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Ontario Superior Court of Justice Cites Fasken Lawyer in Addressing Controversial Estates Law Decision

Fasken
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Overview

Private Client Services Bulletin

In 2020, the Ontario Superior Court of Justice released the decision Calmusky v. Calmusky, 2020 ONSC 1506, which dealt with a dispute between two brothers regarding certain assets of their father’s estate. Although the immediate impact of Justice Lococo’s decision was limited to the Calmusky family, upon a close reading it seemed that the decision would have far-reaching implications for financial institutions, employers, lawyers, insurance companies and potentially hundreds of thousands (if not millions) of Ontarians. On June 18, 2021, Justice McKelvey of the Ontario Superior Court of Justice examined the controversial outcome of Calmusky in the decision Mak (Estate) v. Mak, 2021 ONSC 4415, and in doing so provided at least some comfort to those in the estate planning world who felt that Calmusky was incorrectly decided.

The Calmusky Decision

First, it is important to understand what exactly happened in Calmusky. Fasken lawyer Demetre Vasilounis provides a detailed explanation of Calmusky in his article “A Presumptive Peril: The Law of Beneficiary Designations is Now in Flux”. As the article describes, one of the core issues in Calmusky was the validity of one of the sons’ receipt, as beneficiary, of his father, Henry Calmusky’s Retirement Income Fund (“RIF”). The defendant son, Gary Calmusky, argued that, as Henry had designated him as beneficiary of the RIF via documentation provided by the bank facilitating the RIF, he was entitled to the RIF funds for his own personal use.

Conversely, the plaintiff son, Randy Calmusky, argued that Gary was not entitled to the RIF personally, and instead that the designation only meant that Gary was holding the RIF in trust on behalf of Henry’s estate. Henry left a will in 2014, which named Randy and Gary as co-executors, although it did not name either of them as beneficiaries. If Randy’s argument was successful, Gary would not receive any of the proceeds of the RIF, and instead such proceeds would be split amongst the residuary beneficiaries of the estate (of which Randy’s son was one of them).

In making his argument, Randy relied upon the decision of the Supreme Court of Canada in Pecore v. Pecore, 2007 SCC 17. Demetre’s article summarizes the relevant key principles in Pecore:

Pecore established that where there is a gratuitous transfer (i.e. a transfer for no consideration) of assets from a parent to an adult child, there is a presumption of resulting trust, that is, a presumption that the transferee holds the assets as trustee for the transferor (usually for the benefit of that transferor or that transferor’s estate). Prior to Pecore, in such transfers between parents and adult children, a presumption of advancement used to apply; in other words, that a parent, in making such a transfer, was merely “advancing” to their adult child what their adult child was going to get anyway upon their death, and therefore not creating any trust relationship. However, the Supreme Court of Canada in Pecore ruled that this was an outdated manner of thinking with respect to adult children, and thus that the presumption of advancement is no longer applicable to them (but note that it is still applicable to minor children). Instead, it is the presumption of resulting trust that applies with respect to adult children, and courts often apply this presumption in situations where a party is alleging that the adult child of a deceased parent is holding property that said child owned jointly with said parent in trust for said parent’s estate (rather than as beneficial owner).

The key takeaway is that the presumption of resulting trust is a presumption that a court must apply before looking at the facts and evidence surrounding the dispute asset. The presumption can only be rebutted by the party seeking to do so if it adduces evidence that, on a balance of probabilities, satisfies the court that a gift, and not a trust, was intended.

In Pecore, the presumption of resulting trust applied in the context of a father naming his daughter as a joint owner of his bank accounts while he was alive. Interestingly enough, a joint bank account was also a point of contention in Calmusky, as Henry had opened and funded a joint chequing account with Gary. Accordingly, the court applied the Pecore presumption of resulting trust, and Gary was unable to adduce evidence that Henry had intended the joint account to be an outright gift to him. As a result, the court determined that Gary was holding the proceeds of the account in trust for Henry’s estate.

Up until this point, the Ontario Superior Court of Justice had done nothing out of the ordinary in terms of the Ontario estate planning community’s understanding of the law surrounding the presumption of resulting trust. The problem arose when the court also applied the presumption of resulting trust to Henry’s RIF. This was the heart of the community’s anxiety with respect to Calmusky, as the presumption of resulting trust was never understood to apply to RIFs or similar assets that allow for beneficiary designations such as Registered Retirement Savings Plans, Tax-Free Savings Accounts and life insurance policies.

Henry had designated Gary as the beneficiary of his RIF via a form he signed with his bank, but even with such a form the court was not satisfied that Gary was the intended beneficiary of the RIF. The problem for the Ontario estate planning community, and Ontarians generally, is that these types of forms are provided by numerous financial institutions, employers and insurance companies, among other entities. After Calmusky, it seemed that advisors, and more perilously, beneficiaries, could no longer view these forms as legally reliable, as the door had now been opened for any disgruntled party in an estate planning dispute to apply to a court to have a presumption of resulting trust apply to an RIF or similar assets that allow for beneficiary designations, particularly as the court suggested that a form in itself was not enough to rebut the presumption. In addition, note that Gary had even provided testimony from bank employees that supported his position that the RIF was intended to be gifted to him personally, although in the court’s view this too was not enough evidence to rebut the presumption of resulting trust.

In his article, Demetre outlined several key criticisms of the Calmusky decision:

  • Part III of the Ontario Succession Law Reform Act (“SLRA”) explicitly allows for these types of beneficiary designations. The court made no mention of the SLRA in its decision or how Part III would impact the presumption of resulting trust.
  • In Pecore, the key asset at issue was a bank account gifted to the child while the parent was alive. In the case of the RIF, Gary was not entitled to it until Henry died. Ergo, a beneficiary designation is not the same type of “gratuitous transfer” as a joint account, or as a simple cash gift made during one’s life. By the court’s logic, one might assume that every transfer of a parent’s property to their adult child upon the parent’s death is a gratuitous transfer to which the Pecore principles apply. All beneficiary designations are inherently gratuitous.
  • The court seemed to imply that any beneficiary designation outside of a will would be subject to the presumption of resulting trust. But the whole point of a beneficiary designation is to specifically provide for what will happen to an asset upon death. The average person would likely not be aware of what the presumption of resulting trust even is, and would likely understand that when they’re making a beneficiary designation they’re doing so in the conventional sense (i.e. the beneficiary will receive the asset for their own use personally).
  • A person can also choose to name their estate as beneficiary of these types of assets; thus, it would seem improper to presume that if a person instead names a specific beneficiary to hold the asset in trust for their estate when naming their estate itself as beneficiary has the same effect and is done so in a clearer manner.
  • Stemming from these criticisms, it may be the case that a person would need legal advice for every beneficiary designation that they make to help them understand the relevant implications for their estate planning, which would be onerous for individuals and institutions alike. Similarly, this could also be excessively problematic for anyone who had made a beneficiary designation prior to Calmusky.
  • Lastly, beneficiary designations are a means of reducing probate tax, as pursuant to a beneficiary designation the asset flows outside of the estate and directly to the beneficiary. The presumption would potentially undo this type of tax planning.

As Demetre explains in his article, there have indeed been cases in Canadian law where a court has held that an RIF was being held in trust by its named beneficiary on behalf of the deceased’s estate. However, generally there was overwhelming evidence in these cases to show that a trust relationship was intended. None of these cases applied the presumption of resulting trust, which from an evidentiary standpoint can be difficult for the average person to rebut as the individuals making these beneficiary designations often leave little documented evidence to support their intent outside of a beneficiary designation form. As Calmusky demonstrates, even when there is some evidence (i.e. testimony from others), rebutting the presumption may still be a challenge.

The Mak Decision

Mak also involved a dispute amongst siblings, this time with respect to certain assets of their mother’s estate. Amongst the assets was a Registered Retirement Income Fund (“RRIF”) of which the mother designated one of her sons as beneficiary. His siblings argued that the presumption of resulting trust should apply to the RRIF.

It was here that the Ontario Superior Court of Justice examined how the law of the presumption of resulting trust applied to the RRIF, citing Pecore, Calmusky and a few other relevant cases. However, the court expressed disagreement with the application of the law in Calmusky, and went on to make the following analysis:

[42] This leaves the question as to whether there is a presumption of a resulting trust. The leading case on the principles of a resulting trust were canvassed in the Supreme Court of Decision in Pecore v. Pecore, 2007 SCC 17 (CanLII), [2007] SCJ No. 17. I will have further comments about this case later in these Reasons. At this point, the issue is whether the principle of a resulting trust applies to a beneficiary designation. The plaintiffs argue that the presumption of a resulting trust applies and relies upon the decision of this Court in Calmusky v. Calmusky, 2020 ONSC 1506. In that decision the Court found that the doctrine of resulting trust applied to an RIF beneficiary designation. In arriving at that decision, the court relied on an obiter comment of this Court in McConomy-Wood v. McConomy (2009), 2009 CanLII 7174 (ON SC), 46 E.T.R. (3d) 259 (S.C.). In that case, the Court found on the evidence that there was not the “slightest doubt” that by designating her daughter as the beneficiary under her RIF, the now deceased mother intended that her daughter hold the RIF proceeds in trust for the beneficiaries of the mother’s estate. The trial judge went on to say that if he had to decide the presumption issue, he would agree with the current trend expressed by the Supreme Court of Canada in Pecore against applying a presumption of advancement.

[43]  The Court also relied on a Manitoba Court of Appeal decision in Dreger (Litigation guardian of) v. Dreger (1994), Man. R. (2d) 39. This was a case decided before the Supreme Court’s decision in Pecore. In that case the court found that the mother’s intention at the time she designated her son as a beneficiary was that upon her death, her son would take the proceeds for the benefit of her estate.

[44] In my view, however, there is good reason to doubt the conclusion that the doctrine of resulting trust applies to a beneficiary designation. First, the presumption in Pecore applies to inter vivos gifts. This was a significant factor for the Court of Appeal in Seguin, and similarly is a significant difference in the context of a resulting trust. Further, the decision of this Court in Calmusky has been the subject of some critical comment. As noted by Demetre Vasilounis in an article entitled “A Presumptive Peril: The Law of Beneficiary Designations is Now in Flux”, the decision in Calmusky is, “ruffling some feathers among banks, financial advisors and estate planning lawyers in Ontario”. In his article, the author comments that there is usually no need to determine “intent” behind this designation, as this kind of beneficiary designation is supported by legislation including in Part III of the Succession Law Reform Act (the “SLRA”). Subsection 51(1) of the SLRA states that an individual may designate a beneficiary of a “plan” (including a RIF, pursuant to subsection 54.1(1) of the SLRA.)

[45]  Section 53 of the SLRA provides that an institution administering the “plan” must pay it out in accordance with subsection 51(1) beneficiary designation upon the plan owner’s death.

[46]  It is also important that the presumption of resulting trust with respect to adult children evolved from the formerly recognized presumption of advancement, a sometimes erroneous assumption for a parent that arranges for joint ownership of an asset with their adult child is merely “advancing” the asset to such adult child as such adult child will eventually be entitled to such asset upon such parent’s death. The whole point of a beneficiary designation, however, is to specifically state what is to happen to an asset upon death.

[47] I have therefore concluded that the Pecore presumption of a resulting trust does not apply to a beneficiary designation for the mother’s RRIF. Like the situation with the presumption of undue influence, the onus is on the plaintiffs to establish that the Mother’s intention was to benefit her estate with the beneficiary designation. Having failed to do so I have concluded that the plaintiffs have failed to establish an entitlement to the proceeds of the RIFF.

As demonstrated by this passage, the Ontario Superior Court of Justice in Mak chose not to follow its ruling in Calmusky, and chose not to apply the presumption of resulting trust to the mother’s RRIF. In doing so, it cited some of the criticisms of Calmusky to which Demetre drew attention in his article. The Ontario estate planning community has generally viewed Mak as the appropriate application of the law in this area.

However, this does not mean that there is absolute certainty with respect to the law of the presumption of resulting trust applying to assets for which a beneficiary designation is possible. Both Calmusky and Mak are decisions of the Ontario Superior of Justice, meaning that the court, in future decisions, is not bound to follow one decision over the other. At this point, only the Ontario Court of Appeal or Supreme Court of Canada could issue a ruling that could affirm which decision is correct such that it becomes clear law in Ontario. Calmusky has not been appealed, and it is not yet clear if Mak is being appealed.

In the interim, there will likely be disputes in this area where one side is citing Calmusky and the other is citing Mak. We will be monitoring this issue closely. If you have any questions about this issue, please do not hesitate to reach out to one of our lawyers.

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