The Trustee Act and Asset Protection/Creditor-Proofing Opportunities for Owners of Private Corporations

October 10, 2012 | Martin J. Rochwerg, Rahul Sharma


The unexpected death of a business owner could mean that his or her estate trustees will come to hold legal title to all, if not a controlling portion of, the issued and outstanding shares in the capital of an operating company.  On the other hand, a business owner’s estate plan may have specifically contemplated his or her shares in an operating company being held by his or her estate trustees, including for creditor-proofing purposes, and to take advantage of the two-year limitation period under the Trustee Act (Ontario).  This may be particularly relevant to the owners of businesses in certain industries, which place them at a higher risk of being the subject of actions in tort commenced by third parties.

This paper will discuss the Trustee Act’s two-year limitation period, and its judicial interpretation.  In light of the two-year limitation period, this paper will also consider why business owners, as well as other high net worth individuals who want to creditor-proof their estates to the greatest extent possible, may consider having estate assets, including shares in an operating company, held by their estate trustees after their death.

Subsection 38(3) of the Trustee Act

Estates in Ontario benefit from the protections afforded by subsection 38(3) of the Trustees Act, which provides that no action may be brought against the estate of a deceased person more than two years after the date of the deceased’s death. Unlike the Ontario Limitations Act, the two-year limitation period in subsection 38(3) of the Trustees Act imposes a strict bar to actions against an estate, and is not dependant on when an action or cause of action was discovered by a particular plaintiff or creditor.  This is clear from the language of the subsection, which provides that: “an action under this section shall not be brought after the expiration of two years from the death of the deceased.”  This is also in contrast to the Limitations Act, which provides that claims shall not be brought before the earlier of two years after the date that they were discovered, or fifteen years following the incident that gave rise to the claim.

Section 38 of the Trustee Act permits estate trustees to maintain claims or actions in tort brought by the deceased during his or her lifetime against third parties, with the exception of claims in libel or slander.  Subsection 38(2) also permits such third parties to bring actions against a deceased’s estate for any wrongs committed by him or her during his or her lifetime against their property, with the exception, once again, of claims in libel or slander.  The subsection 38(3) limitation period may therefore be particularly advantages to the owners of businesses in certain industries or sectors, which may cause them to be at a higher risk of being the subject of third party tort claims.  Such businesses may be in the transportation or energy sectors, or may otherwise be directly involved in activities that place them at risk for damaging the environment or private property owned by third parties.

More particularly in this regard, paragraph 19(1)(a) of the Limitations Act provides that the limitation periods contained in the Limitations Act (including no limitation for environmental claims) trump all other limitation periods contained in all other Ontario statutes, with the exception of those provisions listed in Schedule A to the Limitations Act. Note, however, that there may be an argument that, in providing no limitation period for environmental claims, the Limitations Act does not actually impose any limitation period at all that could be caught by paragraph 19(1)(a). Subsection 38(3) of the Trustee Act is listed in Schedule A to the Limitations Act and is therefore exempt from the application of that statute.  As such, by operation of paragraph 19(1)(a) of the Limitations Act, the ultimate two-year limitation period from the date of an individual’s death governs a plaintiff’s ability to bring an action against in tort against his or her estate.  As discussed, the doctrine of discoverability, which is a component of the section 4 limitation period in the Limitations Act, is therefore irrelevant with respect to the time limit for bringing actions against estates.

Planning Opportunities

The Court of Appeal for Ontario confirmed this view in Washkowski v. Hopkinson Estate.  The Court of Appeal held that, due to the clear language of subsection 38(3) of the Trustee Act, the discoverability principle does not apply to actions against estates, which are governed by a strict two-year time limit. The case dealt with the liability of an estate with respect to negligence on the part of the deceased that led to a motor vehicle accident.  The facts in Waskkowski are therefore not on par with a business owner’s circumstances, but the principle is nonetheless relevant and applicable in estate planning.

To the extent that dividends are regularly paid to the estate from an active business, the resulting income may be protected from liability.  If the creditors of an active business pursue their claims against the business, although the corporation’s assets may be at risk, the estate itself, and the estate trustees, in their personal capacities, are protected from liability.  Evaluating the risk and possibility of future claims and actions, and the benefits of creditor protection, may also be relevant considerations when building an estate plan and determining whether to include a spousal trust.  If such a plan is implemented, as long as sufficient powers and discretion are provided to the estate trustees to lend funds to third parties, including individuals and corporations, the trustees may loan funds paid to the estate by way of dividend from an active business corporation back to the corporation and secure such loan with a general security agreement (“GSA”).  The GSA may, in turn, be registered at the personal property registry, providing enhanced creditor protection to the business and to the estate.


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