When the patriarch or matriarch of a family decides to implement a freeze it is quite common for him or her to insist that the gift of the growth shares be excluded from net family property for the purposes of the Family Law Act (Ontario). Are such exclusions effective? McNamee v McNamee, 2011 ONCA 533, illustrates well why lawyers must emphasize to clients that the answer is still a definite “maybe”.
Our deeds of gift contain language like that used in the instrument by which Mr McNamee Sr gifted Common Shares to his son as part of his freeze. The language used was as follows:
I hereby direct that the whole of the Property gifted to each Donee, the income arising therefrom, any appreciation in the value thereof, and any property acquired in substitution therefor shall not fall into any community of property which may exist between the Donnee and his spouse, and shall not form part of the net family property of the Donee for any purpose or purposes under the Family Law Act, R.S.O. 1990, c. F.3 and any amendment thereto or any successor legislation thereto, and is given to the Donee on the condition that it shall remain his separate property, free from the control of his spouse. This direction shall apply not only to the Family Law Act, but also to the laws of any other jurisdiction dealing with the distribution of property in the event of death or marriage breakdown.
The McNamee trial judge (McNamee v McNamee, 2010 ONSC 674) held that the father’s transfer of shares to his son was not a gift that was excluded from the son’s net family property because
a) The transfer was not a gratuitous transfer but was a transfer for consideration;
b) Mr. McNamee Sr. did not intend to gift the shares;
c) Mr. McNamee Sr. did not divest himself of all power or control over the shares; and,
d) The appellant did not accept the gift.
The Court of Appeal rejected each of these propositions and found that the transfer of shares was by way of a gift. The trial judge, for example, had held that Mr McNamee Sr hadn’t made a gift because he received a benefit in the form of accomplishing his estate planning goals. The Court of Appeal responded (at ¶ 31) that consideration or a benefit, to vitiate a gift, must flow from the donee (cf Maréchaux). The trial judge had found that Mr McNamee Jr hadn’t accepted the gift because he did not understand the transactions relating to it. The Court of Appeal disagreed:
Here, contrary to the trial judge’s view, the appellant understood the essential nature of the transaction – he had received shares in the company and had paid nothing for them – and he willingly accepted title to those shares. In the circumstances of this case, we do not think the appellant’s lack of knowledge of the terms and conditions attached to the gift is particularly germane.
Imagine if every client needed to understand all aspect of a tax-driven reorganization before gifts made in connection with it could become effective!
The Court of Appeal rejected the trial judge’s approach, which would seem to add some certainty about when a gift will be excluded for family law purposes. But the decision also highlights the other avenues of attack that remain for the spouse who has been shut out. The Court ordered a new trial “on the issue of unjust enrichment and constructive trust”. Under the Family Law Act, a gift can be excluded from the value of a spouse’s net family property, but the logically prior question is who owns what for the purposes of computing the net family property values. In McNamee, the son appeared to own the Common Shares as a result of the gift from his father, but the doctrine of constructive trust might be found to apply to give Mrs McNamee a beneficial ownership interest in the shares. If the judge at the new trial determines that the doctrine applies, then Mr McNamee might end up splitting the value of the shares with Mrs McNamee after all.
