John McNamee founded a successful trucking business. In 1988, he implemented an estate freeze to ensure that future capital gains from the business would accrue to his two sons, to whom he transferred shares in the business. All the usual stuff. What was unusual was that Mr. McNamee kept control of the business by retaining voting preference shares (non-voting prefs would be usual) and had a right to unlimited dividends at any time (thereby allowing him to strip the company of all value if he wanted to). Having been through a divorce, he also wanted to ensure that the shares and any income from them would remain each son’s separate property and would not form part of net family property under the Family Law Act (FLA) if a son’s marriage broke down. These terms were set out in a declaration of gift, but neither this nor the details of the estate freeze were made known to McNamee’s son Clayton, who thought he had an equal 1/3 interest in the business with his brother and father.
Clayton’s marriage broke down – by all accounts relatively amicably – in 2007, after nearly 20 years characterised by equal financial partnership. Clayton’s wife Connie claimed a constructive trust over the shares, based on her contribution to her husband’s success in the business. The central issue was whether there had been a valid gift at all; if there had, then it would fall outside Clayton’s net family property under the FLA. The trial judge thought not: the transfer was one made for consideration, and Connie was therefore entitled to half the value of the shares; it was not necessary to consider the unjust enrichment claim. Clayton appealed.
The Court of Appeal reviewed the indicia of a gift and found there had been one; the strings attached to the gift did not invalidate the gift itself, even though Clayton was unaware of the conditions: McNamee v McNamee, 2011 ONCA 533 [Link available here]. The court went on to say that the trial judge was also wrong not to have assessed the unjust enrichment claim before dealing with equalisation under the FLA; it is necessary to determine who owns the property (including under a constructive trust) before the division can be made. The court then returned to the strings attached to the father’s gift, finding them of no force or effect because they had not been disclosed to the son. As a result, the conditions could neither invalidate the gift nor prevent the imposition of a constructive trust over the subject of the gift. Whether a constructive trust arose was unclear on the evidence; a new trial on that question was ordered.