Business Law, Litigation, Taxation law

Family Trust Requires an Independent Trustee

Dec 20th, 2012

By Daniel Frajman

A recent Quebec Superior Court judgment makes one of the clearest statements yet that a trust governed by Quebec law requires at least one independent trustee (independent in the sense, usually, that there is at least one trustee who is also not a beneficiary of the trust).  The judgment was rendered on October 31, 2012 in the case of Financière Transcapitale Inc. v. Estate Allaire  (2012 QCCS 5733).

 The case concerned a family trust, settled by a father.  The trust beneficiaries were the mother (as to interest) and the two children (as to capital).  The three trustees were the same mother and her two children.  (The trust seemed to not be a spousal trust under the Income Tax Act of Canada, because the mother was not entitled to all interest earned.)

 The trust granted a movable hypothec (akin to a security interest) over its brokerage account, but the Court held that the hypothec was null and of no effect because of the lack of an independent trustee.  (The Court did not nullify the trust, but one wonders if that is also theoretically possible.)  According to the Court:

  •  Article 1275 of the Civil Code of Quebec requires at least one trustee that is not a beneficiary;
  • The fact that a trustee-beneficiary is actually a future beneficiary (such as the children in this case) does not itself make that beneficiary an independent trustee;
  • When there is no independent trustee, one must be appointed as soon as possible, and if necessary by Court judgment amending the trust.
  • The rule requiring an independent trustee is of “public order” (i.e., cannot be deviated from), and is “strictly” applied.

 Therefore, for existing trusts and for those being formed, the rule requiring the appointment of an independent trustee, which has been a pre-occupation since it was introduced in 1994 under the new Civil Code of Quebec, has taken on even more importance.

 Interestingly, one kind of trust that does not require an independent trustee is a charitable trust (at least for private foundations under the Income Tax Act of Canada), where the trustees should not benefit personally as beneficiaries.  For more information, see my recent article on this topic, originally published in Carswell’s The Canadian Taxpayer in February/March 2012.

Daniel Frajman practices corporate and commercial law with a particular emphasis on trusts and charities.