Residence held in trust can be included in division of property at separation in Quebec: SCC

Although trustees did not own property, their control over it gave them “rights which confer use,” in the family patrimony majority found

Residence held in trust can be included in division of property at separation in Quebec: SCC
The decision reflects a trend toward a wider interpretation of family laws to include trusts, says Stewart Litvack

A family residence held in a trust that was not owned by either spouse can be included in the family patrimony for division on spousal separation in Quebec, the Supreme Court of Canada ruled today in a 5/2 decision.

In Yared v. Karam, the majority of the Supreme Court found that although neither spouse in the case owned the family home, the husband, who had co-established the trust which purchased the house, had “rights which confer use” to it. Although the trustees do not own the property in the trust, the control they have over it may give them “rights which confer use”; in this case, the court found that the husband had control over the family home, including the ability to decide who could use the home and who had a right to its value.

The family home was therefore included in the family patrimony, under which regime property is divided equally between spouses on dissolution of marriage.

Although the Supreme Court was cautious to limit the lion’s share of its analysis to trusts and what is constituted in the Quebec Civil Code, the decision “reflects a trend toward a wider interpretation of family laws and patrimonial laws to include trust properties,” says Stewart Litvack, a partner at Robinson Sheppard Shapiro LLP in Montreal and counsel for the appellants.

This is especially so when it relates to patrimonial rights between spouses, he adds.

“Courts are [increasingly] putting family patrimonial rules above trust rules, they’re widening their interpretation of family rules, and limiting their protection of trusts, particularly in that context.”

Although it may be more difficult to include trust property in the family patrimony in Quebec because of the way the civil code is structured, compared to common law jurisdictions, says Litvack, “I think that this Supreme Court judgement … generally reflects the attitude that courts … are taking toward these questions, where they’re giving a more liberal interpretation to patrimonial rights between spouses, and giving less weight to protections offered by the trust between those spouses.”

The decision also “relieves a very difficult burden that would be imposed on financially vulnerable spouses, in specific, to have to prove intention, when the property was acquired or when the trust was made, which could be very difficult burden of proof to make,” he says.

Finally, the judgement “creates an expectation that the family residence will be shared, and that the benefits of a trust won’t extend to protecting a family residence from your spouse, essentially.”

The respondent, Roger Karam, and the late Taky Yared were married in Lebanon in 1998 and had four children. They immigrated to Montreal in 2011, where a family trust was constituted. Karam was named as co-trustee of the trust along with his mother, and as sole electeur of the trust.

In 2012 the family trust purchased a property that would serve as the family residence. Yared left the residence in 2014 and filed for divorce from Karam; she died in 2015 before the divorce could be finalized. Her will appointed her two brothers as liquidators of her estate, which was bequeathed to her four children in equal parts.

Karam demanded the will’s annulment, and Yared’s brothers then served an application for a declaratory judgment to have the family residence declared as part of the family patrimony, which denied by the Court of Appeal of Quebec.

In allowing the appeal, the Supreme Court reaffirmed the notion of public order, and “made it clear that public order provisions don’t relate to intention or supersede contractual rights,” particularly pertaining to family patrimony, says Litvack.

Article 317 of Quebec’s civil code says that a legal person – in this case, a trust – cannot be used to hide fraud, abuse of law or the contravention of a rule of public order; in other words, to hide behind a “corporate veil.” Neither the Quebec Court of Appeal nor the Supreme Court found that applying this analogy was appropriate to this case.

Article 415 of the Civil Code defines family patrimony as including “the residences of the family or the rights which confer use of them.”

“Although I would not rely on art. 317 C.C.Q. by analogy, in my view the ‘rights which confer use’ of the family residence at art. 415 C.C.Q. provided a sound basis for [the trial judge] to declare that the value of the residence ought to be included in the family patrimony,” wrote Justice Malcolm Rowe for the majority, with Chief Justice Richard Wagner and Justices Rosalie Abella, Russell Brown and Sheilah Martin concurring.

“Absent an overriding and palpable error in [the trial judge’s] determination that Mr. Karam held ‘rights which confer use’ within the meaning of art. 415 C.C.Q., it was not open to the Court of Appeal to overturn this decision on appeal,” Justice Rowe continued. “I would therefore set aside the decision of the Court of Appeal and reinstate the declaratory relief granted by the trial judge.”

In dissenting reasons Justice Suzanne Côté, also writing for Justice Andromache Karakatsanis, found that, since it was clear there was no intention to evade the family patrimony rules in creating the trust, as a result the parties should have been entitled to structure their affairs as they saw fit. They disagreed that the respondent “held rights which conferred use of the Residence pursuant to art. 415 C.C.Q.

“While it is important to keep in mind that the family patrimony provisions are intended to protect economically disadvantaged spouses, courts must not overlook the fact that spouses are free to acquire and dispose of property as they wish,” Justice Côté wrote, “even if this means that they do not acquire property falling within the family patrimony.”

In addition to confirming the respondent’s position on the  “corporate veil,” today’s decision “also confirms that a trust could not be set aside as it was presented by the first judge and the appellants, confirming the stability of trusts in Quebec for the future as a separate patrimony,” Antoine Aylwin, a partner at Fasken Martineau DuMoulin LLP in Montreal and counsel for the respondent told Canadian Lawyer in an email.

The decision “also gives an interpretation of 1294 CCQ that would open the possibility to vary a trust in order to compensate for a claim under the family patrimony in order to avoid … a spouse [being] forced to compensate out of [their] own assets a value that would be held by a Trust,” Aylwin said.

“This decision will certainly have an impact on the drafting of trusts in the future in order to have a more thorough reflection on the rights conferred to spouse within a trust.”

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