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In Quebec, article 1824 of the Civil Code provides that a gift of movable property is absolutely null unless it is made by way of notarial deed. However, this rule does not apply in the case where a gift is made by consent of the parties, “accompanied by delivery and immediate possession of the property”.

This rule is simple enough to understand when one is dealing with corporeal movables. If I say: “I am making you a gift of my pen” and I physically deliver you the pen, which you accept, that is a valid and irrevocable gift of the pen with no legal requirement to have a notarial deed to perfect the gift.

This rule is less easy to understand when one is dealing with incorporeal movables, such as stocks, bonds, bank accounts and so on. For example, if I have a bearer bond and I say: ““I am making you a gift of this bearer bond” which I physically deliver to you and you accept, that would be a valid and irrevocable gift because I would have immediately delivered the bond to you, and you would have immediate possession of it, whereupon all rights of ownership attached to that bearer bond would belong to you, again with no legal requirement to have a notarial deed to perfect the gift.

On the other hand, if I did the same with a share certificate of a private corporation where the bylaws of the corporation impose modalities for the transfer (such as approval by the corporation’s board of directors), then simply physically delivering the share certificate does not give you legal possession and ownership of the shares represented by the certificate. Physical delivery of the share certificate does not transfer legal ownership of the shares by way of gift, in the absence of a notarial deed.

So, this leads to the problem I want to briefly discuss in this article.

Where a person has a securities account with a broker such as RBC Dominion or Scotia Capital, can you make a gift of the “account”? Or are you making a gift of the stocks, bonds, mutual funds or cash in the account? Can you make such a gift by simply instructing your broker to make the transfer, or is a notarial deed required? What do you actually own when you receive a statement of account from your broker every month listing your stocks, bonds, mutual accounts and so on? What is actually getting transferred when you give your broker instructions and when does the legal transfer actually happen?

Regarding most publicly traded stocks, bonds and mutual funds, Canada and the United States have created an indirect holding system using central securities depositories such as the Canadian Depository for Securities Limited (CDS) and the Depository Trust Company (DTC) in the United States.

Attorney Michel Deschamps explains the historical context as follows:

“Prior to the 1960’s, purchasers of shares and bonds in public companies would typically receive physical certificate evidencing their securities. In order to transfer ownership, they could simply deliver the certificates to the purchaser endorsed for transfer or accompanied by a stock transfer power of attorney. This system, known as the direct holding system, became impractical for handling the large volumes of public trades occurring on a daily basis.

To address this issue, a book-entry system -known as the indirect holding system- was introduced using central securities depositories such as the Canadian Depository for Securities Limited (CDS) and the Depository Trust Company (DTC) in the United States as clearing houses. Under this system, the vast bulk of securities transactions are transferred by computerized book-entries on the records of various intermediaries (primarily brokers, banks and trust companies) that in turn settle on a net basis with the central depositories in which the intermediaries are the participants.” ^[1]

This system is governed in Canada by legislation called the Securities Transfer Act (“STA”) which became effective in Ontario, Alberta and elsewhere in 2007 (and in Quebec in 2008).^[2]

All of these statutes were modelled closely on Revised Article 8 of the United States Uniform Commercial Code (“UCC”). These statutes contain inter alia the legislative provisions applicable to financial assets that are indirectly held (that is, where the investor has rights in relation to an underlying financial asset but holds his interest through an intermediary rather than directly with the issuer).

As explained by Professor Russel A. Hakes, currently Professor Emeritus at Widener University School of Law (Delaware Law School):

“For years, those holding securities indirectly have considered themselves “owners” of the securities: having all rights and property interests in the securities. Article 8 does not support that view although it was “designed to ensure that parties will retain their expected legal rights and duties…” To understand why this is true, a distinction must be drawn between the property interest in the security entitlement itself and the property interest in the underlying financial asset. An entitlement holder has all rights and property interests the security entitlement provides to the underlying financial asset”.^[3] (Citations omitted).

The STA statutes, modelled on the UCC, introduced the term “security entitlement” to describe the rights and interests of a person who holds a security or other financial asset through a security intermediary, such as a broker or a bank.

The legal nature of a security entitlement is defined as follows in sub-section 97 (2) of the Ontario STA:

“An entitlement holder’s property interest with respect to a particular financial asset under subsection (1) is a proportionate property interest in all interests in that financial asset held by the securities intermediary, without regard to:

(a) the time that the entitlement holder acquired the security entitlement; or

(b) the time that the securities intermediary acquired the interest in that financial asset.”

The legal nature of the “property interest” created by a security entitlement was considered in some detail by Professor Hakes. In considering the meaning of sub-section 8-503 (b) of the UCC, which mirrors the definition in section 97 (2) of the Ontario STA, Professor Hakes explains as follows:

“Sub-section 8-503 (b) describes the entitlement holder’s property interest in a financial asset as a “pro rata property interest” in all interests in that financial asset held by the securities intermediary. Although it is not explicitly stated, the pro rata interest is implicitly limited to the amount of the financial asset credited to the securities account. In other words, if the security entitlement is to 100 shares of IBM stock and the securities intermediary holds 100,000 shares of IBM stock, the security entitlement is a 1/1000 interest in each share of IBM stock held by the intermediary. It is important to note that this pro rata interest extends to financial assets acquired by the securities intermediary before the entitlement holder acquired the security entitlement, as well as those acquired thereafter. Thus the fungible bulk in which an entitlement holder has a pro rata interest regularly changes. This pro rata interest in the fungible bulk of a particular financial asset, however, is not a claim to a specific asset held by a financial intermediary”.^[4]

In the indirect holding system, the crediting of a security to a person’s account by a financial intermediary only creates an in personam claim against the financial intermediary. It does not create any ad rem rights.

In Quebec, section 3 of the STA refers to an account holder “acquiring” a security entitlement to a financial asset, without defining in civil law terms what “property interest” a Quebecer who holds a security entitlement actually acquires.

In Quebec, sub-section 103(1) of the STA provides: “A person acquires a security entitlement and so becomes the entitlement holder if a securities intermediary indicates, by book entry, that a financial asset has been credited to the person’s securities account.”

Section 107 provides: “To the extent necessary for a securities intermediary to satisfy all security entitlements with respect to a particular financial asset, all rights in that financial asset held by the securities intermediary are held by the securities intermediary for the entitlement holders, are not the property of the securities intermediary, and are not subject to claims of creditors of the securities intermediary except as otherwise provided in section 130.

Each entitlement holder has a proportionate right with respect to that financial asset, without regard to the time that the entitlement holder acquired the security entitlement or the time that the securities intermediary acquired the rights in that financial asset.”

Therefore, it seems that in Quebec, the situation of the holder of a securities account is not dissimilar to the situation of any other Canadian: Essentially, a Quebec holder of a securities account acquires a “security entitlement” in that account: He or she does not own the underlying securities in the account.

Can you transfer your “security entitlement” by gift and if so, how do you do it? The Quebec Court of Appeal recently dealt with that issue in the case of Labis v. Labis.^[5]

In that case, a person instructed his investment advisor by way of letter of direction to transfer an investment account to his children. The letter of direction was signed March 28. The donor died on March 29, before the instruction was carried out and before the transfer was actually recorded in the books of the broker. The issue in the case was: did the letter of instruction transfer possession of the account and ownership of the account by way of gift to the donee or was a notarial deed necessary? Also, when did the transfer occur?

The Quebec Court of Appeal cited article 39 of the STA which provides that the transfer or redemption of a security is initiated by means of an endorsement or instruction and that of a financial asset, by means of an entitlement order and that the instruction given by the donor to transfer the account was valid within the meaning of the STA and took effect immediately upon the donor signing it. The Court basically looked at the security account as if the account itself was the asset and held that the account could be the object of a gift without a notarial deed if the donor gave a valid instruction to a financial intermediary to effect the transfer of the account to a third party. Or to put it another way, you can gift the security entitlement that you have in connection with your Quebec brokerage account. The Court further held that the delivery and transfer of the security entitlement occurred at the moment that the instruction was signed by the donor, because section 45 of the STA provides that “The effectiveness of an endorsement, instruction or entitlement order is determined as of the date that the endorsement, instruction or entitlement order is made. What is unclear is that while a security entitlement may be transferred by a written order, why does that equate to a transfer of ownership of the account or is contents? As a holder of a brokerage account, I do not have ownership rights in the underlying assets. I have a bundle of rights that falls short of ownership and if I want to gift that bundle of rights, it seems to me that the written order to do so has to be in notarial form if what I am really doing is making a gift.

However, in the result, it appears that the Court of Appeal made a policy determination to expand the nature and type of “asset” that can be gifted without the legal formality of a notarial deed in Quebec to include a security entitlement, which may well be a laudable result, because the formalities surrounding gifting by notarial deed are obviously more cumbersome and expensive than simply instructing one’s broker to transfer assets. On the other hand, one may legitimately inquire whether this result was something that was more properly within the purview of the Quebec National Assembly than the courts.

[1] Michel Deschamps, Securities Transfer Act Enacted in Ontario and Alberta,

[2] For purposes of simplification, we will use the Ontario STA to set forth the legal argument in connection with the nature of a security entitlement, but the same principles apply in all of the relevant STA statutes.

[3] Russel A. Hakes, UCC Article 8: Will the Indirect Holding of Securities Survive the Light of Day, 35 Loy. L.A. L. Rev. 661 (2002) at pg. 686

[4] Russel A. Hakes, Supra, pg. 688

[5] 2018 QCCA 992