To understand what a resulting trust is, it is necessary to first understand what a trust is. Some people might not know that there are two forms of property ownership: legal ownership and beneficial ownership. It is because of these dual forms of property ownership that trusts can exist.  

When a person holds legal ownership of a property, it is their name that appears on formal title or registered documents. They are the person who has authority to deal with the property, though there are often limits on that authority if they are not also the beneficial owner. A beneficial owner, on the other hand, has the right to enjoy the property’s value and benefits even if their name is not on title (i.e. someone else is the legal owner). Because the beneficial owner is entitled to the property’s value and benefits, they are often described as the “true” owner.

Generally, the legal and beneficial owner will be the same person. Under British Columbia’s land title system, the registered (or legal) owner of a property is presumed to be the beneficial owner as well (Land Title Act, R.S.B.C. 1996, c. 250, s. 23). That presumption is referred to as the “presumption of indefeasible title” and is the starting point in any dispute over beneficial ownership of property.

Sometimes, however, the legal and beneficial owner of property are different people. In those scenarios, the legal owner holds the property in “trust” for the beneficial owner. There are several ways in which this trust relationship is established. One such way is a resulting trust.

The Resulting Trust

The resulting trust is a manifestation of the maxim, “equity presumes bargains, not gifts.” It is a legal presumption that allocates the burden of proof in disputes over beneficial ownership of property when that property was transferred gratuitously, meaning for nothing in return.

If a person receives property but provides no consideration or value for it, the law presumes that person holds the property in a resulting trust for the transferor. In effect, the presumption of resulting trust displaces the presumption of indefeasible title and shifts the burden of proof to the transferee to establish that the transfer was a gift. If the transferee cannot establish that the transfer was a gift, the resulting trust is established and the transferee must return the property to the transferor.

This displacing of presumptions is an important point. It is the transferor who at the first instance must rebut the presumption of indefeasible title by showing that the transferee gave no consideration or value for the property and only then will the presumption of resulting trust be engaged. Ultimately the transferor’s intention is the overriding consideration, but due to the evidentiary challenges with proving intention, particularly when the subject transfer happened many years past, disputes over beneficial ownership of property can often turn on the applicable presumption.

Whether you are a transferor looking to recover property or a transferee looking to retain it, it is important to obtain legal advice early. Resulting trust disputes are often won or lost on the available evidence, the applicable legal presumptions, and the ability to prove what was intended at the time of the transfer. A litigation lawyer can help assess the strengths and weaknesses of your claim or defence, identify the evidence needed to advance your position, and develop a strategy for resolving the dispute.

This article is for general information only and is not legal advice.

Article by: Doug Conolly and Robert Goddard

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Chris J. Bettencourt – Real Estate Law

Sarando Matheos – Insurance Law

Dan A. T. Moseley – Corporate and Commercial Litigation

Greg P. van Popta – Real Estate Law

Sepideh Alimirzaee – Insurance Law (Ones to Watch)

Adam Van Noort – Corporate Law (Ones to Watch)

Best Lawyers recognition is based on a peer-review process that gathers feedback from members of the legal profession regarding the professional abilities of their colleagues.

Best Lawyers: Ones to Watch recognizes lawyers who are earlier in their careers for professional excellence in private practice.

We appreciate the trust our clients place in us and value the respect of our peers in the legal community. Congratulations to the lawyers recognized in the 2027 edition.

McQuarrie – Providing Exceptional Legal Services in Surrey & the Fraser Valley Since 1967

Since 1967, McQuarrie has provided exceptional legal services in Surrey and the Fraser Valley. McQuarrie is a multi-practice firm that is optimally sized to meet the needs of a diverse range of business, individual, and institutional clients.

From business law and land development to insurance denial and estates, McQuarrie delivers innovative, result-driven legal solutions. We believe trust is the foundation of every good client-lawyer relationship and we value the trust and confidence that clients have placed in our firm.

We work hard to earn that confidence by understanding the diverse needs of our clients and responding to those needs with careful preparation, attention to detail and proactive, practical solutions.

The post Six McQuarrie Lawyers Recognized as Best Lawyers Award Recipients 2027 appeared first on McQuarrie Legal Services.

Estate planning can feel overwhelming, particularly when faced with important legal, financial, and personal decisions. Without clear guidance, it can be difficult to know where to begin or how to ensure everything has been properly addressed. Working with an experienced estate planning lawyer brings clarity and structure to the process, helping you make informed decisions with confidence.

The Role of a Will in Your Estate Plan

A will could be the foundation of your estate plan, as it can provide clear direction on how your affairs should be handled after your passing.

A properly prepared will can address a wide range of important matters, including the ability to:

• appoint an executor to manage your estate and carry out your instructions;
• clearly outline how your assets will be distributed and who will receive them;
• name a guardian for minor children; and
• incorporate planning strategies that may help minimize taxes and preserve more of your estate for your beneficiaries.

Without a will, you are considered to have died intestate, meaning your estate will be distributed according to provincial laws rather than your personal wishes. This can create uncertainty and lead to:

• delays;
• increase costs;
• disputes among family members; and
• a distribution of your estate contrary to your intentions.

Planning for Incapacity

Many people focus on what happens after death, but overlook what could happen during their lifetime. If you are unable to make decisions due to illness or injury, you will need a trusted representative to act on your behalf.

A Power of Attorney allows a trusted individual to manage your financial affairs, while a health care directive and representation agreement appoints a representative to make health care decisions on your behalf. Together, these documents allow you to appoint who can make decisions for you and how those decisions should be made. Without them, loved ones may need to go through a time‑consuming and costly court process to gain the authority to act.

Making Sure Your Assets Transfer Smoothly

How your assets are structured can significantly impact what your family ultimately receives from your estate. A well-planned estate ensures assets are transferred efficiently and with minimal complications.

Tools such as trusts can play an important role in managing how and when beneficiaries receive their inheritance. A trust allows you to set conditions around distributions, which can be particularly useful when planning for minor children, individuals who may need financial guidance, or situations where you want to protect your assets over time.

Other available estate planning tools, such as properly designated beneficiaries and revised ownership structures, can also impact how assets are held and then transferred to your beneficiaries. When all these elements are aligned, they not only simplify the process, but also help maximize the value of your estate, ensuring that more of what you have built is preserved and passed on to your intended beneficiaries.

Complex Situations and Avoiding Costly Mistakes

Estate planning becomes even more important when personal or financial circumstances are more complex. Without careful planning, these situations can lead to unintended outcomes, or prolonged disputes which can lead to significant legal costs to resolve.

Key considerations include:

• excluding or limiting the assets transferred to a child or spouse, in accordance with equitable considerations;
• planning for blended families or second marriages;
• providing for dependents with unique needs;
• preparing for business succession and coordinating existing legal agreements;
• eliminating or reducing taxes (capital gains tax, property transfer tax, probate tax; etc.);
• protecting your will from wills variations claims or court challenges to change your intended distribution; and
• ensuring the right individuals act as executor/trustee for your estate.

Working With the Right Estate Planning Team

Estate planning is a personal process. The right lawyer can help you make informed decisions by providing advice tailored to your goals, family dynamics, assets, and financial circumstances.

A thoughtful estate plan should work as a coordinated whole. With proper guidance, your plan can:

• protect your interests and preserve your assets;
• reduce avoidable tax liabilities and administrative complications;
• provide clear direction for your executors, trustees, and representatives; and
• support your loved ones with clarity, certainty, and care.

The result is a carefully structured plan that reflects your wishes, safeguards what you have built, and helps ensure your loved ones are provided for according to your intentions.

Contact us today to discuss your estate planning needs.

This article is intended for general information only and does not constitute legal advice.

Article by: Cindy Zheng and Jaskirat Purewal

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We are often asked by clients for a simple, easy to understand, description of estate freezes and how they work. While this article endeavours to provide this, there are a number of technical (but extremely important) considerations that are not touched on here. The comments set out in this article do not constitute legal advice. Please consult with your legal advisor prior to entering into an estate freeze.

For the purposes of this article, we will utilize the fictional Mr. X as our taxpayer. Mr. X has heard about estate freezes and is interested in implementing one. For simplicity, we will assume that Mr. X has adult children but no spouse.

Mr. X’s Current Structure

Some years ago, Mr. X created a business, which we will refer to as “A Co.” Mr. X subscribed for his 10 common shares in the capital of A Co. at a price of $1 per share. Mr. X’s total investment in A Co. was, initially, $10. Mr. X is the sole shareholder of A Co.

Over the years, as a result of Mr. X’s hard work and efforts, the value of A Co. (and, therefore, Mr. X’s 10 common shares in the capital of A Co.) grows steadily. As of today’s date, Mr. X’s 10 common shares in A Co. are worth $1,000,000.

Mr. X’s existing corporate structure may be depicted as follows:

Gains on capital assets held by a taxpayer immediately prior to his or her death are typically realized immediately prior to the death of that taxpayer (with some notable exceptions, including certain transfers of property to a spouse or common-law partner). What does this mean for Mr. X.? Mr. X will be deemed to dispose of all of his capital assets immediately prior to his death for proceeds of disposition equal to the fair market value of the assets at that time. In other words, if Mr. X dies today, he will realize a capital gain equal to $999,990. (That is, $1,000,000 less $10).

Perhaps Mr. X will live for many years yet. During Mr. X’s lifetime, he expects the value of A Co. to continue to increase. Mr. X wants to shelter future growth in respect of the value of the A Co. shares from tax that will otherwise accrue at the time of his passing. In other words, Mr. X wants to take steps to freeze his future tax liability so that, if his A Co. shares increase in value by an additional $3,000,000 during his lifetime, this additional $3,000,000 gain will not be taxable on Mr. X’s death.

An estate freeze is an estate and tax planning tool which allows a taxpayer to lock in the current value (and associated tax liability) of appreciating assets to avoid taxes on the future growth of those assets. Estate freezes are often used by business owners for the generational transfer of their company in a tax-efficient manner. Through an estate freeze, business owners are able to transfer the future growth in the value (and related tax consequences) of their business to other individuals (often their children) while having the option of maintaining control over the operation of the business and the ability to share in its profits.

Simple Estate Freeze

While there are a number of ways of effecting an estate freeze depending on a myriad of factors, Mr. X’s advisors consider Mr. X’s needs and circumstances and recommend the following:  

1. Mr. X transfers his 10 common shares in A Co. back to A Co.
2. A Co. cancels the 10 common shares that previously belonged to Mr. X.
3. In consideration for the 10 common shares that A Co. receives from Mr. X., A Co. issues preferred shares in the capital of A Co. to Mx. X. The value of these shares will be fixed at the value of the transferred common shares as of the freeze date. In this case, the value will be $1,000,000. Mr. X receives 1,000 preferred shares, each of which is redeemable at $1,000 per share. Mr. X can ask the company to cancel some or all of these preferred shares in exchange for $1,000 per share over time or as he chooses.
4. Since the fair market value of A Co. is now equal to the value of the issued preferred shares (in other words, the value of A Co. is $1,000,000 which is equal to the value of Mr. X’s preferred shares), the net value of A. Co is nil. In other words, the value of A Co., net of the preferred shares issued to Mr. X, is nil.
5. A newly established family trust subscribes for new common shares in the capital of A Co. for a nominal subscription price. The new family trust receives 100 common shares of A Co., issued at $1 per share.

The new structure can be depicted as follows:

As the value of Mr. X’s preferred shares is fixed at $1,000,000 (or less, if he has started redeeming his preferred shares), any future growth in value of A Co. will accrue to the family trust (which, as noted, holds the “growth” common shares of A Co.). If the value of A. Co. increases to $4,000,000 during Mr. X’s lifetime, his interest in A Co. will remain frozen at $1,000 per share. If he hasn’t redeemed any preferred shares during his lifetime and therefore still holds $1,000,000 worth of preferred shares, he will be taxed on death on the $999,990 gain in respect of his preferred shares that he would have been taxed on if he disposed of the shares at the time of the freeze. (Yes – it does get more complicated than this. Please be sure to consult your tax advisor).

The remaining $3,000,000 of growth will accrue to the family trust. If the beneficiaries of the family trust are the children of Mr. X, the family trust may eventually distribute the new common shares to them. They will not have to pay tax on the $3,000,000 gain until they dispose of the shares or die. Mr. X has potentially deferred tax on the $3,000,000 by an entire generation.

Benefits of an Estate Freeze:

1. Transferring Future Growth: Through an estate freeze, the future appreciation of the transferred shares will be linked to the newly issued common shares of the Company. This means that any increase in the value of the Company post-freeze will be attributed to the holders of the newly issued common shares​.
2. Tax Efficiency: The business owner’s capital gains tax liability is frozen at the current value of the shares. Future growth, and hence future tax liabilities, are transferred to the next generation.
3. Reduction of Probate Fees: An estate freeze can reduce probate fees by limiting the size of a taxpayer’s estate.
4. Retention of Control and Income: The business owner has the option to retain control and profit-sharing rights in the Company by assigning voting and dividend rights to the preferred shares received as a result of an estate freeze.
5. Income Splitting: After an estate Freeze, the business owner can engage in income splitting by distributing dividends from the Company to family members in lower tax brackets​​.

The 21-year rule must be considered if a family trust is used. Specifically, a family trust is deemed, for tax purposes, to have disposed of its assets on the 21^st anniversary of the trust’s creation date. This triggers capital gains taxes on accrued gains in respect of any assets held by the trust on its 21^st anniversary date. Therefore, where a family trust is used for an estate freeze, taxpayers should plan for this (eg. by having the assets of the trust distributed to the beneficiaries prior to the 21^st anniversary of the creation date of the trust) or other tax planning should be undertaken to avoid the triggering of tax on the 21^st anniversary date.

Again, if considering an estate freeze, please consult with a tax professional.

For all your tax-related legal inquiries, contact McQuarrie at 604.581.7001 or by filling out the contact form below.

The post Estate Freezes and How They Work appeared first on McQuarrie Legal Services.

Originally published: August 2, 2023
Updated on January 18, 2024

A. Introduction

The federal government has expanded the mandatory disclosure rules in the Income Tax Act (“ITA”) by making changes to the reportable transaction rules and introducing a new notifiable transaction regime, as outlined in this Memorandum. Notifiable transactions differ from reportable transactions in that notifiable transactions are those that the Minister of National Revenue specifically designates as requiring reporting, whereas reportable transactions require reporting if certain specified criteria are met.

The primary objective of these amendments is to promote transparency and compliance in tax-related matters. To achieve this goal, the amendments impose specific obligations on taxpayers, advisors, and promoters to provide comprehensive information returns regarding reportable and notifiable transactions to the Canada Revenue Agency (CRA).

The proposed changes have undergone significant legislative progress, with draft legislation being presented on February 4, 2022, and further developments occurring since August 9, 2022. The bill, known as Bill C-47, received Royal Assent on June 22, 2023, transforming the rules in their current form into law.

B. Reportable Transaction Rules

A “reportable transaction” refers to an avoidance transaction that is entered into by or for the benefit of a person. This includes not only the specific avoidance transaction but also any transaction that is part of a series of transactions (referred hereto as “transaction or series”) that consists of the avoidance transaction.

The mandatory disclosure rules in respect of reportable transactions apply when two criteria are satisfied:

a) A transaction or series has at least one of three generic hallmarks, which will be explained in further detail later in the memorandum; and

b) It can reasonably be concluded that one of the main purposes of entering into the transaction or series of transactions is to obtain a tax benefit.

Before the introduction of changes to the reportable transaction rules, taxpayers were obligated to report transactions that meet the criteria of an “avoidance transaction” as defined in section 245 of the General Anti-Avoidance Rule (GAAR).¹ Under this definition, a transaction or series would not be deemed an avoidance transaction if it could be reasonably demonstrated that it was primarily undertaken or arranged for bona fide purposes other than obtaining the tax benefit.

According to the new regime, an “avoidance transaction” is defined as a transaction that may reasonably be considered to have as one of its main purposes, or one of the main purposes of a series of transactions of which it is a part, to obtain a tax benefit. This definition establishes a lower threshold compared to the former definition modelled in the GAAR. This lower threshold implies that a transaction could be classified as an avoidance transaction even if it has additional legitimate purposes or motivations. Therefore, under the new reportable transaction rules, it is important to note that there is no requirement for a transaction to be abusive.

When discussing the avoidance transaction definition, the Department of Finance made the following statement in the explanatory notes to the April 2023 Notice of Ways and Means Motion (the “Explanatory Notes”):

“Normal commercial transactions that do not pose an increased risk of abuse, in and of themselves, are not intended to result in a reporting obligation under these rules.”²

That said, the language of the definition of “avoidance transaction” may catch normal commercial transactions. Whether such transactions pose an increased risk of abuse may be a matter of some controversy.

1. The Three Hallmarks

As discussed, one of the criteria for determining whether a transaction or series is reportable is the presence of at least one of three generic hallmarks. Conversely, if none of the three generic hallmarks, as defined below, are present in a transaction or series, there is no legislative requirement to report it, even if it can be reasonably concluded that one of the main purposes of entering into the transaction or series is to obtain a tax benefit. According to the CRA Guidance released on July 5, 2023 (the “CRA Guidance”), transactions such as estate freezes, debt restructuring, loss consolidation arrangements, shareholder loan repayments, purification transactions, claiming of the capital gain exemption, divisive reorganizations and foreign exchange swaps may not trigger a reporting requirement, though they are typically driven by a desire to obtain tax benefit. This list is not exhaustive.³

a. The Contingent Fee Arrangements Hallmark

The first hallmark pertains to the circumstances where an advisor or promoter is entitled to receive a fee based on the presence of a tax benefit. This hallmark encompasses the following situations:

a) computation of fee is based (to any extent) on the amount of a tax benefit that could result;

b) entitlement to fee contingent upon the obtaining of, or failure to obtain, a tax benefit; or

c) the fee is attributable to the number of persons who

i) enter into the avoidance transaction or

ii) have been provided access to advice or opinion given by the advisor or promoter regarding tax consequences.

Exclusions⁴

According to the CRA Guidance and the Explanatory Notes, the following activities do not trigger the contingent fee hallmark and as a result, are not reportable to the extent the transaction is limited to the circumstances below and no other specific hallmark is met:

a) A fee for the claiming of the scientific research and experimental development (SR&ED) tax credits;

b) A fee for the preparation of an annual income tax return that results in a taxpayer obtaining a refund of tax, including entitlement to personal tax credits, such as the disability tax credit or refundable tax credits, the Canada child benefit, the GST/HST credit or the Canada workers benefit;

c) Fees based on the numbers of preparations of and filings of income tax elections in respect of a transaction or series of transactions. This also extends to the fees for the preparation of the documents effecting those elections when the person in charge of preparing the documents is different than the person filing the elections;

• As an example, a commercial reorganization may require the filing of multiple T2057s pursuant to section 85 of the ITA for the purpose of deferring capital gains. A firm may bill for the preparation of the T2057s on a per-transferor basis given the work to be done for each taxpayer will be similar. For greater certainty, the fees are only contingent on the number of returns prepared and not the attainment of the tax benefit.

d) In certain circumstances, a firm may bill a fee attributable to the number of taxpayers that participate in or have been provided access to the advice given on the tax consequences of the transaction. It is important to note that the fees must only be contingent on the number of returns or elections prepared, rather than the attainment of a tax benefit. A few examples are outlined below:

• A section 85.1 rollover (excluding subsection 85.1(3) for foreign affiliates) for the tax-deferred exchange of shares between public corporations to the extent that it is not part of a broader series. This may be in the context of takeover bids, share exchanges based on plans of arrangement, and other acquisitions where shares of a target corporation are exchanged for shares of the acquiring corporation.

• A section 85 rollover in the context of a share-for-share exchange to defer a gain in a large commercial reorganization to the extent that it is not part of a broader series.

• Wind-ups as outlined in subsection 88(1) and amalgamations described in subsection 87(1) that result in tax benefits, where the shareholders’ shares or properties of subsidiary or predecessor corporations are rolled over on a tax-deferred basis during wind-up processes or amalgamations.

e) Value-billing arrangements by professionals such as lawyers and accountants, where a fee is agreed to at the time of billing and is based on criteria other than the value of the tax benefit resulting from the transaction or series, which might include:

• the level of training and experience of the persons engaged in the work;

• the time expended by the persons engaged in the work;

• the degree of risk and responsibility that the work entails;

• the priority and importance of the work to the client; and

• the value of the work to the client;

f) Contingent tax litigation fee arrangement in relation to an appeal of a tax assessment by a lawyer in respect of a tax benefit from a completed transaction or series.⁵ Therefore, the litigator would not generally be an advisor in respect of a transaction or series solely because of the existence of the contingent litigation fee arrangement that is implemented after the completion of the transaction or series that is the subject of an appeal. This position would also generally extend to the professional assistance provided to a taxpayer in relation to an audit as well as the issuance of assessments (including proposed reassessments); and

g) Billing practices and circumstances of an advisor in respect of an avoidance transaction involving the collection of a standard fee (generally available to the public under normal commercial terms and in comparable circumstances) by a financial institution:

• for the establishment and ongoing administration of a financial account, such as a registered retirement savings plan (RRSP), or a financial instrument, such as a related segregated fund investment, including where the fee is determined in relation to the amount of the investment;

• where the fee offered to a particular client is discounted in relation to the number of financial accounts maintained by the financial institution for the particular client;

• for the establishment of a bank account for a trust;

• for a loan to allow for the subscription of shares by a family trust as part of an estate freeze, the annual fee earned by the Trustee(s) or fees for the establishment of a bank account for such a trust;

• for the repayment of a shareholder loan where a taxpayer is indebted to a Canadian-controlled private corporation, borrows sufficient funds from a Canadian Bank and the latter charges lending fees and interest;

• as a normal per-transaction charge for each security trade in the context of a year-end tax-loss selling program operated by the financial institution.

On this basis, no reporting obligation would generally arise for a financial institution that collects a standard fee in relation to the provision of an ordinary financial account that is broadly offered in a normal commercial or investment context in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly.

It should be noted that exclusion may not apply where the financial institution can reasonably be expected to know that the financial account will be used in a reportable transaction to their client.⁶

b. The Confidential Protection Hallmark

This applies when an advisor or promoter obtains “confidential protection” regarding an avoidance transaction. “Confidential protection” means anything that prohibits the disclosure to any person or to the Minister of National Revenue (“MNR”) of the details or structure of the transaction.

It is important to note that confidential protection does not include provisions that solely disclaim or restrict an advisor’s liability if the disclosure of transaction details or structure is not prohibited. Furthermore, the requirement for confidential protection to be applicable must relate to the tax treatment of the avoidance transaction.

It may be advisable for lawyers to consider including “notwithstanding language” in their engagement or retainer letters to clarify that any confidentiality clauses contained within their documents should not be interpreted as providing confidential protection under the reportable transaction rules. This issue is elaborated on in detail in the “Recommendations” section of this Memorandum.

Exclusion

In the absence of any other specific hallmark, the CRA Guidance clarifies that the protection of trade secrets unrelated to tax matters does not trigger a reporting obligation. Moreover, standard confidentiality agreements that do not require tax advice to be confidential, such as a letter of intent that includes a confidentiality requirement, do not give rise to a reporting requirement. Similarly, the CRA Guidance stipulates that standard commercial confidentiality provisions in standard client agreements or documentation, which do not contemplate a specific identified tax benefit or tax treatment, do not, in and of themselves, impose a reporting obligation.

c. The Contractual Protection Hallmark

The third hallmark applies when a taxpayer or certain other individuals, including promoters or advisers, receive contractual protection if the transaction in question fails to achieve the intended tax benefit. It pertains to transactions that involve insurance or other forms of protection, including an indemnity, compensation or guarantee that:

a) protects against a failure of the transaction or series to achieve any tax benefit; or
b) pays for or reimburses expenses, fees, taxes, interests, penalties, or any other costs that may arise during a dispute related to a tax benefit.

Exclusions

According to the CRA Guidance and the Explanatory Notes, in the absence of any other specific hallmark, the below-listed matters would not give rise to a reporting requirement:

a) A limitation of liability clause in a professional engagement letter, provided that the purpose of the limitation clause is to generally limit the accountant’s liability for negligence (i.e., it is related to professional indemnity insurance).

b) Standard professional liability insurance of a tax practitioner.

c) Standard representations, warranties and guarantees between a vendor and purchaser, as well as traditional representations and warranties insurance policies, that are generally obtained in the ordinary commercial context of mergers and acquisitions transactions to protect a purchaser from pre-sale liabilities (including tax liabilities).⁷ It is important to note that the Explanatory Notes do not explicitly mention other types of commercial transactions. Therefore, this hallmark may still be applicable where agreements drafted in respect of other commercial transactions, contain tax indemnities and the like.

d) Standard commercial indemnities provisions in standard client agreements or documentation, which do not contemplate a specific identified tax benefit or tax treatment.

e) Tax return insurance – It is our general view that tax return insurance would not constitute contractual protection insofar as the insurance is extended to a taxpayer’s filings generally, and does not contemplate any particular transaction or series entered into by a taxpayer and those who engage in aggressive tax planning would continue to bear potentially significant financial risks associated with such activities. The insurance would not pay for or reimburse taxpayers for tax imposed as a result of disputed tax positions in respect of aggressive tax planning, and it is subject to maximum amount of coverage (or protection) which would not likely cover a material portion of the total expenses incurred by a taxpayer as a result of an audit in respect of aggressive tax planning.

f) Re-insurance – For greater certainty, where the original insurance policy is not subject to a reporting obligation, the reinsurance of the risk generally should not cause further reporting.

g) A reporting obligation would not arise solely in respect of contractual protection in the form of insurance that is integral to an agreement between persons acting at arm’s length for the sale of a business⁸ where it is reasonable to conclude that the insurance protection is intended to ensure that the purchase price paid under the agreement takes into account any liabilities of the business immediately prior to the sale and the insurance is obtained primarily for purposes other than to obtain a tax benefit from the transaction or series.

• Indemnities related to existing pre-closing tax issues, or the amount of existing tax attributes (tax pools, capital cost allowance, etc.).

• An acquisition by a public company where the acquisition transaction is specifically and carefully structured by the public acquiror (the Purchaser) and its tax advisors to achieve a paragraph 88(1)(d) bump of non-depreciable capital property owned by the target company (the Target) and the Purchaser obtains specific contractual covenants and/or indemnities from the Target and the significant shareholders of the Target (whether under the acquisition agreement or under separate support agreements) that are intended to ensure the Target and/or the significant shareholders do not take certain steps that may cause the bump denial rules to apply and, in the event the covenants are breached, that the Purchaser is indemnified for the additional taxes payable as a result of the loss of the paragraph 88(1)(d) bump. Contractual protection obtained in respect of indemnifications provided by the Purchaser would generally not be considered to trigger the contractual protection hallmark. This could also apply in a private corporation context.

• A purchase of taxable Canadian property from a non-resident of Canada, who could be liable for 25% (or in some cases 50%) of the purchase price for the property pursuant to subsection 116(5) of ITA in the absence of a certificate of compliance issued by the CRA under subsection 116(2) or subsection 116(4) in respect of the disposition. Tax insurance may allow the parties to complete the transaction and go their separate ways without concern for lingering tax liabilities. Tax insurance or other contractual protection obtained in such circumstances would generally not be considered to trigger the contractual protection hallmark.

• A pre-sale transaction where intercorporate dividends are paid to a holding company to extract safe income from the target company. Contractual protection obtained in respect of the calculation of safe income would generally not be considered to trigger the contractual protection hallmark.

• Indemnities or covenants to a purchaser and/or target in respect of Part III tax liabilities and other adverse tax consequences arising from dividends paid as part of a pre-closing reorganization.

It should be noted that this exception does not extend to other forms of insurance or protections that may be obtained to cover specific identified tax risks (other than the risks specifically discussed above), such as tax liability insurance policies used in avoidance transactions. The existence of such insurance may often be an indication of aggressive tax planning.

h) Standard price adjustment clauses, as discussed in the Income Tax Folio S4-F3-C1.⁹

i) Other price adjustment clauses that are not tax-driven (such as a working capital adjustment clause in a Purchase and Sale Agreement).

j) Obtaining an advance income tax ruling from the CRA or other tax administrations on non-Canadian tax issues, by a person seeking a tax benefit from an avoidance transaction or series of transactions involving an avoidance transaction.

k) Contingent litigation fee arrangement in relation to an appeal of a tax assessment by a lawyer in respect of a tax benefit from a completed transaction or series. This position would also generally extend to the professional assistance provided to a taxpayer in relation to an audit as well as the issuance of assessments (including proposed reassessments).

l) Withholding tax – Standard contractual representations and indemnities with respect to the failure to deduct or withhold an amount under section 215, in an arm’s length situation.

m) Partnership investment – For greater certainty, a partnership agreement containing a standard clause to the effect that, in the event of an audit of a partner, the partnership will provide reasonable assistance to that partner to help them resolve such an audit generally would not be considered to meet the contractual protection hallmark. However, the contractual protection hallmark would be met if the purpose of the clause contemplates any particular avoidance transaction or series (including an avoidance transaction).

n) Mutual fund merger (where an investment fund manager merges two investment funds within a fund family) – The merger is structured to be tax-deferred pursuant to section 132.2 of ITA such that the surviving fund acquires the assets of the terminating fund. If under the terms of the merger agreement, the fund manager agrees to indemnify the trustee of the terminating fund for any liabilities that might arise in respect of the terminating fund (commercial disputes, securities law claims, etc.) such indemnity would not constitute contractual protection. 

o) The contractual protection hallmark will not apply in a normal commercial or investment context in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly, and does not extend contractual protection for a tax treatment in respect of an avoidance transaction. Without providing an exhaustive list of examples, these can include:

• Tax indemnities in standard provisions such as gross-up clauses in loan agreements or International Swap and Derivative Agreements.

• Tax indemnities in employment agreements and severance agreements.

• In the course of the establishment of a self-directed RRSP with a Canadian Bank, the RRSP plan document includes a Tax Indemnity, where the client agrees to indemnify the Trustee (the subsidiary of the Canadian Bank which agrees to act as the plan trustee) if the RRSP plan faces tax consequences, such as holding a non-qualified investment. Despite the RRSP being potentially considered an avoidance transaction, the Tax Indemnity is not regarded as contractual protection since it aligns with standard market practices and applies in a regular commercial or investment context.

2. Tax Shelters and Flow-Through Shares

Disclosure under the reportable transaction regime is not required for the acquisition of a tax shelter or the issuance of a flow-through share where the appropriate information return has been filed. Please consult with your tax advisor.

3. Who Should File?

According to the reportable transaction rules, several parties have an obligation to file information returns with the appropriate authorities. These include:

a) Every person for whom a tax benefit results or is expected to result from the reportable transaction or series;

b) Advisors and promoters who are entitled to a fee in respect of the reportable transaction or series; and

c) Every person who is not dealing at arm’s length with the advisors or promoters, and is entitled to a fee in respect of the transaction or series.

It is important to note that clerical or secretarial services are excluded from the filing obligation. Additionally, it is worth emphasizing that each obligated person is responsible for fulfilling their individual reporting obligations.

For a partnership or employer who receives a fee as an advisor or promoter in respect of an avoidance transaction and discloses a reportable transaction as required, its partners or employees including in-house tax advisors would generally not also need to make a disclosure. The foregoing also applies to an individual who provides services as an employee of a professional corporation that is a partner of the relevant partnership, directors of a corporation and former employees or former partners.

4. What Is an Advisor?

In the context of reportable transactions, an advisor refers to any person who provides, directly or indirectly, in any manner whatever:

• any contractual protection in respect of the transaction or series, or
• any assistance or advice with respect to creating, developing, planning, organizing or implementing the transaction or series

to another person (including any person who enters into the transaction for the benefit of another person).

5. What is a Promoter?

A promoter, in respect of a transaction or series, means each person who

a) promotes or sells (whether as principal or agent and whether directly or indirectly) an arrangement, plan or scheme (referred to as an “arrangement”), if it may reasonably be considered that the arrangement includes or relates to the transaction or series;

b) makes a statement or representation (whether as principal or agent and whether directly or indirectly) that a tax benefit could result from an arrangement, if it may reasonably be considered that
ii) the statement or representation was made in furtherance of the promoting or selling of the arrangement, and
iii) the arrangement includes or relates to the transaction or series; or

c) accepts (whether as principal or agent and whether directly or indirectly) consideration in respect of an arrangement referred to in paragraph (a) or (b) above.

6. When To File?

Taxpayers, advisors, and promoters must file information about reportable transactions within 90 days of the earlier of:

a) the date on which the person becomes contractually obligated to enter into the transaction; and

b) the date on which the person actually enters into the transaction.

The revised rules governing reportable transactions are applicable to transactions or series that occur after royal assent, which took place on June 22, 2023. This means that if an individual enters into a contract for a reportable transaction on June 1, 2023, but the actual transaction occurs on June 30, they are still obligated to report it, and the 90-day reporting period will begin on June 30, 2023. Similarly, if a person is involved in a series of transactions that span the date of royal assent, the reporting requirement will be triggered by the first reportable transaction entered into after the date of royal assent.¹⁰

7. How To File?

Reportable transactions are required to be disclosed to the CRA in the prescribed form, RC312 Reportable Transaction and Notifiable Transaction Information Return.

C. Notifiable Transaction Rules

Under the new regime, there is an obligation to report transactions or series that are designated as “notifiable” transactions as well as transactions that are “substantially similar” to notifiable transactions. The term “substantially similar” is defined as encompassing transactions or series that are expected to result in “the same or similar types of tax consequences” and are “either factually similar or based on the same or similar tax strategy”. The legislation expressly states that “substantially similar” should be “interpreted broadly in favour of disclosure”.¹¹

1. Designated Transactions

Effective November 1, 2023, the Minister of National Revenue with the Concurrence of the Minister of Finance, designated the following transactions and series of transactions as notifiable transactions. The descriptions and examples provided are directly quoted from the CRA’s publication:¹²

1) Straddle loss creation transactions using a partnership

The following series of transactions has been designated as a notifiable transaction:

a. A taxpayer enters into an agreement to acquire a partnership interest from an existing partner.

b. The partnership trades foreign exchange forward purchase and sale agreements on margin through a foreign exchange trading account. The foreign exchange forward agreements are essentially straddle transactions where it is reasonable to conclude that each agreement is held in connection with the other and where, in the aggregate, the individual agreements (legs) will generate substantially equal and offsetting gains and losses. 

c. Shortly before the taxpayer’s acquisition of the interest in the partnership, the partnership disposes of the gain leg(s) of the foreign exchange forward agreement(s). 

d. The income from the gain leg(s) is then reflected in the income of the partnership and is allocated to the original partner immediately prior to the acquisition of the interest in the partnership by the taxpayer.

e. Following the acquisition of the partnership interest by the taxpayer, the loss leg(s) are realized and a business loss is allocated to the taxpayer.

2) Avoidance of deemed disposal of trust property

The following transactions and series of transactions have been designated as notifiable transactions:

a. Indirect transfer of trust property to another trust

A Canadian resident trust (“New Trust”) holds shares of a corporation resident in Canada (“Holdco”) that is or will become a beneficiary of another Canadian resident trust (“Old Trust”) that holds property that is capital property or land included in the inventory of a business of Old Trust. At any time prior to its 21-year anniversary, Old Trust transfers the property to Holdco on a tax deferred basis pursuant to subsection 107(2).

In the result, the 21-year rule will not apply to Old Trust, and a new 21-year period will start to run with respect to New Trust, providing for a much longer period of deferral. New Trust’s assets will reflect the property formerly held by Old Trust but may have a higher tax basis than such property.

b. Indirect transfer of trust property to a non-resident

One or more of the non-resident beneficiaries of a Canadian resident trust hold shares of a corporation resident in Canada (“Holdco”) that is or will become a beneficiary of the trust. At any time prior to its 21-year anniversary, the trust transfers property (other than property described in any of subparagraphs 128.1(4)(b)(i) to (iii)) to Holdco on a tax deferred basis pursuant to subsection 107(2).

In the result, the 21-year rule will not apply to the trust, with the transfer of the trust’s property to Holdco providing for a much longer period of deferral. The non-resident beneficiaries of the trust hold shares of Holdco that reflect their former indirect interest in the property of the trust, possibly providing an opportunity to have such property transferred by Holdco to the non-resident beneficiaries at some future time without triggering the application of subsections 107(2.1) and 107(5). 

c. Transfer of trust value using a dividend

A Canadian resident trust (“New Trust”) holds shares of a corporation (“Holdco”) that is or will become a beneficiary of another Canadian resident trust (“Old Trust”) that holds property that is shares in a Canadian corporation (“Opco”).  At any time prior to Old Trust’s 21-year anniversary, Opco redeems shares held by Old Trust and issues a promissory note or gives cash as consideration. In so doing, Opco is deemed pursuant to subsection 84(3) to have paid, and Old Trust is deemed to have received, a dividend equal to the amount by which the amount paid by Opco on the redemption exceeds the PUC in respect of the shares. The deemed dividend is designated by Old Trust and deemed to be received by Holdco pursuant to subsection 104(19). The dividend is deductible in the hands of Holdco pursuant to subsection 112(1). The cash or the promissory note is paid or made payable in the year by Old Trust to Holdco as payment for the dividend allocated to it.

In the result, the 21-year rule will not apply to Old Trust, and a new 21-year period will start to run for New Trust, providing for a much longer period of deferral. New Trust’s assets will reflect the value of the property formerly held by Old Trust but will undoubtedly have a significantly higher tax basis than such property.

3) Manipulation of bankrupt status to reduce a forgiven amount in respect of a commercial obligation

The following series of transactions has been designated as a notifiable transaction:

a. A person or partnership (“Debtor”) is assigned into bankruptcy.

b. While Debtor is a bankrupt, a commercial obligation of the Debtor is settled, deemed to be settled or extinguished for an amount that is less than the principal amount of the obligation.

c. At any point in time, Debtor files a proposal under Part III of the Bankruptcy and Insolvency Act and the bankruptcy is annulled either upon the approval of the proposal by a court or on the date stated in a court order.

4) Reliance on purpose tests in section 256.1 to avoid a deemed acquisition of control

The following transactions and series of transactions have been designated as notifiable transactions:

a. Purpose test in paragraph 256.1(2)(d)

Lossco is a taxable Canadian corporation that has tax attributes that are subject to the application of one of the provisions listed in the definition of “attribute trading restriction” in subsection 256.1(1). Another person (“Aco”) does not, immediately before the particular time, hold shares of Lossco with a FMV that satisfies the 75% FMV threshold test. At a particular time, Aco acquires shares of Lossco and, following the acquisition, Aco does not control Lossco but satisfies the 75% FMV threshold test. The taxpayer takes the position that because the purpose test in paragraph 256.1(2)(d) is not satisfied, subsection 256.1(3) does not apply.

b. Purpose test in paragraph 256.1(4)(a)

Lossco is a taxable Canadian corporation that has tax attributes that are subject to the application of one of the provisions listed in the definition of “attribute trading restriction” in subsection 256.1(1). A corporation (“Profitco”) and another person (“Aco”) not dealing at arm’s length with Profitco acquire shares of Lossco. Following the acquisition of the Lossco shares, Profitco does not control Lossco and does not hold shares of Lossco with a FMV that satisfies the 75% FMV threshold test. However, Profitco would satisfy the 75% FMV threshold test if the acquisition of the Lossco shares by Aco is ignored. The taxpayer takes the position that subsection 256.1(3) does not apply solely because the purpose test in paragraph 256.1(4)(a) is not satisfied.

c. Purpose test in paragraph 256.1(6)

Lossco is a taxable Canadian corporation that has tax attributes that are subject to the application of one of the provisions listed in the definition of “attribute trading restriction” in subsection 256.1(1). Lossco acquires control of a particular corporation (“Profitco”) and it can reasonably be concluded that one of the reasons for the acquisition is so that a specified provision as defined in subsection 256.1(1) does not apply. However, the taxpayers take the position that subsection 256.1(6) does not apply solely because its purpose test is not satisfied.

5) Back-to-back arrangements

The following transactions and series of transactions have been designated as notifiable transactions:

a. Thin capitalization

Non-resident 1 (NR1) is a relevant non-resident in respect of a taxpayer. NR1 enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer. The taxpayer files, or anticipates filing, its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules.

b. Part XIII tax

A non-resident person (NR1) enters into an arrangement to indirectly provide financing to a taxpayer through another non-resident person (NR2). If interest had been paid by the taxpayer directly to NR1, it would be subject to Part XIII tax. The taxpayer’s income tax reporting reflects, or is expected to reflect, the assumption that the interest it pays in respect of the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.

Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.

2. Who Should File?

Similar to the new reportable rules, the following parties have the obligation to file information returns:

a) Every person for whom a tax benefit results, or for whom a tax benefit is expected to result based on the person’s tax treatment of the notifiable transaction, from the notifiable transaction or series;

b) Every person who enters into a notifiable transaction for the benefit of a person described in (a);

c) Every advisor or promoter in respect of the notifiable transaction; and

d) Every person not dealing at arm’s length with an advisor or promoter in respect of the notifiable transaction and who is or was entitled to a fee in respect of the notifiable transaction.

As with the reportable transaction rules, there is no filing requirement if a person provides clerical or secretarial services only.

3. What Is an Advisor?

Under the notifiable transaction rules, the definition of an advisor includes any person who provides any assistance or advice with respect to creating, developing, planning, organizing or implementing the notifiable transaction to another person. Additionally, anyone who provides assistance or advice to any promoter or any other advisor in respect of the transaction is an advisor.

The definition of promotor with respect to the notifiable transaction rules is the same as the definition of promoter for the reportable transactions rules.

It is important to highlight that, unlike the reportable transaction rules, an advisor or promoter does not necessarily need to be entitled to a fee to be caught by the notifiable transaction rules. There can be more than one advisor in respect of a notifiable transaction or series, each of whom may be subject to a filing obligation. However, a person that provides advice or representation in respect of an audit or tax dispute is excluded from the definition of an advisor or promoter, unless they are otherwise involved in the notifiable transaction.

4. When To File?

A taxpayer who enters into a notifiable transaction or another person who enters into such a transaction in order to procure a tax benefit for the taxpayer must file information returns within 90 days of the earlier of the date on which the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the notifiable transaction and the day on which the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) enters into the notifiable transaction.

5. The Information Required for Notifiable Transactions

The prescribed form for disclosing the notifiable to the CRA is RC312 Reportable Transaction and Notifiable Transaction Information Return. The relevant person would indicate on Form 312 that the transaction is a reportable transaction, a notifiable transaction or both. For notifiable transactions, the relevant person has to complete Part 3, “Notifiable transaction” and then continue with Part 5, “Penalty” of the form.¹³

6. Filing Requirements Rule

Under the filing requirements for notifiable transactions, a separate information return is required for each transaction within a series. However, in some cases, a single information return that provides details of every transaction within the series may be sufficient.

Like the reportable transaction regime, each person who is affected by the notifiable transaction is required to file an information return. Employees and partners are deemed to have met their reporting requirement when the employer or partnership has filed the required information return. The foregoing also applies to an individual who provides services as an employee of a professional corporation that is a partner of the relevant partnership, directors of a corporation and former employees or former partners.

7. Due Diligence Defence

A person who obtains or expects to obtain a tax benefit from a notifiable transaction and for taxpayers entering into such transactions for their own benefit, a defence against penalties imposed for failure to comply with reporting requirements may be available, if they have exercised a degree of care, diligence, and skill in determining whether the transaction qualifies as a notifiable transaction. This exemption recognizes that if a person has taken reasonable measures to assess the nature of the transaction and has acted in a manner that a reasonably prudent person would in comparable circumstances, there is no obligation to file an information return. For example, this defence may be available where the taxpayer seeks the opinion of their advisors regarding potential reporting obligations and is informed by the advisors that there is no requirement to file.

For advisors, promoters, or persons not at arm’s length with advisors or promoters who are entitled to a fee, the due diligence defence may be available where it can be established that the person does not know or should not reasonably be expected to know that the transaction qualifies as a notifiable transaction.

The determination of what a person should “reasonably be expected to know” is assessed objectively, taking into account all the relevant facts and circumstances. It does not rely on the person’s subjective intention or knowledge alone. The question is whether a reasonable person, in the same position and having the same knowledge and information, would be aware that the transaction meets the criteria for being considered a notifiable transaction.

Advisors who provide ancillary services or have narrow mandates may not be expected to know that a transaction is a notifiable transaction, depending on the nature of their involvement and expertise. This applies particularly to members of a team with limited involvement or knowledge of the transaction or series, such as junior employees with specific and focused roles.

D. Penalties

Failure to report or late filing of a reportable or notifiable transaction can result in penalties imposed on taxpayers. The specific penalties are as follows:

b) For taxpayers:
i) $500 per week for each failure to report a reportable or notifiable transaction, up to the greater of $25,000 and 25% of the tax benefit, or
ii) for a corporation with assets having a total carrying value of $50 million or more for its last taxation year that ends prior to the day on which the information return is required to be filed: a penalty of $2,000 per week for each failure to report a reportable or notifiable transaction, up to the greater of $100,000 and 25% of the tax benefit.

c) For advisors, promoters or persons not at arm’s length with advisors or promoters who are entitled to a fee: a total of
i) 100% of the fees charged by that person in respect of the reportable or notifiable transaction,
ii) $10,000, and
iii) $1,000 per day that the person fails to report the reportable or notifiable transaction, up to a maximum of $100,000.

In order to avoid imposing two sets of penalties upon a person who both 1) enters into a reportable or notifiable transaction for the benefit of another person, and 2) is a person who does not deal at arm’s length with an advisor or promoter in respect of the reportable or notifiable transaction and is entitled to a fee, the legislation provides that such a person would be subject only to the greater of these two penalties.

It is unclear whether professional liability insurance would cover the above penalties. We would recommend that affected parties clarify this with their insurance providers.

It should be noted that when required filings for a notifiable transaction are not made, the Minister has the authority to take certain additional measures, which may include denying tax benefits that could result from the notifiable transaction. Moreover, the Minister can reassess a participant in a notifiable transaction outside of the normal reassessment period for a taxation year in respect of the transaction.

E. Solicitor-Client Privilege

According to the CRA Guidance and the relevant provisions, the information is not required to be disclosed if it is reasonable to believe that the information is subject to solicitor-client privilege.¹⁴

F. Recommendations

1. As so many transactions could potentially be in play due to these new rules, it is prudent to review and update the firm’s Engagement Letters, Closing Agenda, Transaction Checklists and Reporting Letters.

2. A step may be added to the Closing Agenda and Transaction Checklists to include a review of the transaction for possible reporting requirements.

3. As the CRA announces designated transactions, taxpayers must promptly respond to meet their reporting obligations. This means identifying any planned and pending transactions that fall under these rules and providing the necessary information within 90 days of entering into these transactions.

4. Advisors participating in creating, planning, or implementing a reportable or notifiable transaction should understand their primary duty to uphold the confidentiality of their clients’ information. If the advisor is required by law to disclose confidential information, the advisor must communicate this to the client in writing, informing them of the potential disclosure to the CRA. The client should be fully informed about the nature of the information that might be disclosed, the circumstances under which it may happen, and the potential risks associated with such disclosure.

Reportable Transaction Flowchart

Notifiable Transaction Flowchart

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[1] Section 245(3): An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

[2] M.P. Deputy Prime Minister and Minister of Finance, “Explanatory Notes Relating to the Income Tax Act and Other Legislation”, published by The Honourable Chrystia Freeland, P.C., April 2023, at p 71, available at: https://fin.canada.ca/drleg-apl/2023/nwmm-amvm-0423-eng.html.

[3] Canada Revenue Agency, “Mandatory disclosure rules – Guidance” (Last modified: November 2, 2023), available at: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/mandatory-disclosure-rules-overview/guidance-document.html

[4] Ibid.

[5] Ibid.

[6] Supra Note 2 at p. 76.

[7] Ibid at p. 73.

[8] For greater certainty, this contemplates an indirect sale of all or part of a business which would include:

• A sale of some, but not all, of the shares of a target corporation or interests in a target partnership or trust.

• An indirect sale of a corporation, partnership or trust in a transaction where the purchaser subscribes for new interests in the corporation, partnership or trust and the subscription proceeds are used to redeem the interests of the existing (selling) shareholders, partners or beneficiaries.

• A merger or acquisition effected by the amalgamation of two arm’s length corporations (including in the context of a standard amalgamation squeeze-out transaction).

[9] The CRA has previously characterized the price adjustment clauses as provisions that can potentially prevent adverse tax consequences (in other words, to protect against the failure to achieve a tax benefit).

[10] Supra Note 3.

[11]             Department of Finance, “Legislative proposals relating to the Income Tax Act and the Income Tax Regulations (Budget 2022 and other proposals)” (October 10, 2020), available at: https://fin.canada.ca/drleg-apl/2022/ita-lir-0822-l-2-eng.html.

[12] Canada Revenue Agency, “Notifiable transactions designated by the Minister of National Revenue” (November 01, 2023), available at: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/mandatory-disclosure-rules-overview/notifiable-transactions-designated-by-minister-national-revenue.html

[13] Supra Note 3.

[14] Supra Note 3.

For all your tax-related legal inquiries, contact McQuarrie at 604.581.7001 or by filling out the contact form below.

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The Prohibition on the Purchase of Residential Property by Non-Canadians Act, S.C. 2022, c. 10, s. 235 (the “Act”) and the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2022-250 (the “Regulations”) came into force on January 1, 2023, preventing non-Canadians from purchasing residential property in Canada for two years.

On the Minister of Housing and Diversity and Inclusion recommendation, the Regulations Amending the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2023-66 (the “Amending Regulations”) were announced. These changes are effective from March 27, 2023.

In this Article, while we give an overview of the Act and its Regulations (collectively referred to as the “Prohibition Legislation”), the focus is on exemptions the Prohibition Legislation has considered for some foreign national individuals whose status in Canada is referred to as “temporary residents” under the Immigration and Refugee Protection Regulations, SOR/2002-227 (the “Immigration Regulations”).

1) Prohibition Legislation and Recent Amendments

The primary provision that forbids “non-Canadians” from acquiring residential properties is Section 4(1) of the Act. This section explicitly states that a non-Canadian is prohibited from directly or indirectly purchasing any residential property.

As we delve into the above-underlined legal terms, we address four significant changes that have been introduced through the Amending Regulations. These changes include expanding eligibility for work permit holders, exempting vacant land from the Prohibition Legislation, introducing exceptions for development purposes, and adjusting control thresholds for corporations.

2) Who are “non-Canadians”?

Under the Prohibition Legislation¹, “non-Canadian” defines as:

a. an individual who is not a Canadian citizen, a permanent resident, or a person registered as an Indian under the Indian Act;
b. a corporation or an entity that is either incorporated outside Canada; or inside Canada, whose shares are not listed on a stock exchange in Canada and is controlled by a person referred to in the above paragraph (a) and by a corporation or an entity outside Canada in the following manners:

• direct or indirect ownership of shares or ownership interests of the corporation or entity representing 10% or more of the value of the equity in it, or carrying 10% or more of its voting rights; or
• control in fact (de facto control) of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.

It is important to highlight that the term “entity” encompasses not only corporations but also other types of business structures. Accordingly, all forms of business entities, including partnerships, sole proprietorships, and trusts, are subject to the Prohibition Legislation.

Prior to the implementation of the Amending Regulations, the criterion for establishing control over a corporation or entity was set at 3%. However, this threshold has now been raised to 10%. Despite this alteration, it remains essential for property lawyers and notaries to thoroughly examine the capital structure as well as the direct or indirect control exerted by corporate or entity purchasers before engaging in any conveyancing.

Exceptions

The Prohibition Legislation includes exceptions for certain non-Canadian nationals. These exceptions are as follows:

a. Temporary residents studying in Canada, if they:

• are enrolled in an authorized study program at a designated learning institution;²
• have filed income tax returns for five years preceding the year of purchase of the property;
• have been physically present in Canada for a minimum of 244 days in each of the past five years, preceding the purchase of the property; and
• purchase a property worth up to $500,000; and
• have not purchased more than one residential property in Canada.³

Holding a study permit and studying in a designated learning institute alone does not qualify international students to buy a residential property in Canada. As discussed above, there are tax filing requirements and a property value cap.

b. Work permit holders, if they:

• have at least 183 days of validity remaining on their work permit or authorization at the time of purchase; and
• have not purchased more than one residential property.⁴

One significant amendment introduced is the expansion of eligibility for work permit holders. Previously, the Prohibition Legislation required work permit holders to work full-time for at least three years in Canada and file income tax returns for three of the four taxation years, preceding the year the purchase is made.

c. Refugees, if they:

• have been given refugee protection or are a protected person under the Immigration and Refugee Protection Act, 2001 (the “Refugee Act”).⁶

d. Refugee claimants and individuals fleeing international crises, if they:

• have claimed for refugee protection, which has been found eligible and referred to the Refugee Protection Division in accordance with the Refugee Act; or
• have received temporary resident status based on humanitarian public policy considerations.⁷

e. Accredited members of foreign missions in Canada, if they:

• hold a passport with a valid diplomatic, consular, official, or special representative acceptance issued by the Chief of Protocol of Canada.⁸

f. Non-Canadian spouses and common-law partners, if they:

• purchase residential property in Canada jointly with their spouse or common-law partner who is a Canadian citizen, Indian Act registered, permanent resident, or non-Canadian partner to whom the prohibition does not apply.⁹

3) What constitutes a “Purchase”?

The act of acquiring a legal or equitable interest or a real right in a residential property, whether with or without conditions, is considered a purchase and falls under the prohibition.¹⁰

However, Section 4(2) of the Regulations outlines several exceptions to this prohibition, which are as follows:

(a) the acquisition by an individual of an interest or a real right resulting from death, divorce, separation or a gift;
(b) the rental of a dwelling unit to a tenant for their occupation;
(c) the transfer of a residential property under the terms of a trust that was established prior to the enactment of the Act;
(d) the transfer that occurs as a result of the exercise of a security interest or secured right by a secured creditor; or
(e) the acquisition by a non-Canadian of residential property for the purposes of development.¹¹

Even though the exception mentioned in paragraph (c) allows for the transfer of a residential property under an existing trust created before January 1, 2023, it is important to note that if a new beneficiary acquires a beneficial interest in a residential property under that trust, it will still be subject to the prohibition, notwithstanding that the trustee remains the registered owner on title.

Moreover, if the non-Canadian becomes liable or assumes liability under an agreement of purchase and sale for a residential property before January 1, 2023, they are not subject to the Prohibition Legislation.¹²

4) What does constitute “Residential Property”?

Section 2 of the Act defines “Residential Property”. According to Section 3(1) of the Regulations, properties located in areas of Canada that are not within a Census Agglomeration (CA) or a Census Metropolitan Area (CMA) are excluded from the Prohibition Legislation.

CA and CMA are defined by the Statistics Canada document entitled “Standard Geographical Classification (SGC) 2021”. Some factors, such as population, are determinative to categorize an area as a CMA or CA. A CMA must have a total population of at least 100,000 or a core population of at least 50,000, and a CA must have a core population of at least 10,000.¹³

It should be noted that the classification of areas as CAs or CMAs can change over time due to factors such as population growth and the integration of municipalities. So, before proceeding with any conveyancing, if there is any uncertainty regarding whether a residential property is excluded from the Prohibition Legislation, the most recent data from Statistics Canada on CAs and CMAs should be consulted.

By virtue of the Amending Regulations, Section 3(2) of the Regulations has been repealed. As a result, vacant lands designated for residential and mixed-use purposes are no longer subject to the previous prohibition. This means that non-Canadians can now purchase and utilize such vacant land for residential development or other purposes.

5) Offence

Any non-Canadian who contravenes the Prohibition Legislation, as well as any person or entity who counsels, induces, aids, abets, or attempts to engage in such actions, resulting in the non-Canadian purchasing residential property directly or indirectly, is deemed guilty of an offence. Upon summary conviction, they are liable to a fine not exceeding $10,000. Moreover, the court can force the sale of the property as a consequence of the violation.

Furthermore, the officers, directors, agents of corporations or entities, or any individual authorized to exercise managerial or supervisory functions on behalf of the corporation or entity can be held responsible and face the prescribed consequences for their involvement in the violation.¹⁴

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[1] Section 2 of the Act and Sections 1 and 2 of the Regulations.

[2] Designated learning institution has been defined in Section 211.1 of the Immigration Regulations.

[3] Section 5(a) of the Regulations.

[4] Section 5(b) of the Regulations.

[5] A protected person is a person on whom refugee protection is conferred, and whose claim or application has not subsequently been deemed to be rejected.

[6] Section 6(b) of the Regulations.

[7] Section 6(c) of the Regulations.

[8] Section 6(a) of the Regulations.

[9] Section 4(2)(c) of the Act.

[10] Section 4(1) of the Regulations.

[11] In a move to attract investment and foster economic growth, the Amending Regulations introduce an exception that allows non-Canadians to purchase residential property specifically for development purposes.

[12] Section 4(5) of the Act.

[13] Census metropolitan area (CMA) and census agglomeration (CA), Source: https://www12.statcan.gc.ca/census-recensement/2021/ref/dict/az/Definition-eng.cfm?ID=geo009

[14] Sections 6 and 7 of the Act.

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For trusted litigation or real estate advice, contact our Dispute Resolution & Litigation lawyers or Real Estate solicitors by asking for Amy Salak, Paralegal, at 604.580.7066. No matter how complex the issue, McQuarrie is here to help.

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Life insurance is a benefit that can help your loved ones deal with the financial impact of your death. Life insurance provides a financial benefit to dependants upon premature death of an insured person. The death benefit paid from a life insurance policy is a tax-free, lump-sum amount that can be used to replace your income so your family can maintain their standard of living and/or provide for your children or dependents.

Sadly, some life insurance claims are denied by insurance companies, leaving the grieving loved ones in a difficult position. The beneficiary is left with having to deal with the insurance company for the payout or receive nothing at all.

These insurance policies are contracts and are governed by the terms of the policy. As with any contract, each party has certain rights and obligations. A denial is not evidence that the insurance company has done anything wrong. Sometimes the terms of the contract allow for non-payment.

However, it can be difficult to know whether such non-payment of benefits is lawful and consistent with the terms of the contract. That is why whenever a policy of life insurance is denied, you need to understand the meaning of the terms of the contract before you may be satisfied that no money is payable. If the life insurance benefit is denied, having a lawyer review the denial is a great place to start.

In this article, our lawyers discuss the common reasons for life insurance denials and how to avoid or challenge some of them.

Common reasons for life insurance denials are:

1. Misrepresentation in the Application
2. Exclusionary Terms
3. Missed Premium Payments
4. Expired Term Life Insurance

1. Misrepresentation in the Application

As part of an application for life insurance, the insurance company will ask you to fill out a few lengthy forms. These forms will contain questions regarding your medical health, risk factors such as smoking, alcohol use, and dangerous hobbies like heli-skiing or scuba diving. 

These factors help the insurance company determine the applicant’s risk of death. Based on the assessment of your individual risk factors, the insurer will decide on whether to insure you, the benefit amount available to you and the monthly premium amount payable by you based on this information. 

It is important to be truthful and thorough in your life insurance application. If you do not know an answer then do not guess – make sure you provide accurate information. If you do not understand the question then ask for clarification from the insurance sales person or bank representative. Confirm your understanding in writing so there is no confusion on anyone’s part. According to British Columbia legislation, you are required to provide full disclosure to the insurance company. If you misrepresent any of the required information, the insurance company may deny the life insurance benefit to your beneficiary after you die.

In British Columbia, there is currently legislation in place that says if the policy has been in force for more than 2 years, the policy is “incontestable”. This means the insurer would still have to pay even where there was a material misrepresentation on the application form. However, if the insurer can prove that the answers were given fraudulently, they would be allowed to withhold payment. Often, the fight in that circumstance is over the legal meaning of “fraud”.

2. Exclusionary Terms

The life insurance policy will have terms that describe circumstances where benefits will not be paid. Some examples include:

Death by suicide: Sometimes policies will say that if the suicide occurs within a certain time frame (usually the first 2 years of coverage) that benefits will not be paid. This is to discourage people from purchasing policies in circumstances where they are contemplating suicide and want to provide financial security for loved ones. It is not always obvious that the manner of death is suicide. We have represented beneficiaries where there was a dispute as to whether a fatal gunshot wound was deliberate or accidental. In another matter there was a dispute as to whether a drug overdose was deliberate or accidental.

Death due to illegal activities: Most policies exclude circumstances where the death occurred while committing a criminal act. Criminal acts may include driving a vehicle under the influence of illicit drugs or excessive alcohol, operating a motor vehicle at extreme speeds, stealing property etc. Again, it is worthwhile to investigate any allegations of criminal acts as there may be mitigating factors that remove the behaviour out of the exclusionary language.

Death due to acts of war: This exclusion is intended to deny claim for civilians who are killed as a result of a military conflict or war.

These terms are often worded ambiguously and are subject to interpretation. As such, if an insurer is relying on an exclusion under the contract, it is important for a lawyer to review the denial.

3. Missed Premium Payments

To maintain your life insurance coverage, you must pay the monthly premium every month. If you miss your payments, you might lose your coverage and the payments you made with it.

It is important to be aware of the different grace periods your policy may have. The grace periods vary depending on the insurance company, policy type, and the governing law in your jurisdiction. In British Columbia, the legislation allows for a 30-day “grace period” in which you can pay an overdue premium for life insurance.

Sometimes beneficiaries are unaware that their loved one stopped paying the premiums, so they file life insurance claims that eventually get denied. The insurance companies deny such claims because the policy would not have been active at the time of the policyholder’s death due to the non-payment of the premiums. Therefore, it is important that you stay on top of the regular premium payments to ensure active insurance coverage.7001

4. Expired Term Life Insurance

A term life insurance policy is a policy that terminates at a specific age (usually 65). If you pass away after the term has expired, no life insurance benefits are payable. Once the term expires, you may be able to apply for a policy renewal for another term for a higher premium or convert the policy to permanent coverage.

It is important to remember that your insurer could refuse to renew the coverage at the end of the policy term. If you are looking to renew or convert your term life insurance, make sure to familiarize yourself with the policy terms or talk to your insurance broker to ensure you know your policy’s deadlines.

Conclusion

Life insurance claims may be denied for many reasons, including misinformation on the application, missed premium payments and expired term life insurance. If you have been denied life insurance coverage, it is important to understand that you may have limited time to appeal the claim. Whatever the reasons, our team of experienced insurance denial lawyers will help you fight for your rights under the policy.

Have you been denied your life insurance claim? Contact one of our experienced insurance denial lawyers today. We work on a contingency fee arrangement so there is no up-front cost to you, and you only pay a legal fee if the insurer pays you.

Contact us at 604.581.7001 for a free initial consultation.

The post Common Reasons for Life Insurance Denials – 4 Reasons Your Claim Could Be Denied appeared first on McQuarrie Legal Services.

Intro

The recent Supreme Court of British Columbia decision provides clarification as to when the court will find a will is invalid. The case of Jung Estate v Jung Estate, 2022 BCSC 1298 (“Jung Estate”), involves an elderly mother who had close relationships with both of her adult sons. Justice Blake found the mother’s will to be invalid as a result of suspicious circumstances at the time the will was made, the mother’s lack of testamentary capacity and the mother’s lack of knowledge and approval of the contents of her will. The overarching issue in the case of Jung Estate, was whether an elderly mother’s will was valid (spoiler: it wasn’t).

Facts

Rose Jung (“Ms. Jung”), a widow, died at the age of 88 due to natural causes. Her surviving beneficiaries were her two sons, Jerry, age 67; and Steven, age 62. Steven passed away on January 6, 2021, so his wife, Wendy Lee (“Ms. Lee”) took over the claim as the executor of Steven’s estate.

The primary asset of Ms. Jung’s estate was her Vancouver home. Jerry moved into the Vancouver home shortly before Ms. Jung’s death and lived there until the trial. All witnesses described Ms. Jung as a passive and non-confrontational woman.

Ms. Jung had been diagnosed with dementia in April 2017.  She signed a will on July 17, 2017 (the “Will”), one month before she passed away on August 16, 2017. The Will left Ms. Jung’s Vancouver home to Jerry and the residue (the deceased’s leftover assets after the payment of debts and estate expenses) to Steven. The Will replaced Ms. Jung’s former will from 2001 that divided her estate equally to Jerry and Steven.

The signing of the Will met the formal requirements under the relevant statute for a Will to be formally valid (Wills, Estates and Succession Act, SBC 2009, c 13, at s. 37 (“WESA”)), those requirements being that the will is:

(a) in writing,
(b) signed at its end by the will-maker, or the signature at the end must be acknowledged by the will-maker as the will-maker’s signature, in the presence of 2 or more witnesses present at the same time, and
(c) signed by 2 or more of the witnesses in the presence of the will-maker.

Ms. Lee argues Ms. Jung’s Will should be invalid because:

• There were suspicious circumstances surrounding the Will’s creation and execution;
• Ms. Jung did not have the required testamentary capacity to make the Will;
• Ms. Jung did not know and appreciate the contents of the Will; and
• Ms. Jung was unduly influenced by her son, Jerry, in the making of the Will.

Jerry disputed these claims and asked for the Court to declare the Will valid.

Discussion

Credibility and Reliability

In the Court’s assessment of witness’ evidence, it must assess the credibility and reliability of such evidence. Credibility relates to honesty. In a credibility assessment, the Court will presume truthfulness. Reliability relates to accuracy. Factors to be considered when assessing credibility and reliability:

• the truthfulness of a witness’ testimony based upon the veracity or sincerity of a witness;
• the accuracy of the evidence;
• the ability and opportunity to observe events;
• the firmness of their memory, the ability to resist the influence of interest to modify their recollection;
• the unreasonableness, impossibility or unlikeliness of a witness’ testimony;
• the potential motive for a witness to lie;
• the witness’ demeanour; and
• the consistency of the evidence with the probabilities affecting the case as a whole and shown to be in existence at the time.
  
  Bradshaw v Stenner, 2010 BCSC 1398 at para 186, aff’d 2012 BCCA 296

The Court in Jung Estate found that Jerry’s evidence was largely unreliable and must be examined carefully. On the other hand, Ms. Lee’s and Steven’s evidence was found to be reliable and credible, which was in part due to their evidence being largely corroborated by contemporaneous emails.

Formal Validity

The first step in assessing circumstances surrounding the creation and execution of a will is to ensure the will meets the formal requirements in accordance with s. 37 of WESA, namely, that the will was signed by the testator in the presence of two witnesses, who also signed the will.The court found Ms. Jung’s Will was executed in accordance with the requirements of s. 37 of WESA and was therefore formally valid.

Suspicious Circumstances

When a will has been executed in accordance with the formal requirements, the person attempting to validate the will has the benefit of the presumption that the will-maker had the required knowledge and approval, and testamentary capacity to sign and execute the will (Vout v. Hay, 1995 CanLII 105 (SCC), at para 26 (“Vout”)). However, when suspicious circumstances are shown to be present, this presumption is spent. The standard of proof for establishing suspicious circumstances is that of a balance of probabilities. Suspicious circumstances must raise what has been described as a specific and focused suspicion, a general suspicion is not enough. Suspicions must be “well grounded” and will generally relate to circumstances:

(1) surrounding the preparation and execution of the will,
(2) calling into question the capacity of the will-maker, or
(3) tending to show that the free will of the will-maker was overborne by acts of coercion or fraud.
Leung v Chang, 2013 BCSC 976 at para 31, aff’d 2014 BCCA 28; and Vout at para 25.

The Court found the following suspicious circumstances surrounding the creation of Ms. Jung’s Will:

• Jerry signing Ms. Jung’s cheques;
• Steven searched through Ms. Jung’s closet for her purse and cheque book;
• Numerous arguments between Ms. Jung and her sons, and between the sons themselves;
• A report from a social worker reporting Ms. Jung may be financially manipulated by Jerry; and
• Jerry’s attempts to take Ms. Jung’s Power of Attorney that Steven held.

Testamentary Capacity

Testamentary capacity is a legal concept. It does not equate to mental capacity and cannot be granted merely by a medical assessment. Justice Blake restated the long-established test for testamentary capacity which requires the will-maker be sufficiently clear in their understanding and memory to know, on their own:

• the nature and extent of their property;
• the persons who are the natural objects of their bounty;
• the testamentary provisions they are making; and
• they must be capable of appreciating those factors in relation to each other and forming an orderly desire as to the disposition of their property
  
  See: Schwartz v. Schwartz (1970), 1970 CanLII 32 (ON CA); Banks v Goodfellow (1870); Vout; Laszlo v Lawton, 2013 BCSC 305 at para. 188; and Halliday v Halliday Estate, 2019 BCSC 554 at para. 26 (“Halliday”).

These are commonly referred to as the Banks v Goodfellow factors (dating back to the 19^th century). Determining whether a will-maker possessed testamentary capacity at the necessary times is a question of fact, to be determined from all of the circumstances. Mental capacity can fluctuate, what is important is that the will-maker had the necessary testamentary capacity at the relevant time, i.e. when providing instructions for the will or when signing the will. In assessing testamentary capacity, the evidence of the drafting solicitor, who took instructions and prepared the will, is often given considerable weight, particularly where that person is an experienced wills and estates lawyer (Benekritis v. Gilbert Estate, [1998] B.C.J. No. 171at paras. 41 – 43). Cognitive deterioration does not necessarily mean the will-maker is no longer capable of possessing testamentary capacity (Bull Estate v. Bull, 2015 BCSC 136 at para. 114).

Although there was strong evidence both for and against testamentary capacity, the Court held that Jerry had not proven, on a balance of probabilities, that Ms. Jung had testamentary capacity at the time she made the Will. The finding was largely due to Ms. Jung not having sufficient understanding of the value of her assets and the consequences of giving Jerry the Vancouver home and Steven the residue of the estate, which effectively disinherited Steven and left everything to Jerry. This distribution went against Ms. Jung’s wishes regarding the distribution of her estate at the time she provided instructions for the Will to the drafting lawyer, which was ¾ of the estate to Jerry and ¼ of the estate to Steven.  

Knowledge and Approval of Contents

If it is proven that the will-maker doesn’t have the required testamentary capacity to sign and execute the will, it is unnecessary to determine whether they knew and approved of the will’s contents.

However, knowledge and approval of the contents of a will is not the same as testamentary capacity. Testamentary capacity includes the ability to make choices, whereas knowledge and approval requires no more than the ability to understand and approve the choices that have already been made. Reasoning for the twin requirements of knowledge and approval, and testamentary capacity ensures that the will is the product of the conscious intention of a sound mind. Knowledge and approval is the “conscious intention” in that formula. The knowledge and approval requirement does require the will-maker to be aware of the magnitude of their estate and they must appreciate the effect of the disposition of their estate (Geluch v. Geluch Estate, 2019 BCSC 2203 at para. 127; citing Russell v. Fraser (1980), 1980 CanLII 737 (BC CA), 118 D.L.R. (3d) 733 (B.C.C.A.) at para. 12).

The Court held that Ms. Jung was not able to appreciate the impact of her gift of the Vancouver home to Jerry and the rest of her estate to Steven because it effectively left nothing to Steven, which went against her expressed wishes regarding the distribution of her estate.

Undue Influence

If it is found the will-maker lacks testamentary capacity to execute the will and the will-maker does not have the necessary knowledge and approval of its contents, it is unnecessary to determine whether there was undue influence.

However, Justice Blake held that to establish undue influence, the party claiming undue influence must claim that the will resulted from another person being in a position where the potential for dependence or domination of the will-maker was present, and that they used that position to unduly influence the will-maker to make the will. If they are able to establish that the other person was in a position where the potential for dependence or domination of the will-maker was present, then the party seeking to defend the will has the onus to establish that undue influence was not exercised over the will-maker with respect to the will. To give rise to the presumption of undue influence, it is sufficient to establish that the will-maker was reliant on a person, and that person exercised dominance over their will through persuasive influence (Halliday). If there is evidence that the will-maker was dependent, and that the person upon whom they were dependent exercised dominance, legal advice may not be sufficient to overcome concerns about undue influence (Kozak Estate (Re), 2018 ABQB 185 at para. 16).

Jerry was in a position where dependence or domination could have been present with Ms. Jung. Ms. Jung was passive, non-confrontational, dependent on her sons and susceptible to financial abuse by Jerry. However, Jerry arranged for Ms. Jung to meet with the Will drafting lawyer alone; respected the lawyer’s instructions, including that an independent medical assessment of Ms. Jung should occur, and that Jerry could not attend Ms. Jung’s medical appointment. The Court held that Jerry had proven that undue influence did not occur.

Key Takeaways

In Jung Estate, the Will was declared invalid on the grounds that Ms. Jung, the will-maker, lacked testamentary capacity and did not know of and approve of the contents of the Will. The Will was therefore found to be invalid and Ms. Jung’s estate was ordered to be distributed according to her 2001 will, meaning the estate was equally split between Jerry and Steven (not the ¾ to Jerry and ¼ to Steven instructions she gave the lawyer in 2017).

Jung Estate provides a thorough analysis of the law on how a court can find a will to be invalid. The factors that led to Justice Blake’s finding in this case were Ms. Jung’s passive and non-confrontational character, as well as her lack of understanding of the effect of her Will. The will-maker must understand the general nature of their assets when executing their will and Ms. Jung did not have this understanding.

If you require assistance with drafting or contesting a will, please contact McQuarrie and let us help.

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The trust provisions of the Builders Lien Act¹ (“BLA”) are often misunderstood and misapplied by practitioners. Although most of the provisions of the BLA pertain to lien rights (unsurprisingly), the trust relationships created by this statute should not be given short shrift. If understood and applied correctly, breach of trust and related claims arising from the trust provisions of the BLA can be powerful tools for an aggrieved party in a construction dispute.

Two Types

There are two types of trust relationships created under the BLA.

Pursuant to s. 5(2), all funds in the owner’s holdback account are held in trust for the benefit of the contractor from whom the holdback was retained, subject to, inter alia, any lien claims by those engaged below the said contractor.

Pursuant to s. 10, all funds received by a contractor (or subcontractor) on account of the price of their contract (or subcontract) are held in trust for the benefit of all persons that the contractor (or subcontractor) engaged in connection with the improvement. All beneficiaries of the s. 10 trust must be paid before the trustee can appropriate the trust funds for its own use or uses not authorized by the trust.²

By way of an example, suppose that Alpha is the owner of a property. Alpha contracts with Bravo for the construction of a building on that property. In turn, Bravo contracts with Charlie to perform the roofing work and with Delta to perform the painting work. Charlie then contracts with Echo to supply the materials for the roofing work.

In this scenario:

• pursuant to s. 5(2), the funds held back from Bravo in Alpha’s holdback account would be held in trust for Bravo, subject to the lien claims of Charlie, Delta, and Echo; and 
• pursuant to s. 10:
  • Bravo would hold all amounts received from Alpha on account of the price of its contract with Alpha in trust for Charlie and Delta; and
  • Charlie would hold all amounts received from Bravo on account of the price of its contract with Bravo in trust for Echo.

Flow of Relationships

The scheme of ss. 5(2) and 10 is such that the trust obligations created by these provisions only flow one step down the construction pyramid. This means that the trustee-beneficiary relationship only exists between those directly above or below one another in the construction pyramid and that the trust obligations only flow downward.³

Consequently, owners do not hold s. 5(2) funds in trust for subcontractors⁴ and contractors do not hold s. 10 funds in trust for the owner⁵ or for those engaged by their subcontractors.

Using the same scenario as above:

• Alpha would only hold the s. 5(2) funds in trust for the contractor from whom the funds were held back, namely Bravo, and not for Charlie, Delta, or Echo; and
• Bravo would only hold the s. 10 trust funds in trust for the parties it directly engaged, namely Charlie and Delta, and not for Alpha or Echo.

Limitation Period

Pursuant to s. 14, all s. 10 trust claims are subject to a one-year limitation period, running from the date that the head contract is completed, abandoned or terminated, or if there is no head contract, then running from the date that the relevant improvement was completed or abandoned.⁶ Therefore, a party who has failed to file a lien within the 45-day time period stipulated by s. 20 may still be at liberty to advance a trust claim under s. 10.

Architects, Engineers, and Material Suppliers

Although architects, engineers, and material suppliers can be beneficiaries of a s. 10 trust, pursuant to s. 10(4), they are not trustees of a s. 10 trust. Given that the funds received by architects, engineers, and material suppliers on account of the contract or subcontract price are not impressed with a s. 10 trust, these parties are free to appropriate these funds without risking a breach of the statutory trust.

That said however, when an architect, engineer, or material supplier is providing services or materials to one party on account of multiple improvements, they are required to make inquiries to the party from whom they are receiving the funds in order to determine which improvement the funds are being advanced on account of⁷ and to credit the funds against the debt in respect of the improvement.⁸ Failure to do so will not constitute a breach of trust but may impact an architect, engineer, or material supplier’s BLA rights.⁹

Breach of Trust

Section 11 of the BLA specifies the statutory consequences of a breach of a s. 10 trust, for both trustees and, in cases where the trustee is a corporation, its directors or officers. The statutory penalties include fines and imprisonment; however, these provisions are not exhaustive with respect to the claims, liabilities, and remedies which may flow from a breach of a s. 10 trust.

A trustee’s directors, officers, and other “strangers to the trust” may also be liable in tort for, inter alia, knowing assistance in breach of trust and/or knowing receipt of trust funds.¹⁰ Therefore, whenever a breach of trust claim is being advanced under the BLA, whether the relevant facts give rise to these tort claims should also be considered as such claims, if proven, may entitle a wronged beneficiary to restitutionary remedies which are not expressly set out under s. 11.

————

¹ Builders Lien Act, SBC 1997, c 45 [BLA].

² Aside from payment to beneficiaries, see s 11(4) of the BLA for other authorized uses of s 10 trust funds.

³ It should be noted that trust relationships flowed differently under the previous scheme of the Builders Lien Act, RSBC 1979, c 40 (and more specifically, s 2) Therefore, one should be mindful of this when relying on case law interpreting the predecessor statute. See also Columere Park Developments Ltd. v Enviro Custom Homes Inc., 2010 BCSC 1248 at paras 61-63 [Columere Park Developments Ltd.].

⁴ Bear Creek Contracting Ltd. v Pretium Exploration Inc., 2020 BCSC 1523 at paras 61, 66-68.

⁵ Columere Park Developments Ltd., supra note 3 at para 63. Although the court in this case confirmed that the owner was not the beneficiary of a statutory trust under the BLA, it did find a wrongful conduct constructive trust in favour of the owner over the monies advanced by the owner to the contractor for the construction project. See paras 85-89.

⁶ For further discussion regarding the implications of s 14 and the issues arising with respect to same, see British Columbia Law Institute, “Report on the Builders Lien Act” (2020) BCLI Report No 89 at 155.

⁷ Ross Gibson Industries Ltd. v Greater Vancouver Housing Corp., 1985 CarswellBC 293, [1985] BCWLD 3469 [Ross Gibson Industries Ltd.].

⁸ BLA, supra note 1 s 12.

⁹ See Ross Gibson Industries Ltd., supra note 7.

¹⁰ For a detailed discussion regarding these torts, see DBDC Spadina Ltd. v Walton, 2018 ONCA 60.

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This award is based on a thorough, independent analysis conducted by Great Place to Work Institute® Canada, the global authority on workplace culture. They recognize Canada’s Best Workplaces through employee feedback, deep insights, data analysis, by measuring employee experience, corporate culture, and leadership behaviours.

Nancy Fonseca, Senior Vice President of Great Place to Work® Canada, says that a great workplace is about the level of trust that employees experience in their leaders, the level of pride they have in their jobs, and the extent to which they enjoy their colleagues. “Our data shows that great workplaces benefit from stronger financial performance, reduced turnover, and better customer satisfaction than their peers. What’s more, work environments with trust at the foundation are ripe for innovation, agility, resilience and efficiency,” Fonseca said.

At McQuarrie, we have an ongoing commitment to prioritize our people and dedicate our efforts to upholding our values of trust & integrity, collaboration, and commitment to excellence. Competence, collaboration, and courtesy are hallmarks of our approach to the practice of law.

ABOUT MCQUARRIE

McQuarrie has been proudly serving British Columbians since 1967. From business law and land development to insurance denial and estates, McQuarrie delivers innovative result-oriented legal solutions. As an established law firm in British Columbia, McQuarrie Hunter LLP offers comprehensive legal services and representation for a wide range of areas including business law, dispute resolution and litigation, estates and trust litigation, insurance denials, personal injury, real estate transactions, estate planning and administration, professional regulation & administrative law, debt collection and creditor remedies, and family law services.

For a list of our career opportunities, visit: https://www.mcquarrie.com/careers/

Questions? Contact our office at 604 581 7001 or send us an email at info@mcquarrie.com.

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