The Profiteering Fiduciary

Fiduciary Duties: The Rules on Profit
Fiduciaries must account for their handling of trust properties to the trust beneficiaries, and are not allowed to profit from being a fiduciary other than being paid reasonable fees for services rendered.
Equity compels a fiduciary to hold and manage trust property on the terms of the express trust by imposing a trust obligation upon it in favour of the trust beneficiaries.
The typical example of this constructive trust is found as far back as 1726 in the English decision of Keech v. Sandford , 20 E.R. 223, that is authority for the principle that a trustee may not make a profit for himself through his trusteeship. This decision has been adopted many times in Canada.
It is a fundamental duty of a trustee that he not permit his personal interest to conflict with his duty as trustee. This duty extends to any profits which the court may consider to be acquired improperly.
The principle of profiteeship encumbrances any gains made personally by the fiduciary and the law will then impose a constructive trust on the asset on the terms of the express trust, all of which depends on the facts of the particular case.
If the profit remains in the same form in which it was held by the fiduciary, then the beneficiaries can recover it in the same form or trace it into any other form into which it was converted by the trustee. The beneficiaries are entitled to argue that the property in dispute was always theirs  and never the trustee/fiduciaries, and if they can identify it among the assets in the trustee’s name, or in mixed funds, they are entitled to recover it.
The nature of the fiduciary relationship arises from the placing of trust and confidence by the claimant in the fiduciary and equity will impose express trust obligations upon the fiduciary who abuses that trust and confidence. Once equity imposes the trust provisions, the fiduciary will become a constructive trustee of the assets.

The rule against profits is a strict one, which is designed to ensure that the fiduciary acts, as equity requires, from the purest motives – the fiduciary must be motivated only by the best interest of his beneficiary.

The Supreme Court of Canada in Soulos v Korkontzilas (1997) 2 SCR 217 held that to establish a constructive trust to be imposed upon a wrongful gain, four conditions must generally be satisfied:

  1. The defendant must of been under an equitable obligation- an obligation of the type that courts of equity have enforced in relation to the activities, giving rise to the assets in his hands;
  2. The assets in the hands of the fiduciary must be shown to have resulted from deemed or actual agency activities of the fiduciary in breach of his equitable obligation to the plaintiff/owner;
  3. The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties;
  4. There must be no factors which would render imposition of a constructive trust unjust in all of the circumstances of the case- for example, the interests of intervening creditors must be protected.
The imposition of constructive trusts in breach of fiduciary obligations have included cases that vary from the crown acquiring land from first nations people in breach of its fiduciary obligations to them, to commercial cases in which one Corporation owes a fiduciary duty to another; to information where the fiduciary has acquired information that is used to acquire a personal gain.

Fiduciary Duties of Corporate Directors

Fiduciary Duties of Corporate Directors

Ascent One Properties Ltd v Liao 2017 BCSC 1017 dealt with an aborted real estate development project that alleged inter alia a breach of fiduciary duties by a corporate director and officer.

The case outlines the law relating to the fiduciary duties owed by a director and officer of a corporation.


173      It is trite law that directors owe duties to the companies they serve.

174      The Business Corporations Act, S.B.C. 2002, c. 57 (“BCA“) provides in relevant part as follows:

Powers and functions of directors

136(1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.

Duties of directors and officers

142(1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must

(a) act honestly and in good faith with a view to the best interests of the company . . .

175      The statutory fiduciary duty requires company directors and officers to respect the trust and confidence that have been reposed in them to manage the assets of the company in pursuit of the realization of the objects of the company. They must avoid conflicts of interest and abusing their position for personal benefit: Peoples Department Store Inc. (Trustee of) v. Wise, 2004 SCC 68at para. 35.

176      A director must not usurp for herself a maturing business opportunity.

177      As was stated by the Supreme Court of Canada in BCE Inc. v. 1976 Debenture Holders, 2008 SCC 69:

[37] The fiduciary duty of the directors to the corporation originated in the common law. It is a duty to act in the best interests of the corporation. Often the interests of shareholders and stakeholder are co-extensive with the interests of the corporation. But if they conflict, the directors’ duty is clear — it is to the corporation . . .

[38] The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand . . . the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation.

. . .

[40] In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Court should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives [citations omitted]. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions.

. . .

[66] . . . However, the directors owe a fiduciary duty to the corporation, an only to the corporation . . . not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.

178      The fiduciary duty is to maximize the value of the corporation: Carr v. Cheng, 2005 BCSC 445at para. 25. A director’s interests as a shareholder must be subservient to his fiduciary duty: Polar Star Mining Corp. v. Willock (2009), 96 O.R. (3d) 688 (Ont. S.C.); Peoples Department Stores at para. 43.

179      It is a breach of fiduciary duty to use, for personal advantage or gain, information acquired as a director in order to attempt to take control of the company: Dockside Brewing Co. Ltd. v. Strata Plan LMS 3837, 2007 BCCA 183 at para. 54.

180      In determining whether a director has acted in the best interests of the company, the court will consider whether the director has applied informed judgment which had a reasonable basis: Maple Leaf Foods Inc. v. Schneider Corp., (1998), CanLII 5121 (Ont. C.A.) at p. 42. This “business judgment rule” operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds: Krynen v. Bugg, 2003 O.J. No. 1209 (Ont. C.J.) at para. 74(7).

181      A director will not be liable for breach of fiduciary duty when the conduct at issue is qua shareholder and not qua director: Polar Star Mining at paras. 33-34.

182      The court must scrutinize the circumstances of each case to determine whether the director has acted honestly and in good faith and with a view to the interests of the company. A finding that there was no fraud or dishonesty on the part of a director’s who was attempting to solve the company’s problems stands in the way of a finding of breach of fiduciary duty: Peoples Department Stores at paras. 39 — 40.

183      When assessing whether a breach of fiduciary duty has occurred, the subjective motivation of the director is relevant: Peoples Department Stores at paras. 62 — 63; Dockside Brewing Co. at paras. 54 — 55.

Trustees Breach of Trust Excused

Trustee Act: Trustees Breach of Trust Excused

Section 96 of the Trustee Act allows the court to excuse a trustee for negligence or breach of trust when handling estate assets if the trustee acted honestly and reasonably.

Section 96 states as follows:

96. If it appears to the court that a trustee, however appointed, is or may be personally liable for a breach of trust, whenever the transaction alleged to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, then the court may relieve the trustee either wholly or partly from that personal liability.



Like trustees, pursuant to section 96, executors may be excused of liability in appropriate circumstances: see Brown v. Brown, 2011 BCSC 649.

To be excused, a trustee must satisfy all three elements in section 96:

  1. he or she must have acted honestly;
  2. must have acted reasonably;
  3. and the court must find that, in the circumstances, it would be fair to excuse the trustee for the breach and for failing to obtain directions from the court: Langley v. Brownjohn, 2007 BCSC 156 at para. 61.

The burden rests with the trustee who is seeking the protection of section 96 to prove that his or her actions are worthy of the exercise of the court’s discretion to excuse the trustee for the breach: Langley, supra, at para. 63.

In exercising its discretion pursuant to section 96, the court will consider factors including {Langley, supra at para. 66):

In Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302 (“.Fales”), the Court discussed the duties of trustees. The principles in Fales apply to executors: see Madock v. Greater, 2010 BCSC 567 at para. 61 and Re Ili/lis Estate, 2015 BCSC 208 at paras. 76- 77.

As set out in Fales, it in large part it reflects the longstanding principles regarding the duties of a trustee:

Traditionally, the standard of care and diligence required of a trustee in administering a trust is that of a man of ordinary prudence in managing his own affairs (Learoyd v. Whiteley [(1887), 12 App. Cas. 727.], at p. 733; Underhill’s Law of Trusts and Trustees, 12th ed., art. 49; Restatement of the Law on Trusts, 2nd ed., para. 174)

Personal Costs Against Lawyer

Personal Court Costs Awarded Against Lawyer - Disinherited

C.A.S. of the R.M.of W. v C.T.and J.B. 2017 ONSC 318 awarded personal court costs of $100,000 against a lawyer for her role in a custody battle involved in the Children’s Aid Society.

The court found that the lawyer’s tactics and strategy had caused an unnecessary duplication of effort of counsel, unnecessary extra court attendances, and a significant consumption of court and counsel’s resources and taxpayer funding.

While this is an unusual development, it is not unheard of in Canadian jurisprudence were counsel’s behaviour is unacceptable irresponsible at it best reprehensible, at worst.  In fact, I sense it is a growing trend the courts attempts to deal with over crowded court lists that are made worse by the few lawyers that ultimately waste limited  court resources.
In a nutshell, decision to require a lawyer to pay court costs to a person is not predicated upon a finding of ineffective or inadequate counsel or upon that councils negligent conduct. Although such a finding may be relevant, the test is whether the lawyer has” wrote up costs without reasonable cause, or has wasted costs.”

Court costs are traditionally intended to:

a) indemnify the successful litigant;
b) encourage parties to settle disputes; and
c) sanction a parties unreasonable behaviour or parties that are unprepared ie costs wasted

[76] InRand Estate v Lenton (2009 ONCA 251 (CanLII)) at para. 5, the Ontario Court of Appeal found that the determination of costs against counsel requires a holistic and contextual approach to the entirety of the solicitor’s behaviour (not just during the trial only, as Ms. Sack argues) in order to “…produce an accurate tempered assessment” of costs.

Further, other case law confirms that the test for determining costs against counsel is a two-part test:

(1) did counsel cause costs to be unnecessarily incurred?

(2) should the court exercise its discretion to impose costs against counsel despite the requirement that it use extreme caution before doing so? (see Galganov v Russell (Township) )2012 ONCA 410 (CanLII)) at para 22. This decision reiterates the “extreme caution principle” set out in Young v Young (1993 CanLII 34 (SCC), [1993] 4 SCR 3 at para 263) which was also followed by Justice Hackland, in Carleton v Beaverton Hotel, 2009 CanLII 92124 (ON SCDC), [2009] 96 OR (3d) 391; 314 DLR (4th) 566 where, at para 15, he noted:

anLII 92124 (ON SCDC), [2009] 96 OR (3d) 391; 314 DLR (4th) 566 where, at para 15, he noted:

I agree with the appellant’s submission that the “extreme caution” which courts must exercise in awarding costs against a solicitor personally as stated in Young v. Young, means that these awards must only be made sparingly, with care and discretion, only in clear cases,

[76] In F. (V.) v F. (J.) (2016 ONCJ 759 (CanLII) at paras. 11-15) Kurz, Prov. J. elaborated  on the first part  of the test, as set down by the Ontario Court of Appeal in Galanov:

11          The Ontario Court  of Appeal offered the following directions in regard to the first part of the two-part test in Galganov:

a.    The first step is to determine whether the conduct of the lawyer comes within the rule; that is, whether his or her conduct caused costs to be incurred unnecessarily. To do so, the court must consider the facts of the case and the particular conduct attributed to the lawyer.

b.  The rule allowing costs against a lawyer is not intended as punishment for professional misconduct. Rather, it is as indemnity for the time wasted and expenses unnecessarily expended as a result of the conduct of a lawyer.

c.   Neither negligence nor bad faith is a requirement for imposing costs against a lawyer.

d.  Mere negligence or conduct that does not meet the level of negligence may be sufficient to attract costs against a lawyer.

e.   The costs rule is intended to apply “…only when a lawyer pursues a goal which is clearly unattainable or is clearly derelict in his or her duties as an officer of the court…”

f.   In determining whether the rule applies, the court must examine “the entire course of the litigation that went on before the application

Judge’.” This requires a “holistic examination of the lawyer’s conduct” in order to provide an “accurate tempered assessment”. But a general observation of the lawyer’s conduct is not sufficient. Instead, the court must look to the specific incidents of conduct that are subject to complaint, (my emphasis)

Negligence Standard Same For Lawyers and Notaries

Negligence Standard Same For Lawyers and Notaries

I recently advised an inquiry that the negligence standard for a lawyer/solicitor is the same as that for a notary public.

The authority for that proposition was initially pronounced in British Columbia in the decision Flandro v Mitha (1992) 93 DLR (4th) 222 at paragraph 232.

The Flandro case was followed and unreported decision from new Westminster registry 19980325

SO 847, Crowe and Killeen v Bollong of Mr. Justice Boyle who after a brief review of the standard of care, determined that the standard of care towards the client is the same for lawyers as it is for Notary Publics.

The test he or she must meet is that set out in Tracy and Morin v. Atkins (1980) 16 B.C.L.R. 223 at 227 (B.C.C.A.):

… one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his (her) part may be likely to cause damage to the latter – in which case a prima facie duty of care arises.

The notary had failed to advise the clients to have a discretionary trust included in their will so that their disabled child would not lose state medical benefits after their passing. In passing the judge also noted that notaries are not allowed to prepare such discretionary trusts and that the notary should have referred the matter to a solicitor.

“I did not conclude it was necessary that the precise consequences of ineligibility for G.A.I.N. need have been foreseeable in order to bring home to the Defendant in negligence the injury and damage suffered by Sherry Ann.  It is enough that it was foreseeable – as I find it was – that a failure to create a discretionary trust would not preserve the body, management and distribution of the funds and would put the wellbeing of Sherry Ann at risk of harm.

[34] The Defendant is to be judged as a reasonably competent notary. He owed the same duty as a solicitor.  (Flandro v. Mitha (1992) 93 D.L.R. (4th) 222 at 232).

[35] It is not in itself fatal but the Defendant had no authority under the Notaries Act to draw a Will which included trust provisions (see s. 15). The weight of that exception as it applies in this case is that the testator’s instructions should have triggered the duty to refer her to a solicitor coupetent to draft a Will including the provision she sought which was to establish a discretionary trust. She probably would not have known the phrase “discretionary trust” but she knew what she wanted.

Attorney’s Fiduciary Obligations Increase When Donor Incapable

Fiduciary Duty

Turning to the law, as one might expect, the fiduciary obligations of an attorney become elevated once the donor of the power becomes incapable. This is described by the Ontario Court of Appeal as follows (Richardson Estate v. Mew, 2009 ONCA 403):

  1. In Banton [Banton v. Banton (1998), 164 D.L.R. (4th) 176 (Ont. Sup. Ct.)], Cullity J. held that while an attorney acting under a continuing power of attorney is always a fiduciary, the scope of the attorney’s fiduciary duties depends on whether the donor of the power is incapable at the time of the transaction. If the donor is mentally incapable, the attorney’s position approaches that of a trustee. …
  2. As a fiduciary, Ms. Ferguson was obliged to act only for the benefit of Mr. Richardson, putting her own interests aside: see Ermineskin Indian Band and Nation v. Canada, [2009] 1 S.C.R. 222, at para. 125. In British Columbia (Public Guardian and Trustee of) v. Elgi, 2004 B.C.J. No. 796, 28 B.C.L.R. (4th) 375 (S.C.) aff’d [2005] B.C.J. No. 2741, 262 D.L.R. (4th) 208 (C.A.), Garson J. described the prohibition against using a power for the attorney’s profit, benefit or advantage, at para. 82, in the following way:

It is the attorney’s duty to use the power only for the benefit of the donor and not for the attorney’s own profit, benefit or advantage. The attorney can only use the power for his or her own benefit when it is done with the full knowledge and consent of the donor. I am not aware of any authority that detracts from this principle in circumstances where the benefit is conferred on family members.

The Factors To Determine an Executor’s Compensation

In the well-known case of Re Toronto General Trusts and Central Ontario Railway (1905), 6 O.W.R. 350 (H.C.), five central factors should be considered by the audit judge in arriving at the amount of an executor’s compensation. The maximum fee for obtaining probate and distributing the assets is %5 with management of capital charges available over and above that where appropriate.
Those factors are:
(1) the size of the trust;
(2) the care and responsibility involved;
(3) the time occupied in performing the duties;
(4) the skill and ability shown; and
(5) the success resulting from the administration.
The later case of Re Atkinson, [1952] O.R. 685, [1952] 3 D.L.R. 609 (C.A.) added some helpful clarifying comments on the s. 61(1) discretionary power, especially on the use of “percentages” to establish the level of compensation.
The Court said at p. 698 [O.R.]:
If these statutory provisions are properly borne in mind, then in many instances the proper compensation may well be reflected by the allowance of percentages, but the particular percentages applied, or any percentages, are not to be regarded as of paramount importance; they should be employed only as a rough guide to assist in the computation of what may be considered a fair and reasonable allowance; the words of the statute override everything else and that fair and reasonable allowance is for the actual ‘care, pains and trouble, and time expended’. In some estates, indeed perhaps in many, no fairer method can be employed in estimating compensation than by the application of percentages. In others, while percentages may be of assistance, it would be manifestly unreasonable to apply them slavishly and to do so would violate the true principle upon which compensation is always to be estimated.
It can readily be recognized that, depending upon the idiosyncrasies of the particular estate, the care, pains and trouble and time expended may be disproportionate to the actual size of the estate. A small, complex estate may make more demands upon the trustee’s care and time and skill than a much larger estate of a simpler nature; conversely, even in a large estate with many complex problems, assessment of the compensation by the adoption of what might be said to be ‘the usual’ percentages would result in a grossly excessive allowance.

Party Cannot Take Tax Benefit For One Purpose and Deny It For Another

In Rosenthal v Rosenthal, 1986 CarswellOnt 288 (HCJ), it was held that an individual cannot take a position to obtain a tax benefit and then deny that position to obtain a different benefit.

At para 51 of Rosenthal, the court noted that “it is being argued that for the purpose of the Income Tax Act in 1969, the transfer of shares was not a gift, but for the purpose of the Family Law Act in 1986, the transfer of shares was a gift. Such a result should not be condoned by the court on the grounds of public policy alone.”

Further, the husband could not assert for tax purposes that the transfers were not a gift but for division of family property purposes that they were. Thus, the value of these shares form part of the net family property.

The Prudent Investment Standard For Trustees

The Prudent Investment Standard For Trustees

Miles v Vince 2014 BCCA 290 allowed an appeal and removed a  trustee for failure to abide by the Prudent Investor Standard expected of a trustee.

The Trustee had used the funds from an insurance trust for a speculative real estate investment

The Prudent Investor Standard

[52]         The respondent’s legal obligation with respect to the investment of the property of the Insurance Trust is to act as a prudent investor. Section 15.2 of the Trustee Act, R.S.B.C. 1996, c. 464, provides:

In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.

[53]         The appellant argues that a prudent investor would not place all of the Insurance Trust’s assets into one investment, but instead, would have a diversified portfolio of investments. The respondent says that she was under no statutory obligation to diversify the investment portfolio or invest the trust funds in any particular manner.

[54]         In Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302, the Supreme Court of Canada held that the primary duty of a trustee is to preserve trust assets. This principle applies despite broad discretionary powers given to the trustee in the trust document. Justice Dickson (as he then was) articulated this standard (at 316):

This standard, of course, may be relaxed or modified up to a point by the terms of a will and, in the present case, there can be no doubt that the co-trustees were given wide latitude. But, however wide the discretionary powers contained in the will, a trustee’s primary duty is preservation of the trust assets, and the enlargement of recognized powers does not relieve him of the duty of using ordinary skill and prudence, nor from the application of common sense. [Emphasis added.]

[55]         This Court applied Fales to underscore the duty of a trustee to preserve trust assets in Froese v. Montreal Trust Co. of Canada (1996), 20 B.C.L.R. (3d) 193, leave to appeal ref’d [1996] S.C.C.A. No. 399.

[56]         In Froese, an employee was a beneficiary of a pension plan for which he was to receive regular benefits. His employer began to make irregular contributions to the plan, and soon ceased to contribute. As a result, the beneficiary’s pension was reduced significantly.

[57]         This Court held that Montreal Trust, as trustee of the plan, had a duty to inform the beneficiary when it became aware regular contributions were not being made. Chief Justice McEachern, for the majority, held (at paras. 57-58):

The trial judge framed the question as whether there was any obligation to volunteer information to the beneficiary. With respect, I think that is far too narrow. In my view, “true” trustees have obligations of prudence to protect not just the corpus of the trust, but also the interest of the beneficiaries from the ongoing operation of the plan.

I postulate a simple example. Assume that the Company appoints an investment manager, and that that manager instructs the trustee to invest the corpus, or so much thereof as the plan permits, in the subordinated securities of the company. (This is an extreme example because most plans provide investment rules that must be followed.) Absent such rules, can it seriously be argued that a trustee owes no larger, general duty of prudence respecting the trust which transcends the four corners of the agreement? In this respect, I agree with the comments of Dickson J. (as he then was) in [Fales], although stated in a different context. He said, no matter how wide their discretionary powers:

… a trustee’s primary duty is preservation of the trust assets, and the enlargement of recognized powers does not relieve him of the duty of using ordinary skill and prudence, nor from the application of common sense.

[58]         Section 15.2 of the Trustee Act enacted in statutory form the standard of care for trustees investing trust property. As noted above, it requires an investor to exercise the care, skill, diligence and judgment of a prudent investor.

[59]         The “prudent investor” is also referred to in s. 15.3 of the Trustee Act:

A trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor would adopt under comparable circumstances.

[60]         Professor Donovan Waters discusses the development of the “prudent investor” standard in Canada in Donovan W.M. Waters et al., Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Thomson Reuters Canada Limited, 2012) at 1006-1009.

[61]         Professor Waters notes (at 1008) that in 1997 the Uniform Law Conference of Canada promulgated the Uniform Trustee Investment Act, 1997, which imposed an obligation for trustees to diversify investments and provided a list of factors which a trustee may consider in making investment decisions.

[62]         He describes the “prudent investor” standard as used in the B.C. Trustee Act, (at 1018):

The reference to the “prudent investor” is intended to bring into the picture the requirements of modern portfolio theory, which teaches that one must first decide what is the level of appropriate level of risk, and then seek to maximize the return within that constraint.

[63]         He points out that diversification is implicit in the prudent investor standard, based on modern portfolio theory (at 1019-1020):

It is true that in some jurisdictions, particularly those retaining the prudent man standard, there is room for argument as to whether the trustee has the duty to diversify. The new prudent investor standard, based on modern portfolio theory, leaves less room for argument; diversity is inherent in modern portfolio theory. Even so, the circumstances of a trust might be inconsistent with diversification. For example, if a trustee expected to hold property only for a few weeks, it might not be prudent to expose the assets to the volatility which inheres in equity investments.

[64]         Unlike other jurisdictions in Canada, B.C.’s Trustee Act does not expressly impose a duty on trustees to diversify investments in accordance with modern portfolio theory (see The Trustee Act, 2009. S.S. 2009, c. T-23.01 s. 26; Trustee Act, R.S.O. 1990, c. T. 23 s. 27(6); Trustee Act, R.S.N.S. 1989, c. 479 s. 3B; Trustee Act, R.S.P.E.I. 1988, c. T-8 s. 3.1).

[65]         As Professor Waters suggests, however, the “prudent investor” standard implicitly brings modern portfolio theory into play, and thus requires the trustee to assess the level of appropriate risk and whether diversification is required.

Is the Loan a Prudent Investment?

[66]         In my opinion, the respondent trustee did not meet the prudent investor standard by investing all of the Insurance Trust’s assets, through the Loan, in the Main Street Properties.

[67]         The respondent says she consulted the Redden Report before embarking on the development of the Main Street Properties, and considered the information on the potential profitability of the development before making the Loan.

[68]         The respondent did not meet her statutory obligations to act as a prudent investor with respect to the assets of the Insurance Trust by relying on the Redden Report to assess the potential profitability of the development of the Main Street Properties. There is no evidence that she assessed the appropriate level of risk for the Insurance Trust, and then sought to maximize the return within that constraint. Rather, it appears she consulted the Redden Report to assess the development potential and required investment to develop the Main Street Properties, and used the funds from the Insurance Trust to meet those requirements.

[69]         The respondent maintains she was under no statutory obligation to diversify any investments made from the Insurance Trust. As Professor Waters points out, however, the link between the prudent investor standard and modern portfolio theory suggests that a trustee must assess whether diversification is required to preserve the trust assets.

[70]         In my view, prudent investment of the assets of the Insurance Trust required the trustee to consider the interests of all of the beneficiaries, including the appellant’s interest as an income beneficiary, in the context of the circumstances of the settlement of the Insurance Trust by Mr. Vince with proceeds of life insurance for the benefit of his wife and children after he knew he was ill. Mr. Vince’s interest in creating social housing, or his interest in the broader development of the Main Street Properties for market housing and commercial space with a component of social housing, which is what the respondent has embarked on, bears little relation to the creation of the Insurance Trust.

[71]         Had Mr. Vince intended that the proceeds of his life insurance be invested solely in the development of the Main Street Properties for the benefit of his children as the Division Date Beneficiaries, it is likely he would have provided for those proceeds to be settled on the Family Trust. I agree with the appellant that the existence of separate trusts indicates that Mr. Vince had separate intentions with respect to the use of the proceeds of the life insurance. It is a reasonable inference from the surrounding circumstances that Mr. Vince intended the life insurance proceeds to be used to support and maintain his widow and children after his death. It appears the chambers judge conflated Mr. Vince’s intention with respect to the Family Trust with that of the Insurance Trust.

[72]         Had the chambers judge correctly assessed Mr. Vince’s intention with respect to the Insurance Trust, he would not have concluded that investing all of its assets in the Loan was a prudent investment. The Loan is an illiquid asset invested in an illiquid real estate development project. It appears the Main Street Properties do not produce sufficient income to pay expenses including property taxes, as the proceeds of the B.C. Housing financing were used for that purpose. No interest or principal has been paid despite the Loan being due and payable, and there is no evidence of when the Loan will be repaid.

[73]         It is obvious that the Loan is in default. For the respondent to say that no demand has been made demonstrates “the difficult situation” for the respondent, recognized by the chambers judge, that arises if the Loan is in default. Only the respondent can make a demand for payment of the Loan, and as she argues, such a demand would put the development of the Main Street Properties at risk, contrary to her various interests as the primary promoter of that project.

[74]         Further, all of the security on the Loan was subject to the priority of the first mortgage and other security granted to B.C. Housing, including the priority agreement and option to purchase. If the option to purchase was exercised the Loan would have no value. To say that the priority agreement did not have that effect because the conditions under which it might be exercised had not occurred and were “highly speculative” simply ignores the terms of the Loan.

[75]         While the respondent in this case was under no express statutory duty to diversify the investment portfolio of the Insurance Trust, she nonetheless had a duty to act as a prudent investor. For the reasons above, I conclude her investment strategy in this particular case did not meet this standard.

[76]         The investment of the Insurance Trust’s assets into a single, illiquid set of properties has put the Insurance Trust’s assets at risk. The respondent has wide discretionary powers under the terms of the trust, but the respondent failed to undertake an appropriate risk assessment, in the context of the settlor’s intention with respect to the Insurance Trust, before investing all of the Insurance Trust’s assets in the Loan.

[77]         The respondent’s handling of the Insurance Trust assets also breached her duty of impartiality between the capital and income beneficiaries of that trust. The respondent justifies the investment of the assets of the Insurance Trust in the development of the Main Street Properties on the basis that her goal was to maximize the capital growth of the trust property for the benefit of the capital beneficiaries of both trusts. She dismisses her obligation to the income beneficiaries of the Insurance Trust, including the appellant, on the ground that the appellant did not provide financial information as to her needs as requested by the respondent, stating in her factum (R.F. at para. 84):

The extent of the respondent’s duty of even-handedness towards a beneficiary whose interest in the trust is merely discretionary cannot possibly be extended beyond a duty on the part of the trustee to make reasonable enquiries into the financial needs for the discretionary income beneficiaries. The respondent has done this.

[78]         The respondent has provided no authority for, in effect, ignoring the income beneficiaries in investing the trust property, and I find her argument unpersuasive. As noted by Professor Waters (at 1025):

With regard to the trust fund the income beneficiary is looking for the best yield obtainable, while traditionally the capital beneficiary is concerned with the safety of the fund. However, high yield usually means high risk, low yield low risk, and here is the inherent conflict between the interests of these two types of beneficiary. It is the duty of the trustees so to manage the fund that they do the best possible for both, and this means holding an even balance between yield and risk. Unless, and to the extent only that, the trust instrument requires or permits them to do otherwise, they must ensure that the assets originally received into the trust are put into a form which brings about this balance, and that the assets they subsequently acquire, again in the exercise of their power of investment, have the same result.

[79]         In this case, the respondent failed to undertake an investment strategy that balanced the interests of the capital and income beneficiaries of the Insurance Trust. As a result, I find she breached her duty to remain impartial between these beneficiaries.

Executor Ordered to Repay Monies

Executor Ordered to Repay Monies Back to Estate

Executor Ordered to Repay Monies Back to Estate Paid Out Before Expiration of 6 Month Limitation

Stevens v. Wood Estate (Re), 2013 BCSC 2380. Until six months have passed from the issuance of probate of a will, s. 12 of the Wills Variation Act, R.S.B.C. 1996, c. 490 (the “WVA”) prohibits, absent consent or court order, the distribution of any portion of an estate to its beneficiaries.

The question for determination on this application is the appropriate remedy when such a distribution has been made.

However, the case of Etches v. Stephens (1994), 99 B.C.L.R. (2d) 171 (S.C.) [Etches] assists with determining the purpose of s. 12(1) of the WVA.  Etches deals with the precursor to what is now s. 3(1) of the WVA which requires that an action under this Act must be brought within six months from the date of the issue or resealing of probate.  The court stated that this provision must be read alongside the precursor to what is now s. 12(1) which has the same time-limited language.  When the two sections are read together, the reason for the limits become clear (see paras. 9-12, and 15):

  1. The “main aim” of the WVA is “adequate, just and equitable provision for the spouses and children of testators” when a will does not provide for this: see Tataryn v. Tataryn Estate, [1994] 2 S.C.R. 807 at 815.  As such, it must allow those falling within these groups to apply to the court to have the will varied.
  2. If those affected were allowed to apply to court for a variation without any time limit on the action, then there would be the danger that the distribution of the assets would remain uncertain for a prolonged period of time.  Thus there is a limitation period of six months on the action.
  3. On the other hand, if there was not a rule against distributing the assets before the limitation period to challenge the will was expired, then there would be the danger that a legitimate action could be started but the assets would already have been distributed.  This would deprive those affected of an effective remedy and potentially result in an injustice.
  4. Furthermore, without the restriction placed on the administrator of the estate by s. 12(1), it would be possible for that administrator to attempt to thwart a legitimate claim by the dependents under s. 2 of the Act by distributing the assets before an action is brought.

[29]         The purpose of s. 12(1) is to keep the estate intact to ensure that a successful plaintiff is able to recover that to which they may become entitled. A breach of this statutory provision is a serious matter.  It goes to the heart of the legislative scheme.

[30]         Until the six-month limitation period has passed, a beneficiary’s entitlement to a share in the estate is not absolute. It is subject to variation if a successful action is brought under the WVA. Unless consents are obtained, the beneficiaries are not entitled to receive and benefit from their share of the estate until the WVA claims have been resolved or a court order has been obtained.

[31]         Similarly the plaintiff in a WVA action is entitled to have the assets in the estate preserved pending the outcome of their claim. They should not be put in the position of having to pursue after the executor or other beneficiaries to reap the benefits of a successful action.

[32]         Where there is a breach of the statutory provision and funds are distributed contrary to the legislation, the remedy of a claim against the executor or other beneficiaries, after the completion of the WVA action, does not sufficiently protect the successful WVA claimant. Those parties may, by then, be without assets or have taken steps that make it difficult to locate their assets.

[33]         It is the party who has breached the provisions of the statue who must make matters right. This application is not the forum to determine the strength or otherwise of a WVA claim. The WVA claimant is entitled to have the estate reconstituted to its state prior to the wrongful distribution.

[34]         I find that the appropriate remedy for a breach of s. 12 of the WVA is for the party who has breached the provisions to either repay the estate or to post security in the entire amount which has been wrongfully disbursed.

[35]         The Executrix in this matter must make matters right. She must, within 30 days of the date of these reasons, repay the estate or post security in the amount of $202,000, being the amount which she has improperly advanced to the beneficiaries. If the security is not posted within 30 days the plaintiff will be at liberty to seek further relief.