Canada (Ontario)

Abstract

On 31 October 2006, the federal government announced an overhaul to the taxation of income trusts to ‘restore balance and fairness’ to the federal tax system in order that income trusts and corporations be subject to similar tax treatment. Income trusts formerly enjoyed more favourable tax treatment than corporations. Corporations have connected to the income trust structure in order to pay out a large portion (and in many cases, all) of their operating income to be taxed at the level of unit holders and to avoid taxation at the corporate level. Despite pressure from stakeholders to reconsider this new initiative, the federal government has held firm to its decision. In Rose v Rose (2006), 81 O.R. (3d) 349 (Ont. S.C.J.), the Ontario Court addressed the issues of rectification and termination of a discretionary family trust and removal of a trustee in the context of acrimonious divorce proceedings. The father had settled the trust in 1992 naming his two daughters as beneficiaries, and appointing himself as sole trustee. A summer cottage and a ski chalet were transferred to the trust and were the only assets of the trust. Following their parents’ separation, the daughters’ relationship with their father deteriorated. The daughters applied to court for an order removing their father as trustee and appointing a new trustee, and an order terminating the trust and dividing the trust assets between them, with a negotiated payment into court on behalf of their unborn children. The father cross-applied for an order that the trust deed be rectified to permit him to use the cottage, or alternatively for an order rescinding the trust and having the trust property result back to its original owner(s). The court held that the trust deed did not authorize either parent to use the trust property and declined to rescind the trust. The court granted an order removing the father as trustee and replacing him with a third party trustee. The court also ordered the sale of the chalet to pay the parties’ costs and that any surplus net proceeds remain in the trust.