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Trusts under the Civil Code of Quebec (“CCQ”), since a legislative change in 1994, have required an independent trustee (i.e., essentially, there must be at least one trustee who is not a beneficiary).

Courts have decided that until an independent trustee is appointed to the trust, actions undertaken by the trust (ex., the signing of contacts, and perhaps the distribution of funds from the trust) are null.

Furthermore, when deciding who is capable of being an independent trustee, the jurisprudence is apparently not clear as to whether one applies an objective test (i.e., is in fact the trustee in question not a present or future beneficiary?¹) or if one applies instead a subjective test (i.e., would the applicable facts, such as for example family ties or even possibly friendship or other ties, unreasonably influence the decision-making of the trustee so that the trustee, even if not a present or future beneficiary, would not be independent?²).

Therefore, when establishing the trust, the existence of an independent trustee is a must, and whether or not there is such independence may be hard to establish.

There is an alternative in certain situations, and it is called a “substitution” under the CCQ.

Substitutions originated in French law and have always been a part of Quebec law. (Compare this to trusts, which originated in English common law. Trusts were not in the original Quebec Civil Code, and were added to it later)

A substitution can be set up as a gift while the person setting up the substitution is still alive (an “inter vivos” substitution), or in the will of the person setting up the substitution (a testamentary substitution). In its simplest incarnation, the donor gifts property to the “institute” who can use it, say, during his or her lifetime. When the institute passes away, the property goes to persons designated by the donor, who are known as the “substitutes.”³

Perhaps an interesting aspect of the substitution is that no trustee at all (let alone an independent trustee) is required. Also very important is that from a tax point of view, the substitution is deemed to be a trust (this is indicated at subsection 248(3) of the federal Income Tax Act, and the equivalent provision of the Quebec Taxation Act).

How would the substitution work in practice? Think of the following fictional example. Mr. Smith wants his surviving spouse, Mrs. Smith, to receive all the earnings from his estate while she is alive, with a right for her benefit only to encroachment on capital to provide adequately for her care, support, maintenance, comfort and general welfare, and with their children to receive the remaining capital upon the death of Mrs. Smith.

One way of dealing with this would be to set up a trust in Mr. Smith’s will. To comply with Quebec law, Mrs. Smith couldn’t be the sole trustee to administer the assets of her late husband.  She might be very uncomfortable with adding an independent trustee to formally administer with her, and instead wants to be the sole trustee (which would be allowed in the rest of Canada outside Quebec where there is no independent trustee rule).

The situation could also be handled by including a substitution in Mr. Smith’s will, with Mrs. Smith referred to as the “institute” with respect to the property, and it being stipulated that on her death, the remaining capital passes to their children, who are the “substitutes” with regard to the property.

From a tax point of view, the substitution is treated as a trust, so there is a spousal trust tax deferral on Mr. Smith’s death. Income paid or payable to Mrs. Smith under the will is taxed in her hands. Trust tax returns are filed for the substitution until Mrs. Smith’s death.

The recent Quebec Court of Appeal case of Boudreault v. Boudreault⁴ seems to indicate that such a substitution does not require a trustee, and that the first rank beneficiary can receive for example all the income and be given a right to encroach on the capital in his or her own favour.

A substitution then can be a good alternative to a trust in certain situations, but it will not always be appropriate. For example, the substitution does not really provide any creditor protection (because from a civil law point of view, the institute owns the property, with the ownership afterwards passing to the substitute). Furthermore, in an estate freeze, the substitution cannot really be effectively used in the place of a trust. Also, if there is a desire to have an independent trustee (or just a non-independent co-trustee) so as to try to provide security to the capital beneficiaries, a trust is more appropriate.

However, in many cases, including the situation described above for the fictional Mr. and Mrs. Smith, a substitution may be a good alternative to a trust. Deciding to use a trust or a substitution is a delicate choice which should be considered carefully based on the specific facts and circumstances of each case.

I would be pleased to provide more details, and provide if desired the substitution clauses for my clients’ gifts and wills.

¹ C.T. v. D.J., 2009 QCCA 22460.

  ² Graham v. Boyer-Richard, 2004 CanLII 20712 (QSC).

  ³ There can be no more than three ranks of beneficiaries in the substitution.

  ⁴ 2015 QCCA 1781.