Just when we think our estate freeze shares are safe from Family Law Act claims because the appellate court overturned the trial decision in MacNamee v MacNamee, and found that the gift of the shares was a valid gift, the same Court of Appeal has released a very short decision which could have far-reaching effects on the validity of trusts, especially after the Antel. The case is Duca Financial Services Credit Union Ltd. v. Bozzo, 2011 CarswellOnt 4816.

In this case, two years after incorporation of A Inc., Mr. Bozzo declared himself to hold 51% of the shares in their company in trust for his wife who owned 49% in her own name. The following year, the credit union made a loan to a company controlled by A Inc., personally guaranteed by Mr. Bozzo. The credit union was successful against the borrower company and against Mr. Bozzo on the guarantee. Mr. Bozzo went bankrupt. The credit union wanted to attach the shares ostensibly owned by Mr. Bozzo’s wife in A Inc. on the ground that the trust was a sham because of lack of true intent to create a trust.

The trial judge found that there was an intent to create the trust because Mr. Bozzo wanted to preserve A Inc. for his wife and family, and not expose it to his future business creditors.

The Ontario Court of Appeal overturned the trial judge’s decision for reasons released orally on June 2, 2011, and which are now published. The Court of Appeal said the trial judge failed to properly consider Mr. Bozzo’s own evidence that he maintained control of the company before and after the trust. The court quoted from the viva voce evidence given at trial:

“Q      So, again, you’re saying in your mind the control of         

the company didn’t change either before the Trust         

Declaration or after the Trust Declaration?

A       No sir. [Emphasis added.]

[5] In our view, this evidence conclusively demonstrates that the respondent, Mr. Bozzo, considered himself to have retained control of the assets purportedly held in trust. In his own mind, he had not separated himself from the beneficial interest in the shares. Accordingly, there was no intention to create a valid trust as one of the three certainties was missing and the trust is therefore void.”

This could be an issue for a client doing a freeze and retaining voting control of the company. The court intimates that the real beneficial interest in shares is with the votes and that control cannot be separated from the beneficial interest, a position with which we emphatically do not agree. We can only wonder if the decision would have been different if there had been a third party settlor rather than a declaration by the shareholder.

The other option the court could have chosen was to declare the trust a fraudulent preference on the admitted evidence that it was the trust declaration which was made by Mr. Bozzo to defeat his future creditors. Such a decision would certainly have pleased the trustee in bankruptcy without throwing this monkey wrench into the world of trusts.