The Supreme Court of Canada rendered a groundbreaking family law decision that will have an impact far beyond family law. The decision involved a residence purchased by a trust and whether the value of the residence should be included in Quebec’s family patrimony regime, which is a remedial set of family law rules that aim to foster economic equality between spouses with respect to certain properties more fully described in article 415 of the Civil Code of Québec (the “CCQ”).
Following tragic news in 2011 that Ms. Yared was suffering from incurable cancer, she and her husband Mr. Karam moved to Montréal. In light of this news, Mr. Karam decided to establish a trust to protect the family’s assets for the benefit of Ms. Yared and the couples four children who were the beneficiaries of the trust although Mr. Karam could add himself as a beneficiary pursuant to the exercise of a special power of appointment that he held as trustee. The trustees are Mr. Karam and his mother. Both spouses contributed assets to the trust, which were used to acquire a residence on Doctor-Penfield Avenue in Montréal for the sum of $2,250,000. The family moved into the residence in 2012.
In 2014, Ms. Yared moved out of the residence and started divorce proceedings, which were not completed prior to her death in 2015. Litigation followed between the liquidators of Ms. Yared’s estate and Mr. Karam over the inclusion of the value of the residence in the family patrimony regime. If it were not included, Ms. Yared’s estate would have little value.
Article 415 CCQ includes both the ownership of family residences as well the “rights which confer use” of such residences. The issue before the Supreme Court was how the words “rights which confer use” in article 415 CCQ applied in the context of a discretionary family trust that purchased a family residence. The previous decisions of the Quebec courts involving the family patrimony and trusts related to residences that were owned by the spouses and that were subsequently transferred to a trust.
In the first instance, the Superior Court of Québec applied by analogy the concept of “lifting the trust veil” from corporate law as well as the “rights which confer use” found in article 415 CCQ to conclude that the value of the residence was indeed part of the family patrimony. The Court of Appeal allowed the appeal.
At the Supreme Court of Canada, Rowe J., a common law judge who wrote the decision for the majority, granted the appeal and affirmed the decision in the first instance. The majority rejected the analogy to the corporate concept of “lifting the veil” given that the relevant family law provisions of the CCQ provided an adequate answer to the question before the court.
The majority recognized that under the CCQ, none of the settlor, trustee and beneficiary have ownership rights (rights in rem) in trust property but determined that what may or may not constitute a “right which confers use” in article 415 CCQ is dependent on the relation to the level of control exercised by either spouse with respect to the residence. They also held that the intention of the parties in creating the trust was irrelevant except to determine that the residence was used by the family. In the context of a trust, Rowe J. stated that if a spouse has the right to control the entitlement to the value of the assets as well as the right to control who may benefit from the use of the property then the value of the residence should be included in the family patrimony.
Rowe J. found that Mr. Karam had sufficient control over the trust given that he was a trustee and given his power of appointment to name beneficiaries (including himself), the power to remove a beneficiary and the power to determine how the income and capital of the trust would be distributed. Thus, Mr. Karam held the rights which confer use, therefore the value of the residence was to be included in the family patrimony as belonging to him.
Mme Justice Côté, a civil law judge, writing for the minority, held that the appeal should be dismissed. She recognized that while the family patrimony is of public order it does not oblige spouses to purchase family patrimony property. Just as parties are free to rent a residence, they are free to arrange their affairs in any other manner so long as they do not act with the intention of defeating the family patrimony. The uncontested evidence was that Mr. Karam settled the trust to protect his wife and children, not to defeat the family patrimony.
Unlike the majority, Côté J. characterized Mr. Karam’s ability to determine who was a beneficiary and what they could get from the trust as a trustee power subject to fiduciary duties and not rights within the meaning of article 415 CCQ. Instead, only rights as a beneficiary or rights pursuant to an agreement to use trust property are “rights which confer use” in the context of article 415 CCQ. According to Côté J., if the residence were to be included in the family patrimony, it would be included equally between Ms. Yared and Mr. Karam pursuant to a tacit right between them and the trustees or in the hands of Ms. Yared as she was a beneficiary while Mr. Yared was not.
Unfortunately, the saga for this family has not ended as many vexatious questions remain, such as how Ms. Yared’s succession is to satisfy the receivable now forming part of the succession and the fairness of the result to Mr. Karam as he has no right to the trust assets to satisfy the claim unless he were to exercise his power to appoint himself a beneficiary, which would no doubt be subject to attack. Thus, the children could receive effectively 150% of the value of the residence, to which they would not have been entitled if the residence had been owned by Mr. Yared. This is due to the fact that they are the sole heirs of Ms Yared’s succession which has a claim under the family patrimony against Mr. Karam (50%) and as they are the sole beneficiaries of the trust that owns the residence (100%).
The majority’s judgment also leaves open the question as to at which point the powers of a trustee-spouse can be diluted so as to no longer qualify as a “right which confers use.” The majority’s focus on trustee powers rather than rights of a beneficiary will no doubt lead to prospective asset protection purposes in an attempt to avoid the application of the family patrimony and other matrimonial rights.