Ademption: Beware the Potential Failure of Gifts

Spring 2011 | Michael W. Kerr, Kelly A. Charlebois

Introduction

Professionals involved in the preparation of Wills should be made aware of the potential consequences of the doctrine of ademption. Put simply, the doctrine provides that you cannot bequeath what you do not own.  For example, if a testator’s Will gives the family cottage to his son, but the cottage is sold prior to the testator’s death, there is no cottage to give to the son and the gift fails.  Although the result may seem harsh, it is logical.

The doctrine has, however, been expanded tomore technical levels that many testators would not expect, especially where a testator’s assets are held by corporations.

Using the previous example, if the testator owns a holding company which owns the cottage, a gift by Will of the cottage to his son will also fail.  This is because the testator does not own the cottage directly; he owns the shares of a corporation, which, in turn, owns the cottage.  The same rule applies to holding companies that own operating companies.

The ademption doctrine has long been the law of the United Kingdom and throughout Canada.  Recent cases in British Columbia, Alberta and Saskatchewan have applied the doctrine of ademption in the case of personal holding companies that owned the underlying assets purportedly bequeathed by the testator, thereby causing the gifts to fail.

In Ontario, there is some indication that Courts are unwilling to be so rigid.  In the recent case of Re Kaptyn Estate (2010), 102 O.R.(3d)1, the testator owned three commercial malls and a vacation property through corporations that directly or indirectly owned the properties.  Justice Brown found that, notwithstanding the bequest in the Will was of the properties and not the shares, Mr. Kaptyn’s intention was clear. Justice Brown determined that the language of the Will could be rectified to permit the transfer of the properties to the named beneficiaries.

In spite of this decision, the law of ademption remains a landmine for the unwary. Given the increasing prevalence of using corporate structures as a means of reducing probate fees and generally organizing one’s affairs, it is important to take the necessary steps to guard against its consequences.  It is prudent practice to:

  1. Update a Will if a significant asset that is the subject of a legacy has been sold or replaced;
  2. Prepare a corporate chart for the lawyer drafting the Will with the assistance of the corporate lawyer and accountant to ensure that the corporate structure is understood and properly described;
  3. Ensure that proper language is used to gift any asset that is not owned directly by the person making the Will.  In the cottage example, the testator’s Will should provide that the cottage which is owned by XYZ Limited be transferred by the corporation to the son and that the Estate Trustees shall, to the extent possible, cause all necessary corporate resolutions to be passed as officers and directors of XYZ Limited to transfer the cottage to the son.  If the cottage is the only asset in the corporation, the shares of the corporation could be the subject of the gift. Discretion with respect to the method of transfer should be given to the Estate Trustees in order to allow the cottage to be transferred in a tax-effective manner.

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