Michael Ford (post until Oct. 31/18)
Estates & Wills & Trusts

Simplifying succession – should Ontario abolish the Perpetuities Act?

By Matthias Duensing

One of the oldest and most complex issues that arise when advising clients on succession planning is how to manage what is known as the “rule against perpetuities.”

The Alberta Law Reform Institute recently released its recommendation to strike down Alberta’s Perpetuities Act.  Currently, Saskatchewan, Manitoba and Nova Scotia have each removed statutes governing the rule against perpetuities. 

What is the rule against perpetuities?

Imagine 17th century England. You are an aristocrat on his deathbed, fearful that your descendants may destroy the dynasty that you have created. You instruct your trusted solicitor to draw up your will to include your children, grandchildren, all the way to your great-great-great-grandchildren, thereby tying up your money and property for generations, for what you think is for the benefit of your family. 

The law abhors uncertainty. And government abhors anything that restricts the economy (and its tax collection). 

To prevent landowners from tying up assets (specifically land) for generations, the English courts devised the idea of the common law “rule against perpetuities,” which provided that if there is any uncertainty at the date of the creation of the interest as to whether it will vest within life plus 21 years, then it is void.  

In the scenario above, for example, at the time the will is created, you don’t even know whether you will have great-great-great-grandchildren (and very possibly even great-grandchildren). This divestiture becomes void, and under English common law, cannot and will not be permitted to occur. 

How does Ontario handle the rule against perpetuities?

Over time, the common law rules governing the rule against perpetuities became unwieldy and complex. Nonetheless, Canadian provinces and territories (excluding Quebec) each originally adopted the English rule, with surprising variance between jurisdictions.

Newfoundland and New Brunswick each adhere to the original common law rule, as does Prince Edward Island with an increase from 21 years to 60 years as its perpetuity period. 

The remaining jurisdictions, including Ontario, made heavy changes to the original common law rules, for the most part, to try and save a disposition. The most relevant change was to adopt a “wait and see” approach to the rule. Now, instead of deciding whether there’s any uncertainty at the time of creating the will, the rule waits until the expiry of the 21-year period to decide whether the proposed disposition violates the rule against perpetuities.

One step further — abolishing the rule?

The rules governing perpetuities are immensely intricate, complex and difficult to understand and apply, to the point where lawyers have been excused for inadvertently drafting clauses that violate the rule. 

The original impetus for trying to limit aristocratic empire building is arguably largely obsolete. If a family wishes to do so, should the courts interfere? Further, if there is true uncertainty, the Alberta Law Reform Institute notes that the courts have powers to vary terms of trusts, if necessary. And for the few families who have the means, they already have access to creative ways to ensure their family legacy, such as using Dynasty Trusts, which are permissible in many states in the U.S. and some Caribbean jurisdictions, as a type of trust which allows for the avoidance of generational transfer taxes. 

In Canada, provincial trust laws and federal tax laws already help to deter the creation of endless trusts. The deemed disposition rule requires that capital gains tax be paid on the eligible assets of a trust every 21 years (the eligible assets are deemed to be disposed of every 21 years). This is a very expensive deterrent and addresses the other original concern that led to the creation of the rule against perpetuities — the need for the alienation of assets, market liquidity and government taxes.

As previously noted, Saskatchewan, Manitoba and Nova Scotia ultimately chose to abolish their statutes governing the rule against perpetuities and now Alberta is considering a move in that direction.   

Maybe it’s time for Ontario to do the same — a move that can potentially simplify will drafting and provide you with peace of mind for your descendants, your legacy.


To Read More Matthias Duensing Posts Click Here
Lawyer Directory
BridgePoint Financial Services (post to 5.31.19)Toronto Lawyers Association (post to 6.30.19)MKD International (post until Sept. 30/18)Feldstein Family Law (post until May 31/19)Legal Print & Copy Inc.Larson Lawyers Grey Wowk Spencer LLPGelman & Associates