also significant life insurance). Cases in which the court has denied approval due to the absence of a more tangible benefit for the next generation include Kunater v. Royal Trust Corp. of Canada (1980), 23 B.C.L.R. 287(B.C. S.C.); Re Nathanson (1981), 45 N.S.R. (2d) 151, 9 E.T.R. 256 (N.S. T.D.); Salt v. Alberta (Public Trustee) (1986), 45 Alta. L.R. (2d) 331, 23 E.T.R. 225 (Alta. Q.B.); and Samoil v. Buob Estate (1999), 86 Alta. L.R. (3d) 250, [2001] 2 W.W.R. 280 (Alta. Q.B.) (even though the Public Trustee did not oppose). In Canada Permanent Trust Co. v. Assie (1985), (sub nom. Re Assie),42 Sask. R. 262, 24 E.T.R. 278 (Sask. Q.B.), the judge rejected the application as failing to show any tangible benefit for the contingent beneficiaries, expressing a concern that applications should not be granted as of course. The application was modified and renewed (1985), 45 Sask. R. 142, but it was refused again.

[14] Re Zekelman [1971] 3 OR 156 (HC)

[15] Lafortune v. Lafortune Estate (1990), 40 E.T.R. 299 (Ont. H.C.)

[16] William Innes and Joel T. Cuperfain “Variations of Trusts: An analysis of the Effects of Variations of Trusts Under the Provisions of the Income Tax Act” found at: https://www.ctf.ca/ctfweb/Documents/PDF/1995ctj/1995CTJ1_Innes.pdf

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