Discretionary Trusts and Ontario Net Family Property

A recent Ontario Superior Court decision (Tremblay v. Tremblay, 2016 ONSC 588; under appeal) has suggested that a beneficial interest in a discretionary trust can be as valuable as the trust property itself for the purposes of calculating net family property (NFP)—the value of property that will be divided among the parties upon marital dissolution under Ontario’s Family Law Act.

In 2009, Michael Tremblay implemented an estate freeze for his family business, permitting some of the future growth of the family business to accrue to his son, Jeff. To this end, a holding company (Nictor) was incorporated to retain Jeff’s share of surplus distributed from the Tremblays’ various operating companies. Jeff was Nictor’s sole director. A fully discretionary family trust was settled to hold Nictor’s common shares for the benefit of Jeff, Jeff’s former spouse Catherine, and their children. Jeff, Michael, and Heather (Jeff’s mother) were appointed trustees of the family trust. As trustee, Jeff held the power to unilaterally appoint and remove other trustees.

When Jeff and Catherine separated years later, the court was faced with assigning an appropriate monetary value to Jeff’s beneficial interest in the family trust to be included in his NFP. The court held that Jeff’s extensive influence over Nictor and the family trust resulted in the value of his beneficial interest equalling that of the Nictor shares owned by the family trust. The court said that Jeff’s ability to appoint a majority of trustees elevated the possibility of trust distributions to Jeff as a beneficiary into “something more like a certainty.” Presumably, in the court’s view, this certainty was just as valuable to Jeff as direct ownership of the Nictor shares.

Further, the court found that Jeff’s beneficial interest did not qualify for the exclusion from NFP for property owned on the valuation date acquired by gift after marriage, on the ground that Jeff did not hold complete title to the trust property. Thus, the relevant “property” was not “owned” by him, as required for the exclusion in section 4(2) of the Family Law Act. (Interestingly, the court did not refer to the fact that the NFP definition in section 4(1) provides that property must also be “owned” to be included in NFP. Query whether property can be owned for the purpose of its inclusion in NFP but not for the purpose of its exclusion therefrom.)

Tremblay suggests that to reduce the value of a beneficial interest included in NFP, a beneficiary’s control over trust property, whether direct or indirect, should be minimal. Tremblay also suggests that the distribution of trust property to a spouse in satisfaction of her beneficial interest prior to the valuation date may be required to exclude its value from NFP as property that was acquired by gift after marriage or as property traceable thereto.

Robert Santia and Nathan Wright
JGW Business and Tax Law, Toronto
rsantia@jgwlegal.com
nwright@jgwlegal.com

Canadian Tax Focus
Volume 6, Number 4, November 2016
©2016, Canadian Tax Foundation