Law Times

lAw Times • April 14, 2014 Page 3 www.lawtimesnews.com Door opened to abuse as beneficiaries left in the cold Appeal court decision deems estate trustee to be true owner of family home hen Adalgisa Di Michele died in 1996, she le her house to three of her children. None of them now owns any part of the Missis- sauga, Ont., home thanks to a recent On- tario Court of Appeal decision on the power of an estate trustee that lawyers say leaves a door open to abuse. e will named one of Di Michele's sons, Antonio, as an estate trustee for the home all of her children were to in- herit. But years later, when he was facing a personal litiga- tion matter in 2002, Antonio put up his mother's property as security. In 2010, he lost the litigation and his opponents brought an application for the sale of the home. Di Michele v. Di Michele hinged on the question of whether Antonio's opponents could take the home. One of the siblings, Roberto, lived in the home with his mother and was under the impression he would take it upon her death, according to the ruling. In an April 3 decision that highlighted the scope of an estate trustee's power, the Ontario Court of Appeal found Antonio's opponents in the personal litigation were en- titled to the entire value of the house and not just the one- third share belonging to Antonio as per his mother's will. e ruling found an estate trustee is the true owner of a property unless the home is sold. In the appeal, Roberto alleged Antonio was involved in a fraud in which he misrepresented himself as the owner of their mother's home when in fact he was just a trustee of the estate. But the court, citing s. 63 of the Land Titles Act, disagreed. "As a result of these provisions, it is clear that Antonio had the legal right to grant the mortgage," wrote Justice Ei- leen Gillese on behalf of the court. "Antonio was in the same position as if he had become the registered owner of the property under a transfer for valuable consideration: Land Titles Act, s. 63. A registered owner has the right to grant a mortgage over his or her land: Land Titles Act, s. 93(1)," she wrote. Before the appeal, the trial judge had found that since the 2002 action was against Antonio personally and not in his capacity as an estate trustee, he would only have to give his opponents one-third of the home's value. But the appeal court found the mortgage put up as a security was binding on the whole of the property. "Second, the beneficiaries' entitlement under the will did not amount to a property interest in the property," wrote Gillese. "e will does not give the beneficiaries a specific be- quest on the property. Rather, it gives them a contingent interest in the residue of the estate." She added: "Accordingly, to become entitled, a ben- eficiary had to be alive on the date of distribution. Until distribution, the beneficiaries had only a contin- gent beneficial interest in the residue of the estate, as well as the personal right to compel the estate trustee to duly administer the estate." In effect, the ruling gives no consequence to the abbre- viation "TWW" under a land title, which refers to a trustee with a will, says Toronto lawyer Mark Ross. A system that treats an estate trustee as a true owner of a property also opens the door to abuse, according to Ross. "Under the Estate Administration Act, if there's an un- fettered power to sell given to an estate trustee, [the trust- ee] can sit on it for as long as he wants and he doesn't have to sell it within three years, 10 years, 15 years . . . and until he sells it, nobody has any interest in that property," he says. "at is an issue — that you have an unfettered right to sell. But it's open to abuse," he adds, noting some ben- eficiaries may delay selling a property to avoid creditors. For beneficiaries with an estate trustee, the message is to act on getting the property sold so they can recover their entitlements, Ross suggests. at an estate trustee can act like a true owner is a novel issue, he notes. Real estate lawyer Morris Sosnovitch says it's true the decision means real estate lawyers no longer have to inves- tigate a title if it lists a trustee with a will. But the court's decision to relieve lawyers of that investigation is against the trend of urging them to probe even the slightest signs of fraud, he says. e court in this case was lax on the due diligence ex- pected of real estate lawyers, he adds, pointing to a section of the ruling that states that aer Antonio offered the prop- erty as a security, his opponents were entitled "to operate on the assumption that Antonio was acting lawfully in granting the mortgage." Says Sosnovitch: "is is pretty incredible given the stringencies we're expected to govern ourselves by with respect to fraud." Another concern relates to the treatment of the benefi- ciaries in this case. "Even though the court in this decision did not find a fraud . . . the fact is that fraud was perpetrated on the in- nocent beneficiaries of the estate," says Sosnovitch. LT NEWS BY YAMRI TADDESE Law Times W A system that treats an estate trustee as a true owner of a property also opens the door to abuse, says Mark Ross. SCC consideration of adviser penalties significant for lawyers Case will look at whether income tax sanctions are penal or administrative In a case with significant implica- tions for lawyers, the Supreme Court of Canada has agreed to consider whether adviser penalties found in s. 163.2 of the Income Tax Act are penal or adminis- trative in nature. e penalties target professional tax advisers, planners, and preparers, in- cluding lawyers and accountants, who provide tax advice regarding matters that eventually prove unsustainable be- fore the Canada Revenue Agency and the courts. "e penalties are designed to have a chilling effect by inhibiting tax profes- sionals from lending their credibility to aggressive tax schemes, particularly those marketed to the public as tax shel- ters," says Claire Kennedy of Bennett Jones LLP's Toronto office. e difficulty with s. 163, which some lawyers have described as the "sword of Damocles," is that the standard of mis- conduct is quite low, requiring only "culpable conduct" to attract liability. Indeed, the adviser penalty is equal to the amount a client who engaged in "gross negligence" would pay. Generally speaking, that amounts to about 50 per cent of the understated tax. Compounding the problem is the fact that, so far, the courts have held that s. 163 adviser penalties are administra- tive in nature. What that means is that the burden of proof on the Crown is the general civil burden on a balance of probabilities rather than the crimi- nal standard of beyond a reasonable doubt. Similarly, penal sanctions give those charged the benefit of other con- stitutional protections not available to individuals charged with administrative offences. Julie Guindon v. Her Majesty e Queen, the case in which the Supreme Court granted leave in March, involved a family lawyer who wrote an opinion for a relative regarding a tax shelter pro- gram. e opinion stated the lawyer had read the underlying documents despite the fact she hadn't done so. e program involved the donation of Turks and Caicos time-share prop- erties to a charity. e lawyer was also president of the charity and signed at least some of the tax receipts issued to investors. Although the promoters con- firmed the transfer of the properties orally, the lawyer never saw documen- tation substantiating the conveyances. As it turned out, the transfer of the properties didn't happen. e CRA levied adviser penalties in excess of $500,000. At first instance, the Tax Court of Canada ruled the penalties were crimi- nal in nature and that it had no jurisdic- tion to hear what amounted to criminal charges. But the Federal Court of Ap- peal ruled adviser penalties didn't con- stitute true penal sanctions. As the Federal Court of Appeal saw it, the tax system required deterrents to ensure its proper functioning as a self-assessment system. Administrative sanctions or penalties were a way of achieving deterrence. e adviser penalties, then, weren't about condemning "morally blamewor- thy conduct or inviting societal con- demnation of the conduct" but about ensuring the regulatory scheme worked properly. "In my view, section 163.2 is mainly directed to ensuring the accuracy of in- formation, honesty, and integrity within the administrative system of self-as- sessment and reporting under the act," wrote appeal court Justice David Stratas on behalf of a unanimous bench also composed of justices Johanne Gauthier and Marc Noël. "e imposition of a section 163.2 penalty by way of assessment and the subsequent procedures for challeng- ing the assessment are proceedings of an administrative nature aimed at redressing conduct antithetical to the proper functioning of the administra- tive system of self-assessment and re- porting under the act. Put another way, proceedings under section 163.2 aim at maintaining discipline, compliance or order within a discrete regulatory and administrative field of endeavour. ey do not aim at redressing a public wrong done to society at large." William Innes of Toronto's Rueter Scargall Bennett LLP says the Court of Appeal's decision displays a great degree of deference to the administrative appa- ratus of the CRA. "It may signal a shi in the court's ju- risprudence in the direction of greater administrative discretion for tax au- thorities," he says. However that may be, Kennedy is concerned Guindon won't afford the top court an opportunity to clarify what she calls the "fuzzy line" between penal and administrative sanctions in the Income Tax Act. "We don't really have a crisp issue or a fact pattern that will help the court to clarify that fuzzy line," she says. "An- other problem is that, as the Federal Court of Appeal pointed out, no notice of constitutional issue was served in this case." LT BY JulIuS MElnITzER For Law Times

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