Know the Law When Structuring – and Accepting – Gifts
A recent Ontario Court of Appeal case illustrates the treatment of gifts for family law purposes, and highlights the importance of getting competent legal advice when structuring gifts by way of estate freezes and other complex legal mechanisms.
The decision in McNamee v. McNamee involved a husband named Clayton and a wife named Connie. They separated in 2007, after being married for almost 20 years in what was an equal partnership in all respects. They had two children. Clayton worked for his father’s very successful concrete trucking company as head of a construction division.
The issue for the court was whether 500 shares in the trucking company that Clayton received from his father were properly considered a “gift” – and therefore exempt from being included in his Net Family Property (NFP) upon separation from Connie, in accordance with Ontario family law. The shares were worth more than $400,000.
The father’s share transfer had been accomplished in a complicated and unusual manner using an estate freeze, and was done reluctantly on the advice of his accountant and lawyer. Its main purpose was to protect his business from creditors and to limit the tax impact upon his death. It involved folding the business into a holding company, fixing its value, accruing that value back to himself, using a second holding company, then undertaking a series of share transfers. The end result was that Clayton and his brother were each directly transferred 500 shares of their father’s trucking company, but the father expressly retained control (by retaining voting shares and the discretion to take unlimited dividends, both of which are unusual features in an estate freeze).
The father also signed a Declaration of Gift for the purposes of documenting the transaction. However – unbeknownst to Clayton – the father intended the shares to be excluded under Ontario family law from both of his sons’ NFPs, in the event either of them separated from their spouses. The Declaration of Gift therefore specified that the shares (and any increase in their value or income) were expressly excluded from NFPs, and that they were to remain the sons’ separate property, free from either of their wives’ control.
Needless to say, when Clayton and Connie separated, the treatment of $400,000 in shares became an issue, and Connie ended up taking the matter to court. She disputed Clayton’s position that the shares should be excluded from his NFP as a “gift” after marriage, like his father intended. The trial judge found in Connie’s favour, included them in Clayton’s NFP, and awarded Connie half their value upon equalization.
Clayton appealed that decision to the Ontario Court of Appeal. He was successful in having a new trial ordered on the specific question of whether a constructive trust was in existence (since this issue was not dealt with at trial in light of the trial judge’s findings on the NFP exemption question).
The Court of Appeal began its analysis by observing:
The trial judge found as a fact that “[if] Clayton and Connie had been asked as to their intention with regard to the shares [prior to separation], they both would have readily confirmed their intention to share in that benefit equally.” This finding is supported in the evidence. The legal effect of the transfer of the shares in the marital breakdown context is not that simple, however.
In this case, Clayton had clearly received these shares as a “gift: from his father; the trial judge had erred in finding otherwise. Although “gift” is not defined by the Family Law Act, it consists of a voluntary transfer of property without consideration, and is a gratuitous, unilateral transaction. Here, all the necessary legal elements were present, specifically:
1) an intent by the father to make a gift to Clayton, without expecting remuneration in exchange;
2) acceptance of the gift by Clayton; and
3) a sufficient act of delivery or transfer to complete the transaction.
The signed Declaration of Gift was further proof of the father’s intentions.
The Court of Appeal also pointed out that the trial judge was wrong in concluding that this could not be a “gift” because the father’s intention was not inspired by affection, respect or charity. That was not the correct test. Also, the mere fact that Clayton did not know that conditions were attached to the gift did not serve to invalidate the effectiveness of it. There is a distinction between the father’s “motives” and his “intent”: Simply put, the father’s intent was to give Clayton a gift, and Clayton was aware of the gift and had accepted it.
In the end, the Court of Appeal sent the matter back for trial on the issue of whether a constructive trust existed over these shares; unless Connie could show that she had a beneficial interest in them at trial, they would be excluded from Clayton’s NFP.
Russell Alexander, Family Lawyers focus exclusively on family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit www.RussellAlexander.com.
For the full text of the decision, see:
McNamee v. McNamee, 2011 ONCA 533 (CanLII)