Civil Section Minutes 2007

Forms of Business Associations Income Trusts

Uniform Act and Commentaries

Presenter: Wayne D. Gray (Ontario Bar Association), McMillan Binch LLP

At the 2005 meeting of the ULCC, a Report on Forms of Business Associations in Canada was delivered, and a Working Group was struck. In 2006, Mr. Gray, as Chairperson of the Working Group, provided a Report to the ULCC which included an overview of the income trust. The 2006 Report made 40 recommendations and concluded by reiterating that legislation dealing with income trusts must be sensitive to the distinctive tax treatment that led to the rise of income trusts. At the 2006 meeting, the Conference resolved:

1. That a Working Group be established to consider the relation of the recommendations in the report and directions of the Conference to Quebec law, and that this Working Group report its conclusions and recommendations to the Drafting Group described below as soon as possible, but no later than December 31, 2006; and

2. that a Drafting Group be established to prepare a Uniform Act and Commentaries based on the recommendations in the Report and in accordance with the directions of the Conference, including any recommendations received from the Working Group described above, for consideration at the 2007 meeting.

Mr. Gray presented the proposed Uniform Income Trusts Act to the Conference. He noted that the recommendations from the 2006 Working Group Report are incorporated throughout the proposed Uniform Act for ease of reference. Mr. Gray also noted that 36 of the 40 recommendations are reflected in the draft. One recommendation – Recommendation No. 5 (Statutory Purpose) – was dropped. It had been modelled after a provision in the Canada Business Corporations Act, but is not common practice in Uniform Acts and raised some concerns in the Drafting Group. Mr. Gray then provided an overview of the provisions of the proposed Uniform Act and invited discussion and questions.

In Part 1 (Interpretation and Application), section 4 (Trust, mutual funds, not legal persons) was highlighted as a crucial provision, linked to Recommendation No. 6. For tax purposes, it is very important that an income trust not be a legal person. Part 2 – Unit Holder Immunity – incorporates Recommendations 7 and 8 of the 2006 Report. It was noted that section 9 of the proposed Uniform Act makes these immunity provisions retroactive.

With respect to Part 3 (Unit Holder Rights and Remedies), Mr. Gray indicated that the underlying philosophy was to strike a balance between all the affected parties (investors, unit holders, trustees, managers of the trust and creditors). It was noted that sections 22 and 23 establish an optional “oppression remedy” for unit holders – the remedy is not available unless the trust instrument “opts in”. If a trust instrument opts in, the proposed Uniform Act provides certainty for unit holders as to the scope of the remedy. Alternatively, jurisdictions may wish to make the remedy available to unit holders with respect to all income trusts, regardless of whether a particular trust instrument opts in. Mr. Gray also noted that the Canadian Coalition for Good Governance has taken the position, in the context of pension funds, that such remedies should be mandatory.

Discussion:

A question was raised respecting the registration of income trusts. Mr. Gray responded by noting that Recommendation No. 38 of the 2006 Report recommended that there be no registration requirement because:

1. This looks too much like a corporation, and also noted that registration is usually an act of creation, which would not be the case here.

2. As this is not currently done, a new bureaucracy would have to be created.

3. In terms of registration providing an “information source” for the public, he noted that registry type information exists in a more robust form on SEDAR (System for Electronic Disclosure and Recovery), operated by the Canadian Securities Administrators.

It was pointed out that the Canadian Association of Corporate Law Administrators are concerned that appropriate consideration be given to the matter of whether, in the uniform legislation, income trusts should be required to “register” with corporate registries. Their concern stems from the fact that the public tends to approach corporate registries to obtain information on business organizations, presumably including income trusts. They were aware that Securities Commissions would have some information on these trusts, but did not know if this would be an adequate substitute for the information being available through a corporate registry. This issue was discussed at some length, and Mr. Gray noted that a unit holder would have access to more information under SEDAR.

In the discussion respecting Part 4 (Powers and Duties of Trusties) it was noted that some concerns with subsection 32(2) of the proposed Uniform Act – “the trustees of a trust may, but are not obliged to comply with a direction of the unit holders of a trust”. Mr. Gray noted that there was some discussion on this point in the Working Group, and that it grandfathers trusts that currently have “veto powers”. With respect to new trusts, one would have to look at the trust instrument, as most, if not all, address how to deal with matters such as disposition of assets, etc. As such agreements are not uniform, it would be very difficult to draft for this. It was also noted that there was also concern that this would attract unit holder liability. The remedy would seem to be that the unit holders can vote the trustees out. Mr. Gray pointed to section 35 as important – no provision in a contract, trust instrument or resolution relieves a trustee from the duty to act in accordance with the Act or regulations – and noted that this is a change from the current situation. Also important is section 42 (unsecured creditors), as it solves a major problem by clarifying that an unsecured creditor may be able to look to trust assets to satisfy the debt. Part 5 (Arrangements and Compulsory Acquisitions) and 6 (General) were also discussed.

There was a question about why certain remedies were optional. From the trustee and “entity” point of view, the legislation seems designed to make the entity as much like a corporation as possible except for tax purposes. However, unit holder rights did not seem to “track” the benefits that shareholders enjoy in this same way. In response, Mr. Gray noted that the unit holder would not have any these rights today and that investors know this going into a unit trust arrangement. The Working Group did consider this issue, but on balance the general consensus was that it is more empowering for unit holders to decide for themselves on appropriate remedies.

It was finally noted that the proposed Uniform Act, as drafted, does not follow the usual ULCC approach to respect to commentaries. Clark Dalton, Q.C. (ULCC) will work with Mr. Gray and the drafter to develop the recommendations which appear throughout the proposed Uniform Act into commentaries.

RESOLVED:

THAT the draft Uniform Income Trusts Act and commentaries be circulated to the jurisdictional representatives. Unless two or more objections are received by the Executive Director of the Conference by a date to be determined by the Steering Committee, but no later than November 30, 2007, the draft Act should be taken as adopted as a Uniform Act and recommended to the jurisdictions for enactment.

Next Annual Meeting

2017 Conference

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August 13 - 17, 2017
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