This is a three-part blog series that seeks to explore the manner in which one can conduct estate planning with respect to their copy of the popular 2020 Nintendo Switch video game Animal Crossing: New Horizons. Part I discussed the importance of this topic and described the applicability of a non-charitable purpose trust to this type of estate planning. Part II examines the practical considerations for operating a non-charitable purpose trust for this purpose. Part III will explore the duties and powers that the trustees of such a trust would have, as well as how to enforce their obligations.

For greater certainty, the principles discussed in this blog post, while focusing on Ontario and Canadian law, are based on common law principles. Many other common law jurisdictions (such as the United States and the United Kingdom) share similar principles.

Note also that the provisions here are generally applicable to one’s copy of any entry in the Animal Crossing franchise.

…And We’re Back!

Welcome to the second entry in this three-part blog series about estate planning for supporting the villagers and island in one’s copy of Animal Crossing: New Horizons for the Nintendo Switch. In the last blog entry, we established that a non-charitable purpose trust would be the best way to go about this, as the villagers/island could not themselves be beneficiaries of a trust.

A Trust Requires, Well, Trust

Since we’re discussing this in the context of estate planning, it is important to note that one would specifically have to direct for such a trust to be created in their will. If one were to do this, then, unless they provide instructions stating otherwise, the executors and trustees of their will would be the trustees of such a trust.

But what do all of these terms mean? Keep in mind there is a difference between an executor of an estate and a trustee under the will. The executor (also sometimes referred to as a “personal representative” or an “administrator”) is essentially the person who “executes” the directions under the will and administrates the estate, and is responsible for doing things like taking an inventory of the testator’s (in other words, the deceased willmaker’s) assets, paying estate debts, etc. Under the common law, when a person dies, their property automatically vests in the executor (and this is codified in certain statutes, such as subsection 2(1) of Ontario’s Estate Administration Act).

A trustee, on the other hand, is not necessarily responsible for the whole estate, but just one or more trusts created by the will. The executor passes the trust property for such trust(s) from the estate to the trustees. The trustees are responsible for administering the trust(s) for the benefit of the beneficiaries in accordance with the terms in the will.

Usually, the executor and trustee are the same person, and they are often the trustee of all trusts created under the will. People often appoint family members or close friends to these roles. As its moniker suggests, a trustee should be an individual whom the testator trusts. If such trustworthy family or friends aren’t available, then it may be prudent to instead appoint a trust company, which is an entity that has experience in estate and trust administration and will conduct such administration for a fee.

Lastly, note that there is no limit to the number of executors that one can appoint under their will, nor is there a limit for the number of trustees of a particular trust. However, having too many executors and trustees can needlessly complicate estate administration.

Administration in the Real World vs. Administration in the Virtual World

Now that that’s out of the way, for a non-charitable purpose trust in this context, it would be important for a testator to ensure that someone involved with the administration of the trust is familiar with Animal Crossing: New Horizons, and can play the game on a regular or semi-regular basis to give villagers gifts, maintain the island, keep on top of any updates to the game, and perform any similar tasks the testator would’ve performed had they still been alive.

It may very well be possible that you don’t have a friend, family member or other trusted person whom you could appoint as a trustee and would also be familiar with the game, and thus it may not be effective for them to play the game on a regular basis (assuming, of course, that no one has yet established an Animal Crossing trust company). If that is the case, then you may wish to, in your will, give your trustees the power to hire an agent on their behalf.

An agent is essentially someone’s “representative”, and their job is carry out instructions and/or make decisions for a person upon that person’s direction. Thus, if the trustees aren’t familiar with how to play Animal Crossing: New Horizons, they can hire an agent who is familiar with the game to play it for them, and thus can carry out the purpose of the trust in that way. Furthermore, thanks to the magic of the internet, it could even be the case where the trustees can use the Nintendo Switch Online service to invite a player from anywhere in the world to the island, and that player could go on to take actions that would improve the quality of (digital) life for the villagers and the island. In that way, the “agent” would not need to have physical access, or be in close proximity to, the testator’s copy of the game.

This wouldn’t, however, put the trustees out of a job. The trustees would still need to make arrangements for hiring a responsible agent, and pay that agent from the trust property (discussed below). Thus, the trustees would be responsible for the “real world” administration of the game, while the agent could fulfill all of the “virtual world” duties that necessitated the existence of the trust in the first place.

Trust Property: Bells Included?

As suggested above, a trust has to have property that is administered for the benefit of the beneficiaries (or in this case, to carry out the non-charitable purpose). Whether the trust is inter vivos (made by the settlor while they are alive) or testamentary (made by the settlor after they’ve died; usually through a will), the trust property needs to be sufficiently identified so that the trustees can properly administer it.

In a non-charitable purpose trust for the purpose of maintaining one’s villagers and island in their copy of Animal Crossing: New Horizons, the trust property would likely consist of the following:

• a copy of the Animal Crossing: New Horizons game;[1]
• a Nintendo Switch;
• accessories to a Nintendo Switch (controllers, charging stations etc.); and
• sufficient funds (money) for the trustees to use in any one or more of the following circumstances:
  • replacing the Nintendo Switch;
  • renewing yearly subscriptions for Nintendo Switch online;
  • hiring agents to play the game;
  • compensating the trustees for their efforts; and
  • covering any other expenditures.

It is at this point that we should ask: when we’re talking about money, are we also talking about Bells? For those of you who don’t know, Bells are the in-game currency used in the Animal Crossing franchise. Could they be considered as trust property separate from the copy of the game itself?

One might argue that they could: after all, a simple search on eBay reveals numerous sellers trying to sell Bells for real world money. There are also “black markets” where players can exchange villagers for Bells or real-world money, including the ever-popular Nookazon (Tom Nook + Amazon), where such exchanges are in addition to similar listings for furniture, clothing and other in-game items.

Additionally, just like real-world money, Bells can be invested. For instance, there is the in-game Automatic Bell Dispenser, which generates interest on a capital deposit of Bells, the size of which compounds every day.

And of course, there is the oh-so-volatile “Stalk Market”. In Animal Crossing: New Horizons, there is an adorable boar named Daisy Mae who visits the player’s island every Sunday. Daisy Mae sells turnips to the players for a different price every weekend. The turnips can then be sold to Timmy Nook and Tommy Nook at Nook’s Cranny in accordance with a Stalk Market price, which could be any price on any given day. The volatility comes from the fact that the turnips cannot be held in perpetuity; they rot after one week. So, just as any real world investor needs to be vigilant, turnip-traders need to be actively checking Stalk Market prices in order to protect their investment. Note that proper turnip trading could definitely be a responsibility of the trustee (and we’ll discuss this point further in the final blog post of this blog series).

All of this is to say that Bells clearly have some value, and may even be the currency in which the trustees chose to pay an agent (or even compensate themselves). If that is the case, then there are other aspects of the trust to consider.

Where There’s Property, There’s Tax

So why does it matter if Bells are trust property? The main reason is that a trust, while it is not a separate legal entity, is considered to be a separate legal taxpayer under the Income Tax Act. So, for example, if a trust generates income because the trustees have invested the trust property in (non-turnip) stocks, bonds, mutual funds etc., then it will have to pay tax on any income generated on those investments.

Normally, it might seem odd to suggest that an in-game item would be taxable, but technology has an ever-changing role in our lives, inclusive the value that we place on it. In this respect, it may be helpful to look at the explosion in popularity of cryptocurrency as a payment method as an example of this. For instance, many businesses now accept Bitcoin as a valid payment method.

Cryptocurrency has become so popular for transactions that it has prompted Canada Revenue Agency (CRA) to clarify that yes, cryptocurrency can be taxed. CRA has since published its “Guide for cryptocurrency users and tax professionals”. As there are many different types of cryptocurrency available to purchase, CRA has provided the following definition of cryptocurrency in this guide:

Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it. Strong encryption techniques are used to control how units of cryptocurrency are created and to verify transactions. Cryptocurrencies generally operate independently of a central bank, central authority or government.

Arguably, a lot of this applies to Bells, with the exception of them making use of “strong encryption techniques”. Then again, while one certainly won’t find blockchain technology in their copy of Animal Crossing: New Horizons, it is interesting to note that both traditional forms of cryptocurrency and Bells can be “mined”. For the former, one can use a network of strong computers to process complex mathematical equations that “compete” with other computer networks for the opportunity to answer the equations first and thus “earn” the cryptographic reward.[2] For the latter, well, one can go fishing, catch insects, pick up sea shells and even literally mine for minerals, fossils and other materials buried underground to produce a profit.

While a full explanation of what cryptocurrency is and the taxation principles applicable to it is beyond the scope of this blog series, one thing to note that is that CRA treats cryptocurrency as a “commodity”, and not as a “currency”. So, for tax purposes, it’s not considered to be an actual method of payment like Canadian dollars or Japanese yen, but is instead closer to a good or service, like a car or a plumber who is offering their services to fix a drain. Thus, in the case of a transaction where cryptocurrency is exchanged for other commodities, such transaction is considered a “barter transaction”. [3]

In simple terms, it then becomes a question of fact as to whether a cryptocurrency transaction produces “income” (like business or employment income) or a capital gain (if the cryptocurrency was sold for more than the cost for which it was obtained). Each is treated differently from a tax perspective. Considering that these trusts are more personal and less business-oriented in nature, it seems that transactions conducted by these trusts subject to tax would be more akin to a capital gain.

An additional question that arises in this context is one of value. According to CRA in its cryptocurrency guide, to figure out the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a “reasonable method”:

Generally, the CRA’s position is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowledgeable, informed and prudent, and who are acting independently of each other, would agree to in an open and unrestricted market.

So, with that in mind, how would we value Bells? Would we just determine an average based off of the rates at which people are selling them off of eBay, Reddit and similar sites? As this issue is without legal precedent, it would be difficult to come up with a definitive answer.

Hopefully, CRA would only apply tax to Bell transactions involving two or more separate taxpayers. It does say in the aforementioned guide that “the income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity (a hobby) or a business activity”. The problem is that while most players do treat the game as a hobby, there are others out there who are indeed making a business out of it. In any event, as history has shown us, it would be wise not to put it past the Government of Canada to come up with a scheme for the taxation of anything, including Bells.

Lastly, the status of Bells as trust property may affect the terms of the trust vis-à-vis the trustees. For example, it may be the case where the trustees are not permitted to take real-life money as compensation, but may take Bells as compensation.

For Whom the Bells Toll

We’ve explored quite a bit about trusts in this post, including who would be involved in the establishment and administration of this trust, as well as the differences between such individuals. On that note, we also explored the fact that, as we are dealing with the maintenance and support of virtual animals in a virtual world, there are certain differences between the necessary real-world considerations and virtual-world considerations.

But, we still haven’t exactly explored what “maintenance and support” specifically means. Furthermore, how do we make sure that the trustees (and/or the agents), know how to provide such maintenance and support? How do we make sure that the trustees are doing their jobs correctly? If you’ve read up to this point, then I know you’re in it for the long haul; so, please stay tuned for the final post in this blog series, where I’ll provide all of the answers to those questions.

[1] Note that the game can either come as a physical cartridge or a digital download. In either case, it is important to remember that Nintendo is the actual copyright owner of the Animal Crossing series. With respect to digitally downloaded games, usually it is the case that the copyright holder assigns a license to the customer. (and thus the customer doesn’t actually “own” the digital download). A discussion of this, while interesting, is beyond the scope of this blog post. For the purposes of this post, we will assume that any license for a digitally-downloaded copy of the game is transferable and can be properly transferred to a non-charitable purpose trust.

[2] Cryptocurrency mining can be a complicated process. For further information on the topic, consider starting with the following CBC article: https://www.cbc.ca/news/canada/calgary/what-is-cryptocurrency-1.4876417

[3] For more on “barter transactions”, please see: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it490/archived-barter-transactions.html