Does a trustee have to disclose the existence of a trust to a beneficiary?

At issue

A trust is an arrangement where someone holds property for another who is entitled to the income and/or eventual receipt of that property. Though things can get quite complex, for present purposes this simple definition suffices to distinguish the two key parties: the former being trustee and the latter being beneficiary.

A trustee is a fiduciary, which at its core imposes an obligation to hold the property solely for the beneficiary’s benefit. If and when called upon, the trustee must account to the beneficiary who is entitled to know that the trustee is fulfilling that obligation. But what if a beneficiary is unaware that there is even a trust in place?

A recent decision of the Supreme Court of Canada (SCC) sheds light on a trustee’s obligations in such a circumstance. While the case deals with a large scale commercial dispute, the principles laid down should be carefully considered by all trustees, including those involved in personal and family trusts.

Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8

This is a commercial construction case where there was a series of subcontracting relationships.  Shortforming the names, BCC subcontracted work to LEL, which in turn subcontracted to VCL, and the events unfolded as follows:

  • BCC obtained a surety bond allowing a “beneficiary” who is unpaid for labour or materials to claim from the bonding company, as long as a claim is lodged within a defined 120 day period.
  • LEL became insolvent, leaving VCL with unpaid invoices. VCL was initially unaware of the bond (which was uncommon in projects of this nature), only becoming aware after the claim period.
  • VCL sued BCC for failing to inform of the bond and its requirements.

Good recordkeeping is a must, in large part to distinguish business from The Court accepted that BCC was in the position of trustee, then quoting from Waters’ Law of Trusts it held that wherever “it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed” of the trust’s existence, the trustee was obliged to disclose.

The Court ordered that BCC was liable to pay to VCL the amount that it could have obtained from the bonding company, had VCL been sufficiently informed to make a timely claim.

Application to personal trusts?

It is important to note that a beneficiary’s right to be informed of a trust is not absolute. Before reaching its conclusion in Valard, the SCC points out that where the interest of a beneficiary is remote, “it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.”

An example of when this remoteness might be considered would be where someone only becomes entitled if trust property remains after the death of a current beneficiary. Or perhaps a trust requires someone to reach a certain age before becoming entitled. Even more remotely, suppose a trustee has discretion whether or how much of the trust property to distribute to beneficiaries, or even to add or remove beneficiaries.

Trustees would be advised to check with their legal counsel where beneficiaries may be in the dark as to their status, particularly in light of the Supreme Court’s ruling in the Valard case.

Practice points
  1. A trust is a separation of legal title to property from beneficial entitlement.
  2. As the legal title holder, a trustee has an obligation to manage the trust property in the best interests of the beneficiary and to account for actions taken.
  3. Where a beneficiary is unaware of the trust, the trustee may be obliged to inform the beneficiary of its existence. Whether and when the trustee must do so is a matter best discussed with a legal advisor.

Electric cars and charging stations as employee benefits

At issue

It’s sometimes said that our society has a love affair with the car. Personally I don’t feel any emotional attachment to those lug nuts, but when it comes to getting to, from and around my work activities, I’m as committed as the next commuter (like it or not).

The car is so prevalent that our tax system keeps an active eye on it, to make sure that employers don’t use transportation perks as a back-door way to provide employee benefits. While the rules have been in place a very long time, technological developments – specifically the entry of electric cars into mainstream usage – can lead to uncertainty as to what is exposed to tax, and how to calculate it.

These challenges were brought before the Canada Revenue Agency (CRA) at a recent financial industry conference, and the agency provided some updated guidance on its approach.

Automobile benefits

As foundation (and this barely scratches the surface of the complexities in practice), there are two main ways that an employee may have a taxable automobile benefit:

  • A standby charge applies when an automobile owned or leased by an employer is made available for the employee’s personal use.
  • An operating expense benefit applies when an employer provides an automobile and pays expenses such as gas, oil, maintenance and licencing related to personal use of the vehicle.
  • Good recordkeeping is a must, in large part to distinguish business from personal use. If the employee reimburses the employer for personal use, that would reduce or eliminate the taxable benefit.
CRA 2017-0703881C6 – Electric vehicle taxable benefits

At an accounting organization conference, CRA was asked about its current views on electric vehicles. Unlike an internal combustion engine that can use any gas station, it is common, if not imperative, for the driver of an electric vehicle to have a charging station in the home. How does the charging station fit within the automobile benefits framework?

For starters, CRA advised that the charging station is not part of the vehicle price, nor does it fall within the operating expense benefit. It is a separate capital asset, for which capital cost allowance (CCA) may be claimed. Of course to the extent the vehicle is for personal use (though CRA did not comment further on the point), presumably there can be no CCA claim.

Beyond the automobile rules, there is the potential that the charging station would be considered a general taxable employee benefit. However, if it could be shown that the primary beneficiary of the charging station is the employer, for example if there is a clear business purpose and it relates to a condition of employment, then no benefit arises. This assumes the station is owned by the employer, and is not intended to be transferred to the employee. In the case of a shareholder-employee, there could potentially be a shareholder benefit even if the employer owns the station.

Finally there is the matter of electricity usage. Employee payments to the electric company for personal use of an employer vehicle may be used to reduce the operating expense benefit for the employee. Furthermore, an employer reimbursement for an employee’s electricity cost to charge up an employer vehicle will not be a taxable benefit. There is still the practical matter of calculating the electrical charges, for which the CRA offered no guidance.

Practice points
  1. Taxation of automobile benefits is complex, and is likely to get even more challenging as new transportation technology develops. Keep clear and up-to-date automobile records.
  2. A taxable employee benefit can arise if an electric car charging station is installed in an employee’s home for an employer vehicle. This can be rebutted if the employer is the owner of the station and is the primary beneficiary of its use.
  3. As a final (and simpler) note for employees using their own cars, they may receive a non-taxable reimbursement from an employer for work-related mileage, though not for commuting to or from a workplace. For 2018, the “reasonable allowance” per CRA is 55 cents for the first 5,000 km driven, and 49 cents thereafter. That’s up a penny from 54 and 48 cents respectively that applied in 2017.

A policy loan and capitalized interest may be taxable, as well as a debt to the insurer

At issue

Life insurance is almost always tax-free on death of the life insured. While that person is living and where the insurance is primarily designed to fund a death benefit, the policyholder still has no income tax concerns.

Where a policy has investment and savings features, the policyholder can be exposed to tax. Accessing a policy’s cash surrender value by way of a withdrawal will be a partial disposition, a portion of which will be taxable if the cash surrender value (CSV) exceeds the adjusted cost basis (ACB) at the time.

By comparison, generally no tax applies on a policy loan up to the ACB, but any amount over that would be taxable. And when a policy loan is used to investment outside the policy, there can be not-so-favourable tax implications. This was outlined in a CRA letter from mid-2017 in response to a taxpayer inquiry initiated about a year earlier.

Income Tax Act ss.20(1)(c) & (d), s.148(9) and Income Tax Regulation s.308

ITA ss.20(1)(c) & (d) allow a deduction for interest (simple and compound, respectively), where borrowed funds are used to gain or produce income. The relevance of this will become clear in the following discussion of the CRA letter.

There are numerous sections of our tax legislation and regulations that are networked together to address the complexity of life insurance. At the heart of it is s.148(9), and the many definitions contained therein, including what constitutes a disposition of a policy, how to calculate the proceeds on a disposition, and how to determine the portion of the disposition that is taxable.

As discussed in brief above, the determination of taxability depends on a policy’s ACB, also defined under s.148(9). The key components of ACB are paid premiums that increase it, and the annual charge of net cost of pure insurance (NCPI, as defined in ITR s.308) that reduce it. Importantly, taking a policy loan decreases ACB, whereas repaying the loan generally increases ACB.

CRA 2016-0658641E5 – What are the tax implications of capitalized loan interest?)

A policyholder contacted the CRA with concerns about the fairness of the tax treatment of life insurance. The policyholder’s loans and accrued interest comprised a debt owed to the insurer that will be deducted from any payout on the policy if still unrepaid at death. Even so, the policyholder received a T5 tax slip reporting taxable policy gains related to the policy loan.

The CRA representative outlined the key definitions in s.148(9) and elsewhere before turning to the details of this particular policy loan. The borrowed money was invested for the purpose of generating income, and the policyholder/taxpayer claimed the interest as a deduction pursuant to ITA s.20(1)(c) and/or (d). Furthermore, interest on the loan was not being paid by the policyholder directly; rather the interest was being capitalized within the policy.

The writer confirmed that the combination of claiming the interest deduction and capitalizing the interest resulted in a disposition pursuant to the definition of that term in s.148(9). In turn, the ACB must have been reduced to nil in the course of these dealings, as the disposition was confirmed as taxable.

Practice points
  1. Life insurance generally accumulates tax-free, and pays out tax-free.
  2. A policyholder is more likely to face tax on a withdrawal than a policy loan.
  3. Sometimes a policy loan can result in tax, even though interest must be paid to the insurer and the loan amount reduces the death benefit.
  4. In a closing point in the 2017 CRA letter, the writer noted that many rules have been modified for policies issued after 2016. Check with your insurer how this may affect your policy dealings.