By: Bob Lock

 

Canadian Common Law Trusts: A Comprehensive Overview

I’m pleased to provide a detailed exploration of Canadian common law trusts for those unfamiliar with this important legal concept. Trusts play a crucial role in estate planning, asset protection, and wealth management in Canada. This post will cover the history, key principles, and practical considerations related to common law trusts in Canada.

Historical Development of Trusts in Canadian Common Law

The concept of trusts in Canadian common law has its roots in English legal history, dating back to the medieval period. The trust evolved from the concept of “use” in feudal England, where land was conveyed to one person “to the use” or for the benefit of another. This arrangement allowed landowners to circumvent certain feudal obligations and restrictions on the transfer of property. In Canada, the development of trust law closely followed English precedents until the mid-20th century. As Canada’s legal system matured, courts began to develop distinctly Canadian approaches to trust law, particularly in areas such as charitable trusts and fiduciary obligations. Key milestones in the development of Canadian trust law include:

1. The reception of English common law in the various provinces (excluding Quebec) in the 18th and 19th centuries.
2. The enactment of provincial Trustee Acts, beginning in the late 19th century, which codified certain aspects of trust law and provided statutory powers to trustees.
3. The landmark Supreme Court of Canada decision in Guerin v. The Queen (1984), which expanded the concept of fiduciary duty in the context of Aboriginal rights.
4. The adoption of the Hague Convention on the Law Applicable to Trusts and on their Recognition in 1992, which Canada ratified in 1993.

Requirements for a Valid Common Law Trust

For a trust to be valid under Canadian common law, it must satisfy the “three certainties” established in the English case of Knight v. Knight (1840) and adopted by Canadian courts. These are:

1. Certainty of intention: The settlor must demonstrate a clear intention to create a trust. This can be express (through written or oral declaration) or implied from the circumstances.
2. Certainty of subject matter: The property to be held in trust must be clearly identified or identifiable.
3. Certainty of objects: The beneficiaries of the trust must be clearly identified or identifiable.

In addition to these three certainties, a valid trust requires:

1. Compliance with formalities: Certain trusts, such as those involving land, must be evidenced in writing to comply with the Statute of Frauds or similar provincial legislation.
2. Capacity of the settlor: The person creating the trust must have the legal capacity to do so.
3. Legal purpose: The trust must not be created for an illegal purpose or contrary to public policy.
4. Transfer of property: The trust property must be effectively transferred to the trustee(s).

Compliance with the Hague Convention on Trusts

Canada’s ratification of the Hague Convention on Trusts in 1993 has implications for the recognition and enforcement of trusts in international contexts. To be compliant with the Convention, a Canadian common law trust should:

1. Be created voluntarily and evidenced in writing.
2. Clearly identify the trust assets.
3. Appoint a trustee or trustees with the power and duty to manage the trust assets.
4. Have a valid purpose and identifiable beneficiaries.

The Convention also provides for the recognition of trusts in civil law jurisdictions, which is particularly relevant in the Canadian context given Quebec’s civil law system.

Revocable vs. Irrevocable Trusts

Canadian common law recognizes both revocable and irrevocable trusts:

Revocable Trusts:

• Can be altered or terminated by the settlor during their lifetime.
• Offer flexibility but may not provide the same asset protection or tax benefits as irrevocable trusts.
• Are often used for estate planning purposes to avoid probate.

Irrevocable Trusts:

• Cannot be altered or terminated by the settlor once created (except in limited circumstances).
• Offer greater asset protection and potential tax advantages.
• Are commonly used for charitable giving, life insurance trusts, and certain types of family trusts.

The choice between revocable and irrevocable trusts depends on the settlor’s objectives, tax considerations, and the specific circumstances of each case.

Common Law Trusts vs. Statutory Trusts

While common law trusts arise from judicial decisions and principles developed over time, statutory trusts are created by specific legislation.

Here’s a comparison:

Common Law Trusts:

• Flexible and adaptable to various situations.
• Governed primarily by case law and equitable principles.
• Can be created for a wide range of purposes.
• Subject to interpretation by courts based on established legal principles.

Statutory Trusts:

• Created and governed by specific legislation.
• Often have more rigid structures and requirements.
• Typically serve specific purposes defined by the statute.
• May have different rules regarding trustee powers, beneficiary rights, and trust administration.

Examples of statutory trusts in Canada include:

• Registered Education Savings Plans (RESPs)
• Registered Disability Savings Plans (RDSPs)
• Certain types of pension trusts

While common law and statutory trusts share some similarities, such as the fiduciary duties of trustees, they can differ significantly in their creation, administration, and legal treatment.

Differences in Taxation

The taxation of common law trusts and statutory trusts can vary significantly:

1. Common Law Trusts: Generally taxed as separate entities at the highest marginal tax rate, unless income is distributed to beneficiaries. The 21-year deemed disposition rule applies, requiring a deemed realization of capital gains every 21 years 7.
2. Statutory Trusts: May have specific tax treatment defined by legislation. For example, RESPs and RDSPs have unique tax advantages and contribution rules defined in the Income Tax Act 7.

Case Law: In Garron Family Trust v. The Queen, 2012 SCC 14, the Supreme Court of Canada clarified the residency test for trusts for tax purposes, affecting both common law and statutory trusts.

Differences in Registration

1. Common Law Trusts: Generally do not require formal registration, though they may need to obtain a trust identification number for tax purposes 8.
2. Statutory Trusts: Often require registration with specific government agencies. For example, RESPs must be registered with the Canada Revenue Agency 7.

Differences in Banking

1. Common Law Trusts: Can open bank accounts, but may face more scrutiny due to anti-money laundering regulations 8.
2. Statutory Trusts: Often have specific banking provisions. For instance, RESP providers must be licensed financial institutions  7.

Differences in Recognition

1. Common Law Trusts: Recognized based on common law principles and may require court interpretation in disputes 1.
2. Statutory Trusts: Explicitly recognized by statute, potentially providing more certainty in their treatment 2.

Case Law: In The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9, the Ontario Court of Appeal clarified the recognition of statutory trusts under construction lien legislation in bankruptcy proceedings  4.

Constitutional Considerations

Under the Canadian Constitution, property and civil rights fall within provincial jurisdiction. As a result, trust law is primarily governed by provincial legislation and case law. However, certain aspects of trust law, particularly those related to taxation, fall under federal jurisdiction.

Key constitutional considerations include:

1. The division of powers between federal and provincial governments in matters related to trusts.
2. The interaction between provincial trust laws and federal tax legislation.
3. The recognition of trusts across provincial boundaries.
4. The application of the Canadian Charter of Rights and Freedoms to certain aspects of trust law, particularly in the context of charitable trusts.

 

Case Studies on Modern Uses of Canadian Common Law Trusts

Case Study 1: Family Business Succession Planning

The Smith family owns a successful manufacturing business in Ontario. To facilitate smooth succession and minimize tax implications, they establish a family trust with the following structure:

• Settlor: John Smith (founder)
• Trustees: John Smith, his wife Mary, and their lawyer
• Beneficiaries: John and Mary’s children and grandchildren

The trust holds shares of the family business, allowing for:

• Income splitting among family members
• Multiplication of the lifetime capital gains exemption
• Flexibility in future distribution of business interests

Benefits:

• Reduced overall family tax burden
• Protection of business assets from potential creditors
• Facilitation of orderly business succession

Challenges:

• Complexity in administration and compliance with tax rules
• Potential for family disputes over trust management

Relevant Case Law: Neuman v. M.N.R., [1998] 1 SCR 770, which addressed income splitting through trusts.

 

Case Study 2: Charitable Giving

A wealthy philanthropist, Sarah Johnson, wants to establish a long-term charitable giving structure. She creates an irrevocable charitable trust:

• Settlor: Sarah Johnson
• Trustees: Sarah Johnson, her financial advisor, and a trust company
• Beneficiaries: Various registered charities

The trust is funded with a diversified investment portfolio and structured to:

• Provide annual donations to selected charities
• Grow the capital for increased future giving
• Allow for flexibility in choosing beneficiary charities over time

Benefits:

• Immediate tax benefits for Sarah through charitable donation receipts
• Creation of a lasting philanthropic legacy
• Professional management of charitable assets

Challenges:

• Ensuring compliance with CRA rules for charitable trusts
• Balancing current giving with long-term growth

Relevant Case Law: Vancouver Society of Immigrant and Visible Minority Women v. M.N.R., [1999] 1 SCR 10, which clarified the legal test for charitable purposes in Canada.

Signature Verification for Trusts in Canada

When establishing a trust in Canada, proper signature verification is crucial to ensure the validity and enforceability of the trust document. While notarization is a common method of signature verification in many jurisdictions, it’s important to note that in Canada, notarization is not always required for trust documents.

Is a Notary Required for Trust Signatures in Canada?

In most cases, a notary is not legally required to verify signatures on trust documents in Canada. However, having a notary verify signatures can provide an additional layer of authenticity and may be beneficial in certain situations, such as:

1. When the trust involves high-value assets
2. If there’s a possibility of future disputes
3. For trusts with international elements

Alternatives to Notary Verification

Several alternatives to notary verification are widely accepted in Canada for trust documents:

1. Witness Signatures: Having one or more witnesses sign the trust document alongside the settlor and trustees is a common practice.
2. Lawyer Certification: A lawyer can certify that they witnessed the signing of the document.
3. Commissioner for Oaths: In some provinces, a Commissioner for Oaths can verify signatures.
4. Affidavits of Execution: An affidavit sworn by a witness to the signing can serve as verification.

Step-by-Step Guide to Alternative Signature Verification Methods

1. Witness Signatures

1. Choose at least two adults who are not beneficiaries of the trust to act as witnesses.
2. Ensure all parties (settlor, trustees, and witnesses) are present at the time of signing.
3. The settlor and trustees sign the trust document in the presence of the witnesses.
4. Each witness signs the document, stating they witnessed the signatures of the settlor and trustees.
5. Include a clause in the document stating that it was signed in the presence of witnesses.

2. Lawyer Certification

1. Schedule an appointment with a lawyer experienced in trust law.
2. Bring the trust document and all signatories to the lawyer’s office.
3. Sign the document in the presence of the lawyer.
4. The lawyer will add a certification clause and sign, stating they witnessed the signatures.

3. Commissioner for Oaths

1. Locate a Commissioner for Oaths in your province (often available at courthouses, law offices, or municipal offices).
2. Bring the trust document and all signatories to the Commissioner.
3. Sign the document in the presence of the Commissioner.
4. The Commissioner will add a statement and their signature, verifying they witnessed the signing.

4. Affidavit of Execution

1. After the trust document is signed in the presence of a witness, prepare an affidavit of execution.
2. The affidavit should state the witness’s name, that they were present for the signing, and that they saw the settlor and trustees sign the document.
3. The witness should swear or affirm the affidavit before a Commissioner for Oaths or a Notary Public.
4. Attach the sworn affidavit to the trust document.

Legal Considerations

While these alternatives are generally accepted, it’s important to consider:

1. Provincial variations in requirements for signature verification.
2. Specific requirements of financial institutions or other parties who may interact with the trust.
3. The potential need for enhanced verification in cases of vulnerable settlors or complex trusts.

Case Law: In Lubberts v. Lubberts Estate, 2020 ABQB 515, the Alberta Court of Queen’s Bench emphasized the importance of proper execution and witnessing of testamentary documents, which can be analogously applied to trust documents.

Digital Signatures for Trust Documents

In addition to the traditional methods of signature verification, digital signatures are becoming increasingly popular for trust documents in Canada. Digital signatures offer enhanced security, convenience, and legal validity when properly implemented. Digital signatures use cryptographic technology to create a unique, verifiable link between the signer and the document. In Canada, digital signatures that meet certain criteria are considered “secure electronic signatures” under PIPEDA and provincial legislation.

Benefits of Digital Signatures for Trust Documents

1. Enhanced security and tamper-evidence
2. Easier verification of signer identity
3. Time-stamping capabilities
4. Improved audit trails
5. Faster processing and reduced administrative overhead

Legal Framework for Digital Signatures in Canada

The Personal Information Protection and Electronic Documents Act (PIPEDA) and the Secure Electronic Signature Regulations provide the federal framework for digital signatures in Canada. According to these regulations, a secure electronic signature must:

1. Be unique to the person using it
2. Be created using means under the sole control of the person using it
3. Be linked to the electronic document in such a way that it can be used to determine whether the document has been changed since the signature was attached

Additionally, the digital signature must have an associated digital signature certificate that comes from a verified certification authority recognized by the Treasury Board of Canada Secretariat.

Step-by-Step Guide to Using Digital Signature Platforms for Trust Documents

1. Choose a Compliant Digital Signature Platform
   • Select a platform that complies with Canadian regulations and industry standards (e.g., Adobe Sign, DocuSign, OneSpan)
   • Ensure the platform uses PKI (Public Key Infrastructure) technology
2. Set Up Your Account
   • Create an account on the chosen platform
   • Verify your identity through the platform’s authentication process
3. Prepare the Trust Document
   • Upload the trust document to the digital signature platform
   • Specify the signatories and their roles (settlor, trustees, witnesses)
4. Configure Signature Fields
   • Add signature fields to the document for each required signatory
   • Set the signing order if necessary (e.g., settlor first, then trustees, then witnesses)
5. Set Security and Authentication Options
   • Choose authentication methods for signers (e.g., email, SMS, knowledge-based authentication)
   • Enable options like access codes or identity verification if required
6. Send the Document for Signing
   • Use the platform to send signing invitations to all parties
   • Include any necessary instructions or deadlines
7. Signatories Complete the Signing Process
   • Each signatory receives an email invitation to sign
   • They authenticate themselves using the chosen method
   • They review the document and apply their digital signature
8. Monitor the Signing Process
   • Track the progress of signatures through the platform’s dashboard
   • Send reminders if necessary
9. Finalize and Distribute the Signed Document
   • Once all signatures are collected, the platform typically finalizes the document
   • Download the signed document and any associated certificates of completion
   • Distribute copies to all relevant parties
10. Store and Retain Records
    • Securely store the digitally signed document and associated audit trails
    • Ensure long-term accessibility and readability of the signed document

Best Practices for Digital Signatures on Trust Documents

1. Use a reputable digital signature platform that complies with Canadian regulations
2. Implement strong authentication methods for all signatories
3. Provide clear instructions to all parties about the digital signing process
4. Maintain comprehensive audit trails and signing logs
5. Regularly review and update your digital signature practices to ensure ongoing compliance

Legal Considerations for Digital Signatures on Trust Documents

While digital signatures are generally accepted for trust documents in Canada, it’s important to consider:

1. Specific provincial requirements that may affect the use of digital signatures
2. The nature of the trust and any specific legal requirements for its creation
3. The potential need for enhanced verification in cases involving vulnerable settlors or complex trusts
4. The policies of financial institutions or other parties who may interact with the trust

Case Law: In R. v. Spencer, 2014 SCC 43, the Supreme Court of Canada emphasized the importance of privacy and security in electronic communications, which can be analogously applied to the use of digital signatures in sensitive documents like trusts. By following these guidelines and best practices, trustees and legal professionals can leverage digital signature technology to streamline the trust creation process while maintaining legal validity and security. However, as with any legal matter, it’s advisable to consult with a legal professional familiar with both trust law and electronic signature regulations in your specific province to ensure full compliance.

Witness Signature Verification for Canadian Common Law Trusts

When creating a common law trust in Canada, proper signature verification is crucial to ensure the validity and enforceability of the trust document. While notarization is not legally required in most cases, having witnesses verify signatures can provide an additional layer of authenticity and may be beneficial, especially for high-value trusts or those with potential for future disputes.

Requirements for Witness Signature Verification:

1. At least two adult witnesses who are not beneficiaries of the trust should be present.
2. Witnesses must observe the settlor and trustees signing the trust document.
3. Witnesses must sign the document, attesting that they saw the settlor and trustees sign.
4. A witness verification clause should be included in the trust document.
5. Witnesses should be of sound mind and capable of understanding their role.
6. If possible, witnesses should provide photo identification, and copies should be kept with the trust records.

Sample Witness Verification Clause:

“SIGNED, SEALED AND DELIVERED by [Settlor’s Name] as Settlor in the presence of:

Witness Signature _________________________

Witness Name (Print)

Witness Address

Witness Occupation

[Settlor’s Name]

______________________ SIGNED, SEALED AND DELIVERED by [Trustee’s Name] as Trustee in the presence of:

Witness Signature __________________________

Witness Name (Print)

Witness Address

Witness Occupation

[Trustee’s Name]

WITNESS VERIFICATION:

We, the undersigned witnesses, hereby certify and attest that:

1. We are both over the age of 18 years and are not beneficiaries of this trust.
2. We were present together and did observe [Settlor’s Name] and [Trustee’s Name] sign this trust document.
3. We believe [Settlor’s Name] and [Trustee’s Name] to be of sound mind and to be acting voluntarily and without duress in signing this document.
4. We have signed our names as witnesses in the presence of [Settlor’s Name] and [Trustee’s Name] and in the presence of each other on this ____ day of _________, 20.

Witness 1 Signature ______________________________

Witness 1 Name (Print)

Witness 1 Address

Witness 1 Occupation

 

 

Witness 2 Signature ______________________________

Witness 2 Name (Print)

Witness 2 Address

Witness 2 Occupation

“This sample witness verification clause meets the requirements for common law trusts in Canada by:

1. Having two witnesses present who are not beneficiaries of the trust.
2. Requiring witnesses to observe the signing of the document by both the settlor and trustee.
3. Including a statement that the witnesses believe the signatories to be of sound mind and acting voluntarily.
4. Providing space for witness signatures, names, addresses, and occupations.
5. Stating the date of signing.

When establishing a common law trust in Canada, obtaining a Trust Identification Number (also known as a Trust Account Number) is a crucial step for tax reporting and administrative purposes. This blog post will guide you through the process of obtaining this number and discuss its relevance for opening bank accounts.

How to Obtain a Trust Identification Number

The Canada Revenue Agency (CRA) provides a straightforward process for trustees to obtain a Trust Identification Number. Here’s a step-by-step guide:

1. Prepare Required Documents:
   • Gather a completed and signed Form T3APP (Application for Trust Account Number)
   • Obtain a copy of the trust document or the last will and testament 1 2
2. Choose Application Method:
   a) Online Application (Recommended):
   • Log into one of CRA’s secure portals:
     • My Account (for individuals): canada.ca/my-cra-account
     • Represent a Client (for registered representatives): canada.ca/taxes-representatives
     • My Business Account: canada.ca/my-cra-business-account 4

1. • Use the trust account registration feature to instantly receive your trust account number 4
2. b) Mail Application:
   • Send the completed T3APP form and required documents to the appropriate tax center:
     • For trustees in Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut, Saskatchewan, Yukon, or specific areas of Ontario and Quebec, send to:
       Winnipeg Tax Centre
       66 Stapon Road
       Winnipeg MB R3C 3M2
     • For trustees in other Canadian locations, send to:
       Sudbury Tax Centre
       1050 Notre Dame Ave
       Sudbury ON P3A 5C1 4
3. Provide Trust Information:
   • Include the trust’s name, type, and language of correspondence
   • Specify the primary trustee’s contact information
   • Provide the trustee’s address and mailing address (if different) 4
4. Wait for Processing:
   • If applied online, you should receive the number instantly
   • If applied by mail, wait for the CRA to process your application and mail you the trust account number 1
5. Use the Trust Account Number:
   • Once received, include this number on all correspondence related to the trust 1

Tax Identification Number for Opening Bank Accounts

In Canada, a Tax Identification Number (TIN) is generally required for a Common Law Trust to open bank accounts. The Trust Account Number obtained from the CRA serves as the TIN for the trust.

Steps to obtain a TIN for banking purposes:

1. Follow the steps outlined above to obtain a Trust Account Number from the CRA
2. Use this Trust Account Number as the TIN when opening bank accounts for the trust

It’s important to note that while the Trust Account Number is necessary for tax reporting, individual banks may have additional requirements for opening trust accounts. These may include:

• Copies of the trust document or will
• Identification of trustees and beneficiaries
• Proof of address for the trust and trustees

Always check with the specific financial institution for their exact requirements when opening a trust account.

In conclusion, obtaining a Trust Identification Number is a straightforward process that can be done online or by mail. This number is crucial for tax reporting and typically serves as the Tax Identification Number required for opening bank accounts for the trust. Trustees should ensure they have this number before proceeding with financial transactions on behalf of the trust.

References:1

Canada Revenue Agency. (2023). T3 Trust Guide. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4013.html 2

CCH iFirm. (2024). T3APP – Application for Trust Account Number. https://support.cchifirm.ca/en/assistance/T3/2024/content/forms/t3app.htm 3

Prasad & Company LLP. (n.d.). Everything you need to know: t3 tax returns. https://www.prasadcpa.com/blog/everything-you-need-to-know-t3-tax-returns/ 4

Canada Revenue Agency. (n.d.). T3 Application for Trust Account Number. https://www.cchwebsites.com/content/pdf/tax_forms/ca/en/t3app_en.pdf 5

All About Estates. (2021). Applying for a trust account number? https://www.allaboutestates.ca/applying-for-a-trust-account-number/

Conclusion

Canadian common law trusts are a complex and nuanced area of law with a rich history and ongoing evolution. I’ve seen firsthand how trusts can be powerful tools for wealth management, asset protection, and charitable giving when properly structured and administered. The differences between common law and statutory trusts in areas such as taxation, registration, banking, and recognition highlight the need for careful consideration when choosing the appropriate trust structure for specific purposes. Recent case law continues to shape the interpretation and application of trust principles in Canada, making it essential for settlors to stay informed about legal developments.

 

For those interested in delving deeper into this topic, I recommend consulting the following resources:

1. Waters, D.W.M., Gillen, M.R., & Smith, L.D. (2021). Waters’ Law of Trusts in Canada (5th ed.). Toronto: Thomson Reuters Canada.
2. Oosterhoff, A.H., Chambers, R., & McInnes, M. (2019). Oosterhoff on Trusts: Text, Commentary and Materials (9th ed.). Toronto: Thomson Reuters Canada.
3. Ziff, B. (2018). Principles of Property Law (7th ed.). Toronto: Thomson Reuters Canada.
4. Hogg, P.W. (2016). Constitutional Law of Canada (5th ed.). Toronto: Thomson Reuters Canada.

These comprehensive texts provide in-depth analysis of Canadian trust law and its practical applications.

1  Waters, D.W.M., Gillen, M.R., & Smith, L.D. (2021). Waters’ Law of Trusts in Canada (5th ed.). Toronto: Thomson Reuters Canada.

2  Oosterhoff, A.H., Chambers, R., & McInnes, M. (2019). Oosterhoff on Trusts: Text, Commentary and Materials (9th ed.). Toronto: Thomson Reuters Canada.

3  Guerin v. The Queen, [1984] 2 SCR 335.

4  The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9.

5  Hague Conference on Private International Law. (1985). Convention on the Law Applicable to Trusts and on their recognition.      https://www.hcch.net/en/instruments/conventions/full-text/?cid=59

6  Knight v. Knight (1840) 3 Beav 148.

7  Canada Revenue Agency. (2023). T3 Trust Guide. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4013.html

8  Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). (2021). Guidance on the risk-based approach to combatting money laundering and terrorist financing.

Garron Family Trust v. The Queen, 2012 SCC

Neuman v. M.N.R., [1998] 1 SCR 770.

Vancouver Society of Immigrant and Visible Minority Women v. M.N.R., [1999] 1 SCR 10.

 

I hope that you have found value in this brief analysis, and I look forward to your thoughts here or on my Telegram chat, at https://t.me/+Sx5ptQeC4ORCc92O. If you enjoyed this content, please consider donating to support our research, by clicking on the “Donate” button to the right. Should you wish to create your own trust(s) for Estate Planning purposes, let’s discuss my Common Law Trust educational materials. Just send me an email to: debtlawyer@gmail.com and I’ll send you some information. Bless you!

 

Disclaimer

The contents of this article are provided for educational and entertainment purposes only. The information, content, and materials made available here do not constitute legal, financial, accounting, or other professional advice. The views expressed above are those of the author writing in his individual capacity only and do not reflect the views of any individuals or organizations with which they are affiliated. All liability with respect to actions taken or not taken based on the contents of this article are hereby expressly disclaimed.