This blog has been written by Darren Lund, Partner at Fasken LLP

In Lang-Newlands v. Newlands, 2024 ONSC 6285, the Ontario Superior Court of Justice revisited the treatment of a discretionary family trust in the context of the equalization of net family property under the Ontario Family Law Act.

Barbara Lang-Newlands (“Barb”) and Ian Newlands (“Ian”) were married on August 21, 1987 and separated on July 31, 2019. There were four children of their marriage, all of whom were adults at the time of separation.

Barb’s father, Gordon Lang (“Gordon”), built a successful family business and had already turned his mind to succession planning for the business before Barb married. In 1977, Gordon had engaged in an estate freeze transaction. As part of the 1977 freeze, Gordon settled a discretionary family trust for each of his four children and their issue. The family trust for the benefit of Barb and her issue was known as the “BJL Trust” and it held 90 common shares of a family holding company (“1977 Common Shares”). The BJL Trust existed at the time of Barb’s marriage, such that value of Barb’s interest in the BJL Trust formed part of her date of marriage net worth.

In 1993, Gordon had a health scare and determined to wind-up the trusts he had settled as part of the 1977 freeze. The BJL Trust distributed all of the 1977 Common Shares to Barb, who accordingly became a direct shareholder.

Following a further health scare in 2000, Gordon once again turned his mind to estate planning and business succession matters. Gordon engaged in a further estate freeze of the common shares he held in a family holding company. A few months later, in 2001, Barb implemented a transaction to freeze the value of the 1977 Common Shares she had received when the BJL Trust was distributed.[1] A new holding company known as “4MK” was incorporated and Barb exchanged her 1997 Common Shares for preference shares of 4MK with a fixed value of $24.48 million. Gordon settled a new discretionary trust for the benefit of Barb and her issue known as the “NFT Trust”. Subsequently, the NFT Trust used funds Gordon had gifted to the NFT Trust to subscribe for new common shares of 4MK. The NFT Trust existed at the date of separation.

At trial, Barb argued that her entire interest in the NFT Trust is excluded property, being a gift received from a third party during the marriage. Specifically, Barb argued that the estate freeze consisted of two steps. In the first step, she sold her 1977 Common Shares to 4MK in exchange for the fixed-value preference shares representing the current fair market value of her 1977 Common Shares. In the second and separate step, Gordon settled the NFT Trust by way of a gift of $100, which was then used to subscribed for new common shares of 4MK. The gift to Barb was her beneficial interest in the NFT, which arose at the time of settlement, and that gift was made by Gordon. This is an argument most trust lawyers would agree with.

The court agreed that Barb’s interest in the NFT Trust was excluded property for purposes of equalization, but there are some winkles. Sharma J. concluded that a prior Ontario Court of Appeal decision, Shinder v Shinder, 2018 ONCA 717, was binding and excluded Barb’s interest in the NFT Trust solely on that basis. The Shinder case had a similar set of facts to Newlands; a spouse owned shares on the date of marriage which were subsequently frozen by that spouse during the course of the marriage as part of an estate freeze undertaken by the spouse’s parent. Despite some reservations about the reasoning, Sharma J. concluded that comments made by the Court of Appeal in Shinder that excluded the spouse’s interest in the family trust as a gift received from a third party during marriage were not obiter and thus he was bound to follow it.

Here is the wrinkle that will be of keen interest to trust lawyers who advise on estate freezes. In Newlands, Sharma J. provided an alternate analysis of Barb’s interest in the NFT Trust in the event that Shinder is not binding. In that analysis, Sharma J. concludes that Barb’s interest in the NFT Trust is not excluded property because it was Barb, not Gordon, who made a “gratuitous act.” In essence, Sharma J. did not give effect to the form of the transaction, rejecting Barb’s “two-step” argument, and concluded that Barb had gifted the future growth in the 1977 Common Shares to the NFT Trust through the freeze, as opposed to the NFT Trust having acquired the future growth by subscribing for new common shares using property gifted to the NFT Trust by Gordon. The Court was concerned that, if Barb’s interest in the NFT Trust is excluded property, she would have excluded the growth in value from the date of the freeze of a date of marriage asset for which she had received a date of marriage deduction.

It is helpful that early in the reasons in Newlands the Court acknowledges the long-standing Canada Revenue Agency positions which have “blessed” estate freezes if specific requirements are met, giving effect to the form of the transaction. Nevertheless, the Newlands case is under appeal, and trust and tax lawyers will be keenly interested to see if the Court of Appeal follows Shinder (i.e. Gordon made the gift), or adopts the alternate reasoning which found that Barb, the freezor, made the gift to the NFT Trust. Of course, trust and tax lawyers will be quick to note that family law is a very different context than trust and tax law, and has different objectives and priorities. On that basis, the argument goes, even if the alternate gift analysis is adopted, it should not be applied outside the context of equalization.

The Newlands decision is an important reminder for estate practitioners that family law considerations are an integral aspect of estate planning and wealth preservation, in particular where there is intergenerational wealth. It would have been prudent for Gordon’s children to enter into marriage contracts to exclude any interests in family trusts not settled by the children. Barb may yet be exposed to a large equalization payment depending on the outcome of the appeal.

Finally, the reasons in Newlands are worth reading for a number of other reasons. There are interesting and helpful discussions on whether an interest in a trust is property for family law purposes, the valuation of an interest in a discretionary trust, the impact of a shareholder agreement on the analysis, and more. Those are, however, beyond the scope of this blog.

Stay tuned for the appeal!

[1]      At the time of Barb’s 2001 estate freeze, the original 1977 Common Shares were actually represented by common shares in a different holding company as a result of intervening reorganizations. However, they are traceable to the original 1977 Common Shares and so I have used the same defined term, the point being the shares that were frozen by Barb were traceable to the BJL Trust, which was a property interest Barb owned on the date of marriage.