What to Know About Investing Within A Trust

Keith Masterman

By: Keith Masterman LLB TEP,
Vice President, Tax, Retirement and Estate Planning,
CI Investments Inc.

Investing within a Trust

Over the last year there have been significant changes to the taxation of testamentary trusts. For instance, as of 2016 any income produced by a trust, whether that trust is testamentary or inter vivos, and taxed within the trust is taxed at the highest marginal tax rate, with the limited exception of a Qualified Disability Trust. These changes have limited the traditional tax planning reasons for creating a trust. However, trusts continue to be an important planning tool to address specific family or beneficiary needs. It is therefore important for trustees and investment advisors to understand the applicable investment rules for a trust.

Traditionally, the law has recognized three investment principles when considering trust investments:

  • All trust investments must be authorized. In other words, what does the trustee deed say? Does it contain restrictions? Does it limit the ability to return capital to the beneficiaries?
  • All trust investments must be prudent. This tenet has now been codified in most provinces in Canada. For instance, the Ontario Trustee Act states that "a trustee may invest trust property in any form in which a prudent investor might invest." British Columbia's Trustee Act is almost identical. The Alberta legislation defines a series of criteria a trustee should consider to determine prudency. However, that list should not be seen as exhaustive. Saskatchewan directs that investments should be "reasonable and prudent."
  • All trustee investments must maintain an "even hand" and consider the interests of both the income and the capital beneficiaries. Again, a careful reading of the trust deed is advisable when considering the duty to maintain an even hand. Some deeds specifically direct that an even hand is not necessary and a trustee is therefore is freed from the strict confines of this legal tenet.

A number of criteria, including the marketability of each investment, the needs and circumstances of the beneficiaries, the expected term of the trust, market conditions, the total value of the trust, and the tax effectiveness of the investments, are all important considerations in determining whether the trustee has acted prudently.

The courts have also provided some guidance. For instance, a 2014 case from the British Columbia Court of Appeal, Miles v. Vince, considered prudency. Prior to his death, William Vince settled a family trust, and an insurance trust. Mr. Vince's sister was named as the trustee of both trusts.

The original assets of the family trust were the shares of three companies Mr. Vince had incorporated to purchase and develop certain urban properties. The original assets of the insurance trust were the proceeds of just over $2 million of life insurance received on the death of Mr. Vince.

Both trusts were discretionary, granting broad powers to the trustee to invest the trust property and make distributions of income and capital to the beneficiaries.

The trustee began to loan funds from the insurance trust to the family trust to further the development of the building properties. As of December 31, 2012, the family trust owed the Insurance Trust a total of $2,135,485, made up of principal of $1,750,000 and accrued interest of $385,485. Interest continued to accrue at the rate of $17,795 per month. However, no amount of principal or interest was paid to the insurance trust. Therefore, the beneficiaries of the insurance trust were unable to receive income or encroach upon capital as substantially all the funds in the insurance trust had been advanced to the building trust.

The question for the court was whether the investment in the building trust was prudent. It appeared to be in accordance with Mr. Vince's wishes, and the interest rate charged on the loans provided a good return (if they were paid) to the insurance trust. Further, the investment power contained in the insurance trust was very broad.

The Court of Appeal was critical of the trustee. In particular, the court stated that a trustee had a primary duty to preserve trust assets. Earlier, in Fales v. Canada Permanent Trust Co., the Supreme Court of Canada stated that the duty to preserve trust assets applied despite broad discretionary powers in the trust deed. In Miles v. Vince, the trustee in lending funds to another trust had failed in her duty to properly preserve the trust property.

The court also found that a trustee has an overriding duty to diversify a trust portfolio. In investing all of its funds in the building trust, the trustee had failed to comply with this requirement.

Lastly, the court was critical of the trustee's decision to loan funds to the building trust on a report she had commissioned on the profitability of the family scheme, rather than assessing whether the risk of the loan was appropriate for the insurance trust.

In conclusion, a trustee must be thoughtful in executing her duties and should consider the three general investment principles, the provincial statutory regime and relevant court decisions. Broad discretionary language in a trust deed should not be interpreted as a carte blanche to invest in any manner whatsoever or as a protection for the trustee from liability. Overly risky investments and investments which may be prejudicial to a particular class of beneficiary should be considered very cautiously as the courts have and will continue to assume the role of the ultimate protector of a trust's beneficiaries.

®CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. This communication is published by CI as a general source of information and is not intended to provide personal legal, accounting, investment or tax advice, and should not be relied upon in that regard. Facts and data provided by CI and other sources are believed to be reliable when posted; however, CI cannot guarantee that they are accurate or complete or that they will be current at all times. CI and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this communication. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Published October 2016. Republished with permission from CI Investments Inc.

Important information about each CI ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at Commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.