Trustees Controlling the Corporation – a Challenging Situation

Estate planning intrinsically results in tax planning; one cannot dissociate the two. Indeed, the easiest manner to maximize the value of an estate is by minimizing the tax payable at death. The same approach applies to the successful business owner; maximizing profit by minimizing taxes.

Trusts are oft enused to accomplish eff ective tax/estate planning. However, the use of a trust to control a private  corporation imposes fiduciary obligations on the part of the trustees to administer the corporation for both the shareholders and the beneficiaries of the trust; a challenging balancing act for the trustees at the best of times.

This newsletter will explore the various duties of trustees and some of the conflicts of interest that can arise.

Powers and Authority of Trustees and Directors
Trustees have a duty to carry their powers and authority in accordance with the Deed of Trust whereas Estate Trustees have a duty to act in accordance with the instructions conferred by the Testator’s Will. Trustees have a fiduciary duty to act in the best interest of the beneficiaries; that is a duty of loyalty and a duty of care toward the beneficiaries.

Trustees have three fundamental duties they must always comply with:

• they may not delegate their duties to a third-party;
• they may not profit personally from their dealings with the trust property; and
• they must act honestly, with prudence and reasonableness.

Trustees also have a duty to act personally, with care and in good faith and must avoid conflicts of interest.

Directors, on the other hand, owe a fiduciary duty to the corporation, and only the corporation. Directors are intended to make policy and specific decisions concerning a variety of business risks as long as it is for the best of the corporation.
It is said that the directors are considered to be the alter ego of a corporation.

Trustees Controlling a Corporation
In many tax planning strategies such as an estate freeze, a family trust is introduced as the majority shareholder of the corporation holding the shares that will represent the future growth of the corporation.

The introduction of a family trust as the majority shareholder is usually viewed as providing greater flexibility in tax planning strategies and estate planning but results in different considerations for decision-making: the duties of the
directors versus the duties of the trustees.

Trustees holding the majority of the shares of a company face the possibility of having to make decisions that may impact the viability and value of the corporation and intrinsically affect the beneficiaries’ interest in the trust. It is nearly impossible to avoid some conflict of interest in these circumstances; indeed when acting as both a trustee and a director, the individual has a duality of fiduciary duties which may ultimately conflict. Where trustees hold shares representing voting control of the corporation, it is difficult to imagine how they can exercise their fiduciary duty without being appointed on the board of directors of the company. They may elect to only have one of them appointed but such does not discharge the other trustees of their fiduciary duties; they nonetheless must place themselves in a position to make informed decisions concerning the company in order to protect the assets of the trust.

If the trustees decide that all of them will be elected to the board of directors, they must vote in accordance with their fiduciary duties as trustees. If the Deed of Trust or the Will requires a decision by vote by majority, then the trustees must vote and make decisions as directors in a fashion similar to casting their vote as trustees.

There are significant differences in the operation of trust law and corporate law. The trustees who must act appropriately as directors must also act in the best interest of the beneficiaries which can sometimes conflict with what is in the best
interest of the shareholders; not always an easy juggling act.

Estate Trustees Controlling a Corporation 
Estate trustees are faced with the same challenges stated above and, further, they must as well meet their fiduciary  duties toward the beneficiaries of the estate. The issue is therefore how can you balance the duty of care to the
beneficiaries of the estate and the corporation??

Estate trustees must also deal with estate planning strategies that render their decision-making even more difficult as they are required to consider different beneficiaries who may have different interests. For example, what if the testator
leaves a life interest of the income of the corporation to his spouse but on her death the shares including all income not paid to the spouse, are to be equally divided amongst his children. In whose interest do they manage the corporation,
the spouse or the children?

This is just one example of the complex issues that can arise from the duality of acting as estate trustee and director of a corporation. A well drafted Will should provide clear instructions to the estate trustee for such circumstances but
often it does not, leaving the estate trustee in a thorny situation.

It is noteworthy that if the estate is dependent upon an income stream from a corporation, the estate trustee must serve as a director to ensure that the appropriate business decisions are made on timing and distributions of profit of a business.

However, an estate trustee/director  of a corporation is caught in an impossible situation that can only result in a conflict of interest. The estate trustee/director must then face the possibility of having their decisions reviewed by either the shareholders or the beneficiaries of the estate.

Jurisprudence appears to indicate that the beneficiary of an estate is not entitled to any disclosure of the corporate and financial records of the corporation. However, as long as the beneficiary’s interest is involved, the beneficiary is entitled and may seek from the estate trustee all documents or communications between the trustee and the corporation.

Furthermore, trustees may also see their actions as director questioned by the beneficiaries claiming an “oppression remedy.” Professionals who advise on estate planning ought to consider this remedy when discussing estate planning with the testator.

The decision of the trustee/director may always be subject to review and remediation in accordance with the available remedy under the legislation or equity.

Conclusion
We have seen that it is nearly impossible to avoid a conflict of interest when one is acting as both a trustee and a director.  In those instances, the trustees/directors have a duality of fiduciary duties which may ultimately result in a conflict.

Many professionals view this “conflict” as a novel concept and dismiss it on the basis that in practice, the trustees and directors have the discretion to administer the trust and the corporation “as they see fit.”

I submit that such view fails to properly advise trustees who must carry both the duties of trusteeship and directorship. It is true that trustees may be absolved of any personal liability if the Deed of Trust or the Will so states. However, that is only partially true as they can still be held liable under equitable remedies or under corporate legislation.

If you are acting as both trustee and director, it is essential that you recognize your fiduciary duties and to whom to you owe such duties. Failure to do so could result in untenable positions and potential personal liability. If you have any questions concerning the duties of a director or trustee, please do not hesitate to contact me directly at 613-288-
3220 or by email at sdesmarais@tslawyers.ca

Sebastian Desmarias
Associate, Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Damages for Psychiatric Damage

We have recently witnessed a change in attitude in our courts whereby they are more willing to acknowledge the impact of psychological injuries on victims of negligent behaviour. As part of this transition, the previously-dominant descriptor for psychological injury – “nervous shock” – has been replaced by the term “psychiatric damage”.

There currently exists a two-part test in Canada which must be satisfied in order to find liability for the negligent infliction of psychiatric damage: (1) the plaintiff must have suffered a “recognizable psychiatric illness”, and (2) it must be reasonably foreseeable that the plaintiff would suffer such damage.

A “recognizable psychiatric illness” may take one of several forms, and includes conditions such as schizophrenia, severe and chronic depression, and post-traumatic stress disorder. Conditions which are described in the Diagnostic and Statistical Manual of Mental Disorders IV-TR will typically be found to meet this criteria.

The courts have reviewed a number of situations in which psychological harm to certain people has been found to be reasonably foreseeable as a consequence of another’s negligence. Such people include those who witness an accident; those who arrive upon the scene of an accident soon afterward and witness its aftermath with their own senses; and those who have a certain relationship with someone injured in an accident, such as a family member or rescue worker. Ultimately, the “reasonable foreseeable” criteria will be determined on a case-by-case basis.

Recently, our courts appear to be more willing to acknowledge the serious effects of psychiatric damage, and there has been a corresponding trend of awarding higher damages for these types of injuries. Many recent cases from British Columbia have resulted in higher damage awards; the hope for Plaintiffs in Ontario is that our local courts will shortly follow suit.

**A more comprehensive analysis of this topic is available. Please contact Cale directly. Coordinates are below.**

Cale Harrison

Cale Harrison, Lawyer
Tierney Stauffer LLP
charrison@tslawyers.ca

This blog entry is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

Accident Benefits – Housekeeping Case Review

This recent case from the Ontario Court of Appeal will no doubt impact greatly on claims for housekeeping expenses. No
longer will it be a simple case of determining the actual cost of replacing the services previously done by an injured party but will entail determining if a non-pecuniary award is in order.

The Ontario Court of Appeal observed that in evaluating housekeeping losses in a personal injury claim Canadian courts “have developed an unnecessarily complex approach” since Fobel v. Dean in 1991.

Background Information:

As a result of a motor vehicle accident Mrs. McIntyre suffers from chronic pain, fibromyalgia, depression and anxiety. In addition to her work outside the home, she did the bulk of the housework at home and was described by family members as a “clean freak” or a “neat freak.” Her housekeeping duties included all the cooking, vacuuming, dishwashing, cleaning, laundry, bed-making and gardening. Her husband assisted with other tasks, such as taking out the garbage, cleaning windows and heavier chores.

After the accident, Mrs. McIntyre experienced pain daily. She had to pace herself carefully and with pain she could undertake most of her housekeeping responsibilities. For the balance of those responsibilities, she relied on assistance provided by her family.

This case was released May 29, 2009. The Ontario Court of Appeal sought to avoid confusion in future cases where different scenarios of housekeeping losses arise and felt that it would be helpful if the jury can be specifically instructed regarding the type of loss at issue and the evidence in support of that loss. To this end the court classified three different types of housekeeping losses and the types of damages that they would attract.

Work left undone:

Where the plaintiff is unable to perform some or all housekeeping tasks, and where a third party [i.e. housekeeper] does not do the work in the injured person’s stead, work will be left undone. In that situation, the injured plaintiff will experience two sorts of intangible losses compensable in an award of non-pecuniary damages.

First there is the personal loss to the plaintiff because the preaccident housekeeping would have contributed to his or her sense of identity in the same way an income-earning plaintiff would have perceive her or his earning to be a valuable contribution to the family’s financial health.

Second, where work is left undone, the plaintiff will be forced to live with the loss of the amenity of an orderly and  functioning home.

Work done by the Plaintiff with Difficulty:

A plaintiff may continue to undertake housekeeping but may experience pain or difficulty in doing so. Justice Lang wrote “He or she may be required to work more hours post accident to accomplish the same amount of pre-accident housekeeping.” If a plaintiff thus works “inefficiently” her or his non-pecuniary award would be increased to reflect any increased pain and suffering. To the extent the plaintiff ’s inefficiency also results in a less clean and organized household, this is the loss of an amenity that the award for nonpecuniary damages would also take into account.

Work done by Third Parties:

The law is well-established that where a plaintiff incurs a pretrial, out- of- pocket loss by hiring a replacement homemaker, the plaintiff may claim the reasonable replacement costs of the homemaker as special damages. In this case Mrs. McIntyre was awarded $60, 000 for damages for “past housekeeping inefficiency” and for past and future “lost housekeeping  capacity.”

If you have questions about personal injury or accessing accident benefits, please contact one of our personal injury lawyers at (613) 728-8057. You can also contact Donan Robinson directly at (613) 288-3215 or by email at drobinson@tslawyers.ca.

Ctation: McIntyre v. Docherty, 2009, ONCA 448

Donna Robinson
Paralegal, Insurance Claims Consultant

 

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Statutory Accident Benefits – Access to Justice Issues

Ontario’s proposed auto insurance reforms will no doubt cause a lot of discussion – from both a positive and a negative viewpoint. For the most part, the public will not understand what it means to have benefits reduced until such time as they are faced with paying out of their own pocket for medical treatment once the Statutory Accident Benefits are exhausted and treatment is not covered by OHIP.

Those who are injured in a motor vehicle accident through no fault of their own will be able to fund the treatment through private lenders and claim not only the cost of the treatment, but also the interest paid on borrowing the money.

The case of Bourgoin v. Ouellette et al. – New Brunswick Court of Queen’s Bench dealt with this issue. In this case a number of disbursements were being assessed. One in particular was the interest owed on a loan taken out by the Plaintiff from a company called Seahold Investments Inc.

To quote the case: “It remains to determine whether the interest charged by Seahold Investments Inc. constitutes a disbursement which is refundable to the plaintiff by the defendants, and if so, is a monthly compound interest of 2.4 % reasonable.”

Seahold Investments Inc. is a private corporation which provides temporary financing to victims of personal injury who are awaiting insurance claim settlements allowing them, for example, to keep their house, vehicle, and to care for their family.

This type of financing would also apply to legal costs and disbursements in lawsuits pending a settlement. This was the case in this matter. The interest rate charged is 2.4% compounded monthly. This is a very high interest rate compared to regular market rates however it is unlikely that regular financial markets would lend money under these circumstances.

Numerous cases were reviewed in this decision. The Plaintiff’s counsel argued that without the assistance of Seahold Investments Inc., his client would not have had the access to justice to which he was entitled.

Although various arguments were put forward by defense counsel, including that interest charges are not part of the refundable expenses since they come under the costs  of a contingent fee agreement between a lawyer and a client, the judge ruled that this interest was not interest charged by the lawyer to his client, but was in fact interest charged by Seahold.

The final decision was that the interest is claimable. To quote the judge “The only option which seemed to be open to him in order to have access to justice, claim his rights and obtain such a considerable settlement, was to get a loan from a financial institution able to support his allowable disbursements for the duration of the action. Seahold Investments Inc. was the  institution that agreed to do it, at a very high interest rate, but also at an elevated risk to itself.

It must be noted that the Bank of Nova Scotia did not want to take on the risk for a lesser amount.” With the proposed  changes to the Statutory Accident Benefits in Ontario, many plaintiffs will be faced with having to borrow money for  treatment once the $50,000 cap is exhausted. The new proposal reduces the medical and rehabilitation expense from the present $100,000 for noncatastrophic injuries to $50,000; however, the $50,000 now includes the cost of assessments.

Today many serious injury cases exceed the $100,000 cap without including the cost of assessments. In the case of serious  injuries, which do not meet the catastrophic designation, the $50,000 will be exhausted long before settlement is achieved.

The plaintiffs will have to pay for treatment out of their own pockets, which in most cases is not possible. They will therefore have to access private lending institutions in Ontario such as BridgePoint Financial Services and Lexfund who will  fund this treatment. In addition, when obtaining treatment outside the Statutory Accident Benefits legislation the health care providers will not be restricted by the hourly rates of the SABs and can charge full market rate.

So, in applying the Access to Justice reasoning in the Bourgoin case, the cost of the treatment and the interest charged  should be claimable from the defendant.  This will undoubtedly increase the settlements in tort actions.

If you have questions about personal injury or Access to Justice, please contact one of our personal injury lawyers at (613)  728-8057. You can also contact Donna Robinson directly at (613) 288-3215 or by email at drobinson@tslawyers.ca.

Donna Robinson
Paralegal, Insurance Claims Consultant

 

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Personal Injury – Common Questions and Answers

1. If you have been injured in an accident, when should you retain a lawyer?

Motor Vehicle Accidents:
If you have been injured in a motor vehicle accident and your injuries appear to be serious and permanent, you should contact a lawyer immediately.

Other Accidents:
If you have been injured in a fall or by some other means, you should contact a lawyer immediately as a short limitation period or deadline may be applicable to the case depending on how or where the injury occurred. If the law firm that you have contacted specializes in personal injury, there will be no charge for the initial interview. The Personal Injury Group at Tierney Stauffer LLP has over 25 years of experience and would be happy to provide you with an initial free consultation to discuss your case.

2. When should you contact your insurance company?

If you have been injured in a motor vehicle accident, it is very important that you contact your own insurance company as soon as you are able in order to apply for no-fault benefits. In order to contact your insurance company, you should telephone your insurance broker who will direct the claim to the appropriate person at the insurance company.
If it is a serious accident, the adjuster for the at-fault driver of the other vehicle will undoubtedly try to contact you. There is no legal obligation for you to speak with a representative from the at-fault driver’s insurance company.

3. Who can make a claim?

If you have been in a motor vehicle accident or have suffered an injury from any other accident, you can make a claim as can members of your family including spouses, children, grandchildren, parents, grandparents, brothers and sisters.

4. What is the legal process?

The legal process commences with an interview with a lawyer, after which the lawyer will attempt to settle your claim with an adjuster from the insurance company. If the lawyer is unable to settle the claim, he or she will then commence a lawsuit on your behalf. Ninety-nine percent of these claims will settle before trial. The legal stages that you will have to attend will be mediation, examinations for discovery, a judicial settlement conference and, if the matter does not settle, a trial.

5. How long does the process take?

Typically, an experienced personal injury lawyer will not attempt to settle the case until he or she has a final medical report or until he or she is satisfied that the medical experts have ensured that the diagnosis and prognosis is correct and final. It is only at that time that the personal injury lawyer can assess a claim properly. Depending on the nature of the injuries, it may take up to two years before the claim can be asessed. Following that, most cases are settled out of court. However, if the matter has to go through the entire court process to trial it will, in all likelihood, take another two years depending on the backlog of cases in the judicial system and the jurisdiction in which the case is being pursued.

6. How much will you have to pay?

Our personal injury lawyers work on a contingency or percentage basis. In other words, if we don’t win or settle your case, we don’t get paid. In all cases the initial interview is free.

7. If you are in an accident, how does a judge determine how much money you receive?

Compensation for injuries or “damages” arise from many different losses. Some obvious examples are pain and suffering for both physical and psychological injury, loss of income, medical expenses, loss of ability to work in the future, and loss of ability to compete against an uninjured person.
Basically, the approach of the courts is to put the person into the same position they would have been had they not been injured.

8. Between the time of the accident and time you receive compensation, how can you make ends meet?

If you have been injured in a motor vehicle accident, you will, in all likelihood, have an income replacement benefit paid to you by your insurance company. You may also have long-term disability benefits available to you through your employment or you may be able to apply for Workers Compensation benefits if the accident happened while you were working. There are other sources of financial assistance available. This is an area you will discuss with your personal injury lawyer at your initial interview.

9. Should you contact the police?

If you have been involved in an accident and have not contacted the police, it is imperative that you do so immediately.

If you have any questions concerning personal injury, or for your free initial consultation, please contact our Personal Injury Team at 613.728.8057 or by email at info@tslawyers.ca.

 

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Deadline and Limitation Periods

A limitation period is the period of time between the accident and when an action must be started or a notice given. These limitation periods are extremely important since, if you do not meet the timelines, then your right to recover damages might be lost.

After a car accident there are a few limitation periods to keep in mind. For instance, with respect to making a claim against your own accident benefits insurer, you should put them on notice within seven days. With respect to completing the accident benefits application, this must be done within 30 days. In order for you to sue your own insurance company for accident benefits, this must be done within two years of the denial of benefits.

The ultimate limitation period for suing the at-fault driver is two years from the date of the accident.

With respect to Municipalities, there are some very short limitation periods which apply. Specifically, a slip and fall on a sidewalk owned by a Municipality obligates one to put the Municipality on notice of the accident within 10 days.

The important thing to note, given the many different deadlines is that you should contact a lawyer immediately upon being involved in an accident to determine which limitation period applies.

If you have any questions concerning personal injury, or for your free initial consultation, please contact our Personal Injury Team at 613.728.8057 or by email at info@tslawyers.ca.

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Taxation of Damages – What a Difference It Can Make

At the conclusion of a long litigation matter, two questions sure to arise – how much was awarded and whether or not that award is taxable. Everyone agrees that a tax-free award is most desirable to the plaintiff . Whether or not a particular award of damages is to be received on a tax-free basis depends upon the characteristics of the action, the pleadings, the methodology used by the trial judge and the actual calculation of the damages.

Lawyers and their clients would be well advised to consider the tax implications of the damages sought from the outset. In some instances, the nature of the action clearly determines whether the damages will be taxable by rule of law.

In other cases, there may be the possibility of framing the cause of action for tax purposes; whether the damages are deemed income and, if so, are they capital gains or income.

Damages Related to Personal Injury or Death
Th e characterization of damages awarded in the context of an injured individual is key to determining whether the award may be received on a tax-free basis. Damages awarded in respect to a personal injury or death are to be
received by the injured party, or by the dependant of a deceased party, on a tax-free basis as long as the damages are special damages, general damages or pre-judgment damages.

Special damages in the context of personal injury relate to compensation such as out-of-pocket expenses (for medical and/or hospital expenses) and accrued or future loss of earning.  However, an amount which can reasonably be considered to be income from employment rather than an award of damages will not be excluded from income.

General damages in the context of personal injury relate to compensation for pain and suff ering, loss of amenities of life, loss of earning capacity, the shortened expectation of life and the loss of financial support caused by the death of the
supporting individual (a parent for example).

Furthermore, damages that are awarded to be paid over a period of time by periodic installments are also to be received on a taxfree basis by the injured party; notwithstanding that it appears to be an annuity. The CRA confi rmed in its IT Bulletin 365 that damages for personal injury or death that are ordered to be paid in periodic payments are not, despite such periodic payments, considered to be an annuity contract and the periodic payments themselves are not considered to be annuity payments.

An annuity contract purchased by a taxpayer or a taxpayer’s representative with proceeds of a lump  sum award received for damages for personal injury or death will be considered an annuity contract and will likely be taxable, with
some limited exceptions.

Business Related Damages

Determining the characterization of damages awarded on business matters and the resulting tax treatment can be difficult. The general principle is that damages in lieu of receipts that would have been taxable as income remain taxable.
Determining whether those damages are deemed income or nontaxable receipts depends on the nature of the legal right at issue.

One must carefully review the facts and determine the purpose of the remedy; i.e., for what do the damages compensate?
If the damages awarded are for loss of income, then the general principle is that they will be considered business income  and therefore taxable.

If the damages awarded relate to the loss of an income-producing asset, it will be considered to be a capital receipt and non-taxable. As one can imagine, the difference between loss of income and the loss of an income producing asset can be nuanced and there exists no bright-line test to diff erentiate the two; it is always a question of fact. Essentially, if the damages received are for the failure to receive a sum of money that would have been income had it been received, the
damages are likely deemed income receipt and taxable. Also, if the damages awarded are essentially a surrogatum for future profits surrendered, the damages will likely be treated as revenue receipts, not a capital receipt, and be taxable.

Employment Related Damages 

In most instances, employment related damages are awarded as compensation for a loss of employment and are specifically dealt within the Income Tax Act as “retiring allowances.” Under the  Income Tax Act, retiring allowances
are fully taxable as income.

As a result, damages for wrongful dismissal, damages for compensation for lost earnings or damages on account of a  contractually agreed settlement (such as a signing bonus) will all be taxable in the  hand of the recipient. Damages awarded by the Workers’ Compensation Board for illness, injury or death ought to be included as income but the recipient is entitled to a deduction which essentially off sets the inclusion by excluding the damages award.

Also, damages awarded in context of a human rights violation, personal injuries (e.g. defamation or harassment) or tortuous conduct by an employer are usually viewed as general damages unrelated to the loss of employment and are therefore non-taxable. Once again, the determination is a factual one.

Conclusion

Th e taxation of damages awarded will inevitably aff ect the ultimate cost of recovery or indemnity. In some instances, the Income Tax Act will clearly dictate whether the damages are taxable. In other cases, a proper determination can only be made sometime aft er the commencement of the litigation process.

Ultimately, the only certainty is that some damages are taxable while others are not, that the analysis is a factual one and that the framing of the cause of action and the pleadings may formulate the determination.

Tierney Stauff er LLP, you can be sure that lawyers litigate with their clients’ best interest in mind and that always includes making informed decisions with respect to taxation.

If you have any questions concerning the taxation of damages, please do not hesitate to contact me directly at 613.288.3220

 

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.