This post aims at summarizing the Supreme Court of Canada’s majority reasoning on Yared c. Karam, 2019 CSC 62.
Factual Background
In October 2011, Mr. K established a trust to protect their family’s assets for the benefits of his wife, Mrs. Y and their four children. The trustees are Mr. K and his mother. The initial beneficiaries were Mrs. Y and their four children. The trust conferred extensive powers of “Appointer” on Mr. K: 1) the power to appoint new beneficiaries, including himself; 2) the power to destitute any beneficiaries; and 3) the power to decide to which beneficiaries and in what proportion the revenues and capital of the trust would be paid.
In June 2012, the trust acquired a residence with funds transferred by the spouses. Then the family moved in the new residence. Mr. K stated that the house would serve both as the family residence and as an investment protected under the trust for the benefit of his children.
In 2014, Mrs. Y filed for divorce.
In 2015, Mrs. Y passed away without having obtained a divorce.
In July 2016, the liquidators of her succession sought a declaration in Superior Court of Quebec that the value of the residence held by the trust should be included in the division of the family patrimony, half of which would become the estate of Mrs. Y.
In November 2016, the trial judge declared that the value of the residence was to be included in the family patrimony. Its analysis relies on “lifting of the corporate veil” at art. 317 C.c.Q. and on the “rights which confer use” of art. 415 C.c.Q. and on the facts that Mr. K had effective, almost complete control of the family residence as the trustee and appointer of the trust (Yared (Succession de), 2016 QCCS 5581).
In 2018, Mr. Y appealed against this decision. The Quebec Court of Appeal reversed the decision and declared that no value from the family residence ought to be included in the family patrimony. The Court of Appeal noted that in the absence of an intention to avoid the rules of the family patrimony, the contractual freedom of spouses who decided to reside in a property held in a trust for investment purposes ought to be respected. The Court of Appeal concluded that the trial judge committed various reviewable errors. (Karam c. Succession de Yared, 2018 QCCA 320)
In 2019, the disputes were heard in the Supreme Court of Canada.
Main Issues to Analyse
Does the evidence support a finding of rights which confer use of the residence within the meaning of art. 415 C.c.Q.?
Is the family residence acquired by the trust included in the family patrimony of Mr. K and Mrs. Y?
Court’s Analysis
1. What may or may not constitute a right which confers use within the meaning of art. 415 C.c.Q. will generally be determined in relation to the level of control exercised by either spouse with respect to the residence. When the evidence can prove that the spouses are in control of the residence, not only by way of exercising control over the entitlement to the value of the assets but by controlling whom may benefit from the use of the property, “it is open to” the trial judge to include the value of the residence in the family patrimony based on art. 415 C.c.Q. even when such residence was acquired directly by a trust or a corporation.
It is worth to note that the rules relating to family patrimony, including art. 415 C.c.Q. aim to foster economic equality between spouses. This set of rules are public order imposed by the legislature to safeguard the interests of vulnerable parties. Thus, these rules should be given a generous and liberal interpretation to favour the inclusion of property in the value to be partitioned between the spouses.
In Quebec law, trusts are not legal persons endowed with juridical personality. Contrary to a corporation, there is no veil to lift nor any mastermind hiding behind a distinct juridical personality in the case of a trust as per art. 317 C.c.Q. When the property listed in art. 415 C.c.Q. is held in trust, the court may invoke art. 421 or/and art.422 C.c.Q. to correct a potential inequity created by the operation of the trust. Thus, the trial judge erred in applying art. 317 C.c.Q. in this matter.
2. On the other hand, to determine whether a right which confers use exists where a residence is owned by a trust, the court would consider the circumstances surrounding the establishment of the trust, its intended purpose, and the rights and obligations of the trustees and beneficiaries under the terms of the trust deed. However, when the powers with which the trustee is charged are significant, they do not constitute a right which confers use. As a general rule, these powers must be exercised in the best interest of the beneficiaries and in keeping with the purpose of the trust. Thus, it is the interests of the beneficiary that are more likely to give rise to a right which confers use under art. 415 C.c.Q.
3. In the present case, neither Mr. K nor Mrs. Y has intention to evade the family patrimony provisions. And there is unchallenged evidence that the trust was established for the long-term benefit of the children. The jurisprudence in Quebec has established that the occupation of the residence prior to its transfer can prove that the couple enjoyed “rights which confer use” within the meaning of art. 415 C.c.Q. despite the lack of formal arrangement with the corporation that owned the residence (D.L. v. L.G., 2006 QCCA 1125; Droit de la famille – 10174, 2010 QCCS 312; Droit de la famille – 13681, 2013 QCCA 501). The majority reasoning of the Supreme Court decision clarifies that as a matter of law, prior ownership is not a necessary condition for a finding of “rights which confer use”. In the present case, Mr. K has exercised full control over the entitlement to the value of the residence. He can even decide who may benefit from the use of the property according to the trust deed. The trial judge has the discretionary power to rule that the family residence held in trust is included in the family patrimony of Mr. K and Mrs. Y.
4. Therefore, the majority of the Supreme Court justices find that the trial decision did not contain a reviewable error that justified the intervention of the Court of Appeal although the application of art. 317 C.c.Q. is not appropriate to dispose of the matter. As a result, the Supreme Court allows the appeal, sets aside the judgement of the Court of Appeal and restores the judgement of the Superior Court with costs to the appellants throughout.
Conclusion: Main Takeaways
1. Simple occupation of a property not owned by the spouses will not automatically give rise to “rights which confer use” within the meaning of art. 415 C.c.Q.
2. The introduction of the family patrimony in Quebec family law is “consistent with a general trend in Canada to protect vulnerable spouses”. The rules aim to foster economic equality between spouses, it should therefore be given a generous and liberal interpretation to favour the inclusion of property in the value to be partitioned between the spouses. In principle, spouses cannot contract out of these rules. In certain circumstances, the spouses can renounce their rights in the family patrimony (Art. 423 C.c.Q.)
3. Art. 1261 C.c.Q. defines trust as a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or beneficiary and in which none of them has any real right. While a common law trust results from the division of ownership, the transferred property in the trust established according to Quebec civil law is administered by the trustee for a particular purpose, yet neither the trustee, the beneficiary nor the settlor own what has been transferred into the trust patrimony.
4. In Quebec, when the constitution of trust conflicts with the operation of the family patrimony, the court should resolve the matter by relying on the rules pertaining to both of these institutions rather than by analogy with art. 317 C.c.Q.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)