Shares in the husband’s father’s company were transferred to the husband as part of an estate freeze undertaken by the husband’s father. The Court of Appeal overturned the trial judge’s decision that the shares were not a gift. They were in fact a gift and thus were exempt from inclusion in considering the husband’s net family property upon marriage breakdown.
The husband’s father had a successful business. In 2003, he reluctantly yielded to the advice of his accountant and lawyer to implement a corporate estate freeze in order to protect the business from creditors and as a means of limiting the impact of taxation in the event of his death. To give effect to the freeze, he transferred his only two common shares in the business to a newly created holding company in exchange for 20,000 voting preference shares valued at $2 million. He then subscribed for 1,000 common shares for $1 and transferred 500 of those common shares to each of his two sons.
The issue was whether the transfer of the common shares was a gift to the sons. Under Ontario law, if they were a gift, they did not have to be included in property division upon marriage breakdown.
During the marriage, the husband understood the shares to be a gift. He did not pay for them. He erroneously thought that he, his brother, and his father were equal 1/3 owners of the business, which is what he told his wife.
The husband’s marriage broke down in 2007. It was only after that time did the husband become aware of the true terms of the transfer of shares. The husband’s father had signed a “Declaration of Gift” specifying, first, that neither the shares nor any increase in their value or income from them were to form part of the net family property of the donee in the event of marital breakdown, and second, that the shares were to remain the donee’s separate property, free from the control of his spouse.
In addition, the husband’s father retained full control of the company by ensuring his preference shares were the voting shares. He was also entitled to take unlimited dividends from the company at any time.
The trial judge determined that the shares were not a gift because they were not a gratuitous transfer, but a transfer for consideration, not intended to be a gift, the father did not divest himself of all power or control over the shares, and the husband did not accept the gift.
However, this result was overturned on appeal, where the appeal court found that the shares were a gift.
The appeal court noted that the issue in determining whether the shares were a gratuitous transfer was whether the donee had provided any consideration to the donor for the transfer of the shares. The fact that the donor accomplished his corporate planning goals did not amount to consideration flowing from the donee to the donor. The shares were not transferred to ensure the sons’ continued involvement in the company; they were transferred to give effect to the estate freeze plan.
Further, the trial judge conflated intention with underlying motivation or purpose. They are not the same concepts and treating them as such constituted an error in law. The donor’s primary purpose or motivation in transferring the shares was to underpin the estate freeze, which does not mean that he did not intend to gift the shares in order to give effect to that purpose. The Declaration of Gift in this case was clear, the donor’s intention was to give the shares gratuitously, even if the estate freeze was the ultimate motivation or purpose. A gift does not have to be motivated by altruism, but may be motivated by commercial purposes provided the transfer was gratuitous, i.e. it involved “[the] intentional giving to another without expectation of remuneration.”
The donee accepted the gift. It does not matter that the donor could affect the value of the shares at any given time, which reflected the nature of the estate freeze in question. It had no bearing on whether the shares were a gift. Nor did the fact that there were unknown strings attached to the gift invalidate it in the circumstances. The donee understood the essential nature of the transaction – he had received shares in the company and paid nothing for them – and he willingly accepted title of those shares.
In the appeal court’s view, the trial judge should have determined claims of ownership, including beneficial ownership, of all assets prior to dealing with whether the shares were a gift and excluded from the net family property calculation. The trial judge should have assessed the wife’s claim of a beneficial ownership interest in the shares first before dealing with property division. A new trial was ordered on this issue.
Most lawyers – estate, corporate, and family lawyers alike – were relieved when the Court of Appeal upheld the donor’s intention to gift away the shares. The husband’s relief was probably short-lived. He still has to endure another trial to deal with the wife’s claim of a beneficial ownership over the shares, so she may have an interest in the shares that still needs to be determined.
Gary S. Joseph is a certified specialist in family law with an LL.M. in constitutional law. He has extensive trial and appellate experience at all levels of our courts in both Ontario and Alberta and has appeared as counsel in the Supreme Court of Canada. He is a founding lecturer for the Family Information Session program of the Superior Court of Justice and was recognized by the Chief Justice for his efforts in this regard.
Vanessa Lam studied psychology at the University of Toronto and law at Queen’s University. Prior to joining MacDonald & Partners LLP, she worked as a judicial law clerk with the Ontario Superior Court of Justice. Vanessa’s practice is focused on research in all areas of family law, with a special interest in children’s issues.
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