As tax advisers, we regularly advise our clients to enter into various legal relationships in order to help them reduce the taxes they would otherwise incur. In providing such advice, however, we would do well to remind our clients that those legal relationships have more than just tax consequences. Rose v. Rose, 81 O.R. (3d) 349, 2006 CanLII 20856 (ON S.C.) could be the cautionary tale.
In 1992, Mr. Rose, married with two daughters under the age of 18, owned a ski chalet and a cottage. The latter he held jointly with his wife. In that year, Mr. and Mrs. Rose transferred the properties to a trust for the benefit of their daughters. Mr. Rose was the sole trustee. The terms of the trust granted Mr. Rose wide discretion in the management of the trust property, and it required him to distribute the capital of the trust to his daughters equally when the youngest of them reached the age of 50 or sooner, if he chose.
For the Roses, life at the recreational properties went on much as before. Mr. Rose spent time at the chalet and the cottage with his wife and daughters during family vacations. Then, in January, 2003, Mr. and Mrs. Rose separated and his relationship with his daughters, the youngest of whom turned 18 four months later, quickly deteriorated. The relationship deteriorated such that, in the spring of 2004, when Mr. Rose went to the cottage to open it, he found that the locks had been changed without his knowledge.
Eventually, Mr. Rose and his daughers took each other to court. His daughters, among other things, asked the court for an order removing Mr. Rose as a trustee of the trust and “an interim and/or permanent Order restraining Brian from interfering with the use and enjoyment by Ashleigh and Kelsey of the Cottage, the boats required to reach the Cottage; and of the Chalet.”
Mr. Rose tried to argue that it was an implied term of the trust that he would continue to have the use and enjoyment of the recreational properties just as he had before he created the trust. He also asked that the trust should be terminated and its property revert to him and his wife. Mr. Rose claimed that the trust had been created merely for tax planning purposes and that, accordingly, he should not lose all of his rights with respect to the property.
Mr. Justice Lissaman of the Ontario Superior Court of Justice did not agree (at ¶54 and ¶56):
I do not accept that the Deed should be interpreted so that the trustee has the power to permit persons, including [Mr. Rose or “Brian”] himself, to use, occupy and enjoy the recreation properties owned by the Trust. There is no mention in the Deed that [Mrs. Rose or “Janice”] or Brian will have the use and enjoyment of the properties. Janice and Brian used the properties with Kelsey and Ashleigh while they were minors; however, Janice and Brian frequently reiterated that their daughters were the real owners of the property.
I do not accept this for the following reasons. Brian and Janice needed to be at the Cottage and Chalet with their children because the children were minors and they needed to be supervised at the properties. This does not indicate that they intended to have the use and enjoyment of the property. I believe the Trust Deed is the most accurate source of information regarding their intention and there is no clause in the Deed that gives them this power. Brian was in a position to know, understand, and control the Deed. He was in a position to insure that there was such a clause. He hired the lawyer. He had direct contract with the lawyer. He instructed the lawyer regarding the Deed. Although Janice was a co-settler of the Deed, she merely signed the documents. Brian gave himself wide powers as a Trustee under paragraph 9 of the Deed but he did not include that he or Janice would have had use or enjoyment of the property. I do not believe this was an omission. I believe that was the intent of both him and Janice when they created the Trust.
In addition, the Mr. Justice Lissaman held that the trust deed should not be rectified to permit Mr. Rose to use the property and that the trust could not be rescinded so that it would pass back to the parents. “Once a trust is created, the settlor cannot retrieve any part of the trust assets unless he retained a power of revocation when he created the trust” (¶64).
Finally, to add insult to injury, Mr. Rose was removed as the trustee of the trust because of the hostility of the daughters and because his attempt to include himself, in effect, as a beneficiary of the trust and to revoke it suggested that he had a conflict of interest with the beneficiaries.
A lot can change in a decade. It seems unlikely that Mr. Rose would have settled the trust for his daughters if he could have foreseen the consequences. No doubt, at the time, he thought his marriage was strong and his relationship with his daughters secure. Time proved otherwise, to his great loss. We must remind clients of these unpleasant risks when we counsel them about estate freezes or other planning that involves transferring property to the next generation.
