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REPORT

ON THE

LAW OF TRUSTS

ONTARIO LAW REFORM COMMISSION

VOLUME I

Ministry of the 1984

Attorney

General

Digitized by the Internet Archive

in 2011 with funding from

Osgoode Hall Law School and Law Commission of Ontario

http://www.archive.org/details/reportonlawoftru01onta

REPORT

ON THE

LAW OF TRUSTS

ONTARIO LAW REFORM COMMISSION

VOLUME I

Ministry of the 1984

Attorney

General

The Ontario Law Reform Commission was established by section 1 of the
Ontario Law Reform Commission Act. Section 2( 1 ) of the Act states that it is the
function of the Commission to inquire into and consider any matter relating to
(a) reform of the law having regard to the statute law, the common law and judicial
decisions; (b) the administration of justice; (c) judicial and quasi-judicial procedures
under any Act; and (d) any subject referred to it by the Attorney General. The
Commissioners are:

Derek Mendes da Costa, Q.C, LL.B., LL.M., S.J.D., LL.D., Chairman

H. Allan Leal, O.C., Q.C, LL.M., LL.D., D.C.L., Vice Chairman

Honourable Richard A. Bell, P.C., Q.C.

William R. Poole, Q.C.

Barry A. Percival, Q.C.

M. Patricia Richardson, M.A., LL.B., is Counsel to the Commission. The
Secretary of the Commission is Miss A.F. Chute, and its offices are located on the
Fifteenth Floor at 18 King Street East, Toronto, Ontario, Canada M5C 1C5.

ISBN 0-7743-8914-1 for set of two volumes
ISBN for this volume: 0-7743-89 15-X (vol. I)

TABLE OF CONTENTS
VOLUME I

Page

Letter of Transmittal xiii

Foreword 1

Chapter 1 Introduction 3

1 . General 3

2. The History of the Trust Concept 5

3. The Need for a Revised Trustee Act: Approaches to Reform 10

(a) The Need for Legislation 10

(b) The Form of Revised Legislation 12

(i) Codification 12

(ii) Modernization of Existing Act 14

4. Conclusions 15

RECOMMENDATIONS 20

Chapter 2 General Principles Governing the Exercise of Power

and Discharge of Duty by Trustees 23

1 . Introduction 23

2. Trustees' Duty of Care 24

(a) The Basic Duty of Care 24

(b) The Non-Professional, Unremunerated Trustee 27

(d) Judicial Power to Excuse Breaches of Trust 35

(e) Exoneration of Trustees from Liability by the Terms of the

Trust Instrument 39

3. Delegation by Trustees of Duties or Powers 42

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Page

(a) Introduction 42

(b) Acts That a Trustee May Delegate 43

(i) Common Law 43

(ii) Statute 45

a. Commonwealth 45

b. United States 47

(iii) Conclusions 48

the Act or Omission of Agents 49

(i) Present Law 49

(ii) Conclusions 51

(d) Reliance Upon Advice 52

(e) Power of Attorney 54

4. Conflict of Interest and Duty 57

(a) Nature and Scope of the Rule 57

(b) A Statutory Formulation of the Rule 62

Duty 62

(d) Validity of Terms in the Trust Instrument Permitting a

Conflict of Interest and Duty 69

5 . Unanimity of Trustees 71

6. Powers of Trustees Solely Theirs 72

(a) Should Beneficiaries Be Entitled to Instruct Trustees in the
Exercise of Their Powers? 73

(b) Beneficiaries' Objection to Trustees' Exercise of Powers 74

RECOMMENDATIONS 79

Chapter 3 Appointment and Discharge of Trustees 85

1 . The Statutory Powers of Retirement, Removal, and Appointment

of Trustees 86

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Page

(a) Non-Judicial Retirement Without Replacement 88

(b) Non-Judicial Replacement or Removal by Appointment of
Substitute Trustees 92

(i) Persons Entitled to Appoint Trustees Under the

Statutory Power 96

a. Persons Nominated by the Instrument 96

b. The Surviving or Continuing Trustees 99

c. The Personal Representatives of the Last

Surviving or Continuing Trustee 102

(ii) Circumstances in Which the Non-Judicial Statutory

Power is Exercisable 105

(d) Liability of Former and Continuing Trustees 113

(e) Non-Judicial Appointment of Additional Trustees 115

(f) Judicial Replacement, Removal, and Appointment of

Trustees 117

(g) The Number of Trustees 1 20

(i) Maximum Number of Trustees 1 20

(ii) Minimum Number of Trustees 123

(h) Supplementary Provisions Applicable to Non-Judicial and

Judicial Appointment of Trustees 125

2. Evidence of Change of Trustees 1 27

3. Vesting of Trust Property in New Trustees 133

(a) Non-Judicial Vesting Declarations 1 34

(i) Express Vesting Declarations 134

(ii) Implied Vesting Declarations 136

(iii) Matters Common to Both Express and Implied

Vesting Declarations 1 36

a. Effect of Vesting Declaration 137

b. The Scope of the Declaration 138

[Vlj

Page

c. Assignment of Choses in Action 139

d. Exceptions to Vesting Declarations 141

(1) Property Transferred in a Manner Prescribed

by Legislation, Including Registration 142

(2) Leasehold Land and Covenants Against
Assignment 145

(b) Judicial Vesting Orders 147

(i) Present Law 148

(ii) Types of Trust Property Comprehended by Vesting

Orders 151

(iii) Circumstances in Which Vesting Orders May Be

Made 152

(iv) Persons in Favour of Whom Vesting Orders May Be

Made 157

(v) Effect of Vesting Orders 158

(vi) Appointment of Persons to Convey in Lieu of a

Vesting Order 1 60

(vii) Special Classes of Vesting Order 160

4. The Exercise of Power by Trustees 163

5. Protection of Third Parties: Should the Proposed Provisions Be
Mandatory? 171

RECOMMENDATIONS 172

Chapter 4 Administrative Powers of Trustees 185

1 . Introduction 185

2. The Power of Investment 1 87

(a) Introduction 187

(b) The Legal List 187

(i) The Ontario Trustee Act 187

(ii) The History of the Legal List 189

a. England 189

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Page

b. Canada 194

(iii) The Legal List Today 1 %

a. Canada 1 96

b. England 1 96

c. Australia and New Zealand 200

d. United States 204

(i) History of the Rule 205

(ii) The Prudent Man Rule Today 208

a. United States 208

b. Canada 210

(d) Objects and Problems of Contemporary Trust Investment ... 212

(e) The Future: Legal List or Prudent Man 214

(i) Legal List Approach 214

(ii) Prudent Man Approach 217

(iii) Conclusion 219

Other Powers of Property Management 222

(a) Introduction 222

(b) Existing Statutory Position in Ontario and Other
Jurisdictions 223

(i) Trustee Acts 223

a. Ontario 223

b. Other Canadian Jurisdictions 225

c. Other Commonwealth Jurisdictions 225

d. United States 226

(ii) The Settled Estates Act 228

a. Ontario 228

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Page

b. England 230

c. Other Canadian Jurisdictions 23 1

d. Other Commonwealth Jurisdictions 232

(d) Specific Administrative Powers 236

(i) Deposit of Trust Funds 238

(ii) Power of Sale 238

(iii) Exchange and Partition 240

(iv) Power to Lease 24 1

(v) Power to Maintain and Repair 242

(vi) Power to Insure 242

(vii) Power to Carry on a Business 243

(viii) Shareholding Obligations 244

(ix) Surrender of Property 244

(x) Acquisition of Dwelling Home 245

(xi) Power to Borrow Money 246

(xii) Settlement and Contestation of Claims 246

(xiii) Power to Give a Receipt 247

(xiv) Power to Pay Outgoings 247

(xv) Reimbursement of Expenses 248

(xvi) Appropriation and Valuation of Property in Specie . . . 248

(xvii) Execution of Administrative Powers 249

(e) Enlargement of Administrative Powers 250

(f) Passing of Accounts and Compensation of Trustees 252

(i) Passing of Accounts 252

(ii) Compensation of Trustees 255

[ix]

Page

4. Allocation of Receipts and Outgoings Between Income and

Capital Beneficiaries 26 1

(a) Introduction 26 1

(b) Allocation of Outgoings 263

(i) Ontario 263

(ii) Other Canadian Jurisdictions 264

(iii) Other Commonwealth Jurisdictions 266

(iv) Conclusions 268

(i) Competing Claims on Change of Ownership 273

a. Ontario 273

b. Other Jurisdictions 275

c. Conclusions 277

(ii) Duty to Convert Assets and Allocation of Income

Pending Conversion 277

a. Ontario 278

b. Other Commonwealth Jurisdictions 28 1

c. Conclusions 282

(iii) Disposition of Insurance Proceeds 286

(d) Separation of Investment and Allocation Decisions 290

(i) Corporate Distributions 290

a. Ontario 29 1

b. United States 292

(ii) Conclusions 296

a. Discretionary Allocation Trust 298

b. Percentage Trust 301

RECOMMENDATIONS 304

[x]

VOLUME II

Page

Chapter 5 Dispositive Powers of Trustees 315

1 . Introduction 315

2. Power of Maintenance 319

(a) Ontario 319

(b) England 324

(i) Canada 329

(ii) Australia and New Zealand 33 1

(d) Conclusions 333

3 . Power of Advancement 342

(a) Ontario 342

(b) England 343

(i) Canada 345

(ii) Australia and New Zealand 346

(d) Conclusions 347

4. Restraints on Alienation: The Protective Trust 355

(a) Introduction 355

(b) Restraints on Alienation: The Common Law 356

(d) The Spendthrift Trust: United States 360

(e) Conclusions 362

RECOMMENDATIONS 365

[xi]

Page

Chapter 6 Contribution and Indemnity Among Trustees 37 1

1 . The Rights of Trustees: An Overview 371

2. Contribution and Indemnity: The Present Law 374

(a) The Case Law Indemnities 374

(b) The Statutory Excusing Power 377

3 . Reform in England 378

4. Conclusions 380

RECOMMENDATIONS 386

Chapter 7 Variation and Termination of Trusts 389

1 . Introduction 389

2. Present Law 390

(a) The Variation of Trusts Act 390

(b) The Rule in Saunders v. Vautier 392

(i) The Reasoning Behind the Rule 393

(ii) Circumstances in Which the Rule Operates and the

Effect of its Operation 393

3 . Reform in Other Jurisdictions 403

4. Alternatives for Reform 407

5 . Conclusions 412

RECOMMENDATIONS 424

Chapter 8 Charitable Trusts and Non-Charitable

Purpose Trusts 429

1 . Introduction 429

2. Imperfect Trust Provisions 429

(a) Charitable Trusts and Non-Charitable Trusts 430

(b) Mixed Charitable and Non-Charitable Purposes 434

[xii]

Page

(d) Preserving the Charitable Element Under

Statute 437

(i) Victoria 440

(ii) England 442

(iii) Canada 444

(e) Alternatives for Reform 445

(f) Conclusions 448

3. Reorganization and Variation of Charitable Trusts 453

(a) Introduction 453

(b) Present Law 454

(i) Common Law 454

(ii) Statutory Reform 459

a. England 459

b. Australia and New Zealand 463

(d) Conclusions 468

recommendations 474

Conclusion 477

Draft Bill: An Act to revise the Trustee Act 479

Ontario
Law Reform
Commission

The Honourable R. Roy McMurtry, Q.C.
Attorney General for Ontario

Dear Mr. Attorney:

Pursuant to section 2(1 )(a) of the Ontario Law Reform Commission Act,
the Commission undertook a study of the law of trusts in Ontario. The
Commission has now completed its consideration of the subject and, accord-
ingly, has the honour to submit herewith its Report on the Law of Trusts.

XI 1 1

FOREWORD

With the submission of the Report on the Law of Trusts, the Ontario Law
Reform Commission completes another substantial portion of its initial un-
dertaking to review the whole of the law of property in this jurisdiction. The
review of the law of trusts was begun some years ago, but circumstances
from time to time necessitated that work on the project be interrupted to
enable our resources to be applied to more urgent matters. It is with a sense
of satisfaction that time and circumstances have now allowed us to bring this
important project to fruition.

During the course of our deliberations it became clear that the review
and treatment of the law governing the administration of estates of deceased
persons, which originally formed part of the law of trusts project, should be
dealt with as a separate project. As a result, the project was split and the law
of the administration of estates of deceased persons is being considered as a
separate subject matter and will form the substance of a subsequent report.

It was also intended to devote a chapter of the report on the law of trusts
to the conflict of laws in this area. A research paper was commissioned and
prepared on this specific subject. We were then apprised of the fact that The
Hague Conference on Private International Law was preparing a draft inter-
national convention to be submitted to a plenary session of that Conference
in 1984 on recognition and choice of law rules involving trusts. The Com-
mission decided that it should await the results of the work of The Hague
Conference before launching into the uncharted seas of formulation or revi-
sion of the conflict rules. Consequently, that aspect of the work of the project
has been deferred, to be taken up again when the provisions of The Hague
Conference are established and known. Canada is a member of The Hague
Conference and is represented on the Special Commission preparing the
documentation for the plenary session of the Conference in 1984.

The Ontario legislation on trusts dates essentially from the nineteenth
century. Most jurisdictions in the common law world have revised their
legislation in recent years. Some have even attempted a codification of the
substantive law of trusts as well as the law governing their administration.

By a majority of its members, the Commission has decided against a
complete codification of the law of trusts and confined its efforts to a whole-
sale revision of the Trustee Act provisions dealing with administration of
trusts and has ventured into areas of substantive law where it appeared that

present rules of law were so outmoded or unclear as to warrant legislative
intervention. For these purposes a Draft Bill accompanies the Report to
indicate a possible form for the implementation of the recommendations
contained in the Report.

The Commission wishes to record here its special thanks to Professor
R.E. Scane, Q.C., the initial director of the Project, and to Professor D.W.M.
Waters who succeeded as director and brought the study to fruition. These
two acknowledged experts in the field, plus Professors A.H. Oosterhoff,
Peter W. Hogg, Q.C., and J.M. Evans, together with Maurice C. Cullity,
Q.C., John I. Laskin, Donald J. Grant and the late Fred B. Baker also assisted
greatly in the submission of working papers. Professor Waters prepared the
initial draft report and L.R. MacTavish, Q.C., former Senior Legislative
Counsel for Ontario, prepared the Draft Bill. Although no formal advisory
group was constituted for this project, our director and staff had the oppor-
tunity to consult from time to time with private legal practitioners specializing
in this area of law. We are most grateful to all of them for their generous and
helpful assistance. We would emphasize again the outstanding contribution
of Professor D.W.M. Waters at all stages of the work of the project.

Counsel to the Commission, Ms. M. Patricia Richardson, and Ms. Pamela
M. Gibson of the legal staff of the Commission, bore an unusually heavy
burden in connection with the work of the project and we lie heavily in their
debt.

The Honourable G.A. Gale and the Honourable J.C. McRuer both held
office as Vice-Chairman of the Commission during the course of the project
but retired before its completion, and accordingly the policy decisions re-
flected in the recommendations are not to be attributed to them. To them we
extend our thanks for their contribution.

CHAPTER 1

INTRODUCTION

1. GENERAL

The law employs the concept of the trust in many ways, and there is no
accepted definition of this concept that covers all modes of use. However, in
general terms a trust may be said to exist when one person holds legal title to
certain property, while another has equitable title - that is, the right to the
enjoyment of that property. The first person, the trustee, is said to hold the
property "on trust" or "in trust" for the second person, the beneficiary.1
Assume, for example, that A holds legal title and that B has the right to
enjoyment. A is the nominal owner and, in relation to legal title, has the right
to sell, lease, mortgage, or otherwise deal with the property, and the right of
management.2 On the other hand, B is the beneficial owner, and is entitled
to the income or "fruits" of the property, and possibly to the property itself.

Generally, a trust may arise in one of two ways: either by words or acts
of a person that indicate an intention to create a trust, or by the law imposing
a trust in certain situations to ensure that equitable title passes from one
person to another. Within these two broad categories, it is usual to classify
trusts as express, implied, resulting, or constructive, although there exist
differing views concerning the meaning of these terms.3 Express and implied
trusts are the product of intention. To refer to the above example, the rela-
tionship between A and B might have occurred because X transferred property
to A to hold on trust for B, or because A had declared that he now holds what
was formerly his own property on trust for B. The intention of X in the first
instance, or of A in the second, may be clearly stated: for example, X might
have said, "I transfer my house, namely, Blackacre, to A to hold it on trust
for B"; or A might have used these words, "I declare myself a trustee of my

1 Maitland (ed. Brunyate), Equity, A Course of Lectures (2d ed., 1936), at 44. defines a
trust in this way:

When a person has rights which he is bound to exercise upon behalf of another or
for the accomplishment of some particular purpose he is said to have those rights
in trust for that other or for that purpose and he is called a trustee.

2 In some cases. A's only duty is to hold the property tor B, handing it over when called
upon to do so. In such circumstances. A must not exercise the rights of disposition and
of management that would otherwise accompany his having legal title.

3 See Waters, Law of Trusts in Canada (1974). at 17-20.

[3]

farm, Blackacre, for B".4 In this form, an express trust is created. On the
other hand, the language used may not be clear, and it may be uncertain
whether X or A intended only a moral obligation rather than a legal obligation.
The court then has to discover their true intention. If it is determined that X
or A intended to create a trust, a trust arising by implied intent is said to exist.

Trusts created by express or implied intention are not the only ones that
may arise. If P transfers property to Q to hold on trust for a certain purpose,
and if after that purpose is carried out some property remains over, Q must
return the remaining property to P. Q is said to hold on a "resulting trust". A
resulting trust also may arise in other circumstances, as for instance where P
purchases a house in the name of Q, who has paid no part of the purchase
price nor given anything of value for the transfer.5 Although the authorities
are in conflict concerning whether a resulting trust is a product of intention
or the imposition of law,6 the theme of all such situations is that Q must
acknowledge the beneficial right of P to the property. By implication P's
intention was that Q should hold the remaining property, or the property
transferred into Q's name, for P. The trust holds Q to this obligation.

A not unrelated type of trust is the constructive trust. This kind of trust
comes into existence when, out of consideration for justice and equity, the
law imposes upon one person the obligation to restore or hand over certain
property to another. The constructive trust has nothing to do with intention
to create a trust; it is machinery that the law utilizes in order to compel one
person to recognize the property rights of another.7

In modern usage the express trust has been described as fiduciary property
management, since the trustee today is often managing an investment, or
portfolio of investments, for the beneficiary or beneficiaries. The resulting
trust and the constructive trust are more a part of the law of remedies.

Within trusts arising by intention a distinction is made between trusts in
favour of persons and purpose trusts. As the name implies, a trust for persons
is a trust in favour of a specified person or class of persons: for example, a
testator may leave his estate on trust "for my wife, A, for her life, and then
to my children equally". On the other hand, the creator of the trust may have
no particular person or class of persons in mind, but may want to see his

Under the Statute of Frauds, R.S.O. 1980, c. 481 , s. 9, these statements would have to
be evidenced in writing, since land is involved.

It should be noted that, under s. 1 1 of the Family Law Reform Act, R.S.O. 1980, c.
152, the presumption of advancement between husband and wife in questions of own-
ership of property is abolished and a presumption of resulting trust applied, subject to
certain exceptions.

See, for example, Mowbray (ed.), Lewin on Trusts (16th ed., 1964), at 8. and Hayton
(ed.), Underbill' s Law relating to Trusts and Trustees (13th ed., 1979), at 21-23.

English legal texts, for example, Baker and Langan (eds.), Snell's Principles of Equity
(28th ed., 1982), at 192, sometimes state that "constructive trust" is a term that expresses
the obligation of the person who must restore or hand over. Other remedies, it is said,
bring about the compulsion. The law is obviously developing in this area, and there is
room for a difference of opinion whether the constructive trust in Canada is not already
a remedy, as opposed to a description of an existing obligation.

money used to carry out some particular task. For instance, he may leave his
estate on trust "for the relief of poverty and distress wherever it exists in
Ontario". Trusts of this nature are termed purpose trusts. If the purpose is
charitable, as that term is defined by the law, the trust is known as a charitable
or public trust, because in principle a purpose can only be charitable if it is
for the benefit of the public. However, the purpose may be non-charitable,
although it should be noted that few non-charitable purpose trusts are recog-
nized by the law as valid.8 One difficulty is that an inanimate purpose cannot
enforce the trust, while in the last resort the Crown will enforce a charitable
trust. Public or charitable trusts are distinguished from other trusts arising by
intention; the latter are described as private trusts because they have no public
element.

Finally, it should be mentioned that trusts may also be created by statute.
An example of a statutory trust is the trust created by section 2( 1 ) of the
Estates Administration Act? whereunder the personal representative of a
person dying testate or intestate is declared a trustee of the deceased's assets
for the purpose of winding-up that person's estate, and distributing to the
entitled beneficiaries the assets remaining after the payment of debts and the
discharge of all the deceased's obligations.

2. THE HISTORY OF THE TRUST CONCEPT

The origins of the trust go back many centuries. Even before the Norman
Conquest one man might transfer land to another and take a promise from
the transferee that the latter would hold the land "to the use of" those persons
whom the transferor described. This practice grew throughout the next two
centuries; the "use" came to fill an important place in the plans of landowners,
because it enabled them to avoid feudal dues (or taxes), to make dispositions
of their land to take effect upon their deaths," and to gain a measure of
privacy for the way in which they dealt with their own property. However,
the common law courts did not recognize the use. Legal title was in the

Under the Perpetuities Act, R.S.O. 1980, c. 374, s. 16(1), a trust for a "specific non-
charitable purpose" is to be construed as a power. It is not clear whether this provision
is for the purposes of that Act only, or whether it means that in all cases such a purpose
is to be construed as a power and, therefore, valid. In Wood and Whitebread v. The
Queen, [1977] 6 VV.W.R. 273 (Alta. S.C., T.D.), at 280, Stevenson L.J.S.C. was of
the opinion that its counterpart in the Alberta Perpetuities Act, R.S.A. 1980, c. P-4. s.
20(1), was of general application. See, further, infra, ch. 8, sec. 2.

R.S.O. 1980, c. 143, formerly The Devolution of Estates Act, R.S.O. 1970. c. 129.

The "statutory trusts" created in England by the Law of Property Ad, 1925, 15 & 16
Geo. 5, c. 20, ss. 34-36 (U.K.). have not been introduced in Canada. In England,
tenants in common of land cannot hold their interests as legal estates. Under the provi-
sions of the Act, the legal estate must be held in joint tenancy on trust lor joint tenants
or tenants in common, whose interests thus become equitable. The object of this "trust
for sale", a device widely used in England since the eighteenth century, is to clear the
title of these fractional interests, a title now transferable by the trustees alone, and thus
to simplify conveyancing. The interests of the tenants are converted into interests in the
proceeds of sale.

Although apparently possible at an early stage in the common law, it became established
by the end of the thirteenth century that, apart from local customs in particular localities.
land- could not be devised b\ will.

transferee, the feoffee to uses as he was called, and there, for the courts, the
matter ended. Should the feoffee renege on his promise to the feoffor and
deny enjoyment to the use beneficiaries, neither the feoffor nor the benefici-
aries could successfully seek redress in the common law courts.

In the thirteenth century, appeals were made, from time to time, to the
Lord Chancellor to compel the feoffee to uses to honour his promise, and the
Chancellor, exercising the Crown's residual justice, would occasionally find
it appropriate that the feoffee do so. In the fourteenth century, this enforce-
ment of uses in the Court of the Chancellor, or the Court of Chancery as it
came to be known, began to take place with sufficient frequency that it became
evident that a new form of property holding was developing. Indeed, between
1400 and 1530 some two-thirds of the work of the Court of Chancery was
the enforcement of uses. But this development came abruptly to a halt. As
has been noted, uses enabled land owners to avoid feudal dues and, at this
time, these dues formed an increasing source of the tax revenue of the Crown.
Accordingly, in 1535 the Statute of Uses12 was enacted, which by "executing"
the use curtailed drastically the efficacy of this form of land holding. The
statute operated in this way. Assume that X conveyed land "to A and his
heirs to the use of B and his heirs". Before the Statute of Uses, A would hold
the legal estate while B would be entitled in equity. After the Statute, the use
was "executed": that is, legal title was taken from A and vested in B, much
as a modern taxing Act may ignore a trust and tax trust income as if it were
the beneficiary's property. However, towards the end of the sixteenth century
it became clear that conveyancers would find a means to restore the valuable
concept of the fiduciary holding of property to its former vitality.

This was achieved by the creation of two successive uses. If the first use
was ineffective, another use was simply imposed upon the first: for example,
X would convey land "to A and his heirs to the use of B and his heirs to the
use of C and his heirs". The Statute of Uses executed the first use and caused
legal title to pass from A to B. The common law courts refused to recognize
the second use in favour of C and, at common law, B was regarded as alone
entitled to the land. In the early seventeenth century, the Court of Chancery,
after some hesitation, finally recognized the use upon a use, and protected
the interest thereby created in C.13 To distinguish it from the preceding use,
the second use was called a trust, and the modern trust was born. Because
the trust, like its predecessor the use, arose through the decisions of the Court
of Chancery (often referred to as the Court of Equity), it is sometimes
described in the terms originated and employed by equity.14

(1535), 27 Hen. 8, c. 10.

See Mendes da Costa and Balfour, Property Law (1982), ch. 19, at 763-85, and Megarry
and Wade, The Law of Real Property (4th ed., 1975), at 168.

Professors Keeton and Sheridan have described the trust in this manner, a description
widely regarded as exact:

All that can be said of a trust, therefore, is that it is the relationship which arises
wherever a person called the trustee is compelled in equity to hold property, whether
real or personal, and whether by legal or equitable title, for the benefit of some
persons (of whom he may be one [But not a secret trustee: Re Rees, [1950] Ch.
204.] and who are termed beneficiaries) or for some object permitted by law, in
such a way that the real benefit of the property accrues, not to the trustees, but to
the beneficiaries or other objects of the trust.

Keeton and Sheridan, The Law of Trusts (10th ed., 1974). at 5.

In 1660, the interest of the Crown in the use faded," and the work of the
conveyancers proceeded without hindrance. After that date, the Court o\'
Chancery began to develop the law of trusts. Great Chancellors, like Lords
Hardwicke, Nottingham, and Eldon, during the period from 1660 to 1830,
fashioned through case decisions the basic principles of the trust law that we
have today. Throughout the nineteenth century Chancery judges continued
the process of refining and honing this branch of the law.

In 1792, the first statute of the first Legislature of the newly-formed
Province of Upper Canada provided for the reception of English law.16 Ac-
cordingly, the body of the law of equity, the work of the Court of Chancery
that includes trusts, was made applicable, as it then stood, in Ontario. There-
after, decisions of the Court of Chancery in England were applied by Ontario
courts, and the steady and continuous influence of English cases must be
acknowledged.17 However, in 1837, as the population and wealth of Ontario
expanded, the Province by statute introduced its own Court of Chancery,
which, following the English Chancery organization of the time, possessed a
Chancellor and a Vice-Chancellor as judges.18 This Court made a significant
contribution to the law of equity, and Ontario had its own distinguished equity
lawyers in the persons of judges such as Chancellor Spragge, and Vice-
Chancellors Esten and Strong.'9 The Court of Chancery existed for nearly

By reason of the Tenures Abolition Act, 1660, 12 Car. 2. c. 24, the King no longer had
any pecuniary interest in the Statute of Uses: see Mendes da Costa and Balfour, supra,
note 13, at 322-23, and Megarry and Wade, supra, note 13, at 32-33 and 168.

An Act to repeal certain parts of an Act passed in the fourteenth year of His Majesty's
Reign, intitled, "An Act for making more effectual provision for the Government of the
Province of Quebec, in North America" , and to introduce the English Law as the Rule
of Decision in all matters of Controversy, relative to Property and Civil Rights, 32 Geo.
3, c. 1. See, now, Property and Civil Rights Act, R.S.O. 1980, c. 395. The previous
year, the old Province of Quebec was divided into Upper and Lower Canada by order-
in-council dated August 24, 1791 . which anticipated the coming into force of An Ad to
repeal certain Parts of an Act, passed in the fourteenth year of His Majesty's Reign,
intitled, "An act for making more effectual Provision for the Government of the Province
of Quebec, in North America" ; and to make further provision for the Government of the
said Province, 31 Geo. 3, c. 31 (U.K.). In 1840, these Provinces were reunited as one
Province under the name of the Province of Canada (3 & 4 Vict., c. 35). Finally, the
Province of Canada was divided into the Province of Ontario and the Province of Quebec
by s. 6 of the Constitution Act, 1867 (30 & 31 Vict., c. 3 (U.K.)). For ease of reference
"Ontario" will be used to designate the Province after 1791 . See, generally, Mendes da
Costa and Balfour, supra, note 13, at 330-33.

At this time, when there was still a distinct Chancery jurisdiction in England, and no
equitable remedies were yet statutorily available in the English common law courts, it
must have been singularly difficult for Ontario judges in the King's Bench to handle
equitable doctrines. Indeed, from 1794 (the creation of the Court of King's Bench for
Upper Canada) to 1837 (the creation of the Court of Chancery), there was no superior-
court with any equitable jurisdiction: see Rayner and McLaren. Falconbridge on Mort-
gages (4th ed.. 1977), at 67-68.

An Act to Establish a Court of Chancery in this Province ( 1837), 7 Will. 4, C. 2. Later,
as in England, the number of Vice-Chancellors was increased ultimately to three, lor
an interesting and informative review of the history in England of the office of Vice-
Chancellor, see Megarry, 'The Vice-Chancellors" ( 1982). 98 L. Q. Rev. 370.

Chancellor Spragge, who was appointed from Vice-Chancellor to Chancellor in 1869.
was succeeded in the last year of the Court's life by Chancellor Boyd, who held office
in the new Chancery Division for many years, and became one of Ontario's most notable
judges in the law of equity.

fifty years,20 only ending its days in 1881 when, following a similar move in
England, the several courts of the Province were combined as divisions of a
Supreme Court of Judicature for Ontario.21

Throughout its many centuries of development, the law of trusts has been
almost exclusively judge-made law and, indeed, still looks to the courts for
its further growth. Today, only to a limited degree is the law of trusts found
in statute.

The role of statute in the law of trusts is a singular one. It was only with
the great liberal reforming movement of Victorian England that legislation
took place in this area. The thrust of this reform was the abolition of the
forms of action and the legal fictions. This movement also swept away the
gross technical complexities that had gradually developed around the Court
of Chancery. In this process, there were many changes that incidentally
affected the law of trusts.22 However, distinct intervention in the trusts area
was limited to legislation that facilitated the more efficient administration of
trusts. This legislation was essentially enabling legislation: its provisions
would not apply if the creator of the trust wished otherwise, and its concern
was principally with the administrative powers and duties of trustees.23 Eng-
lish Trustee Acts contain little or nothing on the main substantive trust
doctrines of equity. The trustee legislation of 1850, 1852, 1859, 1888, 1893,

The Court's decisions for the last thirty-two years of its existence (1849-1881) were
reported by Alexander Grant, a barrister before the Court, as Grant's Chancery Reports.

The Ontario Judicature Act, 1881 , 44 Vict., c. 5, s. 3. By this Act, the Supreme Court
consisted of two permanent divisions, The High Court of Justice for Ontario and The
Court of Appeal for Ontario. The High Court of Justice consisted of three divisions:
namely, Queen's Bench Division, Chancery Division, and Common Pleas Division. A
fourth division, Exchequer Division of the High Court, was added to The High Court of
Justice in 1903 (3 Edw. 7, c. 8, s. 1(3)). The divisions of The High Court of Justice
were abolished in 1909 by The Law Reform Act, 1909, 9 Edw. 7, c. 28, s. 7(1).
Thereafter, the Supreme Court of Ontario was to consist of two branches, The Appellate
Division of the Supreme Court of Ontario and The High Court Division of the Supreme
Court of Ontario. In 1931 these branches became known as they are today: namely, The
Court of Appeal for Ontario and The High Court of Justice for Ontario (S.O. 1931, c.
24, s. 2). Today, the Divisional Court is part of The High Court of Justice for Ontario,
having been added in 1970 (S.O. 1970, c. 97, s. 2). See, generally, Mendes da Costa
and Balfour, supra, note 13, at 779.

See Holdsworth (eds. Goodhart and Hanbury), A History of English Law (1965), Vol.
XV, at 176 et seq.

Holdsworth describes the statutory changes as reforming "the adjective law .... On
the other hand, the statutory reforms made in the principles and rules of equity are few
in number and of minor importance": ibid., at 192-93. Examples of this type of legis-
lation, first introduced in the mid-nineteenth century in England, include the following:
An Act for better securing Trust Funds, and for the Relief of Trustees (1847), 10 & 1 1
Vict. , c. 96 (U.K.), which enacted enabling provisions concerning trustee administrative
powers; The Law of Property Amendment Act, 1859, 22 & 23 Vict., c. 35 (U.K.),
commonly known as Lord St. Leonards' Act, which enacted enabling provisions con-
cerning trustee investment powers; and An Act to give to Trustees, mortgagees, and
others certain Powers now commonly inserted in settlements, mortgages and wills
(1860), 23 & 24 Vict., c. 145 (U.K.), commonly known as Lord Cranworth's Act, I860,
which enacted enabling provisions concerning appointment and discharge of trustees.

and 1925, to name the principal statutes, each of the last two updating and
replacing its predecessor, all bear this character.24

The English tradition has been followed throughout the Commonwealth.
In each of the eleven common law jurisdictions of Canada, in the six states
of Australia, and in New Zealand, the local Trustee Act follows, in some
instances word for word, the English legislation. When statutory changes
have been made in England, similar legislation has traditionally followed a
few years later in other Commonwealth jurisdictions. In the last fifteen years,
some jurisdictions have reworded, and to a limited degree amended, the
English-derived provisions, but otherwise the essential similarity of the law
of trusts throughout these Commonwealth jurisdictions has been maintained.
Where differences exist, they have been created by the far-reaching property
legislation of 1925 in England.25 Although the Trustee Act, 192526 and the
Settled Land Act, 192521 were essentially consolidating measures, they do
reflect the considerable recasting that took place in that year of the land law
of England. This recasting of land law has not generally been followed in
Commonwealth jurisdictions, including Ontario and the other common law
provinces and territories of Canada. As a result, apart from Manitoba28 and
to a lesser extent Prince Edward Island,29 the English consolidation of the
trustee legislation in 1925 has not been adopted in Canada. An older pattern
of English legislation has prevailed, to which occasional provincial amend-
ments have been made, principally in the area of trustees' powers of invest-
ment.

Of all the trustee legislation of Commonwealth jurisdictions, the present
Ontario Trustee Acf30 is perhaps the one that most closely adheres to past
English legislation. Paralleling developments in England in the nineteenth
century, the Ontario legislature from 1 837 onwards enacted a series of reforms
of the substantive and procedural law of property, wills, and trusts with the
emphasis upon the efficacy of estate administration.31 In the 1860's, the terms
"trust" and "trustees" appeared in the titles of reforming statutes. These

27
28
29

The Trustee Act, 1850, 13 & 14 Vict., c. 60 (U.K.); The Trustee Act, 1852, 15 & 16
Vict., c. 55 (U.K.); The Law of Property Amendment Act, 1859, supra, note 23; Trustee
Act, 1888,51 & 52 Vict., c. 59 (U.K.)- Trustee Act, 1893, 56 & 57 Vict., c. 53 (U.K.);
and Trustee Act, 1925, 15 & 16 Geo. 5, c. 19 (U.K.).

Law of Property Act, 1925, supra, note 10. See, also, Megarry and Wade, supra, note
13, at 33-34.

15 & 16Geo. 5,c. 19 (U.K.).

15 & 16 Geo. 5, c. 18 (U.K.).

The Trustee Act, R.S.M. 1970, c. T160.

Trustee Act, R.S.P.E.I. 1974, c. T-9.

R.S.O. 1980, c. 512.

See, for example, An Act for the further Amendment of the Law, and the better Advance-
ment of Justice (1837), 7 Will. 4, c. 3; An Act to Confer certain Powers on Trustees
and Executors (1868-69), 32 Vict., c. 37; An Act respecting Remedies for and against
executors and administrators and respecting the Limitation of certain actions. C.S.U.C.
1859, c.78; An Act to consolidate and amend the Law as to Wills ( 1873), 36 Vict., c.
20; and An Act to provide for allowances to Trustees Executors and Administrators
(1874), 37 Vict., c. 9.

provisions, some amended after their original enactment, were consolidated
as chapter 107 of the first revision of the Ontario statutes in 1 877 /2 Although
the present Act reflects at many points the English Trustee Acts of 1888 and
1893, it retains much of the character of the 1877 revision.33 To this basic
form, piecemeal amendments have been made between 1900 and the present
day. Perhaps the most striking anachronism of the present Act is that it
continues to embrace both Trustee Act provisions and provisions concerned
with the administration of deceased persons' estates - an indication of mid-
nineteenth century thinking when trusts were almost exclusively perceived as
a mode of, and therefore as part of the law of, testamentary disposition.

The Ontario Trustee Act is concerned with the appointment and discharge
of trustees, the investment and administrative powers of trustees, and the
remuneration and indemnification of trustees. The Act confers powers upon
the Supreme Court of Ontario to make various vesting orders, to appoint and
remove trustees where its assistance is needed, to give advice and directions
to trustees, and to relieve trustees, where appropriate, of liability for breach
of trust. Broadly speaking, apart from the sections on estate administration,
these are the contents of the Act. The provisions concerning non-judicial (or
private) appointment of trustees, and trustee powers and remuneration, may
be excluded or varied by the settlor or testator in the trust instrument, if he
so chooses. It is in this latter regard that the Act is intended to be supportive
and enabling.

3. THE NEED FOR A REVISED TRUSTEE ACT:
APPROACHES TO REFORM

(a) The Need for Legislation

Traditionally, the role of legislation in the trust area has been conceived
as supportive of the case law of trusts; that is, as providing better machinery

An Act respecting Trustees and Executors and the Administration of Estates, R.S.O.
1877, c. 107.

An Act respecting Trustees and Executors and the Administration of Estates, ibid.,
appeared, subject to amendment, in R.S.O. 1887, c. 110. In R.S.O. 1897, this Act was
divided into two parts: namely. The Trustee Act, R.S.O. 1897, c. 129, and The Trustee
Investment Act, R.S.O. 1897, c. 130. In 1911, The Trustee Act, 1 Geo. 5, c. 26,
consolidated and superseded these latter two 1897 Acts, as well as the following: An Act
to Protect Persons acting as Executors or Administrators, R.S.O. 1 897, c. 1 3 1 ; An Act
respecting the Estates of Insolvent Deceased Persons, R.S.O. 1897, c. 132; The Trustee
Relief Act, R.S.O. 1897, c. 336; An Act respecting Executors and Administrators,
R.S.O. 1897, c. 337, ss. 10-20; The Surrogate Courts Act, R.S.O. 1897, c. 59, ss. 63-
64; and The Judicature Act, R.S.O. 1897. c. 51, s. 39. The 191 1 Act appeared, subject
to amendment, in R.S.O. 1914, c. 121, and is the form of the Trustee Act that has
prevailed to the present day.

The statutory lineage of the present Ontario Trustee Act, supra, note 30, accounts for
the fact that trust administration and estate administration are equal concerns of the Act.
The fact that executors and administrators are trustees for the purposes of the Act justifies
the short title, the Trustee Act. There is an overdue need to place the sections of the
Trustee Act that deal with the administration of deceased persons' estates in a separate
new Act, concerned explicitly with that subject. A new Administration of Estates Act is
the objective of the Commission's current Project on the Administration of Estates of

for the administration of trusts than has been, or perhaps could be, provided
by the courts through their inductive decisions. To fulfil this role, statutory
provisions must be kept abreast of modern needs and trust drafting, and must
not be allowed to remain as a response only to yesterday's needs and drafting
practices. Should the statute fail to keep pace with the requirements of
practice, it will become increasingly of less value to all those concerned with
the drafting of trusts. Each trust instrument will be drawn incorporating its
own response to contemporary needs, and the statute will become in ever
larger measure ignored legislation.

Unfortunately, this has occurred in Ontario and, for all practical pur-
poses, much of the Ontario Trustee Act is obsolete. Therefore, as the present
Act no longer performs its traditional role in a meaningful fashion, the
fundamental question that the Commission has considered is whether there is
a continuing need for legislation in the area of trust law. If there was originally
a good case for the enactment of enabling legislation to assist and fulfil the
judge-made law, has that reason now disappeared? Many of the Common-
wealth common law jurisdictions have thought not. Indeed, in recent years
the Trustee Acts of New Zealand,35 Western Australia,36 and Queensland37
have been entirely rewritten to meet modern requirements. The same attitude
is reflected in Manitoba where sections taken from the Trustee Act, 1925, the
contemporary English Act, have been introduced in The Trustee Act of that
Province.38

It may be argued, however, that, if a trust instrument incorporates all the
powers and discretions that trustees could ever wish to exercise, there would
be no need for the Trustee Act as supplementary authority for the exercise of
those powers that are in the Act, but not in the trust instrument. Many persons
also consider this statutory supplementation cumbersome, particularly for
non-professional trustees who may not be familiar with the provisions of the
Trustee Act. Yet, against this view, it may be asserted that there is still a
need for legislation. Statute must, for instance, confer upon the courts the
power to advise trustees on the law concerning their instruments, to relieve
trustees of liability where breach is excusable, and to make vesting orders.
Moreover, no trustee who is discharging his duty of care as a trustee can
reasonably afford to be unaware of statutory provisions of this nature.

In addition, the Act can continue to play the role - reflected in English
legislation since the mid-nineteenth century and particularly in the English
Trustee Act, J 925 - of enabling legislation, whereby the length of trust
instruments may be shortened considerably through the incorporation, by

Deceased Persons. The new Act would bring together and revise relevant portions of the
Trustee Act, the Estates Administration Act . supra, note 9. and the provisions governing
practice under the Surrogate Courts A ct. R.S.O. 1980, c. 491 and Rules. R.R.O. 1980,
r. 925. as well as codify and revise a number of the common law doctrines that now
govern estate administration.

35 Trustee Act 1956, Repr. Stat. N.Z. 1977. No. 61.

36 Trustees Act. 1962, W. Austl. Acts 1962. No. 78.

37 Trusts Act 1973. Quecnsl. Stat. 1973. No. 24.

38 Supra, note 28.

reference, of powers and discretions conferred upon trustees by the Act,
unless the trust instrument provides to the contrary. Some practitioners are
of the view that, while this purpose may have had some validity in days when
lengthier instruments were laborious to produce, it has very little significance
in the age of the computerized trust document. Yet, the mode of preparation
of the document is not the point. Aside from the fact that many offices may
not possess word-processing equipment, the trustee will have the benefit of a
shorter instrument, and the draftsman, for his part, may be confident that the
statutory powers have been designed to be free of the constructional faults
that may exist in individually drawn clauses.

However, it may also be argued that, while the adoption by statute of
familiar precedents may have had value in the days when the taxing statutes
did not impinge so heavily on the drafting of trust instruments, it is doubtful
whether general statutory precedents are of widespread value today when
instruments must be tailor-made for particular tax situations. Moreover, given
the prevailing policy of frequent amendments to the Income Tax Act (Can-
ada)39 it is likely that statutory precedents would soon be rendered otiose.
There is force in this argument, but again the sophisticated tax-planned
instrument would seem to be a feature of specialized practice. There is no
evidence that the types of power contained in modern Trustee Acts will not
continue to reflect the powers that appear in the majority of familiar will-
forms in this Province. It was essentially for such testamentary trusts that the
statutory powers were first introduced.

The Commission has concluded that legislation in the area of trust law is
desirable and, indeed, essential. Not only can legislation confer necessary
supervisory and remedial powers upon the court, but also, even in a facultative
form, it can provide modern provisions for the relatively uncomplicated trust
instrument that is drawn in all areas of the Province.

(b) The Form of Revised Legislation

If it is recognized that legislation in the area of trust law can perform an
important and, indeed, necessary function, there arises the question of its
form. There would appear to be two basic approaches available. On the one
hand, the law of trusts could be codified in statutory form, a response that
has support from several jurisdictions in the United States. Alternatively, the
traditional role of the Trustee Act as supportive and facultative legislation
could be continued and the existing Act modernized to accommodate contem-
porary needs and practice.

(i) Codification

The first possible response would be to codify the law of trusts. The
occasion of the Commission's examination of the policy, form, and contents
of the Ontario Trustee Act would provide an opportunity to determine whether,

39 Income Tax Act (Canada), S.C. 1970-71-72. c. 63.

after a period of development as long as that of assumpsit and contract, this
area of the law should now be codified.

There is much attraction in this course of action. It is true that equity
largely complements and supplements the common law, and is associated
today with other areas of law, such as contract, tort, property, and landlord
and tenant. However, the trust was wholly a development of equity, and is
as self-contained an area of law as, for instance, contract. It is, therefore, as
susceptible as contract to possible codification. It is also arguable that the law
of trusts is ripe for codification. One hundred and fifty years have passed
since the consolidating work of Lord Eldon, who turned equity, including
trusts, into a body of law as subject to development solely by stare decisis as
any branch of the common law, such as contract or tort. The honing of trust
law is now sufficiently complete.

This line of reasoning has found acceptance for many years in a number
of United States jurisdictions. In Louisiana, codification was unavoidable,
given the fact that the common law theory of trusts fitted awkwardly into the
civil law. However, because of pressures opposing the introduction of the
trust into the State (a civil law jurisdiction in the French tradition), it was not
until 1964 that Louisiana adopted a complete code of trust law.40 It was,
therefore, in the common law jurisdictions that codification was first intro-
duced. As the settlement of the United States proceeded, a number of states
and territories of the middle and far west, under the influence of David Dudley
Field's codification work in New York - completed in 1865, but rejected in
his home State41 - saw codification as an attractive alternative to the unwritten
law. The Field codification inspired the contents of the Dakota Territorial
Code of 186642 and the California Civil Code of 1872.43 In 1887, Idaho
followed suit,44 as did Montana in 1895.45

In this context, the thinking in these jurisdictions differed from that of
nineteenth century Europe. In Europe, codification was necessary to intro-
duce, as an entity, a law that was to replace diverse local laws, often concep-
tually distinct from Roman law. In the jurisdictions of the western United
States, it was considered that codification could supply succinctness of
expression and convenience of reference to the legal profession and the public

40 La. Rev. Stat. Ann. § 9: 1721-2252 (West). For the literature on earlier partial intro-
duction of the trust in 1920 and 1938, and also the 1964 Code, see Report by the
Louisiana State Law Institute to Accompany the Proposed Trust Code, La. Rev. Stat..
Vol. 3A, at III (West), and Scott, The Law of Trusts (3d ed., 1967), Vol. 1 , § 1 .10. at
29-31.

41 See Scott, ibid., § 1.10, at 30.

42 Later to form the code law of North Dakota, N.D. Cent. Code Ann. § 59, and of South
Dakota, S.D. Comp. Laws Ann. § 55.

43 See, now, Cal. Civ. Code §§ 852-71 and 2215-89 (West).

44 See, now, Idaho Code §§ 15-7-101-15-7-401.

45 See, now, Mont. Rev. Code Ann. §S 86-101-86-706. Sec. also. Oklahoma's Uniform
Trust Act, Okla. Stat. Ann. tit. 60 §§ 175. 1-175.5, and the Texas Trust Act. Tex. Rev.
Civ. Stat. Ann. arts. 7425b- 1-7425H-47 (Vernon). The limited early influence of Mex-
ican-Spanish law in California and the south-west United States meant that the civilian
pressure for codification was not significant in the states so affected.

alike in developing pioneer jurisdictions with their populations of mixed
background. It was a "hip pocket" statement of basic legal principles. More-
over, it provided an opportunity for the codifiers to clarify those many points
of law where an inductive, case law jurisdiction is bound to have uncertainty.
In the older, developed eastern United States, only Georgia adopted the Field
codification.46 Indiana, which adopted a trust code in 1971, 47 is the latest of
the states to codify, although, as in Louisiana, the inspiration for this code is
the American Restatement of the Law of Trusts, originally adopted by the
American Law Institute in 1935, and appearing in its second edition in 1959.

(ii) Modernization of Existing Act

The second possible response to the outdated character of much of the
existing Trustee Act would be to continue, in a revised and updated form, the
tradition of enabling and supportive trustee legislation. This tradition can be
traced from the statutory revision and consolidation of 187748 to the present.

The advantage of this response is that the flexibility and adaptability of
the trust concept, springing as these attributes do from the fact that trust law
is judge-made law, are retained.49 Over the five hundred years prior to 1800
when the law of uses, and then of trusts, was being developed by the courts
of Equity, only two statutes of any significance contributed to or affected that
development: the Statute of Uses50 and the Statute of Frauds. 51 The first proved
to be the incentive for the creation of the trust out of the ashes of the "passive"
use, and the second gave birth to new directions of judicial inventiveness,
namely, the constructive trust and the doctrine of fraud prevention epitomized
in Rochefoucauld v. Boustead.52 Thereafter, as we have seen, came the
nineteenth century reforms, emulated in Ontario, which sought mainly to
eliminate the procedural complexity of the past and to play a supportive role
to the achievements of the case law.

In the last decade of the nineteenth century the first Succession Duty Act
was passed in Ontario,53 while the federal Parliament enacted the first Income

See, now, Ga. Code Ann. § 108.

Ind. Stats. Ann., Code Ed., tit. 30 (Burns). For an interesting study of this codification,
and of the questions involved, see Ard, "A Proposed Trust Code for Indiana - An Effort
at Reform" (1969-70), 45 Notre Dame Law. 427. See, also, American Law Institute,
Restatement of the Law, Second— Trusts, 2*/ (1959), §§ 1-460.

An Act respecting Trustees and Executors and the Administration of Estates, supra, note
32.

F.W. Maitland in his famous lectures on Equity at Cambridge University. England, at
the turn of the century said, "Of all the exploits of Equity the largest and the most
important is the invention and development of the Trust. It is an 'institute' of great
elasticity and generality; as elastic, as general as contract": supra, note 1, at 23.

Supra, note 12. Re-enacted in Ontario as The Statute of Uses, R.S.O. 1897, c. 331.

(1677), 29 Car. 2, c. 3. In Ontario, see, now. Statute of Frauds, R.S.O. 1980, c. 481.

[1897] 1 Ch. 196. See, further, Lewin on Trusts, supra, note 6, at 24, and Waters,
supra, note 3, at 192 et seq.

The Succession Duty Act, 1892, 55 Vict., c. 6.

Tax Act in 1915.54 By 1945 succession duty, estate tax, and income tax were
beginning to make heavy inroads into the wealth of Ontario residents held in
trust. Nonetheless, although taxing statutes affect trusts, they do not contrib-
ute to the development of the law of trusts, [f they contribute at all, it is in
the sense only that they lead to a considerable volume of litigation, which
has served as the medium for the courts, aside from the provisions of the tax
legislation in dispute, to develop the case law of trusts yet further. Today, by
far the greatest volume of legislation concerning trusts is contained in the
Income Tax Act,55 an Act designed among other things to neutralize the trust
so far as possible as a tax avoidance device. Given that the trust, like the use
before it, has considerable tax saving potential, and that in the private dis-
position of wealth a very large number of trusts today have tax saving as their
principal purpose, it is not surprising that many think of the tax statutes as
laying down the primary law on the subject. It is ironic that this should be so
because, for the reasons given above, not only is this a caricature of the true
position, but taxing statutes arrived on the scene when the law of trusts was
already mature, and have occupied a significant position during only the last
thirty or forty years of the trust's three hundred and fifty years of existence
and development.

It should be noted that the trust has numerous uses in business and
commerce. When one reflects that these sophisticated investment and fidu-
ciary property-holding devices are also subject to the same basic principles
of trust law developed by the Equity courts, it is evident that the flexibility
and adaptability considered so significant over the years will continue to be
relevant. In fact, these characteristics are considered by the business com-
munity to be valuable attributes of the trust.

In these circumstances, there is a powerful case for leaving the trust as a
creature of case law, to be developed in the future, as in the past, by the
courts. The Trustee Act would then continue its supportive role, both as to
the powers of trustees and of the courts, and would merely be brought to the
point where it embodies contemporary needs and practice.

4. CONCLUSIONS

Of the two possible responses - codifying the law of trusts or modernizing
the present Trustee Act - the Commission prefers the latter.56 Accordingly,
the Commission recommends that the Trustee Act should retain its present
character as supportive and enabling legislation. The Act should continue to
assist and supplement the judge-made law of trusts57 and to confer powers

54 The Special War Revenue Act, 1915, 5 Geo. 5, c. 8.

55 Supra, note 39.

56 One of the Commissioners, the Honourable Richard A. Bell, P.C., Q.C.. does not agree
with this recommendation. He would have sought to undertake a codification of the law
of trusts and believes this is both feasible and preferable.

57 Draft Bill. s. 3. Section 3 of the Draft Bill provides that, except as otherwise provided
in the revised Trustee Act, the law respecting trusts and trustees in force in Ontario
immediately before the revised Act comes into force continues in force.

upon the court. Moreover, the Act should continue to confer powers upon
trustees, which, for the most part, should be subject to the contrary intention
of the creator of the trust.™ To accomplish this objective effectively, the Act
should be modernized to provide judicial and trustee powers that will accom-
modate contemporary needs and practice.

Although the primary focus of reform should be to modernize the Trustee
Act, the Commission also recognizes that there is a need in certain specific
areas of trust law for clarification or change. Accordingly, the Commission
recommends that, where there appears to be material advantage in accom-
plishing clarification or change, the revised Trustee Act should clarify or
amend the existing law, rather than leave the matter to the courts. However,
this would be by way of exception to the policy that codification of the law
of trusts should not be attempted. The Commission has thought it desirable
to reflect its recommendations for modernization, clarification, and change
of trust law in legislative form, and has, accordingly, prepared a Draft Bill
to revise the Trustee Act, which is appended to this Report.59

A primary reason for choosing the second response is that the law of
trusts is indeed mature and substantially settled, and there would be a danger
that, in codifying the law and introducing a new linguistic expression of
established rules, questions of statutory interpretation would arise that, with-
out codification, would have been avoided.60 If there were significant prob-
lems, lacunae, and doubts in the case law, there might indeed be a compelling
argument for codification, but this is not the situation that exists. In these
circumstances, there is every justification for retaining not only the principles
and rules of present trust law, but also the flexibility and adaptability that
inductive case law has given the trust concept. These merits of the trust
concept are so widely recognized, especially in the use of the trust in business
and commerce, that it would be unwise in our view to "freeze" the concept
in its existing mould. It is true that there could be a gain if, as we have
recommended, the Trustee Act were to clarify or amend the existing law
where that would be advantageous. Similarly, it could be useful if the revised
Act were to state the equitable principle or rule where there is now doubt as
to the exact nature of the principle or rule. This may well be the case with
regard to the three fundamental duties of the trustee: namely, to show the
standard of care of the reasonable man; to avoid, and to account for, personal
profits received in conflict of interest and duty situations; and to act with an
even hand as between successive beneficiaries. But this can be done in an
updated Trustee Act.

As to the advantage to the profession and the public of having the law of
trusts stated succinctly and comprehensively in a single codifying Act, this
is an argument for the adoption of codification as a general principle in

58 Draft Bill, s. 2(b).

59 See Appendix 1 .

60 Scott, supra, note 40, § 1.10, at 30, speaks of the Field Code as "not very satisfactory".
He notes that the Code was based in part on the Revised Statutes of New York, 1828,
which had "caused a great deal of litigation, and insofar as the code attempted to embody
the common law, it is vague, inaccurate and incomplete".

Ontario. Indeed, it is this principle that has been followed, to a greater or
lesser extent, in those American jurisdictions that have codified the law of
trusts. Not only Louisiana, but other states - California and Indiana, for
instance - have reduced a considerable volume of their law to codified form.
Whether this principle should be adopted in Ontario is an issue that raises
fundamental questions, including cost, that are beyond the ambit of trust
law.61 As far as the availability of information regarding the law is concerned,
it should, however, be noted that in Ontario the law of trusts has not been
ignored by current works of reference.62

An additional reason for the Commission's recommendation to modern-
ize the Trustee Act, rather than to codify the law of trusts, is to maintain a
very evident Commonwealth tradition of providing an enabling and suppor-
tive Act to complement a continued reliance on case law, particularly the
persuasive authority of the English decisions. In the United States, the tra-
dition is quite different. Upon attaining political independence in the last
quarter of the eighteenth century, the American states began quickly to
develop a distinctive body of case law. A century later this fact, combined
with the multiplicity of jurisdictions within the United States and the signifi-
cant size of the American population and wealth, had removed the United
States from the path taken by the Commonwealth jurisdictions.

As the law of trusts was already well advanced in 1776, there continues
to be a close doctrinal relationship between trusts law in the United States
and in the older Commonwealth countries. Nonetheless, the tradition of
nineteenth century legislation supportive to the case law was not adopted in
United States jurisdictions. As Scott records,63 legislative intervention, when
it came, differed from state to state, and across the country local case law
abounded to the point that state codification, together with uniformity legis-
lation and statutory consolidation, was a response to the needs of certainty,
standardization, and modernization.64 As a result, the Canadian courts have
looked to England and other Commonwealth jurisdictions, rather than to the

63
64

For a graphic difference of opinion on the value of codification, the labour involved in
its production, and its effects, see Hahlo, "Here Lies the Common Law: Rest in Peace"
(1967), 30 Modern L. Rev. 241; Gower, "A Comment" (1967), 30 Modern L. Rev.
259; Topping and Vandenlinden, "Ibi Renascit Jus Commune" (1970), 33 Modern L.
Rev. 170; and Hahlo, "Codifying the Common Law: Protracted Gestation" (1975). 38
Modern L. Rev. 23.

See Baker (ed.), Widdifield on Executors' Accounts (5th ed., 1967), and Waters, supra,
note 3.

Scott, supra, note 40, § 1 . 1 1 , at 3 1-33.

Codification should be distinguished from extensive legislation and consolidation in the
area of law in question. More numerous than the states that have codified, arc the states
that have enacted uniform or other legislation in areas of trust law that were in need of
reform, and have consolidated their existing legislation, including uniformity legislation:
see, for instance, N.Y. Est. Powers & Trusts Law § 17B (McKinney). The Uniform
Acts of the National Conference of Commissioners on Uniform State Laws have been
widely adopted, either in their recommended, or in an amended, form. An example of
recent codification, which still has significant elements of consolidation about it. is the
Probate. Estates and Fiduciaries Code in Pennsylvania, Pa. Stat. Ann. tit. 20, §§ 101-
8815, enacted by Pa. Laws 1972, c. 164. By that law. the former title 20. known as the
"Consolidated Pennsylvania Statutes", was amended to read as the above "Code".

United States, for persuasive authority in the area of trust law. The Commis-
sion is of the view that, given the Commonwealth tradition of a shared body
of case law and enabling and supportive Trustee Acts, which is well known
and understood in the Province, the case for a departure from this tradition is
not sufficiently persuasive/'5

One final point should be mentioned. If the Trustee Act is to be retained,
its supportive role continued, but its provisions modernized, there is a ques-
tion concerning which types of trust it should seek to support. The Trustee
Act, 1925 in England, like its predecessors, is concerned primarily with the
trust that a person might create in his will or set up by deed in his lifetime in
order to transfer his property to others, normally as successive beneficiaries.
Those persons will probably be his spouse, his children and grandchildren,
and his relations or friends. On the other hand, he may wish to support one
or more charitable organizations, such as his place of worship, and these
gifts, too, may find their way into his testamentary or inter vivos trust.

However, these are not the only types of trust that may be created. As
has been said, the trust has played a considerable role in business and com-
merce since the early investment trusts of the late eighteenth century, and it
is essentially here that the flexibility and adaptability of the trust have been
demonstrated. A company may have a "trusteed" pension plan, which is
essentially an investment trust of the contributions that it receives, usually
from both the employee and the employer. Company profit sharing trusts and
stock purchase agreements are other forms of provision for an employee.
Registered retirement savings plans administered by trust companies are not
infrequent. A partner or director/shareholder may insure his co-partners' or
co-shareholders' lives to the value of their several interests, and the insurance
policy may be held by a trustee. A shareholder may agree that his voting
rights should be subject to a voting trust.

The trust is also used as a substitute for incorporation, especially for real
estate holding and development. The modern investment or unit trust, of
which the "REIT" (real estate investment trust) is a prime example, is a
revival of the management or investment trust idea of the late eighteenth and
nineteenth centuries. The syndicate trust is a pre-incorporation security de-
vice. Indeed, security provision is an important role of the trust. Apart from
its statutory employment in bankruptcy, its best known form is the trust for
bondholders when a company has issued debentures and puts up its assets as
security. The assets are vested in a trustee. Security is also the basis of stock
escrow trusts, trusts of warehouse receipts, and equipment trusts.66

The very diversity of these business and commercial trusts suggests that
they cannot be brought within the confines of the Trustee Act, even though
the law of trusts as established by the cases applies to these trusts as well as
to private individuals' trusts. It is interesting to observe that the Indiana Trust

65 See, however, the comments of the Honourable Richard A. Bell, P.C., Q.C.. Commis-
sioner, supra, note 56.

66 For further explanation of contemporary personal, business, and commercial trusts, see
Waters, supra, note 3, ch. 12.

Code67 and the New York Estates, Powers and Trusts Law68 do not incorporate
provisions for such trusts. In Canada, trusteeship in bankruptcy is covered
totally by the federal Bankruptcy Act ™ trusts for bondholders by the Business
Corporations Act, 1982 ,70 and pension fund trusts by the Pension Benefits
Act.1] Such trusts, therefore, have their own location in various statutes, and
it would be logical for further provisions to be placed in their respective Acts.
In these circumstances, the Commission recommends that the revised Trustee
Act should not apply to business, commercial or investment trusts, including,
for example, pension trusts, employee benefit and profit sharing trusts, re-
tirement savings plans, home ownership savings plans, retirement income
funds or any other savings plan trust registered under the Income Tax Act
(Canada), trusts further to a buy-sell agreement, stock purchase agreement
trusts, corporate bond trusts, and voting trusts. However, a trust should not
be excluded from the revised Act merely because it involves, in whole or in
part, the carrying on of a business.72

Similarly, the Commission is of the view that the provisions of the revised
Trustee Act should not apply generally to charitable trusts and non-charitable
purpose trusts. These types of trust are governed, at present, by a unique
body of case law73 and diverse statutory provisions,74 which should be ex-
amined in toto before reform of this area of the law is undertaken.75 However,
the Commission has concluded that the revised Act can usefully provide
guidance in two areas where difficulties appear to have arisen, without imped-
ing eventual reform of the law of charities: namely, the variation of charitable
trusts and the remedying of trust provisions that contain both charitable and
non-charitable purposes. Accordingly, the Commission recommends that,
until the topic of charity law reform has been examined in detail, the revised
Trustee Act should not apply to charitable trusts or non-charitable purpose
trusts,76 except to provide specific provisions for the variation of charitable
trusts and the remedying of trust provisions that contain both charitable and
non-charitable purposes.77

67 Supra, note 47.

68 Supra, note 64.

69 R.S.C. 1970, c. B-3.

70 S.O. 1982, c. 4, ss. 46-52.

71 R.S.O. 1980, c. 373. The Employee Retirement Income Security Act of 1974, Pub. L.
No. 93-406, 88 Stat. 829, an American federal Act, is so complete a provision concern-
ing pension plan fiduciaries that it has been described as the "Federal Law of Trusts".

72 Draft Bill, s. l(/?)(iii).

73 See Waters, supra, note 3, ch. 14.

74 For example, trusts for the upkeep of graves and tombs are within the provisions of the
Cemeteries Act, R.S.O. 1980, c. 59. Some provision is made lor charitable trusts under
the terms of the Charitable Gifts Act, R.S.O. 1980, c. 63. and the Charities Accounting
Act, R.S.O. 1980, c. 65, as amended.

75 See, for example, Cullity, "Statutory Machinery for Supervising Charities" (1972). I
The Philanthropist 22.

76 Draft Bill, s. L(p)(i).

77 See infra, ch. 8, and Draft Bill. Part VIII.

Generally speaking, subject to the two abovementioned exceptions,78 the
revised Trustee Act is designed to apply to all trusts however created and to
all trustees however appointed.79 Nonetheless, with respect to certain pro-
posed provisions, it will be recommended, for reasons to be discussed in later
chapters, that these provisions should only apply, for example, to express
trusts and not to resulting or constructive trusts.

In addition, it is intended that the revised Trustee Act should apply to all
trusts whenever created and to all trustees whenever appointed.80 Nonetheless,
in certain instances, the nature of the change in the present law that the
Commission will propose is such that special transitional provisions will be
recommended; for example, that the proposed provision should only apply to
trust instruments that take effect after the revised Act comes into force.

The chapters of this Report that follow will deal with the present Ontario
Trustee Act and, in particular, with those aspects of trust law that the Com-
mission considers to be in need of revision, clarification, or change. The
order of the chapters follows, for the most part, the order in which the
provisions of the Draft Bill appear.

Recommendations

The Commission makes the following recommendations:

1. The Trustee Act should retain its present character as supportive and
enabling legislation: the Act should continue to assist and supplement the
judge-made law of trusts and to confer powers upon the court and also
upon trustees, subject to the contrary intention of the creator of the trust.

2. The Trustee Act should be modernized to provide judicial and trustee
powers that will accommodate contemporary needs and practice.

*3. Where there appears to be material advantage in accomplishing clarifi-
cation or change, the revised Trustee Act should clarify or amend the
existing law, rather than leave the matter to the courts. However, this
would be by way of exception to the policy that codification of the law
of trusts should not be attempted.

4. The revised Trustee Act should not apply to business, commercial or
investment trusts, including, for example, pension trusts, employee ben-
efit and profit sharing trusts, retirement savings plans, home ownership

8 A third exception, carried over from the present Trustee Act, is that the revised Trustee
Act should not apply to an estate conveyed by way of mortgage: see Trustee Act, supra,
note 30, s. \(q), and Draft Bill, s. l(p)(ii).

79 Draft Bill, s. 2(a).

80 Ibid.

* See, however, the comments of the Honourable Richard A. Bell, P.C., Q.C., Commis-
sioner, supra, note 56.

savings plans, retirement income funds or any other savings plan trust
registered under the Income Tax Act (Canada), trusts further to a buy-
sell agreement, stock purchase agreement trusts, corporate bond trusts,
and voting trusts. However, a trust should not be excluded from the
revised Act merely because it involves, in whole or in part, the carrying
on of a business.

5. Pending an examination of charity law reform generally, the revised
Trustee Act should not apply to charitable trusts or non-charitable purpose
trusts, except to provide specific provisions for the variation of charitable
trusts and the remedying of trust provisions that contain both charitable
and non-charitable purposes.

6. Subject to Recommendations 4 and 5, and to certain exceptions related
to specific proposed provisions, the revised Trustee Act should apply to
all trusts however created and to all trustees however appointed.

7. The revised Trustee Act should apply to all trusts whenever created and
to all trustees whenever appointed, except in certain specific instances
where the nature of the change in the present law that the Commission
will propose necessitates a special transitional provision.

CHAPTER 2

GENERAL PRINCIPLES
GOVERNING THE
EXERCISE OF POWER AND
DISCHARGE OF DUTY BY
TRUSTEES

1. INTRODUCTION

In the course of administration of a trust, a trustee has to discharge the
duties set out for him in the trust instrument or, if there is no instrument, in
the oral trust terms. For this purpose, the trustee has to make decisions and
often choose between various possible courses of action. It is to enable the
trustee to carry out these duties that he has powers, both administrative and
dispositive. However, over and above the duties that are imposed and the
powers that are conferred upon a trustee by the trust instrument or by statute,
he has certain basic duties that govern him in all his actions. These duties
arise from the nature of the trustee's office. A trustee is a fiduciary. This
means that he is entrusted with title to and control over another person's
property for the exclusive purpose of serving that other person.1 Because of
the trust that is reposed in him through the act of assuming the office, the
trustee promises to perform his tasks personally, with care, and with the sole
interests of the beneficiaries in mind.

The basic duties of a trustee are therefore threefold. First, a trustee must
carry out his task with due care and attention, as well as honestly. Secondly,
a trustee must not delegate to another the responsibilities entrusted to him.
Thirdly, a trustee must not permit his own interest to conflict in any way with
his duty to the beneficiary whom he serves.

There is a wide range of persons, such as solicitors, accountants, and
brokers, who must observe these fiduciary duties, but none must do so as
intensely as a trustee. This is partly due to historical factors.-1 but also because

1 See Waters. Law of Trusts in Canada (1974). at 31-34.

2 The concept of ownership through trusteeship was fashioned in the English Court of
Chancery. Solicitors, accountants, and brokers arc persons practising particular profes-
sions whose activities require of them sonic of the behaviour required of a trustee.

1231

the essence of the trusteeship task, from beginning to end, is indeed one of
trust. Opportunities for abuse of the office are plentiful, whether by retaining
the office but passing over the task of performing the duties of it to others,
by dishonesty through self-seeking in one manner or another, or by mere
neglect. Because title to the property being administered is in the trustee's
own name, and he is usually empowered to buy, sell, transfer, and charge
trust property, his personal involvement, skill, and integrity are of paramount
importance to the beneficiary.

It is for these reasons that, since the latter half of the seventeenth century,
when the modern law of trusts began to be fashioned in the English courts,
the three basic duties have been emphasized constantly by the courts of all
jurisdictions in which the trust is known. These duties are discussed at length
in texts on the law of trusts.3 While it is not our purpose to attempt a
codification of the law of trusts, we have considered whether a revised Trustee
Act might usefully reiterate any aspect of these basic duties, and, in so doing,
clarify the case law in any respect or develop principles already established.
In addition to an examination of the three fundamental duties mentioned
above, we shall discuss in this chapter two other general principles that govern
the exercise of power and discharge of duty by trustees, namely, that trustees
must act unanimously and that the powers of trustees are solely theirs.

2. TRUSTEES' DUTY OF CARE

(a) The Basic Duty of Care

In conducting the management of the trust, the trustee must exhibit the
same diligence and care that an ordinary prudent man of business would
exercise in conducting a business that is his own.4 Whatever he is doing on
behalf of the trust, and in the discharge of his duties, including the exercise
of any dispositive or administrative powers, what is required of him, as
Dickson J. has stated, is "vigilance, prudence and sagacity".5 Such a duty
condemns negligent omission, as well as commission, and is allied with the
equally important duty of the trustee to act in good faith. Although difficult
to define, good faith may be said to mean an honest belief on the part of the
trustee that what he has done, or proposes to do, is proper and appropriate.6
The duty of care complements the primary duty to act in good faith. If either
duty is breached, and loss ensues to the trust or to a beneficiary, the trustee
is in breach of trust, and he must personally make good the loss. However,

See, for example, Mowbray (ed.), Lewin on Trusts (16th ed., 1964), ch. 9; Hayton
(ed.), Underbill's Law relating to Trusts and Trustees (13th ed., 1979). ch. 11; and
Waters, supra, note 1, ch. 18.

For a general discussion of the trustee's standard of care, see Waters, supra, note 1, at
655-61.

Fales, Wohlleben v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302, at 318, (1977),
70 D.L.R. (3d) 257, at 270, [1976] 6 W.W.R. 10, at 22 (S.C.C.) (subsequent references
are to70D.L.R. (3d)).

See further, Cullity, "Judicial Control of Trustees' Discretions" (1975), 25 U. Toronto
L.J. 99.

his lack of good faith or of care must be established as the cause of the loss.
As Lindley L.J. once remarked, "a trustee is not a surety, nor is he an insurer;
he is only liable for some wrong done by himself, and loss of trust money is
not per se proof of such wrong".7

As a result of some dicta of Jessel M.R. in Re Speighf in the English
Court of Appeal in 1883, the thought was encouraged that, if a trustee had
been honest and had done his best to further the interests of the beneficiaries,
he should not be expected to do more. Honest belief that one's actions are
proper is, however, a subjective assessment of trustee conduct, and was
clearly rejected by three leading House of Lords cases between 1887 and
1 889. 9 As a result of these decisions, the relevant question is whether a trustee
has acted with integrity in what he did, seeking to do what the task demanded;
the standard of care expected of him is an objective one, external, that is, to
any consideration of the skills or circumstances of the particular trustee whose
conduct is impugned. The test is what would have been done by that familiar
legal creature, the reasonable man. In the law of torts, he has traditionally
been known as the man on the Clapham omnibus; in the law of trusts he is
the ordinary prudent man of business. The particular trustee must act as this
man would act in the same circumstances. If this standard is not satisfied,
and loss ensues, then the trustee is in breach of trust and responsible.

Despite some ambiguous remarks by Middleton J. in Davies v. Nelson, H)
it has remained unchallenged in Ontario, as elsewhere, that equity is con-
cerned neither with the level of skill of the impugned trustee, nor with the
manner in which he conducts his own affairs. A trustee is in breach of trust
if he fails to demonstrate the level of skill, caution, and active involvement
of the ordinary prudent man of business conducting his own affairs. In putting
it this way, the courts assume that the prudent man will be most conscientious
and diligent when looking after his own interests. Indeed, it is to remove any
doubt whatsoever that some English and American courts have preferred to
emphasize the moral responsibility of trusteeship, and to say that the care
required is that which the ordinary prudent man of business would show in
managing the affairs of others." It is this emphasis that we prefer to employ

Re Chapman, [1896] 2 Ch. 763 (C.A.), at 775.

Re Speight (1883), 22 Ch. D. 727 (C.A.), at 746. The decision of the Court of Appeal
was reversed, however, sub nam. Speight v. Gaunt (1884), 9 A.C. 1 (H.L.).

Learoydv. Whitelex (1887), 12 A.C. 727 (H.L.), affg (1886). 33 Ch. D. 347 (C.A.);
Knox v. Mackinnon (1888), 13 A.C. 753 (H.L.); and Rue v. Meek (1889), 14 A.C. 558
(H.L.).

(1928), 61 O.L.R.457,at463, [1928] 1 D.L.R. 254, at 257 (C. A.). For an examination
of the case law in Ontario and in other jurisdictions on the standard of care, sec Waters,
supra, note 1 , at 656-58, and 685-87.

See Re Whitelex (1886). 33 Ch. D. 347 (C.A.), at 355, per Lindley L.J., and King v.
Talbot, 40 N.Y. 76 (Ct. App. 1869). See, also. Waters, supra, note I. at 685-87. The
distinction between a "'prudent man" and a "prudent trustee" formulation of the duty of
care is most often discussed in the context of the investment power conferred upon
trustees. For a further discussion of this topic, see. infra, ch. 4, sec. 2(c).

in describing the care and attention required of the trustee in the discharge of
his duties and the exercise of his powers.12

Given this preference of expression by the Commission, the question that
we have asked ourselves at this juncture is whether the common law rule
prescribing the duty of care of a trustee should now be made statutory. The
argument against such a proposal is essentially twofold. First, English trustee
legislation since its inception in the nineteenth century has been concerned
solely to facilitate the administration of trusts, and trustee legislation through-
out the Commonwealth has adopted and retained that tradition. Trustee leg-
islation has always been enabling in character, even within the confines of
trust administration, and, accordingly, the general law of trusts remains the
product of case law, evolving by measured step from generation to generation.
A trustee will discover in Halsbury's Laws of England, n or in any of the
legal texts on the law of trusts, the duties that attach to his office, as those
duties have been elucidated by the courts. Statutory intervention, it is said,
is not needed; the courts have satisfactorily fashioned the trustee duties, and
the commentators have provided information, synthesis, and analysis of that
case law.

The second aspect of the argument is that, since it is not proposed that
the rule be changed in any significant manner, a formulation having the
binding force of statute would merely unsettle the case law. The courts would
be bound in future to be concerned with the process of statutory interpretation
rather than with the interpretation and application of case law. Attention has
been drawn to the fact that codifications in the United States are evidence
enough that broad statements of case law principle add nothing, and that
detailed language necessitates precise analysis of the meaning of particular
words in the context of statutory sentences.

The argument on the other hand for the introduction in the revised Trustee
Act of a statutory formulation of the rule is simple. The rule is fundamental,
and it is vital that all accepting the office of trustee should realize that the
rule exists. Moreover, because, as we have noted, there are different formu-
lations of the standard of care, it may be asserted that there is advantage in
setting forth one statement of the standard in the revised Trustee Act. In so
doing, the nature of the obligation that should be imposed upon trustees in
the discharge of their duties and exercise of their powers would be placed
beyond peradventure, namely, that the care required by trustees is that which

12 In Canada, for a similar expression of the duty of care in the context of trustee investment
powers, see Uniform Trustee Act, Conference of Commissioners on Uniformity of
Legislation in Canada, Proceedings of the Fifty-Second Annual Meeting of the Confer-
ence of Commissioners on Uniformity of Legislation in Canada (1970), at 35 and 1 15-
17. In addition, see Manitoba Law Reform Commission, Report on Investment Provi-
sions of "The Trustee Act" (Report No. 50, February 12, 1982), and An Act to Amend
The Trustee Act, S.M. 1982-83, c. 38, s. 5. See, also, infra, ch. 4, sec. 2(c)(ii)b. In
the United States, see the National Conference of Commissioners on Uniform State
Laws, Uniform Probate Code, Uniform Laws Ann., Estate, Probate and Related Laws
(1972), Vol. 8, § 7-302, at 584, for a like expression of the duty of care in a general
context. See, also, infra, this ch., sec. 2(c).

13 Simonds (ed.), Halsbury's Laws of England (3d ed., 1962), vol. 38.

the ordinary prudent man of business would show in managing the affairs of
others.

We are persuaded by this latter argument. Although we do not think
codification of the law of trusts is in general either necessary or desirable in
Ontario,14 it is arguable that, despite the possible hazards of codifying the
rule, the risk should be taken with a rule that is so fundamental as this one.
By codifying the case law rule, the revised Trustee Act would emphasize the
importance that the law attaches to the duty of care. Accordingly, we propose
the incorporation in the revised Trustee Act of the standard of care that is
reflected by the "prudent trustee" formulation. The Commission recommends
that the revised Trustee Act should contain a provision to the effect that, in
the discharge of their duties and the exercise of their powers, whether the
duty or power is created by law or the trust instrument, trustees shall exercise
that degree of care, diligence, and skill that a person of ordinary prudence
would exercise in dealing with the property of another person.15

Against this background of the general duty of care, we now turn to
examine two types of trustee, namely, the non-professional, unremunerated
trustee and the professional trustee. The issue is whether any aspect of the
general duty of care, as just recommended, should be varied depending upon
the type of trustee involved with the exercise of powers and the performance
of duties of the trust.

(b) The Nonprofessional, Unremunerated Trustee

Many trusts in favour of a spouse, children, or grandchildren, that is,
family trusts, are subject to the trusteeship of members of the family. Partic-
ularly is this so where the trust is testamentary. The trustees are likely to be
the spouse-beneficiary, and brothers or sisters of the settlor or testator. Some-
times, if a child is of age, he or she will be named a trustee, probably in
addition to the spouse or the child's aunt or uncle. The question arises whether
the standard of care expected of the ordinary prudent man of business is a
realistic or fair standard to impose upon persons who may have no business
experience, or very little such experience, who perhaps have never acted as
an executor or trustee, and who undertake trusteeship gratuitously out of
loyalty or affection for the creator of the trust and his family.

That the relative experience of trustees may be a factor to be considered
in the conduct of trust affairs is evidenced by two recent cases. Tales,
Wohlleben v. Canada Permanent Trust Co.,16 a decision of the Supreme
Court of Canada, and MacDonald v. Hauer,n a decision of the Saskatchewan

One of the Commissioners, the Honourable Riehard A. Bell, P.C., Q.C., does not agree
with this view. He would have sought to undertake a codification of the law of trusts
and believes this is both feasible and preferable: sec supra, ch. I . note 56.

Draft Bill, s. 4(1).

Supra, note 5.

(1976), 72 D.L.R. (3d) 110. [19771 1 W.W.R. 51 (Sask. C.A.). Sec, also. Waters.
"Liability Between Co-Trustees- Another Contest: MacDonald v. Hauer" ( 1977-78), 4
Estates and Trusts Q. 12.

Court of Appeal , each of which dealt with the judicial power to excuse trustees
for breach of trust. In the former case, the Court noted that on the testator's
death his widow - the co-trustee and a beneficiary - was left as a housewife
with four children to raise, that she took a night school course on "How to
Invest your Money", and generally tried her best. The Court relieved her
totally of any liability for the breach of trust committed by her co-trustee, a
trust company, and herself. In the latter decision, the widow, a co-trustee,
knew nothing about business and took no part in the affairs of the trust. On
the death of her husband, the creator of the testamentary trust, she left her
hometown, Saskatoon, to stay with relatives in England and then in Toronto.
It was presumably her supposition that the family solicitor and her sons, also
trustees, would continue to look after the estate affairs. Both the court of first
instance and the Saskatchewan Court of Appeal said that the court would
have exercised the excusing power in her favour had the need arisen. No
doubt because the statutory language did not require it, the courts in Mac-
Donald v. Hauer did not allude to whether the widow's conduct actually
constituted a breach of trust on her part.

If the courts are prepared to exercise their power to excuse trustees for
breach of trust in these circumstances, would it not be better to take the whole
matter out of the realm of judicial discretion - where each case, as a decision
on the facts, lends nothing to legal precedent - and for the revised Trustee
Act to make express provision for a lower standard of care for non-profes-
sional, unremunerated trustees? Settlors and testators would be on notice
before their trust instruments are drafted concerning all that is expected by
the law of non-professional trustees, especially if those trustees seek no
remuneration. Professional co-trustees, or other remunerated trustees, would
also know before assuming office what risk they run as a co-trustee of being
held solely responsible for loss consequent upon breach.

Indeed, the present formulation of the standard of care expected of
trustees is thought, by some, to be sufficiently flexible to enable the courts to
consider the knowledge and skill of the particular trustee, although applying
an objective test. Would the ordinary prudent man, with this knowledge and
this level of skill, have done as this trustee did? Although we do not consider
this a correct view of the law - the knowledge in the circumstances that the
prudent man of business could be expected to have, and that level of skill,
are also required - we think it underlines the doubt that can exist concerning
the position of the less knowledgeable and less skilled person who accepts
trusteeship. Nonetheless, any standard of care that is lower than that of the
ordinary prudent man of business would, in all probability, assume some
overtly subjective character. It would presumably be required of the trustee,
who accepts the office out of family affection and acts gratuitously, that he
act with the care, skill, and caution that he brings to the management of his
own affairs.

We have had little difficulty in deciding that the emergence of a subjective
standard of care, which is really no standard at all, is not desirable. A trustee
is a fiduciary. With extensive authority, acting on his own decisions, to
commit the trust property in a variety of ways, and with power to bind the
trust beneficiaries, the trustee must be expected to act as would the prudent
man of business, as well as to be loyal and actively involved in decision

making. Fiduciary administration, whether of considerable or small amounts
of property, would be gravely impaired if anything less than the objective
test of the prudent man of business were applied. Expert assistance is available
to the non-professional trustee, and, if he is not able to make a reasonable
assessment of the advice he receives, it is arguable that he should not be
acting as trustee, or at least assuming those duties that he cannot discharge
properly. Nor can it be presumed that the settlor or testator, by appointing
those whom he wishes to act, has accepted each appointee with all his
limitations. Even if the creator of a trust does accept that his original appointee
has limitations, a lower standard of care for non-professional, unremunerated
trustees would also apply to successor trustees, probably appointed by others,
and possibly unknown to the settlor or testator.

We therefore do not recommend any lowering of the prudent man of
business standard. Although the discretionary power of the court to excuse a
trustee for breach of trust may not be an ideal instrument with which to handle
those situations of breach where there are mitigating circumstances involving
a lack of relative knowledge and skill, it does afford a means of dealing
equitably with such cases without the law condoning a generalized lower
standard of care for trustee conduct. Accordingly, we recommend that non-
professional, unremunerated trustees should not be governed by any lower
standard of care than that recommended previously. 18 In the discharge of their
duties and the exercise of their powers, therefore, all trustees would be
required to exercise that degree of care, diligence, and skill that a person of
ordinary prudence would exercise in dealing with the property of another
person.19

Once a trustee accepts remuneration, whether or not he actually possesses
the skill and prudence of the ordinary prudent man of business, there can
surely be no question that he ought to be subject to the prudent man standard
of conduct. He is being paid for his services and, accordingly, has allowed
the matter to be placed on a business basis.

However, where a trustee is a professional, not only is he, or the trust
company, remunerated at current rates, but he holds himself out to the public
as having particular skills to carry out estate and trust administration. A
lawyer, an accountant, or an individual such as an investment authority has
a skill or, because of his particular profession, is assumed by the public to
have such a skill. A trust company not only has a range of technical services
available to it, but it also advertises its expertise in journals and brochures.
If a trustee possesses the skills of a professional, or holds himself out as
having such skills, should he be held only to the same standard of care as
that which is expected of the well-meaning relative?

The response of the American Law Institute to this question is that, where
a trustee "has or procures his appointment as trustee by representing that he

IK See supra, this ch., sec. 2(a).
19 Draft Bill, s. 4(1).

has greater skill than that of a man of ordinary prudence, he is under a duty
to exercise such skill".20 However, the Institute envisages that the settlor or
testator may wish to relax or modify that higher standard of care. Provided
that the trustee is not exonerated by an express clause in the trust instrument
from liability for a "breach of trust committed in bad faith or intentionally or
with reckless indifference to the interest of the beneficiary", or for "any profit
which the trustee has derived from a breach of trust", and provided that the
exoneration clause has not been inserted "as the result of an abuse by the
trustee of a fiduciary or confidential relationship" between the trustee and the
creator of the trust, the Restatement would give full force to an express
alteration of the higher standard of care.21 This approach has been adopted
by a number of American state courts.22

In 1969, the National Conference of Commissioners on Uniform State
Laws, together with the American Bar Association, approved the Uniform
Probate Code,23 which also incorporates the higher standard of care. Section
7-302 states as follows:24

7 — 302. Except as otherwise provided by the terms of the trust, the trustee
shall observe the standards in dealing with the trust assets that would be observed
by a prudent man dealing with the property of another, and if the trustee has
special skills or is named trustee on the basis of representations of special skills
or expertise, he is under a duty to use those skills.

However, as in the Restatement, the higher standard of care for those
trustees possessing special skills or expertise is not made mandatory by the
Uniform Probate Code, but is subject to the express terms of the trust instru-
ment. Given the ability of the institutions discharging estates and trusts work
to insist on the incorporation in trust instruments of such exculpatory clauses
before they will accept trusteeship, it is difficult to determine what impact
the Restatement and the Uniform Probate Code have had in those states that
have adopted these provisions.25

The case law position in the United States is somewhat equivocal.26
Inspired by the Restatement, many courts of first instance and some state

20 American Law Institute, Restatement of the Law, Second - Trusts, 2d (1959), § 174, at
379.

21
22
23
24

Ibid., §222, at 516-17.

See Scott, The Law of Trusts (3d ed., 1967), § 174.1, at 1412-15.

Uniform Probate Code, supra, note 12.

"This is a new general provision designed to make clear the standard of skill expected
from trustees both individual and corporate, nonprofessional and professional": Uniform
Probate Code, ibid., at 584.

Concerning the adoption of the Restatement, see supra, note 22. As of January, 1982,
15 states had adopted the Uniform Probate Code, namely, Alaska, Arizona, Colorado,
Florida, Hawaii, Idaho, Kentucky, Maine, Michigan, Minnesota, Montana, Nebraska,
New Mexico, North Dakota, and Utah: see Uniform Laws Ann., supra, note 12 (Cum.
Supp., 1982), Vol. 8, at 176.

Scott, supra, note 22, § 174, at 141 1, remarks on the higher standard of care expected
of professionals: "There seem to be no cases squarely holding that this principle is
applicable to trustees, but there is no apparent reason why it should not be applicable to
them." See, also, Bogert, The Law of Trusts and Trustees (2d ed., 1965), § 541, at 151-

74.

appellate courts have stated in actions against trust corporations that those
who have or represent themselves as having special skills must be held to
that standard of care. One of the latest examples of such an instance is Re
Estate of Killer,17 where the Supreme Court of Pennsylvania decided without
hesitation that the trust corporation was subject to the higher standard of care,
and remitted the case to the trial court to determine whether the trust corpo-
ration's conduct had conformed to the skills that it had or had represented
itself to have. On the other hand, some courts, although hearing actions
against trust corporations, have made no reference to a higher standard of
care. Appeal courts have sometimes ignored the issue, despite the fact that
the judgment of the trial court spoke emphatically and at length on the
matter.28 These appellate courts have approached the litigation at hand simply
on the basis of whether the professional trustee in question was acting with
both good faith and prudence. Indeed, such instances suggest, particularly
where the appellate court has upheld the judgment of the lower court, that
the language of a higher standard is employed by the court to underline that
the professional trustee is rightly held to have acted in breach; "any trustee
would be held in breach for this conduct, and this trustee is a professional".29

In examining the merits of the issue whether professionals should be
subject to a higher standard of care than non-expert trustees, it must be
recalled that the statutory judicial power to excuse trustees for breach of trust,
common to England, Scotland, Northern Ireland, New Zealand, and through-
out the Canadian and Australian jurisdictions, is unknown in the United
States. The Commonwealth tradition is to retain one uniform standard of
care, namely, that of the prudent man of business, and to give the courts a
discretion to relieve a trustee, wholly or partly, of liability for the breach or
possible breach he has committed. In this way, the courts are free to expect
more of the professional trustee than they might expect of the non-profes-
sional, and they have in fact done so. It has not been easy for professional
trustees to seek successfully the clemency of the courts. In Fales, Wohlleben
v. Canada Permanent Trust Co.,M the Supreme Court of Canada thought fit,
in the circumstances of that case, to excuse the non-professional trustee
completely, and to refuse any such relief to the professional co-trustee, a trust
company.

In the United States, however, where the influence of English statute and
case law has not been felt, breach of trust, so found, is automatically followed
by the liability consequences. The absence of a statutory judicial excusing
power has instead led naturally to the idea that different standards of care
should be imposed upon persons and trust institutions with different levels of
skill. Interestingly enough, it has not been suggested that a trustee should be

27 Re Estate ofKilley, 326 A. 2d 372 (Pa. S.C. 1974).

28 See ReCross' Estate, 172 A. 212. rev'd 176 A. 101 (N.J. Prerog. Ct. 1935). Sec. also.
Re Clark's Will, 242 N.Y. Supp. 210, rev'd 177 N.E. 397 (N.Y. Ct. App. 1931 ).

29 On the American case law with regard to the higher standard of care. see. generally,
Note, "Standards of Care for Corporate Trustees" I 1948-49), 16 V. Chi. L. Rev. 579.
and Berliant, "Standard of Care for Corporate and Professional Trustees" ( 1956), 42
Va. L. Rev. 665.

30 Supra, note 5.

subject to a standard less than that of the objective test of the prudent man of
business; rather, there has emerged a call for greater care from professionals.

The primary issue that must be addressed is whether Ontario should
impose upon professional trustees a higher standard of care than that of the
ordinary prudent man of business. The related issue of whether the statutory
judicial excusing power should be retained will be discussed in the next
section of this chapter.

The argument for change in Ontario - that is, for the adoption of a higher
standard for professionals and the retention of the standard of the ordinary
prudent man of business for non-professionals - is essentially based on the
observation that the law already recognizes the principle that more is expected
of those who have, or hold themselves out as having, special skills than is
expected of others performing the same task. Both in the law of agency31 and
in the law of torts32 this dichotomy is established and well understood. Why,
it is said, should the law of trusts not recognize the same principle? The
American Restatement of the Law of Trusts has made this the central justifi-
cation for its adoption of the double standard, and it is this contention that
has principally convinced both those American courts that have argued that
there now exists a double standard, and those American legislatures that have
statutorily introduced a higher standard for professional executors and trust-
ees. For those who agree with this outcome, it seems absurd that no more is
expected of a trust corporation, which combines a complete range of the
technical services associated with skilled trust management, than of the widow
or other well-meaning member of the testator's family who is likely to know
little, if anything, of fiduciary administration before starting on the task.

In England also, the courts have said that notice must be taken of the
greater skill and experience of the trust corporation in the exercise of the
judicial power to excuse trustees for breach of trust, but they have drawn the
distinction between trustees on the basis of the fact that some charge fees for
their services, while others, usually members of the trust creator's family,

In contract law, one who holds himself out as having special skills is held liable to
demonstrate such skills on the basis of an implied term or inducement to contract. The
standard of performance is objective, namely, that of persons with that level of skill.
Both in this situation, and where the contractor has special skills, but fails to exercise
them at the level of performance that persons in that class would exhibit, he may be held
liable on the basis of breach of a collateral warranty.

See MacDonald v. York County Hospital, [1972] 3 O.R. 469, at 481, affd (1974), 1
O.R. (2d) 653 (C.A.). See, also, Fleming, The Law of Torts (6th ed., 1983), at 104
(footnote reference omitted): "[a] physician will be adjudged by the standard of the
average practitioner of the class to which he belongs or holds himself out to belong: a
higher level of skill will be demanded from a specialist than a general practitioner ...".

The corporate trustee "represented itself as being possessed of greater knowledge and
skill than the average man. It was therefore under a duty to exercise a skill greater than
that of an ordinary man and the manner in which investments were handled must
accordingly be evaluated in light of such superior skill": see Re Estate ofKilley, supra,
note 27, at 375, per Jones C.J. The Trust Division of the American Bankers Association
has stated, "A trust institution should devote to its trust investments all the care and skill
that it has or can reasonably acquire": Scott, supra, note 22, § 174, at 1 141 .

act gratuitously/4 In the North American setting, however, where trustees
are statutorily entitled to remuneration, unless the trust instrument denies
payment, the distinction must necessarily be made on different grounds, and
this is why expertise and advertisement of alleged skills have been stressed
in the United States. In Canada, expertise and experience have therefore
become the court's explanation for demanding more of trust corporations,
where these institutions seek the exercise of the judicial excusing power in
their favour. And again in Canada, proponents of a higher standard of care
for professional trustees have not failed to observe the scarcely veiled unen-
thusiastic response of the Supreme Court of Canada in the Fales case to the
fact that trust law in this country admits of only one standard of care for all
trustees, whoever they may be.-'5

The case for the retention of a single standard of care in Ontario is also
forceful. The argument does not seek to contest the principle that those who
have special skills, or who attract trust business with the claim that they have
such skills, should be held to their consequent responsibilities, but, rather,
analyzes the advantages, and the effect, of introducing such a change in the
law. The major objection is that there is no evidence that the importation of
a higher standard of care for professional trustees is either needed or would

34 National Trustees Co. of Australasia, Ltd. v. General Finance Co. of Australasia, Ltd.,
[1905] A.C. 373 (P.C.), and Re Waterman's Will Trusts, [1952] 2 All E.R. 1054 (Ch.
D.). See, however, Bartlett v. Barclays Bank Trust Co. Ltd., [1980] Ch. 515, at 534.
The Law Reform Committee of England, in its Twenty-third Report: The Powers and
Duties of Trustees (Cmnd. 8733, October, 1982), paras. 2.13-2.15, is of the opinion
that English case law already requires a higher standard of care of professionals in all
circumstances. In Canada, see, also, Krendel v. Frontwell Investments Ltd., [1967] 2
O.R. 579, at 585, 64 D.L.R. (2d) 471, at 477 (H.C.J.). These cases are sometimes
misconstrued in American texts to suggest that Commonwealth courts have recognized
the existence of a higher standard of care for professionals. This error may be because
Americans are not familiar with the judicial excusing power. However, in the Fales
case, supra, note 5, the effect of the exercise of the excusing power comes close to an
apparent dual standard.

This is the only reported Canadian case where the courts have canvassed the issue of
a higher standard of care in relation to professional trustees. Dickson J., in Fales,
Wohlleben v. Canada Permanent Trust Co., supra, note 5, delivering the judgment of
the Court, stated as follows, at 268, 269, and 271:

The weight of authority to the present, [except in the exercise of the statutory
judicial excusing power,] has been against making a distinction between a widow,
acting as trustee of her husband's estate, and a trust company performing the same
role. Receipt of fees has not served to ground, nor to increase exposure to, liability.
Every trustee has been expected to act as the person of ordinary prudence would
act.

It is not necessary to decide whether a higher standard o\' diligence s
applied to the paid professional trustee, for Canada Permanent failed by s

hould be
iny test.

I have no doubt that in an appropriate case a paid professional trustee may seek
and obtain relief under s. 98 [the judicial power to excuse trustees under the British
Columbia Trustee Act]. Section 98 in terms admits of that possibility. All of the
circumstances would have to be considered, including whether the trustee was paid
for its services. . . . Among other relevant considerations is . . . whether the
trustee is someone who accepted a single trust to oblige a friend or is a company
organized for the purpose of administering estates and presumably chosen in the
expectation that it will have specialized departments and experienced officials;
above all, whether the conduct of the trustee was reasonable.

achieve anything that cannot now be achieved. It has been noted that, of the
reported American cases that have espoused the higher standard, none appears
to have imposed a liability upon the professional trustee that could not have
been reached with the prudent man standard.36 Nor has any American judg-
ment clearly stated what the higher standard involves. Negligence is a failure
to employ the degree of care that in the circumstances might reasonably be
expected, and the type of breach with which the majority of the higher
standard of care cases has been concerned arises out of the investment power
where the fault exhibited would have failed the prudent man test. Even in
this jurisdiction, the Supreme Court of Canada concluded in the Fales case
that the inability of the trust company to show that its branch office in
Vancouver had properly monitored the security of the particular trust invest-
ment, and had liaised on the matter with its head office in Toronto, was a
failure by any test. Indeed, it is asked, what more is expected than reasonable
care? Attentiveness and prudence in a trust company is measured by the
recognized office procedures and standards of trust company business.

It is also asked who is a "professional"? Which persons who commonly
undertake trusteeship within the scope of their professional practice can be
said to have special skills or hold themselves out as having such skills?
American authority includes lawyers,37 and to this profession must surely be
added accountants. But whether other professionals, such as stockbrokers
and investment consultants, should also be included is an open question. On
principle, even if they act gratuitously as members of the family of the testator
or settlor, there would seem to be no reason why they should not be required
to exercise the special skills that they have.

The truth of the matter, it may be argued, is that there is no such thing
as a "professional trustee". Whereas a doctor with a specialty skill is carrying
out a specific type of medical work, in which there can be agreed standards
of competence and practice, a so-called professional trustee is merely one
who performs a task, for the discharge of which he will usually charge a fee.
This is why the American Restatement and the American Uniform Probate
Code are careful to speak only of special skills and expertise, or an assertion
of having such skills. The skills of a trust company, a lawyer, an accountant,
and an investment consultant all differ; indeed, while the public may suppose
that any lawyer can handle estate and trust administration, the particular
lawyer may in fact specialize in corporate work, and have merely assumed
the trust administration to accommodate his client. Should he later be free to
argue that he had no special skills, and should he be judged by the same
standard as applies to the widow? In fact, the introduction of a higher standard
of care might turn out to be the introduction of subjective standards of care,
each trustee's conduct being measured by what might be expected of that
particular person or institution. The courts have always done their best to
avoid this outcome; such a "standard" is no standard.

36
37

The final outcome of the Killey case, supra, note 27, appears not to have been reported.

Re Estate of Lohm, 269 A. 2d 451 (Pa. S.C. 1970). An attorney, it was held, must
comply with a higher standard of care than a layman, but with a lower standard of care
than an attorney experienced in estate tax matters. Critics note that the same differentia-
tion would presumably have to be made in relation to other professionals.

In weighing the two arguments, for and against a standard for the so-
called professional trustee higher than that of the prudent man of business,
we have arrived at the conclusion, not without difficulty, that the revised
Trustee Act should adopt the approach of the American Restatement and
Uniform Probate Code. We believe a higher standard of care should be asked
of those who have special skills, or who hold themselves out as having such
skills. In the last analysis, it is for us a matter of principle that the trustee
who is skilled, or who attracts trust work because of the public's perception
of his skill, should be required to live up to that standard of conduct. If there
are particular circumstances that are mitigating, these can always be consid-
ered by the courts under their excusing power, and in this way no injustice
will be done.

Accordingly, we recommend that, in addition to the general duty of care
applicable to all trustees,38 trustees who in fact possess, or because of their
profession, business, or calling ought to possess, a particular level of knowl-
edge or skill which in all the circumstances is relevant to the administration
of the trust, should employ that particular level of knowledge or skill in the
administration of the trust.39

(d) Judicial Power to Excuse Breaches of Trust

As mentioned in previous sections, it does not necessarily follow that a
trustee will be liable for the loss that his breach of duty has caused. In
England, section 61 of the Trustee Act, 1925M) permits the court to excuse a
trustee wholly or partly for the consequences of his breach, if he has acted
honestly and reasonably, and ought fairly to be excused for the breach of
trust and for omitting to obtain the directions of the court in the matter in
which he committed such breach. On any specific question relating to the
execution of a trust, a trustee in England may apply for the direction of the
court under Order 85, rule 2, of the Rules of the Supreme Court, 1965.41

This excusing power of the court was first enacted as section 3 of the
Judicial Trustees Act, 1896,42 and has been reenacted in successive English
Trustee Acts to the present day. It arose from recommendations of a Select
Committee on Trust Administration, set up in 1895 by the English govern-
ment of the day under the Attorney General, to inquire into the liabilities of
trustees for breach, and to determine whether adequate trust administration
might be secured without subjecting trustees to the "risks which they now
run".43 The principal concern of the Committee was with the liability of
trustees for so-called technical breach, for instance, innocently paying trust

38 Draft Bill, s. 4(1).

39 Ibid., s. 4(2).

40 Trustee Act, 1925, 15 & 16 Geo. 5, c. 19 (U.K.).

41 See Underhill's Law relating to Trusts and Trustees, supra, note 3, at 688-97.

42 59 & 60 Vict., e. 35 (U.K.).

43 See Paling, "The Trustee's Duty of Skill and Care"(1973), 37 Conveyancer (N.S.) 48.
at 53, n. 22. The Committee's report was heavily criticized at the time: sec Maugham,
"Excusable Breaches of Trust" (1898). I4L.Q. Rev. 159.

moneys to a person who is subsequently proved not to be entitled to the
moneys.44 The Committee heard considerable evidence from judges and sol-
icitors alike that the existing extent of what might be called strict liability,
despite the then recent case law development of a general fault liability,
placed far too onerous a burden on trustees.

However, perhaps because it was concerned about the then high level of
trustee fraud in England, the Committee did not recommend any statutory
formulation of the standard of care required of trustees. Instead, it recom-
mended the conferment of the excusing power to which we have referred.
This judicial power was subsequently adopted in the Trustee Acts of all
provinces of Canada,45 except Prince Edward Island, in all the states of
Australia,46 and in New Zealand.47

In Ontario, the judicial power to excuse trustees for breach of trust
appears as section 35 of the Trustee Act, which provides as follows:'

.48

35. If in any proceeding affecting a trustee or trust property it appears to the
court that a trustee, or that any person who may be held to be fiduciarily
responsible as a trustee, is or may be personally liable for any breach of trust
whenever the transaction alleged or found to be a breach of trust occurred, but
has acted honestly and reasonably, and ought fairly to be excused for the breach
of trust, and for omitting to obtain the directions of the court in the matter in
which he committed the breach, the court may relieve the trustee either wholly
or partly from personal liability for the same.

The section requires that a trustee must have acted honestly, reasonably,
and be in the position that he ought fairly to be excused. The section, however,
gives no guidance concerning what is intended by any of these factors, and
the courts have not considered it possible or, perhaps, wise to lay down any
general rules or principles to govern the exercise of their discretion under the
section. Each case has been treated on its own merits.

Generally speaking, however, the courts seem to have interpreted "hon-
estly" as an active involvement in the affairs and decisions of the trust
administration, and "reasonably" as conduct associated with the ordinary
prudent man of business. A trustee who pleads the section must therefore
have acted in accordance with his duties of good faith and of care, and the
onus of proof is upon him to show that he did so act. If fairness is not a mere
description of the discretion that is given to the court, it requires the court to
have in mind how excusing the trustee will affect, and can in all equity be

44 Although the trustee is in good faith making payment, and may have carefully considered
the proper construction of the trust instrument beforehand, his mistake of law exposes
him to suit for breach of trust.

45 See Waters, supra, note 1, at 873.

46 See Meagher and Gummow, Jacobs' Law of Trusts in Australia (4th ed., 1977), at 517-
21 . See, also, Ford and Lee, Principles of the Law of Trusts (1983).

47 Trustee Act 1956, Repr. Stat. N.Z. 1977, No. 61, s. 73.

5 The power of a trustee in Ontario to apply to the Supreme Court of Ontario for advice
and direction is also statutory. It is contained in s. 60 of the Trustee Act, R.S.O. 1980,
c. 512.

permitted to affect, the interests of every party, namely, the beneficiaries and
creditors of the trust.

It is because of the requirement of honesty and reasonable conduct on
the part of the trustee that the section appears to be concerned essentially with
technical breach. *9 A trustee is technically in breach if he acts in any respect
and to the slightest degree contrary to the terms of the trust, properly con-
strued. The formulation of the duty of care by the English House of Lords
between 1887 and 1889 marked a substantial move away from strict liability
to fault liability, but situations may still arise where an honest and reasonable
mistaken act, not authorized by the trust instrument, and resulting in loss to
the trust fund or a beneficiary, subjects the trustee to an action for breach.
Payment to the wrong beneficiary,50 or to a creditor whose claim was in fact
unenforceable, and mistakes of law,51 are examples of such situations, and
the courts have exercised their statutory power to relieve trustees in these
circumstances.

However, the courts have also exercised the excusing power in circum-
stances other than technical breach. Applications for relief have most com-
monly been made for the acquisition or retention of unauthorized investments,
where the trustee can show that he was honest and careful in the acquisition
or retention, but yet subsequently found himself outside the protection of the
investment power. In a range of factual circumstances - which can only be
listed, being decisions on the facts that do not fit into obvious categories -
trustees have successfully sought relief. The excusing provision does not
require the trustee to admit to a breach of trust; it merely requires that it be
established that a trustee "may be personally liable for any breach of trust''.
Consequently, the courts have often excused a trustee without actually decid-
ing that there was a breach, and this outcome can make it difficult to determine
the difference between behaviour that constitutes breach and behaviour that
justifies relief.52

We have already stated that this discretion permits the courts to divorce
liability for breach of trust from the finding that a trustee has committed a
breach, and that decisions by the courts in exercising the discretion do not
readily constitute legal precedents, because a decision to exercise the discre-
tion is essentially a decision on the particular facts in the light of all the
particular circumstances. As we have noted, in 1895 the immediate concern
of the English Attorney General's Committee that proposed this discretion
appears to have been the relief of trustees from liability for so-called technical
breach.

49 See Waters, supra, note 1 , at 837-40.

50 Re AIlsop, [1914] 1 Ch. 1. But see Re Diplock, [1948] Ch. 465. which held that
remunerated trustees are not entitled to be relieved tor the same error.

51 Perrins v. Bellamy, [1898] 2 Ch. 521, affd 1 1899] 1 Ch. 797 (C.A.).

52 For a full discussion of the excusing power and the case authorities, see I 'nderluli s Law
relating to Trusts and Trustees, supra, note 3, at 727-31; Lewin on Trusts, supra, note
3, at 690-92; and Waters, supra, note 1. at 873-78. For a critical discussion, sec
Sheridan, '•Excusable Breaches of Trust" 1 1955). 19 Conveyancer (N.S.) 420.

Accordingly, our first thought was whether it might not be better if the
Ontario revised Trustee Act simply stated that a trustee should be excused for
breach of trust only in those circumstances where he is not personally to
blame, because of either his lack of good faith or his negligence. However,
we have come to the conclusion that, having regard to the present state of the
law, it is not possible to isolate all the circumstances that might constitute
technical breach for which a trustee should be excused, and we are of the
view that these should be known before recommending such a change in the
law. Moreover, there may also be circumstances, possibly not constituting
technical breach, in which some of the older precedents would impose liability
upon trustees,53 but where, because of the absence or minimal degree of fault,
a modern court might prefer to take a less strict approach towards liability. It
does seem to us, whatever the shortcomings of discretion in such a crucial
area as liability, that it is valuable for the courts to be able to assess the merits
of the conduct of each trustee who is challenged with an accusation of breach.

Despite the analytical problems, this fairly broad judicial discretion has
been welcomed by the courts and the commentators. We are aware that, in
view of the fact that we have recommended a higher standard of care for the
so-called professional trustee, it might be contended that the necessity for the
statutory judicial excusing power would be largely removed. As in the United
States, it could be argued that the courts should decide whether a trustee was
or was not in breach with reference to the standard of care applicable to the
trustee in question, thereby obviating the necessity to determine indirectly,
by the exercise of the judicial excusing power, whether a trustee should be
liable for the breach of trust in the circumstances. We are not persuaded by
this argument.

In our view, the judicial excusing power has meant, and should continue
to mean, that, if relief is sought by a trustee, whether he is a non-professional
or professional trustee, the courts can ensure that he is only liable to the
extent that blame attaches to his conduct.54 It requires more of the courts than
a well-meaning indulgence towards trustees; it presupposes a careful, indeed
deliberate, assessment of the trustee's fundamental duties as a fiduciary, and
a sensitivity to the fact that the foremost, and perhaps only, protection of the
beneficiary is that the person, who with considerable powers is administering
the trust assets, must act with "viligance, prudence and sagacity".55 On the
whole, we are of the view that this Commonwealth approach has achieved
and continues to achieve its original purpose, and we would therefore rec-
ommend its retention.

We have given some thought to whether section 35 of the Ontario Trustee
Act, which confers the excusing power upon the Ontario Supreme Court,

Scott, supra, note 22, § 201, at 1650, is only prepared to commit himself to the
proposition that "[o]rdinarily [a trustee] does not commit a breach of trust unless he is
in some way personally at fault".

54 In Weir v. Jackson (1905), 5 O.W.R. 281 (C.A.), Meredith C.J. said that in his view
the judicial excusing power should be applied "very liberally" in Canada.

55 Supra, note 5.

might usefully contain guidelines concerning the factors that should be con-
sidered by the courts in exercising their discretion. However, such is the
diversity of situations that come before the courts that we doubt whether such
guidelines would be of significant value. The statutory language in which the
power is expressed - the trustee must have acted "honestly and reasonably",
and he "ought fairly to be excused" - may not be the most felicitous, but the
courts apparently have not encountered difficulties, and we can therefore see
no case for unsettling language that has long been familiar.

Accordingly, we recommend that section 35 of the present Trustee Act,
permitting the court to excuse trustees for breach of trust, should be carried
over to the revised Trustee Act. The revised Act should contain a provision
to the effect that, if in any proceedings affecting a trustee or trust property it
appears to the court that a trustee, or any person who may be held to be
fiduciarily responsible as a trustee, is or may be personally liable for a breach
of trust, whenever the transaction alleged or found to be a breach of trust
occurred, but has acted honestly and reasonably and ought fairly to be excused
for the breach of trust, and for not obtaining the directions of the court in the
matter in which he committed the breach, the court may relieve the trustee
either wholly or partly from personal liability for the breach.

(e) Exoneration of Trustees from Liability by the Terms of
the Trust Instrument

We have observed that trust instruments drawn in this Province, whether
testamentary or inter vivos, very often exonerate the trustee from liability for
any loss arising in the administration of the trust, if the trustee has acted in
good faith. It is often stated expressly that the trustee shall not be liable for a
mere mistake or error of judgment. This exoneration may be made applicable,
for example, to the hiring of agents, but more often it is a general exoneration
covering the whole of the trustee's activities with the affairs of the trust.57

The interpretation of such an exoneration clause may well be that the
trustee is not liable for his negligence, unless it be a conscious or knowing
wrongdoing. Such wrongdoing is usually intended by the term, "wilful de-
fault".58 Where the trustee is exonerated from liability for "mistake", "error
of judgment", or additional terms of that nature, the trust instrument must
surely intend that wilful acts or omissions are to be the sole basis of liability;
namely, deliberately wrongful conduct or conduct motivated by a complete

56 Draft Bill, s. 69.

57 Precedents in use in Ontario include the following: "My trustee is not to be held
responsible for loss arising out of the exercise of [the power) ... to delegate when he
considers necessary any of his powers duties or discretions as he thinks fit"; the trustee
is not to be liable "for any loss suffered ... by reason of any acts or omissions [of a
special fiduciary appointed to administer foreign trust assets) not attributable (a) to his
own dishonesty, or (b) to the wilful commission by him of an act known by him to be a
breach of trust".

58 The term "wilful default" is contained in s. 33 of the Ontario Trustee Act to describe the
nature of conduct required for the imposition of liability on trustees in relation to the
handling of trust moneys and securities.

disregard for the proprieties of trustee aetivity. If, on the other hand, such
terms merely mean that the trustee is not to be liable where he has acted
honestly and in conformity with the duty of care imposed on trustees, then
these terms add nothing to the present case law position: the trustee would
not be liable even if those words were absent from the trust terms. It is also
possible in the circumstances that a trustee may be held not to have acted "in
good faith" where he has merely been negligent, but such an interpretation
would be strained. If "good faith" is intended to include simple negligence -
that is, an absence of the degree of care that a prudent man would employ -
then again this merely holds a trustee to his existing liability under the case
law. Yet this would not be the natural meaning of "good faith", which infers
a state of mind, an honesty of purpose.

Whatever be the intention of a testator or settlor in employing such terms,
we have concerns about the ability of a trust instrument to exonerate a trustee
from liability for negligence. Negligence is the more usual manner in which
a trustee becomes liable, and we do not consider that the risk of loss through
trustee negligence should properly fall upon the trust beneficiary or benefi-
ciaries. Nor can we see any reason that would justify shifting such a risk to
the beneficiaries. A professional trustee should be carrying insurance, and a
non-professional trustee who is sufficiently unsure of his competence to
require such safeguards should not accept the office. As we have discussed,
Ontario courts possess, and have often exercised, a power under section 35
of the Trustee Act whereby a trustee may be excused from liability, wholly
or partly, if he has acted "honestly and reasonably, and ought fairly to be
excused for the breach of trust", and the Commission has recommended the
retention of this power. Given the existence of the judicial excusing power,
we question the desirability of a clause in the trust instrument exonerating
trustees from liability for negligence. The duty of care is a basic obligation
imposed upon all trustees, and, in protecting the beneficiary, it complements
the powers over the trust property that are given to the trustee.

As noted previously, section 7-302 of the American Uniform Probate
Code permits the trust instrument to provide expressly that the standard of
care prescribed by the section for both non-professional and professional
trustees does not apply.60 While the trust instrument could, of course, hold
trustees to a higher standard than that provided by the Code, the more likely
provision would be the express exoneration of trustees from liability for
failure to conform with the standard of care set forth in the Code.

Such exoneration clauses are not valid, however, in all American juris-
dictions. For example, in those states that have adopted the American Law

With regard to the duty of care and its exclusion in the somewhat analogous situation of
a company director, see Canada Business Corporations Act, S.C. 1975, c. 33, s. 1 17(3),
which provides that no provision in a contract, etc. , can relieve a director or officer from
the duty to act in accordance with, among other things, the duty of care set forth in s.
1 17(1), or relieve him from liability for a breach thereof. See, also, the Ontario Business
Corporations Act, 1982, S.O. 1982, c. 4, where, in the context of trusts for bondholders,
s. 47(1) makes statutory the case law duty of care, and s. 47(2) invalidates any provision
in an instrument that purports to exculpate trustees who are nevertheless guilty of wilful
misconduct or negligence.

Supra, notes 23 and 24 and accompanying text.

Institute Restatement of the Law of Trusts, a middle ground is provided in
section 222. M This section states, as a general proposition, that "the trustee,
by provisions in the terms of the trust, can be relieved of liability for breach
of trust". However, this principle is subject to two qualifications. First,
section 222(2) provides that "[a] provision in the trust instrument is not
effective to relieve the trustee of liability for breach of trust committed in bad
faith or intentionally or with reckless indifference to the interest of the bene-
ficiary, or of liability for any profit which the trustee has derived from a
breach of trust". Secondly, section 222(3) states that, "[t]o the extent to which
a provision relieving the trustee of liability for breaches of trust is inserted in
the trust instrument as the result of an abuse by the trustee of a fiduciary or
confidential relationship to the settlor, such provision is ineffective".

Since the Decedent Estate Law of 1936, New York State has also inval-
idated exoneration clauses in wills relating to the standard of care. That
legislation was further considered by the State Commission on the Law of
Estates, 1 963-65, 62 and its provisions were re-enacted in the Estates, Powers,
and Trusts Law of 1966.63 Section 1 1-1.7 provides, in part, as follows:

1 1 — 1.7(a) The attempted grant to an executor or testamentary trustee or the
successor of either, of any of the following enumerated powers or immunities is
contrary to public policy:

(1) The exoneration of such fiduciary from liability for failure to exercise
reasonable care, diligence and prudence.

The 1966 Act further provides, in section 11- 1.7(b), that any attempted
exoneration in breach of this prohibition invalidates the instrument only to
the extent that the instrument is in breach.

Over the period of more than forty years since this prohibition has been
in force in New York, we can find no evidence in the literature that any
objection has been raised, and none appears to have been made before the
State Commission in the 1960's. Indeed, the same policy appears to have
been adopted by the Indiana Trust Code.64 Section 30-4-3- 1 1 and -12 provides
that a trustee is in breach of trust if he fails to exercise reasonable care in the
selection, retention, and supervision of an agent, or enables a co-trustee to
commit a breach through his (the trustee's) own failure to exercise care.
These sections are not made subject to the expression of a contrary intent in
the trust instrument.

We therefore recommend that no term in a trust instrument, or in an oral
declaration of trust, should be valid to the extent that it purports to exonerate
trustees from liability for failure to exercise the degree of care, diligence, and

61 Supra, note 20, § 222, at 516-17.

62 Temporary State Commission on the Modernization. Revision and Simplification of the
Law of Estates, Second Report (Legislative Document No. 19, 1963).

63 N.Y. Est., Powers & Trusts Law. § 1 1-1 .7 (McKinney).

64 Ind. Stats. Ann.. Code Ed., tit. 30 (Burns).

skill that a person of ordinary prudence would exercise in dealing with the
property of another person.65

Moreover, for the same reasons, and again unlike the American Uniform
Probate Code/16 we are of the view that the settlor or testator should not be
free to exonerate a professional trustee from a failure to demonstrate the
higher standard of care that we have recommended. We therefore recommend
that no term in a trust instrument, or in an oral declaration of trust, should be
valid to the extent that it purports to exclude or lower the standard of knowl-
edge or skill required by trustees who in fact possess, or who because of their
profession, business, or calling ought to possess, a particular level of knowl-
edge or skill which in all the circumstances is relevant to the administration
of the trust.67

3. DELEGATION BY TRUSTEES OF DUTIES OR POWERS

(a) Introduction

The maxim adopted from Roman law, which summed up the principle
followed by the seventeenth century courts of Equity, was delegatus non
potest delegare: one who is himself a delegate cannot delegate further to
another. However, even in the days when trustees were middle class gentle-
men handling the affairs of their relatives or friends, it was evident that this
principle could not be carried to the point where everything that was done for
the trust had to be done by the trustee personally. By 1754, the courts had
established that a trustee might delegate, provided it was clearly necessary,
or in the common course of business for men engaged in similar affairs to
delegate the matter in question to an agent.68 Trustees needed the services of
solicitors, accountants, brokers, and persons of a variety of skills, just as
much as men of those skills would call upon each other's services from time
to time.

Since a trustee is a fiduciary, the assumption of the law, as indicated, is
that he must perform his tasks personally. The two principal issues that arise
from this assumption, and that we have examined, are first, what acts may a
trustee properly delegate to an agent; and secondly, what personal liability
has the trustee to the beneficiaries for loss to the trust caused by the agent?
The answer to these questions is to be sought today in the trust instrument,
in case law, and in statute.

65
66
67
68

Draft Bill, s. 1(a).

Supra, notes 23 and 24 and accompanying text.

Draft Bill, s. 1(b).

Ex parte Belchier (1754), Amb. 218, 27 E.R. 144, a decision of Lord Chancellor
Hardwicke relating to an assignee (or trustee) in bankruptcy. This decision was followed
by the leading case of Speight v. Gaunt, supra, note 8. See, also, Lewin on Trusts,
supra, note 3, at 181 et seq., for a discussion of the law in England prior to the Trustee
Act, 1925.

43
(b) Acts That a Trustee May Delegate

(i) Common Law

Probably the majority of trust instruments professionally drawn today in
Ontario will permit the trustee to appoint agents of any description to perform
any task or exercise any discretion that the law or the instrument requires to
be done. The aim of the draftsman in so doing is to give the trustee the
maximum freedom to handle the trust affairs as he thinks fit. This approach
is justified because of the emphasis that is placed upon the initial choice of
trustees, rather than upon any attempt to seek protection for the beneficiaries
through a circumscription of what trustees may do in office. The intent of
such a broad provision is to empower the trustees to appoint agents to perform
not only administrative tasks, whether or not they involve the exercise of
discretion, but also, it would seem, dispositive discretions, such as powers
of maintenance, advancement, and encroachment.

It is unclear, however, whether full effect will be given to broad powers
of delegation contained in trust instruments. In interpreting these clauses, the
courts require that the trustee show that it was intended that he should be able
to delegate the exercise of dispositive discretions, and also of crucial admin-
istrative questions affecting policy. Indeed, the greater the ostensible author-
ity to delegate, the more precisely the courts are likely to require the particular
act of delegation to be authorized by the trust instrument.69

The court might even take the view that the testator or settlor had no
power to authorize the purported grant of delegation. A trustee is a fiduciary,
and the consequent legal assumption, as we have seen, is that he will perform
his duties personally. Is it compatible with trusteeship, for example, that a
trustee be authorized by the trust instrument to delegate to an investment
dealer the entire responsibility for the investment policies, as well as the
purchases and sales, of the trust property?

The answer to these questions is not easy to provide. The testator or
settlor has chosen to confer upon his trustees the widest possible powers of
delegation, and the courts, aware of the technical services required by the
modern trustee, but also cognizant of the dangers of unlimited delegation,
are likely to say that the answer lies in an examination of all the circumstances.
It may also be considered relevant that, as a fiduciary, the trustee has a duty
to act with care and prudence. Total delegation of investment decisions,
although ostensibly permitted, may be considered something that a careful
and prudent man would not have done in the circumstances. In this way the
issues of what the instrument purports to permit, and what it may validly
permit, are avoided.70

69 The judgments in the English Court of Appeal and the House of Lords, supra, note 68,
remain the classic case law position.

70 In Fales, Wohlleben v. Canada Permanent Trust Co., supra, note 5, the Supreme Court
of Canada had clearly in mind the trustee's basic duty of care, whatever language might
appear in the instrument.

In the absence of provision in the trust instrument, the case law takes a
more conservative approach to the use of agents. The 1754 decision of Ex
parte Belchier7i essentially represents the position today: a trustee may del-
egate if the nature of the task to be performed necessitates delegation, or if it
is common business practice to employ an agent in the circumstances. If the
trustee can easily do the work himself, the case law will not permit the
employment of an agent, unless perhaps common business practice is other-
wise.72 For instance, the trustee is not expected to carry out work just because
he has the special skill required, or because no skill is required. The test does
not turn on having skills, but on what is generally considered reasonable in
the normal course of property management. As to matters involving the
exercise of discretion, however, the case law requires the trustee himself to
make such decisions, whatever advice he may have sought and received.73

If an agent may be employed, the case law requires the trustee to select
the agent himself, and he must select a person whose business it is to carry
out the work that the trustee is proposing to delegate.74 This is not quite so
simple as it looks, however. If a house that is trust property is in need of
repair, it would probably not be enough for the trustee to ask his solicitor for
the names of suitable building contractors, from among whom a choice may
be made. If poor work and loss to the trust result, the trustee would have to
show that, from the nature of his practice, the solicitor had a particular
knowledge of builders and the quality of work that each of the named con-
tractors performed. Moreover, once the agent is appointed, the trustee must
carry out a reasonable level of supervision of the work being done, until the
work is complete.75

Where trust property is concerned, especially trust funds, the trustee must
ensure that, if an agent is to receive moneys on behalf of the trustee, the
moneys are not left in the agent's hands for an unnecessary length of time. It
is a cardinal rule that the trustee must always be adroit to see that, at all
times, trust property is under his own control.76 This principle would also
apply to a properly arranged nomineeship or custodianship.

The employment of a co-trustee as an agent is subject, it would seem, to
the same rules. For instance, it has been specifically held that trustees should
not permit trust funds to be under the sole control of a co-trustee for an
unnecessary length of time.77 On the other hand, because the co-trustee is a
trustee, to allow deeds or documents to remain in the co-trustee's possession
would not be improper, if that is a more convenient course to pursue.78 The

71 Supra, note 68.

72 /te #r/>r( 1882), 26 Ch. D. 238 (C. A.).

73 Re Speight, supra, note 8, at 756.

74 Fry v. Tapson (1884), 28 Ch. D. 268, at 280, and Re Weall (1889), 42 Ch. D. 674.

75 Speight v. Gaunt, supra, note 8.

76 Wyman v. Paterson, [1900] A.C. 271 (H.L.), and Re Sheppard, [1891] 1 Ch. 50.

77 Scurfield v. Howes (1790), 3 Bro. C.C. 90, 29 E.R. 425; Candler v. Tillet (1855), 22
Beav. 257, 52 E.R. 1 106; and Lewis v. Nobbs (1878), 8 Ch. D. 591.

78 Re Sisson's Settlement, [1903] 1 Ch. 262.

features distinguishing a trustee's position from that of an agent, however,
are that he must act jointly with his fellow trustees in order to bind the trust,
and that no trustee may be inactive in relation to the conduct o( trust affairs.
Although the courts have not formulated the resulting position in so many
words, this means that the trustees must be as concerned with a fellow
trustee's acts on behalf of the trust as they would be with any other agent,
and that a co-trustee can only do those things that another agent can do. For
instance, the exercise of discretions must be exercised by all the trustees
unanimously.

(ii) Statute

a. Commonwealth

Statutory intervention in respect of the power to delegate came in the
usual nineteenth century manner. That is, powers of delegation, which were
familiar in well-drawn trust instruments of the period, were introduced by
statute to be implied in trust instruments, subject to the expression of a
contrary intent. The Trustee Acts of 1888 and 1893 in England thus put it
beyond question that solicitors and bank managers might be appointed agents
to receive moneys on behalf of trustees, and also empowered these agents to
give discharges to the payors.80 "Money or any valuable consideration or
property" might be the subject matter of such receipt and discharge. However,
it was made clear that, if any trust property were allowed to remain in such
an agent's control for an unnecessary length of time, and loss resulted, the
liability imposed upon the trustee by the case law would continue to arise.

Ontario adopted this form of the English legislation early in the twentieth
century, and it remains as section 20 of the Ontario Trustee Act. The section
provides as follows:

20. — (1) A trustee may appoint a solicitor to be his agent to receive and give
a discharge for any money or valuable consideration or property receivable by
the trustee under the trust.

(2) A trustee may appoint a manager or a branch manager of a chartered bank
or a solicitor to be his agent to receive and give a discharge for any money
payable to the trustee under or by virtue of a policy of assurance or otherwise.

(3) A trustee shall not be charged with a breach of trust by reason only of his
having made or concurred in making any such appointment.

(4) Nothing in this section exempts a trustee from any liability that he would
have incurred if this Act had not been passed, in case he permits any such money,
valuable consideration, or property to remain in the hands or under the control
of the banker or solicitor for a period longer than is reasonably necessary to
enable the banker or solicitor to pay or transfer the same to the trustee.

74 Sec infra, this ch.. sec. 5.

80 Trustee Act, 1HHH. 51 & 52 Vict., c. 59, s. 2 (U.K.), and Trustee Act. 1893, 56 & 57

Vict.,c. 53, s. 17 (U.K.).

In 1925, however, England incorporated the 1893 provision as subsection
(3) of a considerably broader power of delegation. Section 23(1) and (2) of
the English Trustee Act, I925*1 has been the model for subsequent Trustee
Act amendments in Manitoba,82 New Zealand,83 and the Australian states of
Victoria, Western Australia, and Queensland.84 Section 23(1) and (2) of the
English legislation provides as follows (emphasis added):

23. — (1) Trustees or personal representatives may, instead of acting person-
ally, employ and pay an agent, whether a solicitor, banker, stockbroker, or other
person, to transact any business or do any act required to be transacted or done
in the execution of the trust, or the administration of the testator's or intestate's
estate, including the receipt and payment of money, and shall be entitled to be
allowed and paid all charges and expenses so incurred, and shall not be respon-
sible for the default of any such agent if employed in good faith.

(2) Trustees or personal representatives may appoint any person to act as their
agent or attorney for the purpose of selling, converting, collecting, getting in,
and executing and perfecting insurances of, or managing or cultivating, or
otherwise administering any property, real or personal, moveable or immove-
able, subject to the trust or forming part of the testator's or intestate's estate, in
any place outside the United Kingdom or executing or exercising any discretion
or trust or power vested in them in relation to any such property, with such
ancillary powers, and with and subject to such provisions and restrictions as they
may think fit, including a power to appoint substitutes, and shall not, by reason
only of their having made such appointment, be responsible for any loss arising
thereby.

These two provisions liberalized greatly the prudent man rule that arose
out of Speight v. Gaunt .85 Whereas before 1925 the trustee was subject to the
standard of the prudent and reasonable man of business in delegating any
task, as well as in selecting the agents whom he did appoint, he now might
employ agents to discharge any task at all, regardless of whether necessity or
the usual course of business would justify the delegation. It seems that, by
virtue of section 23(1), any duty may be delegated, whether or not it is
discretionary, and, a fortiori, any power may be delegated, whether it is
administrative or dispositive in nature.86 Subsection (2) is couched in different
language, but appears to be equally liberal in relation to trust property, and
the conduct of the trust in relation to that property, outside the United King-
dom.

81 Supra, note 40.

82 The Trustee Act, R.S.M. 1970, c. T160, s. 37(1) and (2).

83 Trustee Act 1956, supra, note 47, s. 29.

See Meagher and Gummow, supra, note 46, at 318-25, and 325-26 (foreign property),
and Kelly (ed.), Garrow and Kelly's Law of Trusts and Trustees (5th ed., 1982), at
256-59.

Supra, note 8.

Whether, and, if so, how far this subsection has changed the law in England is still a
matter of keen debate. For a full review of the debate, see Keeton and Sheridan, The
Law of Trusts (10th ed. , 1974), ch. 16, and Supp. . at 239-41 . Pettit, Equity and the Law
of Trusts (4th ed., 1979), at 333-34, is of the view that only ministerial tasks may be
delegated under section 23(1), but this appears to be the minority view, although the
Law Reform Committee in England is of the same opinion: see supra, note 34, paras.
4.1-4.6.

b. United States

Although Manitoba, New Zealand, and the majority of the Australian
states have adopted the language of seetion 23( 1 ) and (2) of the English Act,87
it is interesting to note that the states of the United States have considered a
less liberal position to be appropriate. Little statutory intervention has taken
place, and the courts appear to have pursued a more cautious and conservative
position, more in line with the prudent man approach to delegation espoused
by the English and Commonwealth courts. Bogert88 lists the tasks, all min-
isterial, that the courts have permitted trustees to delegate, and Scott89 finds
in the American precedents a distinction between the ability to delegate
dispositive and administrative discretions: no dispositive discretion may be
delegated, and an administrative discretion may only be delegated where it
forms a less significant part of an otherwise delegable task.90

The American Uniform Trustees' Powers Act, proposed by the National
Conference of Commissioners on Uniform State Laws,91 confers a broad
power of delegation, but also appears to distinguish between administrative
and dispositive discretions for the purposes of delegation. Section 3(c)(24)
of the Act states as follows:

3. (c) A trustee has the power, . . .

(24) to employ persons, including attorneys, auditors, investment advi-
sors, or agents, even if they are associated with the trustee, to advise or
assist the trustee in the performance of his administrative duties; to act
without independent investigation upon their recommendations; and instead
of acting personally, to employ one or more agents to perform any act of
administration, whether or not discretionary.

A distinction appears to have been made in section 3(c)(24) of the Amer-
ican Uniform Act between "advise or assist" and "perform", which suggests
that the agent can be given a significant trustee task, including an administra-
tive discretion that he alone is to carry out. However, dispositive acts and
discretions are not mentioned specifically, although it is possible that the

87 South Australia and Tasmania retain powers comparable to the English 1893 language,
and New South Wales adopts an intermediate approach: see Meagher and Gummow,
supra, note 46, at 318-25, and 325-26 (foreign property).

88 Bogert, supra, note 26, § 556. at 66-81 , and Supp., at 134-54.

89 Scott, supra, note 22. § 171, at 1388-89.

90 For a comparative study of delegation in England and the United States, see Baringhaus.
"Trustee's Power to Delegate: A Comparative View" ( 1974-75). 50 Notre Dame Law.
273.

91 Uniform Trustees' Powers Act. National Conference of Commissioners on Uniform
State Laws (73d Annual Conference, 1964), Uniform Laws Ann. (1978), Vol. 7A. at
761, and Cum. Supp. (1982), at 365.

The Uniform Act was approved by the National Conference of Commissioners on
Uniform State Laws, together with the American Bar Association, in 1964. and has
been adopted to date by eleven states: namely, Florida (1974). Idaho (1965). Kansas
(1968), Kentucky (1976). Maine (1979), Mississippi (1966). Montana (1974). New
Hampshire (1969). Oregon (1977). Utah (1975), and Wyoming (1965).

word, "administrative", is intended to include all that a trustee does. On the
other hand, the exclusion of the exercise of dispositive discretions from the
tasks that may be delegated seems the more natural interpretation.

(iii) Conclusions

The alternative policies that might be pursued are several. First, section
20 of the Ontario Trustee Act could be repealed. This would leave the case
law in place, which, as we have seen, represents a cautious and conservative
position in the matter of delegation by trustees. The limitation of this approach
stems from the early equity position that a trustee may not delegate; delegation
at common law is therefore an exceptional situation, and may be prohibited
even where delegation would be a prudent course of management. A liberal
power of delegation, policed by the case law requirements of trustee vigilance
and prudence, would appear to be more consistent with present ideas.

Secondly, the recommendation might be for no change of any sort. But
this would leave section 20 of the Ontario Trustee Act as the only addition to
case law, and all the precedents in use in the Province today suggest that the
section has been overtaken by time and represents the views of the late
nineteenth century.

Thirdly, it might be appropriate to replace section 20 by a new section
that permits the delegation of any administrative task, whether or not it
involves a discretion, but expressly subject to the general duty of care. The
case law duties concerning the selection and supervision of agents would
become express, so that there would be no doubt how the case law should be
applied. However, no authority would be given to the trustee to delegate any
dispositive duty or discretion, such as the choices required of him under a
discretionary trust and in the exercise of powers of maintenance, advance-
ment, and encroachment. It is in this manner that the third approach falls
short of many precedents - namely, authority to delegate any task of whatever
kind - and for many draftsmen the revised Act would still, therefore, be
inadequate. Fourthly, the Act might adopt just such a contemporary express
clause permitting unlimited delegation.

We have concluded that neither the first nor the second alternative is
commendable in today's conditions, for the reasons given. As between the
third and fourth approach, we favour the third because it pursues a middle
line between the limitations of the case law and the licence of many contem-
porary precedents. We believe that the third alternative recognizes the indis-
putable authority that trustees must have to delegate whenever it is reasonable
and prudent by contemporary business standards to do so. The balancing
consideration is that the trust beneficiaries must be adequately protected, and
for this purpose we would rely on the trustee's duty of care, which we have
recommended should be placed in statutory form, to police the exercise of
this power of delegation. The effect of this approach would be, for instance,
that, if a trustee wished to delegate his entire investment discretion to brokers,
he would be reminded by the statutory duty of care that he can only do this
if a reasonable and prudent man of business would do the same. We can
envisage no circumstances where total delegation of such a power - that is,

without personal selection of any investment, or regular reports from the
dealers that the trustee analyzes with a reasonably informed mind - would be
compatible with care and prudence.

On the other hand, we are of the view that a statutory power of delegation
should only extend to the delegation of administrative discretions, and should
not permit the trustee to delegate dispositive discretions. A trustee should
perform dispositive tasks personally, and we suspect that, in practice, this is
what is done, however facultative the power to delegate may be in the trust
instrument. If the testator or settlor wishes his trustee to possess power to
delegate dispositive discretions, this could, of course, be expressed in the
trust instrument.

We therefore recommend that section 20 of the Ontario Trustee Act
should be repealed. In its place, we recommend enactment of a provision
authorizing trustees, where it is reasonable and prudent in the circumstances
so to do, to employ one or more persons as agents within or outside Ontario
to carry out any act required to be done in the administration of the trust,
including the execution of documents, the payment, transfer, and receipt of
money or other property, and the giving of discharges for receipts, but
excluding the exercise of any express or statutory discretion as to the transfer
or distribution of trust property to or among beneficiaries of the trust.

We are also of the view that, for the purpose of this proposed power of
delegation, an agent should include a co-trustee. However, we would place
one restriction upon the power to delegate to co-trustees, namely, that where
there are only two trustees, one trustee should not be able to delegate to the
other except where the latter is a trust company. Accordingly, we recommend
that for the purpose of the proposed powers of delegation an agent should
include a co-trustee.93 We further recommend that a non-corporate trustee
should be able to delegate, to the extent that we have recommended, to the
other trustees where there are two or more non-corporate trustees, or to a sole
co-trustee, if the sole co-trustee is a trust company, but that, except where a
sole trustee was originally appointed, where there are two trustees only and
neither is a trust company, neither should be able to delegate to the other.1

(i) Present Law

The trust instrument may relieve the trustee of any liability for losses
caused by the act, omission, or advice of an agent. The case law, however,
is more evidently concerned with the protection of the beneficiaries. Every
trustee is required to exercise the care of the reasonable man, as well as to be

92 Draft Bill, s. 5(1).

93 Ibid., s. 6(1).

94 Ibid., s. 6(2).

honest and objective in all his dealings on behalf of the trust and with trust
property, and the case law constantly reiterates this requirement. A careful
man selects the agent who is to perform a task, making sure, so far as a
prudent man can, that the task lies within the ordinary business of the agent,
and he carries out a reasonable surveillance of what the agent is doing, until
the task is complete. A trustee is not therefore personally liable if the agent,
despite such selection and trustee attentiveness to the discharge of the task
according to the usual practice of business, causes loss to the trust.95 It is also
clear, as we have noted, that a trustee may not excuse himself from respon-
sibility for loss, if he has permitted trust moneys to remain in an agent's
hands or under the agent's control for a longer period of time than is reason-
ably necessary.96

These common law rules were not changed by the Trustee Acts of 1888
and 1893 in England, and therefore remain unchanged by section 20 of the
Ontario Trustee Act. In addition, section 33 of the Trustee Act deals with one
aspect of a trustee's liability for agents, namely, where money and securities
of the trust are in the control of others. The section states in part that a trustee
is "answerable and accountable only for his own acts, receipts, neglects or
defaults, and not for those of any other trustee, nor for any banker, broker or
other person with whom any trust money or securities may be deposited, nor
for the insufficiency or deficiency of any securities, nor for any other loss,
unless the same happens through his own wilful default".

The considerable broadening of the power to delegate that occurred in
the English Trustee Act, 1925 was accompanied by language that appears to
lessen the degree of responsibility of trustees where agents are appointed.
Certainly the position is now not clear in England, and the legislation has
sparked both litigation and controversy.97 Section 23(1) of the English Act,
which we earlier reproduced, ends as follows: "and [trustees] shall not be
responsible for the default of any such agent if employed in good faith". For
the purposes of the administration of trust property outside the United King-
dom, section 23(2) of the Act ends in the following manner: "and [trustees]
shall not, by reason only of their having made such appointment, be respon-
sible for any loss arising thereby".98 It is instructive to compare this language
with that employed in section 30(1) of the English Act, which is of nineteenth
century origin. This section deals with the extent of liability of trustees in
relation to the handling of trust moneys and securities, and appears as section
33 in the Ontario Trustee Act. Section 30(1) of the English Act provides, so
far as is relevant, that a trustee is not liable for loss caused by certain specified
agents' acts or omissions, "unless the same happens through his [the trustee's]
own wilful default". The emphasized words, especially the "good faith" of
section 23(1) of the English Act, and the "wilful default" of section 30(1) of

95 Speight v. Gaunt, supra, note 8.

96 See cases, supra, note 77.

97 See supra, note 86. See, also. Re Lucking' s Will Trusts, [1968] 1 W.L.R. 866 (Ch.D.),
at 874;/?? Victory, [1931] 1 Ch. 572; and Brown v. Brown, [1931] O.R. 759, [1931] 4
D.L.R. 420, rev'd on other grounds [1932] 2 D.L.R. 819 (C. A.). See, further. Waters,
supra, note 1, at 607-08.

98 Emphasis added.

the English Act, are expressions of the trustee's liability that are not employed
in the case law in this way; "good faith" is used together with "and the care
of the reasonable man",49 and "wilful default" is associated with the liability
clauses of insurance policies.

100

It is for these reasons that differences of opinion have arisen concerning
the meaning of the language of section 23(1) of the English Act, and to what
extent, if at all, it has changed the case law. As we noted earlier, this same
legislation has been adopted in New Zealand and the Australian states of
Western Australia, Queensland, and Victoria, and therefore these issues of
meaning have travelled there also.101 Manitoba, alone of the Canadian juris-
dictions, has adopted section 23 of the English Trustee Act, 1925 in its Trustee

Act:02

(ii) Conclusions

We are of the view that the case law position regarding the liability of
trustees for agents is both clear and as appropriate as when Speight v. Gaunt
was decided. We can see no gain for Ontario in adopting the language
employed in relation to this issue by the English legislation of 1925.

The essential point in the case law is that a trustee owes the observance
of good faith and care in all that he does on behalf of the trust, and in the
handling of trust property. Accordingly, we recommend that, in employing
an agent, trustees should personally select the agent and be satisfied of his
suitability to perform the act for which he is to be employed, and that they
should carry out such supervision of the agent throughout his employment as
is prudent and reasonable.103 Moreover, as we recommended earlier with
respect to the general duty of care, we similarly recommend here that no term
in a trust instrument, or in an oral declaration of trust, should be valid to the
extent that it purports to absolve the trustees from this duty in the employment
of agents.104

Having observed the requisite duty of care in employing and in selecting
and supervising agents, we consider that the revised Trustee Act should
include an express provision to the effect that a trustee is only chargeable for
loss caused by an agent, or by a co-trustee acting as agent, when any part of
the loss is due to the trustee's breach of the abovementioned duty of care,105

99 Nevertheless. Hanbury and Maudsley. Modern Equity ( 1 1th ed.. 1981 ), at 580-84, is of
the view that "good faith" does not change the pre- 1926 law as to the liability of trustees
for their agents. This interpretation appears not to be shared by the English Law Reform
Committee: see supra, note 34, para. 4.11.

100 Re City Equitable Fire Insurance Co., Ltd., [1925] Ch. 407 (C. A.), foll'd \x\Re Vickery,
supra, note 97. See, also. Waters, supra, note 1, at 607-08.

101 Supra, notes 83 and 84.

102 Supra, note 82.

103 Draft Bill, s. 5(2).

104 Ibid..s. He).

105 See ibid., s. 5(1) and (2).

or otherwise to his own negligence or wilful wrongdoing. Such a provision
would replace that part of section 33 of the present Trustee Act dealing with
the extent of liability of trustees for defaults involving money and securities
of the trust in the hands of others. Accordingly, we recommend that trustees
should only be chargeable for loss caused by the default of an agent if the
loss is due, wholly or partly, to a breach of the recommended provisions
concerning the power to employ agents and the duty of care in selecting and
supervising agents, or otherwise to the trustees' negligence or wilful wrong-
doing.",(,

(d) Reliance Upon Advice

The draft legislation that we have proposed concerning the occasions
when a trustee may delegate, and the extent of his liability for loss caused by
an agent, requires the trustee to select personally the person who is to give
advice, and to carry out whatever supervision of the preparation of that advice
would be prudent and reasonable. The issue that arises is whether, having
done all this, a trustee should be able to rely upon the advice given without
inquiring further or incurring liability for any loss arising as a consequence
of failure to inquire.

In practice, the trustee would usually seek advice from a person whose
skill or ordinary business it is to advise on the matter in question and, having
received the advice, would proceed on the basis of it. Indeed, express clauses
commonly introduced in trust instruments in Ontario will state that the trustee
may rely upon such advice without making further inquiries.

Under the case law, however, a trustee must satisfy himself, so far as a
prudent man can reasonably do, that he can safely rely upon the advice given
by an agent. The implications of this common law position were discussed
in Fry v. Tapson.]01 In that case, a trustee sought the professional advice of
a valuator concerning whether certain land was adequate security for a loan
by way of mortgage by the trust. The valuator advised in terms "which read
more like the language of an auctioneer puffing what he had to sell than of a
man exercising a calm judgment upon its value as a security for a loan of
trust money".108 The Court noted that solicitors of experience had given
evidence confirming that no prudent lender, whether or not a trustee, would
have loaned money on the advice given as to value. When the security had
subsequently to be realized, and was found to be inadequate to cover the
loan, the trustee was held personally liable for the balance. The clear finding,
then, is that a trustee must exercise care and prudence throughout, and he
does not do this by relying blindly upon advice, whatever form it may take.

Statutory provisions dealing with the extent to which an agent's advice
may be relied upon do not appear to impose as stringent an obligation on

106 Ibid., s. 5(3). As regards that part of section 33 of the present Ontario Trustee Act that
deals with the reimbursement of expenses incurred by the trustee, see infra, this ch.,
note 171 and accompanying text.

107 Supra, note 74.

108 Ibid., at 280.

trustees to evaluate the advice as does the case law. For example, we referred
previously to section 3(c)(24) of the American Uniform Trustees' Powers
Act, which authorizes trustees to employ agents and "to act without inde-
pendent investigation upon their recommendations".104 This provision seems
to enable a trustee to act on any agent's recommendation without looking into
the matter himself. It would appear that, if the agent is properly selected for
the task, and presumably adequately supervised, the trustee is thereafter
entitled to rely absolutely upon advice given him by the agent and will not
incur liability if that advice results in loss to the trust.

This position is also reflected in the somewhat analogous situation of a
company director's ability to rely upon advice. Section 1 18(4) of the Canada
Business Corporations Actuo entitles a company director to rely upon the
written report of the company's auditor as fairly reflecting the financial
condition of the corporation, or upon "a report of a lawyer, accountant,
engineer, appraiser or other person whose profession lends credibility to a
statement made by him". Section 1 18(4) of the Act further provides that the
director may rely on any of the reports mentioned, and is not liable for breach
of the general duty of care"1 "if he relies in good faith".

Although it may be argued that, in practical terms, there is no difference
between the obligation imposed by the "good faith" requirement of section
1 1 8(4)(b) of the Canada Business Corporations Act and the "good faith" plus
prudence standard set forth by the case law, we prefer to reiterate the case
law duty in the revised Trustee Act. In our view, a trustee who relies simply
on the fact that he has received advice from a person with qualifications in
the area concerned, although the nature or form of the advice would cause
concern to a prudent man, is surely demonstrating that he is indifferent to
whether or not he is performing his fiduciary responsibilities when he pro-
ceeds on the basis of that advice. Moreover, trusteeship has always been
regarded as the most intense of fiduciary relationships - in this case, the
relationship is between the trustee and the trust beneficiaries. The Ontario
and federal Business Corporations Acts attempt to establish the extent of the
fiduciary obligations of a company director, a fiduciary relationship that has
been recognized as less intense."3

Accordingly, unlike the statutory provisions referred to previously, and
more akin to the case law position, we are of the view that the revised Trustee
Act should emphasize that a trustee should not only exercise care and prudence
in the selection and supervision of the agent, but also in relying upon the
advice given by the agent. But, if the advice obtained seems satisfactory to
the trustee on any reasonable basis, there seems no good reason why he

I ( 19

Supra, note 91 .

Canada Business Corporations Act. supra, note 59.

Ibid., s. 117.

See, also, Ontario Business Corporations Act, I9H2. supra, note 59. s. 47. which deals
with reliance upon advice in the context of trusts lor bondholders.

The role of director is not only that of manager, but risktaker. He is engaged in a
commercial venture. The trustee is more concerned with conserving, and minimizing
risk.

should be concerned to obtain a second opinion. Accordingly, we recommend
that trustees should not be liable for any loss to the trust if they rely reasonably
and in good faith upon a written statement of an agent who is a duly accredited
member of the legal, accounting, engineering, medical or any other profes-
sion.114

(e) Power of Attorney

In England, section 25 of the Trustee Act, 1925, as amended in 1971,1'5
enables a trustee to delegate any of his duties or powers by way of a power
of attorney for a period not exceeding twelve months. The section provides
as follows:

25. — (1) Notwithstanding any rule of law or equity to the contrary, a trustee
may, by power of attorney, delegate for a period not exceeding twelve months
the execution or exercise of all or any of the trusts, powers and discretions vested
in him as trustee either alone or jointly with any other person or persons.

(2) The persons who may be donees of a power of attorney under this section
include a trust corporation but not (unless a trust corporation) the only other co-
trustee of the donor of the power.

(3) An instrument creating a power of attorney under this section shall be
attested by at least one witness.

(4) Before or within seven days after giving a power of attorney under this
section the donor shall give written notice thereof (specifying the date on which
the power comes into operation and its duration, the donee of the power, the
reason why the power is given and, where some only are delegated, the trusts,
powers and discretions delegated) to -

(a) each person (other than himself), if any, who under any instrument
creating the trust has power (whether alone or jointly) to appoint a new
trustee; and

(b) each of the other trustees, if any;

but failure to comply with this subsection shall not, in favour of a person dealing
with the donee of the power, invalidate any act or instrument executed by the
donee.

(5) The donor of a power of attorney given under this section shall be liable
for the acts or defaults of the donee in the same manner as if they were the acts
or defaults of the donor.

(6) For the purpose of executing or exercising the trusts or powers delegated
to him, the donee may exercise any of the powers conferred on the donor as
trustee by statute or by the instrument creating the trust, including power, for

115

Draft Bill, s. 5(4).

Supra, note 40, s. 25, as am. by Powers of Attorney Act, 197 L c. 27, s. 9(1) (U.K.).
For the genesis of the amending Act, see The Law Commission, Powers of Attorney ,
Law Comm. No. 30, (Cmnd. 4473, 1970). See, also, Samuels, "Powers of Attorney
Act 1971" (1971), 35 Conveyancer (N.S.) 310.

the purpose of the transfer of any inseribed stock, himself to delegate to an
attorney power to transfer but not including the power of delegation conferred
by this section.

(7) The fact that it appears from any power of attorney given under this section,
or from any evidence required for the purposes of any such power of attorney or
otherwise, that in dealing with any stock the donee of the power is acting in the
execution of a trust shall not be deemed for any purpose to affect any person in
whose books the stock is inscribed or registered with any notice of the trust.

(8) This section applies to a personal representative, tenant for life and statu-
tory owner as it applies to a trustee except that subsection (4) shall apply as if it
required the notice there mentioned to be given -

{a) in the case of a personal representative, to each of the other personal
representatives, if any, except any executor who has renounced probate;

{b) in the case of a tenant for life, to the trustees of the settlement and to
each person, if any, who together with the person giving the notice
constitutes the tenant for life;

(c) in the case of a statutory owner, to each of the persons, if any, who
together with the person giving the notice constitute the statutory owner
and, in the case of a statutory owner by virtue of section 23(1 ){a) of
the Settled Land Act 1925, to the trustees of the settlement.

It will be seen that, under this section, notice of the delegation must be given
within seven days to all those with the power to appoint new trustees, and to
each of the co-trustees, although failure to do this does not invalidate any act
entered into by the donee of the power of attorney with a third party. The
English provision makes the donor of the power liable for the acts or defaults
of the donee in the same manner as if they were the acts or defaults of the
donor. The equivalent statutory power in New Zealand to delegate by power
of attorney is different in this respect. Section 31(3) of the New Zealand
Trustee Act 7956116 does not impose liability for the agent's act or default if
the donor can show that the donee was appointed by him in good faith and
without negligence.

In England, the 1925 version of this power was limited in its exercise to
those occasions where the trustee in question was out of the United Kingdom.
Since 1971, however, the English legislation has not limited the circumstan-
ces in which the power may be exercised. This means that a trustee may
delegate by way of power of attorney whenever it is reasonable and prudent
to do so. The New Zealand power - the 1908 New Zealand power"7 was the
first of its kind - still requires absence from the country, as do the equivalent
provisions in the Trustee Acts of New South Wales, Victoria, and South
Australia. "8 Queensland and Western Australia, however, also include trust-
ees who are, or are about to become, temporarily incapable of performing all

llft Supra, note 47.

117 Trustee Act, 1 90S, Statutes N.Z. 1908, No. 200. ss. 103-05.

118 Tasmania has no general power to delegate. For a full discussion of the Australian
legislation, see Meagher and Gummow. supra, note 46, at 326-39.

their duties by reason of physical infirmity. I,y The Manitoba120 and New
Brunswick121 powers of delegation by way of grant of power of attorney are
copies of the English 1925 power, having been adopted before the 1971
revision.

We are of the view that the current English power of delegating by way
of a grant of power of attorney would be of value in the revised Trustee Act.
We are aware that there is evidence that the power was little used in England
prior to 1971, but in part this explains the 1971 revision. We have in mind
that there are always occasions when a trustee is temporarily unable to act,
but neither needs nor wishes to resign. At present, he will probably appoint
his co-trustee as his agent, but, as we have seen, if this is not authorized by
the trust instrument, the extent of the purported delegation may not be proper
on his part. Even if the appointment is authorized by the trust instrument, it
is questionable whether the authorization of a total delegation of administra-
tive and dispositive powers would be valid. It is interesting that the English
power enabling the trustee to grant a power of attorney suggests that some
limitation should be placed upon such a practice. Section 25(2) of the English
Act does not permit a sole co-trustee, other than a trust corporation, to be the
donee of a power of attorney.

We therefore propose the adoption of the English power, and we are of
the view that the revised Trustee Act should make available an appropriate
mode of temporary, partial, or total delegation by way of power of attorney.
We do not recommend the New Zealand provision, which imposes liability
on the delegating trustee for the defaults of the donee of the power of attorney
only if the appointment was in bad faith or negligent. We can understand this
concession to the trustee, but we do not think that statute, as opposed to a
trust instrument, should go this far. The Manitoba, New Brunswick, and
British Columbia sections all adopted and retain the English principle that the
donor of the power of attorney is liable for the acts and omissions of the
donee, as if they were his own,122 and we think this policy is correct. After
all, this is a provision authorizing total delegation. It should be for the trustee-
donor, if appropriate, to require the donee of the power to enter into an
administration bond, or for the trustee to insure himself against liability. The
revised Trustee Act must be concerned with a proper protection of the trust
beneficiaries.

Accordingly, we recommend, subject to certain qualifications discussed
below, that a trustee should be able, by granting a power of attorney, to

120
121

122

Trusts Act 1973, Queensl. Stat. 1973, No. 24, s. 56, and Trustees Act, 1962, W. Austl.
Acts 1962, No. 78, s. 54.

The Trustee Act, supra, note 82, s. 38.

Trustees Act, R.S.N.B. 1973, c. T-15, s. 6. The British Columbia Trustee Act, R.S.B.C.
1 979 , c . 4 1 4 , s . 14, contains a power of delegation by way of grant of power of attorney ,
and it follows the model of the 1925 English power, except that it is restricted to that
situation only where the trustee is engaged on war service, as defined by s. 13. See
further, Waters, supra, note 1, at 752.

Supra, notes 120 and 121. The English Law Reform Committee, supra, note 34, paras.
4.12-4.13, favours the retention of this liability.

delegate to any person for any period not exceeding twelve months the
execution or exercise of all or any of the duties and powers vested in him as
sole trustee or jointly with one or more other trustees. ,23

The qualifications that we would place upon this power are as follows.
First, a trustee should be able to delegate, by granting a power of attorney,
only where the delegation would result in the duties and powers so delegated
being executed or exercised by the donee and one or more other persons,
except that, where the donee is a trust company, it should be able to act
alone.124 Secondly, an instrument creating a power of attorney should be
attested by at least one witness.125 Thirdly, within seven days after granting
a power of attorney, the donor should give written notice thereof, specifying
the date on which the power comes into effect, its duration, the name of the
donee, the reason why the power of attorney is given, and the duties and
powers delegated, to any other persons who have power, alone or jointly, to
appoint a new trustee, and to any other trustees. However, failure to give
such notice should not, in favour of a person dealing with the donee of the
power, invalidate any act done or instrument executed by the donee.126

Concerning the liability of the donor, we recommend that he should be
liable for the acts or defaults of the donee in the same manner as if they were
the acts or defaults of the donor. 127

Finally, we are of the view that two further provisions would be useful
in relation to delegation by way of power of attorney. First, we recommend
that the fact that it appears from a power of attorney given under the statute,
or from any evidence required for the purposes of the exercise of any such
power or otherwise, that the donee of the power is acting in the execution of
a trust should not be deemed for any purpose to affect any person with notice
of the trust.128 Secondly, we recommend that a trust instrument should be
able to exclude the power to delegate by way of power of attorney. However,
if any trust instrument does confer a power to delegate by power of attorney,
it should be done in the terms of the statute, and not otherwise.129

4. CONFLICT OF INTEREST AND DUTY

(a) Nature and Scope of the Rule

No fiduciary acting within the scope of his duties may utilize his position
by making it a means of obtaining unauthorized profit for himself or any third

123 Draft Bill. s. 8(1).

124 Ibid., s. 8(2).

125 Ibid., s. 8(3).

126 Ibid., s. 8(4).

127 Ibid.,s. 8(5).

128 Ibid., s. 8(6).

129 Ibid., s. 8(7).

party.130 There are many persons whom the law considers to be fiduciaries.
Generally speaking, a fiduciary is one who has the task of acting for the
benefit of another, and who is entrusted with goods, office, or influence for
that purpose. A trustee is not only a fiduciary, but, because his role is to
preserve the trust property rather than choose among alternative business
risks, which is the role of the company director and many other agents, the
fundamental duties, of which the conflict rule is one, apply with their greatest
intensity to the trustee.

The rule in Keech v. Sandford,n] an early decision that came to be
associated with the prohibition against profiteering, is strict and uncompro-
mising. The law is not concerned with the level of integrity of the trustee;
that is irrelevant, even if the trustee demonstrates that the trust could not itself
have acquired the benefit, or he protests what is in fact the truth, namely,
that the only point of his actions was to benefit the trust beneficiaries, what-
ever profit may have incidentally come to himself. The only issue is whether
the trustee was in a position where his interest could conflict with his duty to
the trust when the profit or other gain was made, and "his interest will
include the situation where a stranger to the trust is to acquire the improper
benefit. If such profit or benefit was obtained as a result of acts which, given
his duties as set out in the trust instrument, or arising from oral instructions
or the nature of the fiduciary task, would be associated on a reasonable
construction with the performance by him of the trusteeship duties, the profit
or gain must be surrendered.

Nor may a trustee allow himself to be placed in an ambiguous situation.
If a situation exists where his own interests coincide with his duties to the
trust, so that doubt could attach at a later date to his proclaimed reasons for
pursuing a certain course of action or inaction, a trustee may not continue
until a profit is made and a successful challenge is brought against him by a
complaining beneficiary. He must rid himself of the personal interests that
cause the conflict, or, if he is one of several trustees and his withdrawal from
decision making by the trustees collectively is not possible,132 he must resign.

As Lord Eldon stated on several occasions in explaining the strictness of
the rule, the court cannot know what goes on in the mind of a man; it has no
means of discovering what were his true motivations.1" And the court should
not be put in the position where it is asked to make such a decision. It is, of
course, to prevent such conflict of interest situations that cabinet ministers
have been required in recent years to put their private investments into so-
called "blind trusts", where the minister is not aware, at any particular point

130 For a full account, see, further, Lewin on Trusts, supra, note 3, ch. 10; Underbill's Law
relating to Trusts and Trustees, supra, note 3, at 544-52; and Waters, supra, note 1, at
618-55.

131 (1726), Sel. Cas.T. King 61 , 25 E.R. 223.

132 The trust instrument will often entitle the trustee to withdraw from those matters in
which he has a personal interest, requiring him only to lend his name formally to any
decision (other than that which he knows or believes to be a breach) made by his co-
trustees, so that their decision may be joint, as required by the law.

133 Ex parte Lacex (1802), 6 Ves. Jun. 625, 31 E.R. 1228, and Ex parte James (1803), 8
Ves. Jun. 337, 32 E.R. 385.

in time, of the make-up of the portfolio of investments held by his trustees
for his benefit. Without a required disposition of personal investments, or a
"blind trust" arrangement, the concern is that the public may be suspicious
of the true explanation of some ministerial decisions. As with the cabinet
minister charged to conduct affairs on behalf of the public, so too with the
trustee. The rule lifts every trustee above suspicion.

However, the rule is not as Draconian as it may first appear. It does not
condemn the acquisition of personal profits in all circumstances, as it well
might, considering the serious nature of such conduct by a fiduciary. It merely
demands that everything be "above board"; consent must have been given to
the acquisition of gain by the trustee. It is therefore only unauthorized personal
gain or advantage that the rule condemns, and that, if the profit is of the type
that can be handed over, the rule will require the fiduciary to surrender it to
the person for whose benefit he is acting.134 Authority (or consent) permitting
the trustee to be in a conflict situation may be given by the trust instrument,
by the beneficiaries, or by the court.

So far as the trust instrument is concerned, the trustee may be authorized
to retain a particular profit,135 or to act as a trustee although he may have a
competing interest.136 It is most unlikely, although technically possible, that
a trustee will be given a blanket authority to pursue his own interests even if
conflict may occur. This is so patently unwise that few, if any, testators or
settlors are likely to include such an authority, or be advised to confer such
a carte blanche permission. The more likely position is that the testator or
settlor either has no aversion to his trustee being in specified conflict situa-
tions,137 or is prepared to tolerate specified conflicts in order to obtain the
skill of the trustee or the familiarity of the trustee with the affairs of the settlor
or testator. The most common authority in this regard is the charging clause,
enabling a trustee to charge a fee to the trust for his services. Were it not for
statutory intervention in each Canadian jurisdiction, including Ontario,138 a
trustee without a charging clause in the trust instrument, or an agreement
with all the beneficiaries, assuming them to be adult and mentally capable,
would be required to act gratuitously. The case law carries the conflict rule
so far as this.139

If there is no authority in the trust instrument, a trustee may act in a
conflict situation, and even take a profit for himself, provided that all the
beneficiaries of the trust have consented before any profit was made. But all
the beneficiaries must be ascertained, in the sense that all who could possibly

134 An injunction would be appropriate where an advantage has been acquired enabling the
trustee to make a future unauthorized profit.

135 For example, a trustee may be authorized to loan his own moneys to the trust, and at a
rate of interest to be fixed by himself.

136 For example, the would-be trustee may be the majority shareholder in the company
whose remaining shares are held by the trust for the deceased trust creator's family.

137 For example, by purchasing trust assets at the going market price.

138 Trustee Act, supra, note 48, s. 61.

139 See Waters, supra, note 1 . at 804-05.

benefit under the terms of the trust are alive,140 and each must be adult and
mentally capable. If these conditions are satisfied, the general trusts law
principle that all the equitable owners together can effectively authorize the
trustee to act in a manner that is contrary to the terms of the trust, or upon
which the trust instrument is silent, comes into operation. The beneficiaries
are the only persons with a right of action against the trustee for due and
proper performance of the trust and, by consenting, provided it is a fully
informed consent, they forego their right of action for breach.

Finally, consent to act in a conflict situation may be forthcoming from
the court, exercising its inherent jurisdiction over trustees. Although there
seems no reason why the courts could not exercise this jurisdiction regardless
of how the conflict of interest and duty arises, it would seem that the courts
have only been prepared to intervene in one specific situation, and that is
where the trustee is a prospective purchaser of trust property. Why this
situation alone should have received judicial attention is not clear. In any
event, provided the trustee can show to the satisfaction of the court that it
would be for the benefit of the incapacitated beneficiaries if the trustee were
allowed to purchase, and no adult beneficiary objects, the court will, by
order, consent on behalf of infant, unborn, or incapacitated beneficiaries.
This jurisdiction has its roots in the nineteenth century,141 but it would seem
that the approval of the court can now be obtained in the abovementioned
circumstances under the Variation of Trusts Act,142 by way of an application
to vary the terms of the trust. In an application under this Act, however, the
court would be asked to approve the conferment upon the trustee of a power
to purchase trust property; it would not merely be asked to consent to a
particular purchase, as under the inherent jurisdiction.

The conferment of a power is a more difficult task for the court. Under
the terms of the Variation of Trusts Act, the benefit of infants, incapacitated
persons, and unborn persons must still be the deciding issue, but now the
court must consider all the future conflicts that might arise and be authorized
if the power were conferred upon the trustee. Nevertheless, the wording of
the Act leaves us with little doubt that the Supreme Court of Ontario now has
this statutory jurisdiction, and that the Court is able to approve the conferment
of powers upon trustees whatever the nature of the conflict of interest and
duty that has arisen.

There are therefore a number of ways in which the trustee may legiti-
mately be able to continue in a conflict situation and, where it occurs, to
retain any profit that he acquires. However, they do not provide for every
circumstance. For one thing, the Variation of Trusts Act is not designed for
the particular purpose of providing consents and varying trust terms to accom-
modate conflicts of interest. Moreover, practical problems may arise. The

140 If there is a gift over from children to the next generation, the grandchildren, there may
be further grandchildren who are not yet born.

141 Farmer v. Dean (1863), 32 Beav. 327, 55 E.R. 128, and Campbell v. Walker ( 1 800) ,
5 Ves. Jun. 678, 31 E.R. 801.

142 Variation of Trusts Act, R.S.O. 1980, c. 519. This is also the view of Underhill's Law
relating to Trusts and Trustees, supra, note 3, at 548-49.

scrupulous trustee who wishes to act for the benefit of the trust, although in
a manner that yields him a profit that is not authorized by the trust instrument,
may find that there is either a single beneficiary who withholds his consent
while all the others can and do consent, or that there are some beneficiaries
who are minors or unborn and the problem does not concern a proposed
trustee purchase of trust property.

143

Nor are these consent mechanisms an adequate barrier to the entry of the
less scrupulous trustee into what he knows, or ought reasonably to know, is
a conflict of interest and duty situation. Such a trustee, although having no
recognizable intent to defraud, may find justification for saying nothing and
seeking no one's approval for the profit he plans to acquire or has acquired.
The justification may be that no beneficiary is losing anything he otherwise
would have had, that the gain is fairly owed to the trustee for the effort he
has expended on behalf of the beneficiaries, or even that the need to take
advantage of a business opportunity that benefits the trust and the trustee does
not afford the trustee the time to seek consents. He must presume that the
beneficiaries would consent.

The trustee may also reflect that, in the particular circumstances, he
might be able to argue successfully before a court that the profit was made
while he was acting outside the scope of his trustee obligations, and he
therefore gambles on "getting away with it".

Fraud, of course, be it legal or equitable, is a graver charge, and is an
obvious breach of the conflict rule. The receipt of bribes or secret commis-
sions, and the conversion of trust property to the trustee's own beneficial
enjoyment, are examples of fraud. But a beneficiary who alleges such an
intent and conduct is well advised to have an unanswerable case on the facts.
Intent is not a necessary constituent element of conflict of interest and duty
liability; a trustee must simply not be in a position where he could pursue his
own advantage while engaged in his trustee tasks. It follows that any unau-
thorized profit acquired while he is in that position must be surrendered. Since
an injunction and, if necessary, restitution can be obtained against a trustee
who was innocent of any wrongful intent, the courts will demand clear proof
from the beneficiary who seeks to reinforce his case by an allegation of intent
to defraud.

The conflict rule therefore covers a spectrum of trustee conditions of
mind, from the trustee who means well but makes an unauthorized profit, to
the trustee who has thought about the matter but feels he is justified in what
he is doing, to the trustee who is deliberately deceptive for his own or
another's gain. There is also a wide range of factual situations where conflict
of interest and duty can exist. All of them constitute a taking advantage of
the trust property controlled by the trustee, or of the office of trusteeship. The

143 For example, the trust may have a substantial, but minority, shareholding in XYZ Ltd.,
which is under aging, poor management. The trust cannot afford to purchase more
shares, but the company is a sound investment, and the trustee is prepared personally to
buy sufficient shares. By this means the trust and he together constitute the majority
shareholding, and the management problem would then be taken in hand. But see
Boardman v. Phipps, [1967] 2 A.C. 46, [1966] 3 All H.R. 721 (H.L.).

trustee may have purehased, loaned, or simply used trust property for his
own purposes. He may have sold or loaned his own assets to the trust. So far
as his office is concerned, he may have used it to obtain bribes or commissions
for the placing of contracts with third parties, or he may have exploited for
himself business opportunities that rightly belong to the trust. Within these
broad descriptions there are many different types of conduct and situation.

(b) A Statutory Formulation of the Rule

We have asked ourselves whether the rule prohibiting a trustee from
being in a conflict of interest situation, and, a fortiori, from deriving any
personal profit from the situation, should be made statutory. The arguments
concerning the codification of well established common law rules were can-
vassed in this chapter previously in the context of the duty of care.144 We
shall not reiterate those arguments here, except to say that, in a general sense,
they are equally applicable in this context. Like the duty of care, the conflict
of interest and duty rule is fundamental; it is vital that all accepting office
should realize not only that the rule exists, but that it constitutes a total
prohibition of the trustee even allowing himself to be in an ambiguous situ-
ation. If true trust can only exist where there cannot be a shadow of suspicion,
and if it is a legal duty of the trustee to ensure that there can be no suspicion,
then statute should bring this obligation to the attention of every trustee.145 In
addition, the revised Trustee Act could clarify certain of the attendant obli-
gations imposed by the general rule, and provide an opportunity to alter those
aspects of the rule that are no longer relevant in a modern trustee context.

We are persuaded by these arguments and believe that the conflict of
interest and duty rule should be incorporated in the revised Trustee Act.
Accordingly, we recommend that the revised Trustee Act should contain a
provision to the effect that trustees shall discharge their duties and exercise
their powers solely in the interests of the beneficiaries of the trust, and,
without limiting the generality of this duty, they shall not knowingly permit
themselves to be in a position in which their interest conflicts in any way
with the discharge of their duties and the exercise of their powers, or in which
they may derive any benefit for themselves or for any other person, except
so far as the law or the trust instrument expressly permits.

146

It would appear that, if a judicial pre-consent procedure were available,
many hard-fought conflict of interest and duty cases could be avoided. The

144
145

146

See supra, this ch., sec. 2(a).

For a statutory formulation of the conflict of interest rule so far as it concerns trustees
for bondholders and company directors respectively, see the Ontario Business Corpo-
rations Act, 1982, supra, note 59, ss. 48 and 132. See, also, the Canada Business
Corporations Act, supra, note 59, s. 78 (trustee for bondholders), and s. 1 15 (company
directors).

Draft Bill, s. 9(1). As to the ability of the trust instrument to permit a conflict of interest
and duty to exist, see further, infra, this ch., sec. 4(d). The reference to "so far as the
law . . . expressly permits" is intended to preserve the applicability of case law that
might permit trustees to act in a conflict of interest situation.

English case of Boardman v. Phipps141 is an excellent example. In that case,
a solicitor and a trust beneficiary, having no valid authority from the trustees,
held themselves out to a third party as persons authorized to act on behalf of
the trustees. On this basis, the solicitor and trust beneficiary acquired financial
information from a company that would not otherwise have been available to
them and, as a result of this information, purchased shares, securing a profit
for themselves and the trust. The House of Lords, by a majority, held the
solicitor and beneficiary subject to the conflict of interest and duty rule, and
therefore liable to surrender to the trust beneficiaries the personal profit that
they had made. The majority of the House of Lords was of the view that the
solicitor and beneficiary, being intimately associated with the trustees, and
having commenced to act as agents and fiduciaries on behalf of the trust,
used that position to secure a personal profit; that is, they were acting through-
out as fiduciaries of the trust. The minority of the House of Lords, on the
other hand, took the view that the fiduciary relationship ceased before any
plan to purchase the shares was commenced. Valid pre-consents to the pro-
posed course of action might have proved a more productive route.

Section 5(b) of the American Uniform Trustees' Powers Act148 provides
that, if the duty of a trustee and his individual interest should come into
conflict in the exercise of a trust power, he must obtain the authorization of
the court by petition before exercising the power. This means that, where a
conflict arises, a trustee is prohibited entirely from proceeding at all, or any
further, with any power, unless he has the court's consent. We have asked
ourselves whether the revised Trustee Act should impose a similar require-
ment upon trustees in this Province. Such a petition to the court might either
be mandatory or facultative; in the latter case, the trustee would not be
required to obtain the court's pre-consent, but the opportunity would be made
available to him to explain to the court what advantages exist for the trust
and its beneficiaries in his being allowed to proceed as he proposes.

The arguments in favour of a mandatory pre-consent requirement are
based on the contention that it is better to prevent a fiduciary acting in a
conflict situation than to demand accountability once the trustee has so acted
and has derived a profit. In other words, it is preferable to impose the duty
upon the trustee to secure consent before the act than to permit him to act and
then defend himself against the beneficiary's charge that he acted while
subject to a conflict of interest and duty. The reason for the preference is
simple. First, once a trustee has acted in circumstances where his personal
interest was, or could have been, involved, it is by no means easy at a later
date to determine the extent of the impropriety. The evidence of motive is so
often, as Lord Eldon remarked,149 hidden within the breast of the fiduciary.
Secondly, it is hard to impose upon the beneficiary the obligation to expose
a conflict of interest and duty. The information about trust affairs that the
trust beneficiary may demand is limited1"1 and, in any event, he is likely to

147

148
149

Supra, note 143. See, also. Waters, supra, note 1. at 647-49.

Supra, note 91 .

Supra, note 133.

It has been held that a beneficiary is not entitled to sec the correspondence between
trustees, or the minutes of their meetings: Re Londonderry' s Settlement. ( 1965] Ch. 9 IS.
[1964) 3 All L.R. 855 (C.A.) (subsequent references arc to [1965] Ch.).

know little about the day to day business of the trust. The transactions that
the trustees have concluded, and the source of the money and assets in their
hands at any particular time, are matters of which very few beneficiaries will
be, or could be, aware.

This reasoning clearly convinced the National Conference of Commis-
sioners on Uniform State Laws in the United States when it was deciding
upon the text of the Uniform Trustees' Powers Act. Nonetheless, we are of
the view that there is a major disadvantage to this approach, which we think
is fatal. If a trustee were required to obtain the consent of the court every
time he believed he could be in a position of conflict, the conduct of trust
administration in today's circumstances might well be constantly arrested by
applications to the court. Moreover, the court's lists could be heavily com-
posed of such applications; conflict of interest and duty can occur in a myriad
of ways, and he who fails to recognize such a conflict would, as a trustee, be
continuing to act in breach of his statutory duty. It would be irrelevant whether
or not he had personally profited, something which would be a mere exac-
erbation of his wrongdoing. He would have to secure the court's approval if
he were to be sure of his position. We can see no justification for adopting a
legislative provision that might have such an outcome; the cure could be
worse than the ailment.151

Instead, we have pursued the question whether a facultative pre-consent
jurisdiction would be advantageous. As we explained earlier, such a jurisdic-
tion would offer a trustee the opportunity to explain to the court why it would
be for the benefit of the trust and its beneficiaries that he proceed, even though
he is in a conflict situation and may derive a personal profit. The trustee
would have no duty to obtain this consent, but the opportunity would be
there, whatever the nature of the conflict, if the trustee wished to avail himself
of it.

An important factor favouring this approach is that the courts already
have an inherent jurisdiction to consent to a trustee purchase of trust property,
where it can be shown that, despite the potential conflict, such a purchase is
of benefit to the trust.152 The court consents on behalf of the infant, mentally
incapacitated and unborn beneficiaries. A facultative pre-consent jurisdiction
would merely be an application of this solution to any kind of conflict of
interest situation. Moreover, the Variation of Trusts Act is itself a generali-
zation of this same jurisdiction of the court to consent on behalf of the
incapacitated and unascertained beneficiaries. Essentially, the facultative
jurisdiction would allow an honest trustee to show his hand to the court and,
if he obtains consent, proceed without fear of later challenge by any benefi-
ciary.

The same facultative jurisdiction might also be made available to the
trustee who knows or becomes aware of the fact that he has acted while in a

151 Although, admittedly, we could find no evidence that, in those states where the Uniform
Trustees' Powers Act has been adopted, difficulties of this kind have arisen. See supra,
note 91 , for a list of those states that have adopted the Uniform Act.

Underbill' s Law relating to Trusts and Trustees, supra, note 3, at 548-49.

conflict situation. The trustee could be permitted to apply to the court to be
excused for his conduct. As the law stands, a trustee is entitled to ask the
court to excuse him where he is sued by a beneficiary for breach of trust;15'
the jurisdiction we are now considering would allow the trustee to seek that
relief without having to await an action for breach.

There are, however, several objections that can be made to even a
facultative pre-consent jurisdiction. Almost all conflict of interest and duty
cases come before the courts because a beneficiary challenges the trustee to
show why the trustee should not be required to surrender an unauthorized
profit that he has obtained. This means the trial takes place after the conflict
has occurred and any profit has been made. In these circumstances, it is said,
the court can assess exactly what form the conflict took and the significance
the conflict had in the particular circumstances. Unlike the pre-consent juris-
diction, the court is not left to prognosticate what form the conflict may take
in the future or what significance it may assume. The distinction between
pre-consent and subsequent evaluation of trustee conduct where a challenge
has been brought is important because, if consent is given, a later challenge
will be almost impossible to launch.

Only where the trustee has not adhered to the terms of the consent, or
the circumstances afterwards have changed, will a later challenge be a feasible
proposition for any beneficiary. It is arguably much better that the sword of
Damocles - that he will be sued - should hang over the head of a trustee who
knows or suspects he is in a conflict situation than that he should secure a
consent to proceed from a court, which must make an assessment largely
upon the basis of such evidence as the trustee is willing to give the court
concerning his own intentions and the advantages the future may offer him
for the acquisition of personal profit.

While we readily concede that the conflict of interest and duty rule must
be unambiguous in the demands it makes of the trustee, and that its enforce-
ment must be predictable and sure, we have concluded that the existing
inherent jurisdiction of the courts to consent to a trustee purchase should be
extended by statute to cover all conflict situations. In our view, every en-
couragement and opportunity should be offered to the trustee to reveal the
nature of any questionable position in which he finds himself. The scrupulous
trustee, who is convinced that the best interests of the trust will be achieved
by the course in which he also has a personal interest, will welcome the
court's judgment on the propriety of his intended action.

154

The less scrupulous trustee, it is true, will not take advantage of the
statutory jurisdiction; he will continue to shun publicity concerning his activ-
ities. On the other hand, it must be a factor to be considered in any action

153 Trustee Act, supra, note 48, s. 35. See, also, Draft Bill, s. 69, and supra, this eh., see.
2(d).

154 There will also be occasions where the trustee and the beneficiaries are agreed that for
the trustee to aet in a certain manner, or to possess a particular power, though a conflict
of interest may arise, would be for the benefit of the trust: see. tor example. Re Lerner,
[1952] 4D.L.R. 605, [1952] 6 W.W.R. 187 (Man. C.A.).

subsequently brought by a beneficiary against the trustee that the latter did
not seek the consent of the court, a procedure that was readily available to
him.1'5 This may provide evidence of the actual state of the trustee's mind at
the crucial moment. Moreover, even if an unscrupulous trustee does seek
consent, we do not envisage that the courts will lightly give their consent, or
- though this has had no influence upon our decision - that there will be
many successful applications.

We are therefore of the view that the revised Trustee Act should contain
a provision that would authorize the court to permit a trustee, either before
or after he assumes office, to carry out his duties and exercise his powers,
although he will be, or is, in a position of conflict of interest.156 We would
also confirm the power of the court to excuse the trustee from liability for a
past breach of the conflict rule, such jurisdiction being available to the trustee
on application. The safeguards that we would build into this provision are
threefold: first, that the court should be entitled to impose such terms and
conditions upon the trustee receiving consent or being excused as the court
thinks fit; secondly, that all persons having any interest under the trust should
receive notice of such applications;157 and thirdly, that a trustee or beneficiary
should be able on application to have the consent or excusing re-opened if
there is afterwards a change of circumstances. It may be that the personal
interest of a trustee who has received consent becomes more deeply involved
as a consequence of later developments concerning the management of the
trust, or that facts come to light that were not known or revealed when the
court consented to the trustee's request. We would also have the provision
apply to charitable trusts, provided notice of any intended application is given
to the Public Trustee.

Accordingly, we recommend that, where upon application to the court it
is shown that it would be for the benefit of the trust and its beneficiaries,
whether or not any beneficiary withholds his consent, the court should be
able to make an order, on such terms and conditions as appear just, permitting
the trustees to act nothwithstanding that they may be in a position of conflict
of interest and duty, or excusing them from liability notwithstanding that they
may be in breach of trust for having acted while their interest was in conflict
with their duty.158 The latter jurisdiction of the court should be exercisable
upon appliction of the trustees any time after the occurrence of the breach of

155 Had the jurisdiction existed at the time of Crocker and Croquip Ltd. v. Tornroos, [1957]
S.C.R. 151, 7 D.L.R. (2d) 104, the outcome might have been quite different: see
Waters, supra, note 1 , at 906-07. But see Bloodworth v. Bloodworth, 224 Ga. 717, 164
S.E.2d823(Sup. Ct. 1968).

156 The California Civil Code, § 2232 (West), prohibits the trustee from acting at the same
time as trustee of another trust with contrary interests, unless the beneficiaries of the
first trust consent. The Indiana Trust Code, Ind. Stats. Ann., Code Ed., § 30-4-3-7
(Burns), also prohibits a trustee from dealing with himself as trustee of another trust,
unless the instrument in question permits this, or the beneficiaries of both trusts, being
fully informed of the facts, consent. We would leave matters such as this to the courts,
acting under the jurisdiction we propose; an appropriate order can then be made, tailored
to the particular circumstances.

157 For example, the Official Guardian, in the case of minors and the unborn.

158 Draft Bill, s. 9(2).

trust; but nothing in this proposed power should affect in any way the powers
of the court to excuse a trustee for breach of trust.

159

We further recommend that, unless otherwise ordered by the court, the
trustees should give notice of the application to every person having any
interest in the trust.160 Where, however, a minor or unborn person has an
interest in the trust, the trustees should also give notice of the application to
the Official Guardian at least one month before the day fixed for the return
of the application.161 In addition, where an order has been made permitting a
trustee to act in a conflict situation, and the circumstances under which it was
made change, the court should be empowered, upon application by the trust-
ees or any interested person, to vary the order.162 We also recommend that
the proposed procedure should apply to a charitable trust, in which case the
trustees should give notice of the application to the Public Trustee at least
one month before the day fixed for the return of the application.

163

We have also noted and considered the fact that the American Uniform
Trustees' Powers Act recognizes five exceptions to the general rule, contained
in section 5(b), that, if his own interests are involved, a trustee may only
exercise a trust power with the consent of the court. First, the trustee is
permitted, without consent, to exercise the power to retain investments,
though he is personally interested in the investments in question.164 For
instance, a corporate executor and trustee may retain investments in the estate
of the deceased, although they constitute shares in the corporate trustee. We
are of the view that such a trustee should have consent, either from the
beneficiaries or, on its own application, from the court, if it wishes to be free
of any later accusation of retaining investments for its own direct or indirect
benefit.

Secondly, a trustee is permitted under the American Uniform Act to
acquire an undivided interest in property in which the trust holds the other
interest.165 We are of the view that this is a sufficiently rare occurrence, and
that the dangers arising from this conflict are so similar to those arising from
other conflict situations that this exception should not be adopted.

Thirdly, section 3(c)(6) of the Uniform Act permits a trustee to deposit
trust funds in a bank, including a bank operated by the trustee. We can
understand the convenience behind this exception, and, given the protection
afforded depositors by the provisions of the Canada Deposit Insurance Cor-
poration Act,166 we are of the view that this situation should be recognized as

159
160

162
163

165

Ibid., s. 9(3).

Ibid., s. 9(4).

Ibid., s. 9(5).

Ibid.,*. 9(7).

Ibid., s. 9(6).

Uniform Trustees' Powers Act. supra, note 91, § 3(c)(1).

Ibid., § 3(c)(4).

R.S.C. 1970, c. C-3, s. 13(1). as am. by S.C. 1980-81-82-83. c. 148. s. 3, which
amends paragraph 1 3( 1 )(c) by raising the insurable limit to $60,000. The amending Act,
except ss. 4 and 7. came into force on April 21 . 1983. The insurable limit, by virtue of
s. 9, is deemed to have come into force on January 4, 1983.

an exception to the general conflict of interest and duty rule. However, out
of an abundance of caution, we are of the view that a trustee should only be
permitted to deposit trust funds in its own banking facilities or to invest in its
own securities up to the limit established by the Canada Deposit Insurance
Corporation Act. We would also emphasize that this power would only be
available to a trust company, or other depository empowered by law to accept
moneys for deposit, that is acting as trustee, and not to an individual or other
non-authorized corporate trustee, unless, of course, the trust instrument ex-
pressly so provides. Equally, the trust instrument could prohibit its trustees
from depositing and investing trust funds in their own institutions.

Accordingly, we recommend that, subject to our later recommendation
concerning the deposit of trust funds,167 and to any power in the trust instru-
ment, a trust company or other depository empowered by law to accept
moneys for deposit should be able to deposit or invest the funds vested in it
pursuant to a trust of which it is a trustee in any account maintained, or in
any security issued, by itself or any affiliate or subsidiary up to, but not
exceeding, the maximum insurable sum established by the Canada Deposit
Insurance Corporation Act. 168

Fourthly, under the American Uniform Trustees' Powers Act, the trustee
has a lien on the trust property or against the beneficiary for the moneys out
of his own pocket that he has spent as outgoings in the administration of the
trust.169 A trustee in Ontario, of course, has a statutory entitlement to reim-
bursement for all proper expenditures on behalf of the trust, and, alternatively,
the statute permits him to pay or discharge expenses directly out of the trust
property.170 We believe that this provision should be retained in the revised
Trustee Act, and we would merely move it to that part of the Act that is
concerned with the conflict of interest and duty rule. Accordingly, we rec-
ommend that a power in a trust instrument authorizing the trustees to reim-
burse themselves or to make payments directly from the trust funds for the
discharge of expenses or of any other obligation properly incurred or arising
in the administration of the trust should be valid and that the trustees should
not be regarded as acting in conflict of interest and duty in so doing.171

Fifthly, the American Uniform Act provides that a trustee may employ
agents, even if they are associated with the trustee, to advise and assist him,
and that he may act without independent investigation upon their recommen-
dations.172 As we have previously considered this provision and have made
recommendations concerning the ability of a trustee to rely upon the advice
of qualified agents,173 we need say no more here. However, the freedom of a
trustee to employ the services of his partner, or a subsidiary or affiliate, is

167 See infra, ch. 4, sec. 3(d)(i), and Draft Bill, s. 35(a).

168 Draft Bill, ss. 10 and 35(a).

169 Uniform Trustees' Powers Act, supra, note 91 , § 3(c)( 18).

170 Trustee Act, supra, note 48, s. 33. See, further, Waters, supra, note 1, at 795-804.

171 Draft Bill, s. 11.

172 Uniform Trustees' Powers Act, supra, note 91, § 3(c)(24).

173 Draft Bill, ss. 5, 6, and 7. See supra, this ch., sec. 3(d).

another issue. It is probable that lawyers and accountants would associate the
conflict of interest and duty rule with bribes and other illicit commissions,
and not with the hiring of partners to carry out trust work within the areas of
those partners' respective skills, even though this practice will result in the
trustee profiting through his share in the partnership gains. We have concluded
nevertheless that there is no justification for taking this situation out of the
ambit of the conflict of interest rule. This is the very kind of conflict with
which the judicial pre-consent jurisdiction that we have proposed should be
dealing. There may be good reasons why the trustee wishes to employ his
partner, intimate knowledge of the agent's skill being the foremost, but we
think these reasons should be adjudicated upon by the court, if the trust
instrument is silent on the matter. In this, as in every other matter, the trustee
should be above and beyond the situation where suspicion of personal gain
could arise.

(d) Validity of Terms in the Trust Instrument Permitting a
Conflict of Interest and Duty

Trust instruments often contain clauses expressly permitting an act or
acts that otherwise would be voidable for breach of the conflict of interest
and duty rule. Executors and trustees are authorized to loan moneys for trust
administration, both to the deceased's estate and to and from each other, for
instance, and they are enabled to charge such rate of interest as they decide.
Trustees may also be enabled to purchase any part of the trust property, and
on such terms, including unsecured credit, as they choose. On occasion,
words will be added stating that no trustee making such a purchase shall be
required to obtain the consent of the court.

Settlors and testators may have various reasons for adopting such clauses.
Tax planning considerations will explain the power given to executors and
trustees of a will to loan moneys to the testator's estate, and, if the trustee is
a member of the testator's family, it is likely that the testator will also wish
to confer benefits upon him. Such benefits may take the form not only of
direct gifts, but of the authority to acquire or deal with the trust property for
his personal advantage.

On the other hand, we have some doubts whether those who create trusts
always appreciate the significance of these clauses in the sense of the antag-
onisms they can create between the trustee and the beneficiaries. In some
instances, the meaning itself may not be properly understood. The settlor or
testator, particularly the latter, may be ill-advised to appoint as an executor
or trustee a person whom he also intends to benefit, that is, to confer fiduciary
powers upon the executor or trustee, and then authorize the fiduciary to
exercise such power for his personal gain.

The positions that the revised Trustee Act might take on this issue are
several. It might prohibit the exclusion of the conflict of interest rule as to
any trustee behaviour, and thus render void any act o\' a trustee that is in
breach of the prohibition, save insofar as a bona fide third party purchaser
for value without notice is concerned. Alternatively, the revised Act might
prohibit the exclusion of the rule in certain types of trust, for instance, real

estate investment trusts. Thirdly, the revised Act might prohibit the exclusion
of the rule in relation to certain kinds of conflict of interest and duty behaviour,
such as the right of the trustee to borrow from the trust for himself, on
personal security and interest free. The thinking behind such a prohibition
would be that it is in the remuneration clause, and not in the fiduciary powers
of administration, that a trustee should enjoy the benefaction of the testator
or settlor. Fourthly, the revised Trustee Act might prohibit any exclusion of
the right of the beneficiary to apply to the court to determine whether a
conflict permitted by the trust instrument should prevail. Finally, the revised
Act might remain silent on the matter, as the present Act now does.

Although there are good reasons for protecting beneficiaries from mis-
guided or misunderstood exclusions of the conflict rule, we have concluded
that they do not justify the adoption in the revised Trustee Act of any of the
first three alternatives. We are therefore able to this extent to allow force to
be given to the declared intent of the settlor or testator.

As between the fourth and last alternatives, the legislature appears already
to have made a choice in the enactment of the Variation of Trusts Act.114
While we have been unable to trace a reported instance in which the court
has been asked to approve an arrangement under that Act whereby a clause
permitting a conflict of interest and duty has been varied or deleted, we can
see no limitation on the language of that Act that would prevent the court
from giving such an approval in the case of a trust involving unborn, inca-
pacitated, or unascertained beneficiaries. In such a case, it would appear that
a settlor or testator cannot oust the jurisdiction of the court by seeking to
exclude the right of the beneficiary to seek the approval of the court to a
variation or deletion of a term in the trust instrument.

In our view, all beneficiaries, whether or not some or all of them are
incapacitated, should be able to apply to the court for a variation or a deletion
of a term in the trust instrument permitting a trustee to act in a conflict of
interest situation.175 Moreover, because of the potentially prejudicial effect
that the operation of such terms might have on the beneficiaries, the trust
instrument should not be able to prevent beneficiaries from applying to the
court. Accordingly, we recommend that, notwithstanding the terms of the
trust instrument, any beneficiary of a trust should be able to apply to the court
for a deletion or variation of any term in the trust instrument permitting a
conflict of interest and duty. I76

As for those trusts that are conducted as investment or other business
vehicles by professional trustees for investing members of the public, or

174 Variation of Trusts Act, supra, note 142. See infra, ch. 7, sec. 2(a), for a discussion of
the Variation of Trusts Act.

175 The Variation of Trusts Act, supra, note 142, only applies where some or all of the
beneficiaries seeking a variation of a term of the trust are incapacitated. At present, there
is some controversy whether beneficiaries who are all capacitated can vary the terms of
the trust, as opposed to terminating the trust prematurely, under the common law rule
of Saunders v. Vautier (1841). 4 Beav. 1 15, 49 E.R. 282, aff d Cr. & Ph. 240, 41 E.R.
482: see infra, ch. 7, sec. 2(b)(ii).

176 Draft Bill, s. 12(1).

consortia of businessmen and corporations, it will be recalled that we rec-
ommended in Chapter 1 of this Report that such trusts should not be subject
to the revised Act. It is our view that any regulation of such trusts, if regulation
is desirable, should be carried out by specific legislation, such as consumer
protection legislation, rather than by general legislation such as the revised
Trustee Act.

5. UNANIMITY OF TRUSTEES

In the previous parts of this chapter, we have discussed the three funda-
mental duties of trustees that we consider should be contained in the revised
Trustee Act. At this stage, we wish to deal with an issue that, although not
constituting a fundamental duty, is a general principle that governs trustees
in the exercise of their powers and discharge of their duties, the so-called
"rule of unanimity". At present, case law requires trustees to act unanimously
in the exercise of their powers.177 If a trustee refuses to join with his co-
trustees in the exercise of a trust power, a deadlock results.

In the event of a deadlock, the courts may remove one or more of the
trustees if there is such hostility that the administration of the trust is brought
to a standstill and if the interests of the beneficiaries are suffering or are likely
to suffer.178 Further, in certain circumstances of deadlock, Ontario courts
have sometimes been willing to settle the issue by the exercise of their powers
under section 60 of the Trustee Act to give direction on a question "respecting
the management or administration of the trust property".179 However, in a
situation of deadlock, this provision is of limited utility. The reason is that
the exercise of a trust power involves essentially the exercise of a discretion
vested by the trust instrument or the legislation in the trustees, and the courts
traditionally have refused to interfere with the exercise of discretion by
trustees.180 Accordingly, in order for the court to exercise its power under
section 60, it must be clear that trustees are in disagreement about whether
or not to exercise a certain power. If they are agreed that a power should be
exercised, such as the power of sale, but disagree about the circumstances in
which they should exercise the power - for example, they are unable to agree
on the acceptance of a particular offer to purchase181 - it appears that Ontario
courts will not resolve this disagreement by issuing a direction under section
60 of the Trustee Act.

The question that arises is whether the unanimity rule should be carried
over to the revised Trustee Act. An alternative approach is suggested by the

177 See Waters, supra, note 1, at 612.

178 Ibid., at 594-95.

179 See, for example, Re Haasz, [1959] O.W.N. 395, 21 D.L.R. (2d) 12 (C.A.). and Re
5/7/^(1983), 42 O.R. (2d) 110, 148 D.L.R. (3d) 512.

180 See Waters, supra, note 1. at 753-59.

181 See Re Wright ( 1977), 14 0.R. (2d) 698, 74 D.L.R. (3d) 504 (H.C.J. ).

Quebec Civil Code1*2 and the American Uniform Trustees' Powers Act,
each of which provides that trustees may act by a majority. Enquiries we
have made indicate that Ontario trust lawyers are divided on the matter. Some
support the majority rule on the grounds of convenience, while others oppose
it as an invitation for dissension.

In the opinion of the Commission, this issue is a significant one, and it
has received our careful attention. As we have noted, the unanimity rule now
prevails in Ontario and, so far as we can ascertain, has not given rise to undue
difficulties. Further, adoption of the majority rule would inevitably weaken
the protection that trust beneficiaries now enjoy, without conferring upon
them any compensating benefit. In the result, we have concluded that no case
has been made for change in the present law. We consider that the rule of
unanimity should be continued, and in view of its importance should be
placed in legislative form. Accordingly, we recommend that the revised
Trustee Act should contain a provision to the effect that, in the discharge of
their duties and the exercise of their powers, whether the duties or powers
are created by law or the trust instrument, trustees must act unanimously.184
Of course, it would still be open to a testator or settlor, should he so choose,
to modify this provision and adopt the majority rule by an express statement
in the trust instrument. Moreover, where it appears that the trustees are unable
to achieve unanimity on a matter, we recommend that one or more of them
should be able to apply to the court for an order resolving the deadlock in
any way it considers proper.185

We would note that this recommendation renders it unnecessary for the
Commission to consider the implications that adoption of the majority rule
would have upon the law regarding liability of trustees for breach of trust,
and upon the law of indemnification and contribution among trustees.

6. POWERS OF TRUSTEES SOLELY THEIRS

In the preceding sections of this chapter, we have been concerned with
the fundamental duties and principles that should govern trustees in the

182

183

184
185

"Gifts Inter Vivos and by Will of Trusts", art. 98 If, provides that "[wjhen there are
several trustees, the majority may act, unless it be otherwise provided in the document
creating the trust".

American Uniform Trustees' Powers Act, supra, note 91, § 6(a) and (c) provides as
follows:

6. (a) Any power vested in 3 or more trustees may be exercised by a majority,
but a trustee who has not joined in exercising a power is not liable to the benefici-
aries or to others for the consequences of the exercise; and a dissenting trustee is
not liable for the consequences of an act in which he joins at the direction of the
majority of the trustees, if he expressed his dissent in writing to any of his cotrustees
at or before the time of the joinder.

6. (c) This section does not excuse a cotrustee from liability for failure either to
participate in the administration of the trust or to attempt to prevent a breach of
trust.

Draft Bill, s. 13(1).

Ibid.,s. 13(2).

exercise of their powers and discharge of their duties. We now turn to consider
whether the revised Trustee Act should contain any similar general principles
governing the activities of beneficiaries vis-a-vis the trust and its trustees. In
particular, we have given thought to the extent to which beneficiaries should
be permitted to be involved in the administration of the trust, and the recourse
that should be available to them if they do not approve of the manner in which
the trustees are conducting the affairs of the trust, apart from suit for breach
of trust. The first issue we shall examine is whether beneficiaries should be
able to instruct trustees concerning the exercise of their powers. Secondly,
we turn to whether trust beneficiaries should have the means to oppose the
trustees' intended exercise of any power.

(a) Should Beneficiaries Be Entitled to Instruct Trustees in
the Exercise of Their Powers?

It has been asserted that the power of beneficiaries to intervene in the
affairs of the trust should be broad, and, in particular, that they should be
able to instruct trustees concerning the exercise of their powers. The basis
for this assertion lies in an extension of the principle set forth in Saunders v.
Vautier.186 It was established by this case that, if the sole possible beneficiary
of a trust is ascertained, of age, and mentally capable, that person can call
upon trustees to transfer the trust property to him, even though the terms of
the trust permit payment or transfer to take place only at a later time. In these
circumstances, equity regards the beneficiary as the absolute owner and the
trust as a restraint upon his enjoyment with which he may dispense as he sees
fit. Equity also employs the same analysis when there is more than one
possible beneficiary.187 Accordingly, it is contended that, if the circumstances
are such that beneficiaries may direct trustees to wind up the trust, they should
also, in like circumstances, be able to keep the trust in being and instruct the
trustees concerning the exercise of their powers.

This issue has arisen on two specific occasions, and has received two
varying responses. The orthodox view was expressed in Re Brockbank,xm a
case where a continuing trustee wished to exercise his statutory power of
appointment by appointing a trust corporation as his co-trustee, while the
beneficiaries wanted an individual appointed co-trustee. The Court pointed
out that under the Trustee Act, 1925 the power to appoint a substitute trustee
was conferred upon the continuing trustee, and that he was proposing to
exercise his discretion properly. The application was dismissed, and the Court
noted that, if the beneficiaries wished the individual appointed, their remedy
was to wind up the trust and to resettle, appointing new trustees. A different
opinion was expressed in Butt v. Kelson,]H9 a decision of the English Court

186 Saunders v. Vautier, supra, note 175.

187 For example, assume a trust in favour of A for life, then to B for life, and then to C in
remainder. During A's lifetime, A, B, and C, if they are all ascertained, of age, and
mentally capable, may agree and call for the capital from the trustees, in order that it
may be divided among themselves.

188 [1948] Ch. 206, [1948] 1 All E.R. 287. See, also. Underbill's Law relating to Trusts
and Trustees, supra, note 3, at 556.

189 [1952] Ch. 197, [1952] 1 All. E.R. 167 (C.A.).

of Appeal. In this case, trustees, registered as owners of certain shares that
were trust property, were held to have the obligation to vote the shares as
instructed by the beneficiaries. The Court reasoned that, as the trust benefi-
ciaries were entitled to call for the shares, they were entitled to say how the
trustees should use their vote.190

Neither case appears to have been invoked in any reported Canadian
decision, and we are of the view that the matter should be settled in the
revised Trustee Act. We would note that the right of beneficiaries to direct
trustees in the exercise of their powers is not without statutory expression.
The Western Australia Trustees Act, 1962191 contains a provision that requires
trustees to sell land subject to a trust, if the person or all the persons benefi-
cially entitled to an interest in possession express the desire in writing that
they do so. Nonetheless, for several reasons we are inclined to the view
expressed in Re Brockbank.

First, it is the trustees in whom the trust property is vested. The settlor
or testator has placed property in trust for specific reasons, and has entrusted
to persons whom he views as capable the power to make decisions that will
be in the best interests of the trust. To allow beneficiaries to direct the on-
going administration of the trust confuses the roles of trustee and beneficiary
and is inconsistent with the trust concept. If the creator of the trust wishes a
beneficiary to be actively involved in the management of the trust, such
person may always be appointed trustee. Further, beneficiaries are granted
several remedies, which should protect them adequately against imprudent
actions by trustees.

Finally, we mentioned earlier that the basis for the assertion that benefi-
ciaries should be able to instruct trustees concerning the exercise of their
powers lies in an extension of the principle in Saunders v. Vautier. In a later
chapter of this Report,192 we recommend that all Saunders v. Vautier trust
terminations should require the consent of the court. If this recommendation
is accepted, it follows, in our opinion, that the basis for this assertion will no
longer exist. Accordingly, we recommend that the revised Trustee Act should
provide that, subject to the power of delegation, and notwithstanding that all
the beneficiaries are ascertained, of age, and under no disability, the powers
conferred upon trustees by the Act or by the trust instrument, or as a result
of their having title to trust property, should be exercisable by them solely
within their own discretion.193

(b) Beneficiaries' Objection to Trustees' Exercise of Powers

The recommendation that we have made in the preceding section makes
it clear that beneficiaries should not be able, on an ongoing basis, to instruct

191
192
193

In Re Whichelow Ld., [1954] 1 W.L.R. 5, at 8, [1953] 2 All E.R. 1558 (Ch.D.), at
1561, Upjohn J. pointed out that Butt v. Kelson "is difficult to reconcile" with Re
Brockbank, supra, note 188, Re Higginbottom, [1892] 3 Ch. 132, and Tempest v. Lord
Camoys (1882), 21 Ch. D. 571 (C.A.). It seems that Re Brockbank was not brought to
the Court's attention in Butt v. Kelson.

Trustees Act, 1962, supra, note 1 19. s. 27(4).

See infra, ch. 7.

Draft Bill, s. 14.

trustees concerning how the terms of the trust should be administered. None-
theless, the question arises whether beneficiaries should have some means
available to oppose a trustee's intended exercise of power, and, if so, whether
the remedies that are available to beneficiaries at present are adequate in this
regard.

For example, suppose that a testamentary trust is created and that the
trust assets include an old house. Suppose also that the trust is in favour of a
person who is a minor when the will takes effect, and that it is to continue
until the minor attains the age of majority. Suppose further that the trustees
intend to accept an attractive offer to purchase the house either because the
trust requires funds or because they judge the cost of outgoings to be reducing
unjustifiably the original dollar value of the testamentary gift. In this situation,
should the parent or guardian of the minor, on his behalf, be able to challenge
the proposed sale of the house by the trustees?

It may be argued that, although the trustees may act responsibly and in
good faith in exercising their discretion, the beneficiary could make a case in
the above-noted situation. The house may have been the home of the grand-
parents of the minor, and there may be sentimental reasons for retaining the
property, despite its poor showing as an investment proposition. Similar types
of problem could arise with other powers. Under a power contained in the
trust instrument to carry on a business, for example, trustees might decide
that the best course would be to sell the business, while the beneficiaries
might prefer, for their own reasons, to see the business continued.

To meet this type of situation, the New Zealand Trustee Act 1956,i94 the
Western Australia Trustees Act, 1962,i95 and the Queensland Trusts Act
1973196 supplement a beneficiary's case law remedies by conferring upon him
the right to bring his argument before the court. Section 8 of the Queensland
Act, which is modelled upon and is in similar terms to the New Zealand and
Western Australia provisions, provides as follows:

8. — (1) Any person who has, directly or indirectly, an interest, whether vested
or contingent, in any trust property, and who is aggrieved by any act, omission
or decision of a trustee or other person in the exercise of any power conferred
by this Act or by the instrument (if any) creating the trust, or who has reasonable
grounds to apprehend any such act, omission or decision by which he will be
aggrieved, may apply to the Court to review the act, omission or decision, or to
give directions in respect of the apprehended act, omission or decision; and the
Court may require the trustee or other person to appear before it, and to substan-
tiate and uphold the grounds of the act, omission or decision which is being
reviewed and may make such order in the premises (including such order as to
costs) as the circumstances may require.

(2) An order of the Court under subsection ( 1 ) shall not -

(a) disturb any distribution of the trust property, made without breach of
trust, before the trustee became aware of the making of the application
to the Court; or

194
195
I9f>

Supra, note 47, s. 68.
Supra, note 1 19, s. 94.
Supra, note 1 19. s. 8.

(b) affect any right acquired by any person in good faith and for valuable
consideration.

(3) Where any application is made under this section, the Court may, -

(a) if any question of fact is involved, determine that question or give
directions as to the manner in which that question shall be determined;
and

(b) if the Court is being asked to make an order which may adversely affect
the rights of any person who is not a party to the proceedings, direct
that that person shall be made a party to the proceedings.

As will be noted, the Act permits any person who is aggrieved "by any
act, omission or decision of a trustee ... in the exercise of any power" to
apply to the court for relief; the trustee may then be required to give reasons
for the act, omission, or decision in issue. Although beneficiaries have always
had recourse against trustees for a breach of trust, this provision appears to
reverse case law that has held that there is no duty imposed upon trustees, in
the absence of bad faith, to disclose their motives or reasons for the manner
in which they have exercised a particular power.197 The Act also provides
that any distribution of the trust property made without breach of trust, and
before the trustees became aware of the application to the court, shall stand,
and extends this protection to any third party who has acquired a right in
good faith and for valuable consideration.

It may be contended, however, for several reasons, that it would be
inappropriate to confer upon beneficiaries, or those acting on their behalf, an
opportunity to oppose trustees in the exercise of their powers; that is, to grant
beneficiaries what may be described as a "blocking power". First, it is the
trust instrument that provides trustees' instructions and authorities, with the
Trustee Act powers supplementing the instrument. Trustees are, by the in-
strument, vested with legal ownership of the trust assets and, accordingly,
are entitled to act as if they were the owners; for example, trustees may
contract in their own name. Therefore, it would be inconsistent with the
principles of trusteeship to require trustees to justify their decisions, or pro-
posed actions, concerning the administration of the trust at the behest of a
beneficiary who may be contrary minded.

Moreover, the controls upon trustees in the discharge of their duties and
the exercise of their powers constitute the fundamental obligations of trustees:
namely, to demonstrate "vigilance, prudence and sagacity";198 to avoid con-
flicts of interest and duty; to delegate only those matters that do not involve
crucial policy; and, where there are both income and capital beneficiaries, to
exercise their powers in such a way that they favour neither the one nor the
other.199 Where one or more of these obligations have not been honoured, the
remedy available to the aggrieved beneficiary is an action for breach of trust,

197 See Re Londonderry' s Settlement, supra, note 150, at 928, per Harman L.J.

198 Fales, Wohlleben v. Canada Permanent Trust Co., supra, note 5.

9 See infra, ch. 4, sec. 4, for a discussion of the duty to act impartially.

or, where breach of trust is apprehended, an injunction to prevent the conduct
at issue. But, according to this argument, where these obligations have been
satisfied, a beneficiary should not have a blocking power; he should not be
able to arrest a course of action that trustees have determined to be appropri-
ate.

Secondly, it can be asserted that trustees may be reluctant to take deci-
sions that they believe to be in the best interests of the trust, or even to act as
trustees, if, for their efforts, they may be brought before the courts to justify
their decisions on the merits. In addition, the delay that may occur as a result
of judicial proceedings under a blocking power may result in the loss of an
opportunity that the trustees should have pursued and that would have bene-
fited the trust. It has also been noted that beneficiaries are rarely unanimous
concerning a proposed course of action, and that one beneficiary should not
be permitted by means of a blocking power to disrupt and delay the admin-
istration of the trust that is being carried out by the trustees in the best interests
of all the beneficiaries.

Thirdly, it may be said that the introduction of a blocking power might
have serious implications for trustees dealing with third parties. Third parties
who deal in good faith with trustees should be able to rely upon the fact that
trustees have the ability to carry through transactions into which they enter,
and that such transactions will not be set aside subsequently at the behest of
beneficiaries. Trustees' powers will be of little value if ordinary commercial
significance does not attach to their purported exercise.

Finally, it may be asked what principles a court should apply in assessing
the appropriateness of a decision taken by trustees, and what remedies should
be available. It is argued that the court should not be asked to review a
situation and to provide a solution where, for example, trustees contend that
a prudent man of business would sell trust property, while an aggrieved
beneficiary with a remainder interest replies that he would like the property
retained.

The Commission finds the above arguments compelling, and has con-
cluded that a beneficiary who takes exception to a trustee's exercise of power
should not able to apply to the court for a review of the trustee's decision in
the absence of a breach of trust by the trustee. Such a position would come
precariously close to affording beneficiaries an opportunity to instruct trustees
concerning the exercise of their powers, a proposition that we rejected in the
previous section of this chapter.20" As we stated there, the powers conferred
upon trustees by statute or by the trust instrument, or as a result of their
having title to trust property, should be exercisable by them solely within
their own discretion.201 To permit beneficiaries to question the trustees' ex-
ercise, or proposed exercise, of discretion in the absence of an alleged breach
of trust would, in our opinion, undermine this principle greatly.

Generally speaking, we agree with the present position that a court should
not interfere with the bona fide exercise of discretion by trustees. The one

200 See supra, this ch.. sec. 6(a).

201 See Draft Bill. s. 14.

exception to this general principle is where trustees who must act unanimously
cannot agree, in which case we have recommended that the court should be
empowered to break the deadlock by whatever means appropriate, including
the exercise of discretion of the trustees.202 The proposed blocking power
would appear to contemplate a much broader role for the court in reviewing
the exercise of trustees' discretion, if the power were to be meaningful. If,
on the other hand, notwithstanding the existence of a blocking power, courts
were reticent to intervene in trustees' exercise of powers to any greater extent
than contemplated by the present law, such a blocking power would be of
minimal utility. Indeed, it would appear that the courts in Queensland have
adopted a cautious approach to the application of section 8(1) of the Trusts
Act 1973. In the two reported cases dealing with this section, the courts were
of the view that there was a very heavy onus upon the person who sought to
review a trustee's decision and that the court should not interfere lightly with
a discretionary decision of a trustee unless a proper case had been made out.203

While we are of the opinion that a power akin to that provided in section
8 of the Queensland Trusts Act 1973 should not be introduced in Ontario, it
has been pointed out to us that it would be useful to specify the remedies
available to beneficiaries where the trustees refuse to act, in the sense that
they refuse to discharge a duty or to turn their minds to whether they should
exercise a power. At present, of course, beneficiaries may seek to have a
trustee who refuses to act removed from office.204 However, this course of
action may not be attractive for various reasons; all that may be needed is a
direction from the court that the trustees proceed in a timely fashion to
exercise their powers and discharge their duties. The court would not, in
these circumstances, be empowered to instruct the trustees how to act. Rather,
where a proper case of inactivity on the part of the trustees had been made
out, the court would direct that the trustees discharge the duty or turn their
minds to the exercise of the powers that have been conferred upon them. If
the trustees demonstrate that they have, in their discretion, considered the
matter, and have decided on a particular course of conduct that might include
inactivity, the court, in the absence of an allegation of breach of trust, would
not generally interfere with the exercise of discretion by trustees.

We are aware that under the present case law beneficiaries, through their
equitable interest, can "compel the trustees to discharge their fiduciary role
in relation to the powers and duties which they possess".205 This, of course,
is especially the case where a trustee fails to carry out his duties as prescribed
by the trust instrument, statute, or otherwise by law.206 We are also of the
view that, even if what is involved is a power, beneficiaries should be able
to compel trustees to exercise their discretion under the power, but not, as
we have said, to the extent of dictating the manner in which the discretion

202 See supra, this ch., sec. 5, and Draft Bill, s. 13(2).

203 See Re Koczorowski, [1974] Qd. R. 177 (S.C.), and/te Whitehouse, [1982] Qd. R. 196
(S.C.).

204 See infra, ch. 3, sees. 1(b) and (f).

205 See Waters, supra, note 1, at 835.

206 Ibid., at 837-40.

shall be exercised. Accordingly, we recommend that the revised Trustee Aet
should contain a provision to the effect that, where trustees are directed or
empowered to act, whether by the trust instrument, statute, or otherwise by
law, and they refuse or fail to discharge the duty of to consider in good faith
and decide accordingly upon the exercise of the power, the court, upon
application by a beneficiary, may order the trustees to discharge the duty, or
to satisfy the court that such consideration has been given to the exercise of
the power.207

Recommendations

The Commission makes the following recommendations:

1 . The revised Trustee Act should set out expressly the general duty of care
governing the exercise of power and discharge of duty by trustees. Ac-
cordingly, the revised Trustee Act should provide that, in the discharge
of their duties and the exercise of their powers, whether the duty or power
is created by law or the trust instrument, trustees shall exercise that degree
of care, diligence, and skill that a person of ordinary prudence would
exercise in dealing with the property of another person.

2. Non-professional, unremunerated trustees should not be governed by any
lower standard of care than that set out in Recommendation 1. That is,
non-professional, unremunerated trustees should be governed by the gen-
eral duty of care expected of all trustees as expressed in Recommenda-
tion 1.

3. "Professional" trustees, that is, trustees who in fact possess, or who
because of their profession, business, or calling ought to possess, a
particular level of knowledge or skill which in all the circumstances is
relevant to the administratrion of the trust, should employ that particular
level of knowledge or skill in the administration of the trust, in addition
to the general duty of care applicable to all trustees as provided in
Recommendation 1 .

4. Section 35 of the present Trustee Act, permitting the court to excuse
trustees for breach of trust, should be carried over to the revised Trustee
Act. Accordingly, the revised Act should provide that, if in any proceed-
ings affecting a trustee or trust property it appears to the court that a
trustee, or any person who may be held to be fiduciarily responsible as a
trustee, is or may be personally liable for a breach of trust, whenever the
transaction alleged or found to be a breach of trust occurred, but has
acted honestly and reasonably and ought fairly to be excused for the
breach of trust, and for not obtaining the directions of the court in the
matter in which he committed the breach, the court may relieve the trustee
either wholly or partly from personal liability for the breach.

207 Draft Bill, s. 16.

5. The revised Trustee Act should contain a provision to the effect that no
term in a trust instrument, or in an oral declaration of trust, is valid to
the extent that it purports to exonerate the trustees from liability for
failure to exercise the degree of care, diligence, and skill that a person
of ordinary prudence would exercise in dealing with the property of
another person.

6. The revised Trustee Act should provide that no term in a trust instrument,
or in an oral declaration of trust, should be valid to the extent that it
purports to exclude or lower the standard of knowledge or skill required
by trustees who in fact possess, or who because of their profession,
business, or calling ought to possess, a particular level of knowledge or
skill which in all the circumstances is relevant to the administration of
the trust.

7. Section 20 of the present Ontario Trustee Act should be repealed. In its
place, the revised Trustee Act should provide that, where it is reasonable
and prudent in the circumstances so to do, trustees may employ one or
more persons as agents within or outside Ontario to cany out any act
required to be done in the administration of the trust, including the
execution of documents, the payment, transfer, and receipt of money or
other property, and the giving of discharges for receipts, but excluding
the exercise of any express or statutory discretion as to the transfer or
distribution of trust property to or among beneficiaries of the trust.

8. The revised Trustee Act should provide that, for the purpose of the power
of delegation proposed in Recommendation 7, an agent includes a co-
trustee. A non-corporate trustee should be able to delegate, to the extent
permitted by Recommendation 7, to the other trustees where there are
two or more non-corporate trustees, or to a sole co-trustee if the sole co-
trustee is a trust company, but, except where a sole trustee was originally
appointed, where there are two trustees only and neither is a trust com-
pany, neither should be able to delegate to the other.

9. The revised Trustee Act should provide that, in employing an agent,
trustees shall personally select the agent and be satisfied of his suitability
to perform the act for which he is to be employed, and shall carry out
such supervision of the agent throughout his employment as is prudent
and reasonable.

10. The revised Trustee Act should provide that no term in a trust instrument,
or in an oral declaration of trust, is valid to the extent that it purports to
absolve the trustees in the employment of agents from the duty to act in
accordance with Recommendation 9.

1 1 . The revised Trustee Act should provide that trustees are only chargeable
for loss caused by the default of an agent if the loss is due, wholly or
partly, to a breach of the duties prescribed by Recommendations 7 and
9, or otherwise to the trustees' negligence or wilful wrongdoing.

12. The revised Trustee Act should provide that trustees are not liable for any
loss to the trust if they rely reasonably and in good faith upon a written

statement of an agent who is a duly accredited member of the legal,
accounting, engineering, medical or any other profession.

13. The revised Trustee Act should provide that a trustee may, by granting a
power of attorney, delegate to any person for any period not exceeding
twelve months the execution or exercise of all or any of the duties and
powers vested in him as sole trustee or jointly with one or more other
trustees.

14. The power of delegation by way of power of attorney proposed in Rec-
ommendation 13 should be subject to the following limitations in the
revised Trustee Act:

(a) a trustee should be able to delegate by granting a power of attorney
only where the delegation would result in the duties and powers so
delegated being executed or exercised by the donee and one or more
other persons, except that where the donee is a trust company, it
should be able to act alone;

(b) an instrument creating a power of attorney should be attested by at
least one witness; and

(c) within seven days after granting a power of attorney, the donor
should give written notice thereof, specifying the date on which the
power comes into effect, its duration, the name of the donee, the
reason why the power of attorney is given, and the duties and powers
delegated,

(i) to any other persons who have power, alone or jointly, to appoint
a new trustee; and

(ii) to any other trustees,

but failure to comply with this requirement should not, in favour of
a person dealing with the donee of the power, invalidate any act done
or instrument executed by the donee.

15. The revised Trustee Act should provide that the donor of a power of
attorney given under Recommendation 13 is liable for the acts or defaults
of the donee in the same manner as if they were the acts or defaults of
the donor.

16. The revised Trustee Act should provide that the fact that it appears from
a power of attorney given under Recommendation 13, or from any evi-
dence required for the purposes of the exercise of any such power or
otherwise, that the donee of the power is acting in the execution of a trust
shall not be deemed for any purpose to affect any person with notice of
the trust.

17. The revised Trustee Act should provide that a trust instrument may
exclude the power to delegate by way of power of attorney under Rec-
ommendation 13, but that, if any trust instrument does confer a power to

delegate by way of power of attorney, it must done in the terms of
Recommendations 13 to 16, and not otherwise.

18. The revised Trustee Act should state expressly the duty of trustees with
respect to the conflict of their own interests and their duties to the trust.
Accordingly, the revised Act should provide that trustees shall discharge
their duties and exercise their powers solely in the interests of the bene-
ficiaries of the trust, and, without limiting the generality of this duty,
shall not knowingly permit themselves to be in a position in which their
interest conflicts in any way with the discharge of their duties and the
exercise of their powers, or in which they may derive any benefit for
themselves or for any other person, except so far as the law or the trust
instrument expressly permits.

19. The revised Trustee Act should provide that, where upon application to
the court it is shown that it would be for the benefit of the trust and its
beneficiaries, whether or not any beneficiary withholds his consent, the
court may make an order, on such terms and conditions as appear just,

(i) permitting the trustees to act notwithstanding that they may be in a
position of conflict of interest and duty, or

(ii) excusing them from liability notwithstanding that they may be in
breach of trust for having acted while their interest was in conflict
with their duty.

20. The revised Trustee Act should provide that the jurisdiction of the court
is exercisable in cases under Recommendation 19(ii) upon application by
the trustees any time after the occurrence of the breach of trust; but
nothing in this recommendation should affect in any way the power of
the court under Recommendation 4 to excuse a trustee for breach of trust.

21 . The revised Trustee Act should provide that, unless otherwise ordered by
the court, the trustees shall give notice of an application under Recom-
mendation 19 to every person having any interest in the trust.

22. The revised Trustee Act should provide that, where a minor or unborn
person has an interest in the trust, the trustees shall also give notice of
an application under Recommendation 19 to the Official Guardian at least
one month before the day fixed for the return of the application.

23. The revised Trustee Act should provide that, where an order has been
made permitting a trustee to act in a conflict of interest situation, and
circumstances under which it was made change, the court may, upon
application by the trustees or any interested person, vary the order.

24. The revised Trustee Act should provide that Recommendation 19 applies
to a charitable trust, in which case the trustees must give notice of the
application to the Public Trustee at least one month before the day fixed
for the return of the application.

25. The revised Trustee Act should provide that, subject to our later recom-
mendation concerning the deposit of trust funds and to any power in the
trust instrument, a trust company, or other depository empowered by law
to accept moneys for deposit, may deposit or invest the funds vested in
it pursuant to a trust of which it is a trustee in any account maintained,
or in any security issued, by itself or any affiliate or subsidiary up to, but
not exceeding, the maximum insurable sum established by the Canada
Deposit Insurance Corporation Act.

26. The revised Trustee Act should provide that a power in a trust instrument
authorizing the trustees to reimburse themselves or to make payments
directly from the trust funds for the discharge of expenses or of any other
obligation properly incurred or arising in the administration of the trust
is valid and that the trustees are not to be regarded as acting in conflict
of interest and duty in so doing.

27. The revised Trustee Act should contain a provision to the effect that,
notwithstanding the terms of the trust instrument, any beneficiary of a
trust may apply to the court for a deletion or variation of any term in the
trust instrument permitting a conflict of interest and duty.

28. The revised Trustee Act should provide that, in the discharge of their
duties and the exercise of their powers, whether the duties or powers are
created by law or the trust instrument, trustees must act unanimously,
unless the terms of the trust instrument are to the contrary.

29. The revised Trustee Act should provide that, where it appears that the
trustees are unable to achieve unanimity on a matter, one or more of
them may apply to the court for an order resolving the deadlock in any
way it considers proper.

30. Subject to the power to delegate proposed in Recommendations 7 and
13, and notwithstanding that all the beneficiaries are ascertained, of age,
and under no disability, the powers conferred upon trustees by the revised
Act or by the trust instrument, or as a result of their having title to trust
property, should be exercisable by them solely within their own discre-
tion.

31 . The revised Trustee Act should provide that, where trustees are directed
or empowered to act, whether by the trust instrument, statute, or other-
wise by law, and they refuse or fail to discharge the duty or to consider
in good faith and decide accordingly upon the exercise of the power, the
court, upon application by a beneficiary, may order the trustees to dis-
charge the duty or to satisfy the court that such consideration has been
given to the exercise of the power.

CHAPTER 3

APPOINTMENT AND
DISCHARGE OF TRUSTEES

In former decades, when social conditions were different and the levy of
tax less, an express trust, whether created by a will or by a deed, could well
remain in existence for many years, possibly spanning the lives of two or
more generations. Today, in Canada, there are relatively few such trusts,
although most trusts will probably be in operation for several years. Indeed,
the lifespan of an average modern trust is probably between five and twenty
years.1

During the period of a trust's existence, the trustees2 are continually
managing the trust property, which today usually consists of a portfolio of
investments. The trustees periodically renew the trust property by a process
of purchase and sale, and pursuant to the terms of the trust instrument pay
out income or transfer portions of capital to the beneficiaries. The final act is
the transfer of the remaining capital to those persons entitled on the termi-
nation of the trust. So far as the trustees are concerned, an express trust is,
indeed, ongoing fiduciary management.

One of the main objectives of statutory provisions in the area of trust law
is to facilitate efficient management of the trust. Throughout the life of the
trust, the trustees are required to make important decisions concerning the
administration of the trust. Accordingly, if during the existence of the trust a
trustee dies, wishes to retire, or the removal of a trustee is required, questions
arise concerning the statutory provisions that should be available to ensure
that such events and their consequences do not unnecessarily disrupt the
ongoing management of the trust. Furthermore, there is the question whether,
in order to enable persons to discharge their duties as trustees effectively, a
statutory limit should be imposed on the number of trustees who may hold
office at any one time.

1 However, where provision is made for spendthrifts or for mentally incapacitated younger
persons, the duration of the trust might be significantly greater than twenty years.

2 Whether created by will or inter vivos, a trust may have one trustee acting alone, or two
or more trustees, as the creator of the trust may choose. In Ontario, the trustee acting
alone may be an individual, but more often the sole trustee is a trust corporation. When
two or more trustees are acting together, they hold title to trust assets as joint tenants
and must act jointly, although in both circumstances the creator of the trust may provide
to the contrary. As between trustees, therefore, the right of survivorship applies. Because
there may be several trustees, it is usual to refer to them in the plural.

1851

The Commission understands that the statutory non-judicial powers of
appointment and discharge of trustees3 are rarely employed in Ontario. Rather,
as a matter of practice, application to the court is the more frequent means of
appointing and discharging trustees because, at present, it is the only method
that assures the validity of appointment and the vesting of trust property.
Consistent with the position taken by the reformers in England in 1925, the
Commission is of the view that judicial application in this area, involving
time and expense to the trust, should be discouraged, and that non-judicial
appointment and discharge of trustees should be encouraged. In order to be
utilized effectively, however, the non-judicial appointment and discharge
mechanism must be relatively simple and provide, as nearly as possible, the
same assurances that are obtained by a court order. Therefore, the Commis-
sion is of the opinion that the revised Trustee Act should contain non-judicial
appointment and discharge powers that may be easily invoked and upon which
reliance may be placed as to the validity of appointment, the vesting of trust
property, and the proper exercise of powers conferred upon trustees.

In this chapter, the Commission considers four major issues relating to
the appointment and discharge of trustees: first, whether the provisions of the
Ontario Trustee Act relating to the retirement, removal, and appointment of
trustees are satisfactory, including the question whether it is appropriate to
place a statutory limitation on the number of trustees who may administer a
trust at any given time; secondly, the protection that should be afforded a
third party against improperly appointed trustees; thirdly, the evidence that
should be available to a third party in order to determine whether trust property
has been vested in trustees when a change of trusteeship occurs; and fourthly,
the protection that should be afforded a third party against trustees acting
outside the scope of their powers.

1. THE STATUTORY POWERS OF RETIREMENT, REMOVAL,
AND APPOINTMENT OF TRUSTEES

During the lifespan of a trust, some trustees may wish to retire because
of age, illness, or other calls upon their time. Others may become unfit to act
and incapable of recognizing their inability to continue to discharge their
obligations satisfactorily, while others may die in office. A trust corporation
as trustee will not suffer from human ailments, but there still may be occasions
when the corporation wishes to withdraw from its trusteeship, or the benefi-
ciaries have a case for the removal of the corporation as trustee. Therefore,
there will be numerous circumstances necessitating a mechanism whereby
the retirement or removal of trustees can be effectuated and substitute or
additional trustees appointed to the office.

If there is a trust instrument, which is almost always the case, relief may
be obtained by utilizing the mechanism that may be contained in the instru-
ment. An event may occur, however, that the instrument does not contem-
plate. To the extent that the instrument is silent, the position is the same as
if the instrument had made no provision for retirement, removal, or appoint-
ment of trustees. In these circumstances, whether there is no power or an

Trustee Act, R.S.O. 1980, c. 512, ss. 2 and 3.

inadequate power, the remaining trustees or, if there are none, the benefici-
aries, would have to turn to the court for assistance. For its part, the court
has an inherent jurisdiction to ensure that no trust suffers for want of trustees4
or of satisfactory trustees. Consequently, a judicial remedy is available,
although, today, the inherent jurisdiction is rarely invoked. During the second
half of the nineteenth century, Parliament in England began to reduce much
of the court's inherent jurisdiction to statutory form, including that aspect of
the jurisdiction now in question.5 The inherent jurisdiction was not abolished;
it was merely overlaid with a more clearly defined and precise statutory set
of judicial powers. This legislation was adopted in various forms throughout
Canada, Australia, and New Zealand.6 At present, the provisions governing
the judicial removal and appointment of trustees in Ontario are contained in
section 5 of the Trustee Act.

Application to the court, however, involves expense to the trust, delay,
and inconvenience, all of which could be avoided if trustees could retire, be
removed and appointed without the assistance of the court. The nineteenth
century reformers appreciated this, and a non-judicial power of removal by
the appointment of substitute trustees was first introduced in England in 1 860
by Lord Cranworth' s Act.1 This non-judicial power was improved by the
Conveyancing and Law of Property Act, 1881,* but the 1860 power had
already been adopted in Ontario in 1877,9 and has remained substantially
unchanged since that time, appearing now as section 3 of the Trustee Act.10
In addition, section 2 of the Ontario Act contains a non-judicial retirement
power, whereby a trustee may retire without the intervention of the court."
In this event, the trust would be left in the care of the remaining trustees.12
Alternatively, where a trustee desires to retire, he may be discharged and
replaced by the appointment of a substitute trustee under section 3 of the Act.

4 The validity of a trust is not affected by the lack of a trustee, as no trust fails for want
of a trustee: see Guaranty Trust Co. of Canada v. Minister of National Revenue, [ 19671
S.C.R. 133.60D.L.R. (2d) 481.

5 The Trustee Act, 1850, 13 & 14 Vict., c. 60, s. 32 (U.K.). This Act, and The Trustee
Act, 1852, 15 & 16 Vict., c. 55, s. 9 (U.K.), set up the statutory judicial powers. See.
now, Trustee Act, 1925, 15 & 16 Geo. 5, c. 19, s. 41 (U.K.).

6 See, now, for example, the Ontario Trustee Act, supra, note 3, s. 5; The Trustee Act,
R.S.M. 1970, c. T160, s. 1 1; Trustee Act 1956, Repr. Stat. N.Z. 1977, No. 61, s. 51:
Trustees Act, 1962, W. Austl. Acts 1962, No. 78, s. 7; and Trustee Act, 1925, Pub.
Acts N.S.W., Vol. 11, No. 14, s. 70.

7 An Act to give to Trustees, Mortgagees, and others certain Powers now commonly
inserted in Settlements, Mortgages and Wills (1860), 23 & 24 Vict., c. 145, s. 27
(U.K.), commonly known as Lord Cranworth' s Act. The statute was intended to confer
upon all trusts a power that was already familiar in well-drawn trust instruments.

8 Conveyancing and Law of Property Act, 1881, 44 & 45 Vict., c. 41, s. 31 (U.K.).

9 The first statutory non-judicial appointment power was introduced in Ontario by An Act
to provide for certain amendments of the Law ( 1877), 40 Vict., c. 8, s. 30.

10 Section 3 is subject to a contrary intent expressed in the trust instrument: see the Trustee
Act, supra, note 3, ss. 67-68, and infra, this ch., sec. Kb).

" For the history of this section, sec notes 20 and 21. infra, and accompanying text.
Section 2 is also subject to the expression of a contrary intent in the trust instrument: see
the Trustee Act. supra, note 3. ss. 67-68. and infra, this ch.. sec. 1(a).

12 Trustee Act, supra, note 3. s. 2.

However, unless there is a vacancy created by the death, retirement, or
removal of a trustee, thereby bringing section 3 into play, the Ontario Act
does not authorize an increase in the number of trustees by the non-judicial
appointment of additional trustees,13 a statutory power that is available in
England.14

The first issue that arises is whether the nineteenth century statutory
provisions, still in force in Ontario, are adequate, comprehensive, and clear.
Other Commonwealth jurisdictions have thought not and have amended their
Trustee Acts. The Commission has examined the trustee legislation of the
provinces and territories of Canada, as well as the trustee legislation of the
six Australian states, New Zealand, and Northern Ireland.15 As a rule, these
jurisdictions have amended their Trustee Acts in order to bring their legisla-
tion into line with or improve upon the provisions of the English Trustee Act,
1925.

The Commission recommends that, like these other Commonwealth juris-
dictions, Ontario should retain, in an amended and improved form, the
statutory non-judicial powers of retirement without replacement and replace-
ment or removal by the appointment of a substitute trustee.16 It will be
convenient to consider the issues raised by this recommendation under eight
headings: namely, (1) the position where a trustee retires non-judicially and
is not replaced; (2) the position where a trustee is removed non-judicially by
the appointment of a substitute trustee; (3) the position where a trustee is
removed non-judicially without the appointment of a substitute trustee; (4)
the liability of former and continuing trustees; (5) the power to appoint
additional trustees non-judicially; (6) the power of the court to remove,
replace, and appoint trustees; (7) the number of trustees who should be
permitted to hold office at any one time; and (8) the supplementary provisions
applicable to both non-judicial and judicial discharge and appointment of
trustees.

(a) Non-Judicial Retirement Without Replacement

Although there has been a judicial suggestion that the court might prevent
a trustee from retiring if there were no person who could replace him,17 it is

Section 3( 1 ) of the Trustee Act authorizes the appointment of "other persons" to be
substitute trustees on the occurrence of a vacancy, a provision reinforced by s. 6(a),
which permits the number of trustees to be increased on the appointment of a new trustee.
See, also, infra, this ch., sec. 1(e).

In Ontario, unless there is an express power in the instrument to appoint additional
trustees, an application to the court would be required under s. 5 of the Trustee Act. In
England, see the Trustee Act, 1925, supra, note 5, s. 36(6).

All the Canadian common law provinces and territories, except Prince Edward Island
and New Brunswick, have an equivalent of s. 3 of the Ontario Trustee Act (i.e., a non-
judicial power of removing and replacing trustees), and all, except Alberta, have some
equivalent of s. 2 (a non-judicial retirement power without replacement). New Zealand,
together with Tasmania, Victoria, New South Wales, South Australia, and Western
Australia- Queensland being the only Australian exception - also have similar sections.
The tradition in the states of the United States, however, is to utilize express powers and
judicial powers.

Draft Bill, ss. 19-25.

Courtenay v. Courtenay (1845-46), 3 Jo. & La T. 519, 9 Ir. Eq. Rep. 329. The Court,

an accepted conclusion from the cases that no trustee will be compelled to
continue in an office from which he wishes to withdraw. '* Although a trustee
cannot avoid liability for breach of trust by retiring, and will be liable if he
retires in order to facilitate a breach by a co-trustee,1" neither oi these prop-
ositions denies him the right to retire.

A trustee can only effectively retire, however, if he retires in a manner
permitted by law. The trust instrument may include a provision permitting
resignation. Alternatively, if there is no such provision, the court has an
inherent jurisdiction to make an order permitting a trustee to resign. Section
2 of the Ontario Trustee Act is the third procedure available. Section 2(1)
provides as follows:

2. — (1) Where there are more than two trustees, if one of them by deed
declares that he desires to be discharged from the trust, and if his co-trustees and
such other person, if any, as is empowered to appoint trustees, consent by deed
to the discharge of the trustee, and to the vesting in the co-trustees alone of the
trust property, then the trustee who desires to be discharged shall be deemed to
have retired from the trust, and is, by the deed, discharged therefrom under this
Act without any new trustee being appointed in his place.

Under this section a trustee can retire without being replaced and without the
consent of the court, provided his co-trustees and any person with the power
under the instrument to appoint new trustees consent by deed to his request.
The deed constitutes the discharge of the retiring trustee. As will be seen,
however, the section requires that at least two trustees must remain after the
retirement.

Section 2 has its origin in the English Conveyancing and Law of Property
Act, 1881, 20 and was introduced in Ontario in 1911 by The Trustee Act. 2I Since
that time, the section appears to have proved generally satisfactory in opera-
tion. Section 2 requires the consent of the retiring trustee's "co-trustees and
such other person, if any, as is empowered to appoint trustees". The prime
consideration when a trustee wishes to retire should be the effect of his

however, said that the trustee should not suffer thereby. Clearly his right was to retire
on wishing to do so.

18 See Forshaw v. Higginson (1855), 20 Beav. 485, 52 E.R. 690. In contrast to this attitude
towards trustees, the courts in England and in common law Canada will not generally
permit an executor to be discharged, either under the terms of the will or judicially, until
the deceased person's estate has been wound up: see Mowbray (ed.). Lew in on Trusts
(16th ed., 1964), at 406-07. This approach is reflected in s. 2(2) of the Ontario Trustee
Act, supra, note 3. It is interesting to note that American courts have taken the view that
a trustee may not retire where this would prejudice the interests o\' the trust beneficiaries:
see Scott, The Law of Trusts (3d ed., 1967), § 106. 1 . at 837 et seq. Also, in this regard.
Quebec's Civil Code Revision Office. Report on The Quebec Civil Code ( 1977). Vol.
1, Book 4, Title 6, ch. 5, recommends that an administrator, which includes a trustee
as a person entrusted with full administration of the property of others, should be
responsible for any damage caused by his unjustified resignation.

19 Lew in on Trusts, supra, note 18. at 664 et seq.

20 Supra, note 8, s. 32.

21 (1911), 1 Geo. 5,c. 26. s. 3.

retirement upon the security of the trust property and the sound administration
of the trust. If this is so, it seems eminently sound that, unless the trust
instrument otherwise provides, a trustee should not be permitted to retire
where one or more of the persons whose consent is required withholds such
consent.22 In the event that the required consents are withheld, the trustee
desiring to retire would have to apply to the court under its inherent jurisdic-
tion. The Commission recommends that this aspect of section 2, requiring
the consent of "co-trustees and such other person, if any, as is empowered to
appoint trustees", should be carried over to the revised Act, and our Draft
Bill so provides.23

The Commission is of the view, however, that minor improvements to
the section are necessary. First, section 2(1) provides for the case where there
are "more than two trustees" and "one of them . . . desires to be discharged".
Therefore, this subsection cannot be utilized where the retirement would
reduce the number of trustees below two. The equivalent section in the
English Trustee Act, 192524 permits retirement if, after the discharge, there
will be either a trust corporation or at least two individuals to act as trustees
to perform the trust. These are also the criteria required for the discharge of
a trustee who is to be replaced under section 3 of the Ontario Trustee Act.25
There seems to be no reason why a trust corporation should not be able to act
as sole trustee upon a section 2 retirement as well. Accordingly, we recom-
mend that the revised Act should permit non-judicial retirement without
replacement where there would remain either a trust company or at least two
individual trustees to act as trustees.26

The Commission also considered the question whether retirement should
be permitted non-judicially where only one individual trustee would remain
in office. However, an original appointment of two or more trustees by the
creator of the trust would appear to indicate, in the absence of a contrary
intention in the instrument, an intention that more than one person should act
as trustee. Moreover, an individual trustee may not have the facilities of, or
be subject to the controls imposed upon, a trust corporation.27 Accordingly,
we are not attracted to the proposition that non-judicial retirement should be
allowed where only one individual trustee would remain in office. We do
recognize, nevertheless, that there may be occasions where it would be
desirable to have only one individual trustee remain in office. In the view of
the Commission, however, the consent of the court should be sought for the
continuation of an individual as the only trustee in these circumstances. Under
the revised Act this could be accomplished pursuant to the broad judicial

22 The requirement for consents meets some of the Quebec and American concerns that a
trustee should not retire at a time or in circumstances that would prejudice the interests
of the trust beneficiaries: see note 18, supra.

23 Draft Bill, s. 25(1).

24 Trustee Act, 1925, supra, note 5, s. 39.

25 See s. 6(c) of the Trustee Act, supra, note 3, and infra, this ch., sec. l(g)(ii).

26 Draft Bill, s. 25(1).

27 See, for example, the Loan and Trust Corporations Act, R.S.O. 1980, c. 249.

power to remove a trustee that we later recommend, 2H which contains no
statutory limitation with respect to the minimum number of trustees.29

Secondly, section 2(1) speaks only of a trustee desiring to be discharged
"from the trust", and this would appear to prevent a retirement from a part of
the trust, even where separate trust assets are held on distinct trust terms.
Assume, for instance, that land is held by A, B, and C on trust for X for life,
remainder to Y in fee simple, and that under the same trust instrument certain
securities are held by the same trustees on trust for P for life, remainder to Q
absolutely. There seems to be no reason why C should not be able to retire
from the trust of the land, but remain as a trustee of the securities. This is
permitted by the Trustee Act (Northern Ireland), 1958,™ and there is a
provision in the Ontario Trustee Act to the same effect when a new trustee is
being appointed.31 As a general principle, we agree with the concept of
separate trustees for distinct trust assets. Accordingly, we recommend that a
trustee should be able to retire non-judicially, without the appointment of a
substitute trustee, from a part of the trust and remain as trustee of the other
part or of other parts, provided that the parts of the trust reflect separate
property held on distinct trust terms.

Thirdly, section 2 contains no provision that would preclude the trust
instrument from excluding the operation of the statutory powers contained in
the section. Since the Ontario Act takes effect subject to the expression in
the trust instrument of a contrary intent,33 it is presumably possible, unless in
any respect the Act expressly denies effect to a contrary intent, for the creator
of the trust to oust this section. The observable policy of the case law is that
no one should be compelled to continue as a trustee if he desires to retire.34
The Commission agrees with this policy and, accordingly, recommends that
nothing in a trust instrument should withhold from a trustee the right to retire
from the trust or a part thereof, and that any such provision should be invalid
for all purposes.35 We would point out that if the creator of the trust wishes
that a certain power or powers should be exercisable only by a particular

28 See infra, this ch., sec. 1(f), and Draft Bill, s. 56.

29 See infra, this ch., sec. l(g)(ii).

30 Trustee Act (Northern Ireland), 1958, 6 & 7 Eliz. 2, c. 23, s. 38.

31 Trustee Act, supra, note 3, s. 6(b). See, also, infra, this ch., sec. 1(h).

32 Draft Bill, ss. 22 and 25(1).

33 Trustee Act, supra, note 3, ss. 67 and 68.

34 See supra, notes 17 and 18. If there were an application to the court in these circum-
stances, the court would be torn between the intention of the settlor or testator on the
one hand, and the right of the trustee, established by the cases, to retire it" he so desires.
on the other hand. There is no apparent precedent on this issue; possibly the trustee's
right to retire would prevail by virtue of the analogy taLumley v. Gye (1853), 2 El. &
Bl. 216, 118 E.R. 749. However, in their report on "The Trustee Law of Canada".
Canadian Bar Association Proceedings (1926), at 236 ei seq., the Committee on Com-
parative Provincial Legislation and Law Reform of the C.B.A. for the Canadian Uni-
formity of Legislation Commissioners thought it necessary to submit, at 346. that "a
trustee should be permitted to retire whether a contrary intention is expressed in the trust
deed or not".

35 Draft Bill, s. 25(2). It may also be noted that the Manitoba Trustee Act, supra, note 6,
contains a similar provision in s. 9( 1 ).

trustee, he can provide that the power or powers are personal to that trustee.
The effect of such a provision will be that the power or powers will lapse
with the retirement and discharge of the trustee.

Before concluding our discussion of this issue, we would note the argu-
ment that the creator of the trust should be able to make the requirements for
retirement more onerous than are otherwise provided by statute; for example,
by providing in the instrument that no resignation is possible without the
approval of the court. The concern is that a skilled and knowledgeable trustee
may retire in an irresponsible manner, leaving the management of the trust,
including the power to appoint new trustees, in the control of two or more
less skilled and knowledgeable trustees. On balance, we do not consider the
argument sufficiently persuasive. In the opinion of the Commission, the case
law governing retirement and the general duty imposed upon trustees to
manage the trust with the skill and prudence of a reasonable man of business36
are deterrents to irresponsible behaviour. Further, the argument challenges
the entire concept of non-judicial retirement. Therefore, the Commission is
of the view that proffered retirements should be left, as recommended, to the
discretion of the parties designated in the section, who are free to withhold
their consents, thus requiring an application to the court by the trustee desiring
to retire. Accordingly, we recommend that the creator of the trust should not
be able to make the requirements for retirement more onerous than otherwise
provided by statute, and that any such provision should be invalid for all
purposes.37

(b) Non- Judicial Replacement or Removal by Appointment of
Substitute Trustees

Apart from retirement under section 2 of the Trustee Act, a trustee can
be replaced or removed by a non-judicial, as distinct from a judicial, act
under the provisions of section 3.38 Section 3 reflects the nineteenth century
English version of the power, which originated in Lord Cranworth 's Act.39
In England, the statutory power was further developed in the Conveyancing
and Law of Property Act, 1881 ,40 reproduced in its developed form in the
Trustee Act, 1893, 41 and, finally, revised in section 36 of the Trustee Act,

See, for example, Learoyd v. Whiteley (1887), 12 A.C. 727 (H.L.).

Draft Bill, s. 25(2).

The removal of a trustee may be made under an express power contained in the trust
instrument, under the statutory power discussed herein, or by an order of the court under
its inherent or statutory authority. See Hayton (ed.), Underbill's Law relating to Trusts
and Trustees (13th ed., 1979), at 613 et seq. In addition, a trustee may possibly be
discharged if all the beneficiaries consent, provided that they are all capacitated: see, for
example, Butt v. Kelson, [1952] Ch. 197, [1952], All E.R. 167 (C.A.). However, see
also Re Brockbank, [1948] Ch. 206, [1948] 1 All E.R. 287, where it was held that
beneficiaries may not interfere with the exercise by trustees of their statutory power of
appointing substitute trustees.

39 Supra, note 7, s. 27.

40 Supra , note 8 , s . 31.

41 56 & 57 Vict., c. 53, s. 10 (U.K.).

1925. 42 The provisions of Lord Cranworth' s Act were reprodueed in Ontario
in An Act to provide for certain amendments of the Law,4' and in An Act
respecting Trustees and Executors and the Administration of Estates?4 the
statutory power has remained substantially unchanged since that time. Section
3 provides as follows:

3. — (1) Where a trustee dies or remains out of Ontario for more than twelve
months, or desires to be discharged from all or any of the trusts or powers
reposed in or conferred on him, or refuses or is unfit to act therein, or is incapable
of acting therein, or has been convicted of an indictable offence or is bankrupt
or insolvent, the person nominated for the purpose of appointing new trustees by
the instrument, if any, creating the trust, or if there is no such person, or no such
person able and willing to act, the surviving or continuing trustees or trustee for
the time being, or the personal representatives of the last surviving or continuing
trustee, may by writing appoint another person or other persons (whether or not
being the persons exercising the power) to be a trustee or trustees in the place of
the trustee dying, remaining out of Ontario, desiring to be discharged, refusing
or being unfit or incapable.

(2) Until the appointment of new trustees, the personal representatives or
representative for the time being of a sole trustee, or where there were two or
more trustees, of the last surviving or continuing trustee, are or is capable of
exercising or performing any power or trust that was given to or capable of being
exercised by the sole or last surviving trustee.

As will be noted, removal may take place by the act of appointing a
substitute trustee. The power is exercisable, in the circumstances described
in the section, by the person nominated by the instrument to appoint new
trustees. If that person is not "able and willing to act", the power is exercisable
by the surviving or continuing trustee. Failing such a trustee, the power may
be exercised by the personal representatives of the last surviving or continuing
trustee. The person appointed a new trustee may be the person exercising the
appointment power. It follows, therefore, that the person nominated by the
instrument to appoint new trustees, if such a person is nominated, or the
personal representatives of the last surviving or continuing trustee, may be
so appointed. Section 3(1) requires that the appointment be made in writing.
Finally, subsection (2) authorizes the personal representatives of a sole or last
surviving or continuing trustee to exercise or perform any of the trusts or
powers that were capable of being exercised or performed by the deceased
trustee.

We have already recommended that the revised Act should retain, in an
amended and improved form, the statutory non-judicial power of replacement
or removal of a trustee by the appointment of a substitute trustee.45 In assess-
ing the adequacy of section 3, it should be recalled that the purpose of this
type of power is to provide, wherever compatible with the best interests of

42 Supra, note 5, s. 36.

43 Supra, note 9, s. 30.

44 R.S.O. 1877, c. 107, s. 3.

45 Supra, this ch., and Draft Bill. ss. 19-25.

the trust beneficiaries and sound trust administration, the means for non-
judicial appointment, thereby relieving the parties involved of the need to
apply to the court. The attainment of this objective necessitates a review of
the range of persons entitled to appoint trustees non-judicially and the types
of circumstance in which the non-judicial power to appoint substitute trustees
should be exercisable.

Before we turn our attention to these matters, there are two general issues
that should be addressed. The first relates to the right of the creator of the
trust to oust the application of section 3, and the other concerns the form that
the instrument of appointment and discharge should take.

As to the first issue, the statutory power to appoint substitute trustees
non-judicially was introduced in I860,46 and was modelled on a power com-
monly included in trust instruments. The inclusion of the power in the statute
was merely enabling; that is, if he wished, the creator of the trust could
exclude the statutory power in whole or in part. This continues to be the case
under section 3 of the Ontario Trustee Act.*1 We see no reason why the
statutory power should not continue to be subject to a contrary intent ex-
pressed in the trust instrument, and we so recommend.48 However, in relation
to a trustee who desires to retire and be discharged from the trust, we would
note that, although the trust instrument may preclude the exercise of the
appointment power upon the retirement of a trustee, we have previously
recommended that nothing in the trust instrument should withhold from a
trustee the right to retire.

We turn now to consider the second general issue. As stated, section 3(1)
of the Trustee Act provides that the appointment of a substitute trustee shall
be "by writing". By way of contrast, section 2 of the Act requires that the
consent of the qualified persons to the retirement of a trustee must be given
by deed. The same distinction is present in the English Trustee Act, 1925.50
We do not consider that there is a basis for the existence of this distinction,
and recommend that all instruments of appointment and of discharge, whether
pursuant to a statutory authority or the trust instrument, should be by deed.51

It is our intention that the non-judicial statutory power should become
the more frequently employed means of appointing and discharging trustees.
We also later propose that greater significance than is afforded at present
should attach to the instrument as a means of assuring a third party dealing
with trustees of the validity of an appointment or a discharge, the vesting of
trust property in the new trustees, and that trustees possess and are exercising
their powers properly.52 In our view, a deed would impress upon those persons

46 Lord Cranworth' s Act, supra, note 7, s.27.

47 Trustee Act, supra, note 3, ss. 67 and 68.

48 Draft Bill, s. 2(b).

49 Ibid., s. 25(2), and supra, this ch., sec. 1(a).

50 Trustee Act, 1925, supra, note 5, ss. 36 and 39.

51 Draft Bill, ss. 19(1), 21, and 25(1) and (3).

52 See infra, this ch., sees. 2, 3, and 4.

charged with appointing and discharging trustees the importance of their act.
Moreover, as a deed would normally be executed in a lawyer's office, evi-
dence of a change in trusteeship would be preserved and available to interested
parties. For these reasons, the Commission is also of the view that the creator
of the trust should not be able to oust the requirement of a deed, and we so
recommend.53

Finally, regarding the form of the deed, while the Commission is of the
opinion, for the reasons given, that the instrument of appointment or of
discharge should be a formal document, we are, nonetheless, of the view that
the seal is no longer a meaningful requirement. Rather, we believe that other
requirements, such as witnessing and affidavits of execution, would provide
sufficient formality for instruments of appointment and of discharge. Accord-
ingly, the Commission recommends that, for the purposes of the revised Act,
a deed should be an instrument signed by those persons who have the power
to appoint or discharge the trustees, attested by one witness and accompanied
by an affidavit of execution, but that it should not require a seal.54

In addition, we are of the view that two matters, if contained in the trust
instrument, should be recited in the deed of appointment or of discharge.
First, where the appointment or discharge of a trustee is pursuant to a power
contained in the trust instrument, the deed should set out the terms of the
trust instrument that authorize the act.55 Secondly, where trustees are author-
ized by the trust instrument to act by a majority,56 this authority should be set
out in the deed of appointment or of discharge.57

As noted previously, we shall be proposing that the deed of appointment
or of discharge should be afforded greater significance than at present. Ac-
cordingly, we recommended that the requirement of a deed for appointing
and discharging trustees should be mandatory. To further emphasize the
importance attached to the deed, we are of the view that the revised Act

53 Draft Bill, s. 32(1).

54 Ibid., s. \(e). Dr. Derek Mendes da Costa, Q.C., Chairman of the Commission, dissents
in part from this recommendation:

It is my view that compliance with the formalities of a deed of appointment
should not be sufficient to constitute a person a trustee. In my opinion, no appoint-
ment of an added or substitute trustee should be effective without the consent of
the person to be appointed. The office of trustee is an onerous office, and the right
of a trustee to disclaim does not meet my concern. A person who is advised that
he has been appointed a trustee might be unaware that he can disclaim, or, if so
aware, would in all probability be well advised to incur the trouble and expense of
seeking legal advice. Moreover, the law relating to this topic is not without com-
plication. I understand that 'good practice" dictates that prior consent be obtained,
and I know of no good reason for retaining the present law. I would note that
section 62(6) of the Children's Law Reform Act. R.S.O. 1980, c. 68. as am. by
the Children's Law Reform Amendment Act. 19H2. s. 1 , provides that no "appoint-
ment under subsection ( 1 ). (2) or (3) is effective without the consent o\ the person
appointed'. Section 62 (1), (2) and (3) deals with appointments by will in the
context of custody and guardianship.

55 Ibid.,s. 32(2).

56 See infra, this ch., sec. 4, for a discussion ol clauses contained in trust instruments that
authorize a majority of trustees to bind the trust.

Draft Bill, s. 32(3).

<>7

should state expressly the consequences of failure to comply with the above-
noted requirements for executing the deed of appointment or of discharge,
namely, that the appointment and discharge will be invalid. Accordingly, we
recommend that, where the appointment or discharge of a trustee is not by
deed in the form recommended above, the appointment or discharge should
be invalid for all purposes.58

(i) Persons Entitled to Appoint Trustees Under the Statutory
Power

Section 3(1) of the Ontario Trustee Act provides that the persons entitled
to appoint substitute trustees are the persons nominated by the instrument, or
failing such a person, or such a person able and willing to act, the surviving
or continuing trustees or trustee for the time being, or the personal represen-
tatives of the last surviving or continuing trustee. We now turn to consider
difficulties that may occur when the power to appoint trustees is exercisable
by these classes of person.

a. Persons Nominated by the Instrument

The power conferred by section 3(1) is exercisable, inter alia, by the
person nominated by the instrument to appoint new trustees. Many Canadian
trust instruments confer on specific persons, normally a beneficiary of the
trust or the trustees themselves, the power to appoint trustees.59 Two matters
require our .attention. The first concerns the circumstances in which the trust
instrument should be regarded as indicating an intent to oust the exercise of
the statutory power by the person nominated in the trust instrument. The
second matter relates to the requirement that the person nominated by the
instrument must be "able and willing" to act.

As to the first matter, it will be recalled that the statutory power contained
in section 3(1) takes effect "subject to the terms" of the instrument creating
the trust.60 Assume that a trust instrument contains an express power to
appoint trustees. Can it be argued that the mere existence of this power, even
if it is not so extensive in scope as the power conferred by section 3(1), has
the effect of ousting the statutory power, thereby rendering the person named
in the trust instrument not a "person nominated for the purpose of appointing
new trustees by the instrument" under section 3(1) of the Ontario Act? That
is to say, if a power to appoint in certain circumstances is given to a particular
person, can that same person appoint under the statutory power in circum-
stances that justify appointment of substitute trustees under the statute, but
not under the express power in the instrument? In the alternative, is the
statutory power in such a case exercisable only by the continuing or surviving
trustees or their personal representatives? For instance, the express power

Ibid., s. 32(5).

In the alternative, the trust instrument may name specific persons, each to succeed as
trustee the named predecessor should the latter be incapable of acting when called upon
to assume office, or later become incapable of continuing or unwilling to continue.

60 Trustee Act, supra, note 3, ss. 67 and 68.

may give to the life tenant a power to appoint trustees, but enumerate only
the death or retirement of a trustee as the circumstances in whieh it may be
exercised. Can the life tenant appoint a substitute trustee if an existing trustee
is unfit to act, a circumstance provided by the statute?

One line of reasoning, followed in England, is that, as the creator of the
trust has provided for the appointment of trustees and stated the circumstances
in which that power is to be exercised by the person nominated, he has
impliedly said he does not wish that person to exercise the statutory power/11
Another line of reasoning is that, to the extent the instrument is silent, it does
not demonstrate an intention to oust the exercise of the statutory power by
the person nominated in the instrument to appoint new trustees. In other
words, under the former interpretation, the life tenant could not invoke the
statutory power in order to replace the trustee who is unfit to act; under the
latter interpretation he could, because the creator of the trust has said nothing
about this particular circumstance in the instrument.62 Although there is no
case law on this subject in Ontario, it is possible that a court in this Province
would follow the English interpretation of almost identical statutory language
in force in that jurisdiction.

The Commission is of the view that this matter should be clarified, and
has concluded that the latter approach is probably more consistent with the
intention of the creator of the trust. Accordingly, we recommend that where
a person is nominated in a trust instrument for the purpose of appointing
substitute or additional trustees, he should be deemed to be nominated for the
purpose of appointing substitute trustees in any of the circumstances set forth
in the statute. Furthermore, the fact that the circumstances, if any, set forth
in the trust instrument that empower the person therein nominated to act in
the appointment of substitute trustees do not include all or any of the circum-
stances set forth in the statute, should not itself constitute a contrary intent
on the part of the person creating the trust that the statute is not to apply.63

With respect to the second matter, section 3( 1) provides that a nominated
appointor shall take priority in appointing if he is "able and willing to acf .
The issue that arises is whether the word "willing" is ambiguous in this
context and, therefore, should be deleted. Before proceeding to consider this
issue, we would point out that, if there is no nominee "able and willing" to
act, the power to appoint a substitute trustee passes, under the section, to the
class of persons next entitled, the surviving or continuing trustees. If there is
such a nominee, but contrary to the wishes of those interested in the trust no
substitute appointment is made under section 3(1), the power will not pass to
the surviving or continuing trustees; rather, relief must be sought from the
court.

61 See Re Wheeler and De Rochow, [1896] 1 Ch. D. 315, per Kckcwich J.

62 Although this latter approach was preferred by Neville J. in Re Sichel's Settlements,
[1916] 1 Ch. 358, he nevertheless followed sed dubitante Kckcwich J.'s interpretation
in Re Wheeler and De Rochow, supra, note 61 .

63 Draft Bill, s. 19(3). This position is also adopted by the New South Wales Trustee Act.
1925, supra, note 6, s. 6(10); the New Zealand Trustee Act 1956, supra, note 6. s. 43(8);
and the Western Australia Trustees Act, 1962, supra, note 6, s. 7(8).

Assume that circumstances arise that justify the exercise of the appoint-
ment power under section 3 of the Ontario Trustee Act. It seems clear that a
nominee who refuses to turn his mind to the desirability of making a replace-
ment appointment is not "willing" to act, and, accordingly, that the surviving
or continuing trustees could appoint a substitute trustee. However, the nom-
inee might turn his mind to the matter but, after due consideration, decide
not to exercise the statutory power; for example, he might choose not to
remove a trustee who is unfit to act. It could be argued that a nominee who
behaves in this fashion is also not "willing" to act, and that again the appoint-
ment power should pass to those next entitled. In the view of the Commission,
however, this would be an incorrect reading of the section. The bona fide
wishes of a nominated appointor should not be overriden in this fashion;
rather, this situation would seem most appropriate for resolution by the court.

The Commission has considered whether, in order to correct any potential
ambiguity, the word "willing" should be omitted from the revised Act, but
has decided that such a deletion could create more difficulties than it would
solve. The deletion of the word "willing" would remove the possibility that
the bona fide wishes of a dissenting appointor could be disregarded, but it
would also require judicial intervention in situations where a nominated
person, who would simply prefer that others make the appointment, does not
turn his mind to the issue. It is possible to suggest that this problem might be
solved by providing that a person nominated to appoint trustees should be
deemed "willing" to act if he chooses to consider the appointment, but after
due deliberation decides not to exercise the statutory power. After careful
consideration, we have rejected this approach also, because of the seemingly
inherent problems of proof. Moreover, we have observed that, in fifty-nine
years, no criticism has apparently been made of the term "able and willing"
in the English Trustee Act, 1925, a term that occurs on a number of occasions
in that Act. Accordingly, we recommend that the revised Act should retain
the word "willing" with respect to the qualifications of a person nominated
to appoint a substitute trustee, and our Draft Bill so provides.

A subsidiary issue concerning joint nominees flows from the foregoing
discussion. At present, no separate provision appears in the Ontario Trustee
Act respecting joint nominees. It has been held in England that persons jointly
nominated are "unable and unwilling to act" where they are not able to agree
about the person to be appointed a substitute trustee;65 however, the position
in Ontario cannot be stated with complete certainty. In order to avoid the
possibility of judicial intervention in a situation where joint nominees may
satisfy the requirements by being able and willing to act individually, but are
nonetheless in disagreement, we are of the opinion that this point should be
stated in the statute. Accordingly, we recommend that the revised Act should
contain a provision to the effect that where jointly nominated persons are
unable to agree in naming an appointee, they should be deemed to be unable

64 Draft Bill, s. 19(1).

65 In re Sheppard's Settlement Trusts, [1888] W.N. 234 (Ch.D.).

to act within the terms of the section authorizing the non-judicial appointment
of trustees. M

b. The Surviving or Continuing Trustees

Under section 3( 1 ) of the Ontario Trustee Act, persons entitled to appoint
substitute trustees include the "surviving or continuing trustees or trustee for
the time being". The concept behind this terminology is that a trustee who
dies leaves "surviving" trustees, if such exist, to carry on the trust and.
likewise, that a trustee who retires or is removed leaves "continuing" trustees.
This approach raises the question whether a retiring trustee, a refusing or
disclaiming trustee, a trustee who is removable for cause, or a sole trustee,
should be regarded as a "surviving or continuing" trustee for the purpose of
exercising the statutory power contained in section 3(1). Since the revised
Act is intended to establish a comprehensive scheme for the non-judicial
appointment of substitute trustees, a scheme that the creator of the trust can
exclude or amend in whole or in part, these questions should not be left
unresolved.

We turn first to the position of a trustee who desires to retire from the
trust; that is, a trustee who wishes to cease to act as trustee and to be
discharged from the trust. Can such a trustee appoint, or join in the appoint-
ment of, a substitute trustee pursuant to the statutory power contained in
section 3(1) of the Trustee Act? As a retiring trustee does not continue as
trustee after a new appointment has been made, it would seem clear that he
is not a "continuing trustee,, within the meaning of this subsection.67 Further,
there is no authority elsewhere in the Trustee Act expressly authorizing a
retiring trustee to appoint his replacement. At present, therefore, if a trustee
wishes to retire, he may do so, but he must leave it to the continuing trustees,
or to the court where there are no continuing trustees, to appoint a substitute
trustee.68

The English Trustee Act, 1925 overcame this difficulty by providing in
section 36(8) that "[t]he provisions . . . relative to a continuing trustee include
a . . . retiring trustee, if willing to act in the execution of the provisions of
this section". In effect, this statutory provision deems a retiring trustee to be
a trustee who will continue after the replacement appointment for the purpose
of appointing a successor trustee, thereby enabling him to concur in or
disapprove of the appointment of the person who is to replace him. As a
consequence, this provision also obviates the need for court approval of a
replacement appointment in circumstances where there will be no continuing
trustees - for example, if all trustees wish to retire. We are of the view that
a retiring trustee should be entitled to exercise the statutory power to appoint

66 Draft Bill, s. 19(4). In our view, this situation differs from the case, discussed above,
where the nominated appointer, upon consideration, decides not to exercise the statutory
power. In the latter case, to permit appointment by those next entitled would be to
override the bona fide wishes of the nominated appointer. In the case under consideration,
there is simply an inability to effectively determine the issue.

67 SeeStones v. Rowton (1853), 17 Beav. 308. 51 E.R. 1052.

68 See Re Moorlwu.se, [ 1946] 4 D.L.R. 542 (Out. H.C.J. ). at 544.

100

substitute trustees. To preclude evidentiary problems, however, we consider
that the desire to be discharged should be expressed in writing. Accordingly,
we recommend that the revised Act should provide that, for the purpose of
exercising the non-judicial statutory power to appoint substitute trustees, a
surviving or continuing trustee should include a trustee who expresses in
writing a desire to be discharged from all or any of the trusts or powers
reposed in or conferred upon him, and our Draft Bill so provides.

The second issue is whether a trustee who refuses to act or disclaims
should be entitled to exercise the statutory power to appoint substitute trustees
under section 3(1). We understand70 a refusing trustee to be one who has
accepted the office of trustee, but who is unwilling to act or to act further,71
and a disclaiming trustee to be one who has disclaimed the office and never
acted in that capacity. As in the case of a retiring trustee, neither a refusing
trustee nor a disclaiming trustee continues to occupy the office of trustee after
the replacement appointment. Moreover, it may even be contended that a
refusing trustee ceases to continue as a trustee prior to the replacement
appointment upon his refusal to act as a trustee, and it is certain that a
disclaiming trustee has never acted in the capacity of trustee. Consequently,
it would seem that neither a refusing nor a disclaiming trustee is entitled to
join as a "continuing trustee" in the appointment of a substitute trustee, and
that judicial approval is necessary for the appointment of trustees in circum-
stances where, for example, all trustees refuse to act.

We have referred above to section 36(8) of the English Trustee Act, J 925
in the context of a retiring trustee. This subsection also refers to a refusing
trustee and provides that a continuing trustee includes "a refusing . . . trustee,
if willing to act in the execution of the provisions of the section". Similar
legislation exists in New South Wales,72 and the legislation includes the
qualification that a refusing trustee be willing to act in the appointment.
Section 6(1 1) of the New South Wales statute, however, also adds two further
qualifications: namely, that a refusing trustee may not act apart from the
continuing trustee where there is in fact a continuing trustee; and that if a
refusing trustee does not act in the appointment, the fact that he was willing
to act shall not affect the validity of an appointment made by any other
person.

Notwithstanding the approaches taken in England and New South Wales,
it is our opinion that the primary issue is whether a refusing or disclaiming
trustee should be entitled to take any part in an appointment of a trustee under
section 3(1). We have concluded that, unless the trust instrument provides to
the contrary, a person who refuses to carry out the responsibilities of a trustee,
or who disclaims the office, is not a suitable person to exercise the statutory

69 Draft Bill, s. 19(6).

70 See infra, this ch., sec. l(b)(ii).

71 Such a person nevertheless exposes himself to liability with his co-trustees for any breach
of trust that his co-trustees perpetrate. No trustee may plead his own inactivity as a
ground for indemnification by his co-trustees: see Lewin on Trusts, supra, note 18, at
674.

72 Trustee Act, 1925, supra, note 6, s. 6(1 1).

101

power.7' Should all trustees refuse to act or should they all disclaim, an
application to the court would be required to appoint substitute trustees; in
this fashion, the best interests of the trust beneficiaries are more likely to be
secured. We are strengthened in our view by the fact that refusal to act is a
ground for the removal of a trustee,74 and we shall later recommend that a
disclaimer in writing should also be a distinct ground for removal under the
revised Act.75 Accordingly, we recommend that the revised Act should pro-
vide that, for the purpose of exercising the non-judicial statutory power to
appoint a substitute trustee, a surviving or continuing trustee should not
include a trustee who in writing disclaims the trust or who, having neither
disclaimed nor resigned, refuses to act as trustee, unless, of course, the trust
instrument expressly authorizes such a person to make an appointment. Our
Draft Bill reflects this recommendation.76

The third issue relating to the ambit of the phrase "surviving or continu-
ing" trustees is whether a trustee who may be removed for cause under section
3(1) of the Ontario Trustee Act should be a party to the appointment of a
substitute trustee. In In re Stoneham Settlement Trusts,11 it was held that a
trustee who had been removed from office against his will under section 36( 1 )
of the English Trustee Act, 1925 could not demand to be a party to the
appointment of his replacement; he was not a "continuing" trustee within the
meaning of section 36( 1) as modified or extended by the provisions of section
36(8). 78 This reasoning would seem to have like application in Ontario, and
there is no express statutory provision entitling a trustee who is removable
for cause to appoint a substitute trustee. We are of the view that the principle
of In re Stoneham Settlement Trusts is correct, and therefore recommend that
a trustee who is to be involuntarily replaced for cause should not be able to
join in an appointment of his replacement.

7 9

Finally, the trust instrument may appoint a sole trustee to act; that is,
only one person may be appointed as trustee by the creator of the trust. Under
section 3(1) of the Trustee Act, the statutory power is conferred upon the
"surviving or continuing trustees or trustee". There is a question whether
these words embrace a sole trustee who wishes to appoint his replacement.

73 It is true that a nominated trustee, unwilling to accept the office, but anxious to appoint
his replacement, could accept the office, and then at once offer his resignation so that,
as a retiring trustee, he would, if our previous recommendation is accepted, be entitled
to participate in the replacement appointment. However, such a trustee might not receive
the consent of his co-trustees to his retirement, and, if he were forced to retire under
s. 2 of the Ontario Trustee Act, he would have achieved nothing since this is a retirement
without the appointment of a substitute trustee.

74 Trustee Act, supra, note 3, s. 3(1).

75 See infra, this ch., sec. l(b)(ii).

76 Draft Bill, ss. 19(6) and 2(b).

11 In re Stoneham Settlement Trusts, [1953] Ch. 59, [1952] 2 All E.R. 694 (subsequent
references are to [1953] Ch.). This decision was contrary to the views of the text writers
at that time: see. for example, Co/.ens-Hardy Home (ed.). Lewin's Practical Treatise
on the Law of Trusts (15th ed., 1950). at 422, and Underbill and Bagshawe, The Law
relating to Trusts and Trustees (9th ed.. 1939). at 4 16- IS.

78 In re Stoneham Settlement Trusts, supra, note 77. at 62-63.

79 Draft Bill, s. 19(6).

102

and the authorities are in conflict on this point.80 The difficulty arises from
the fact that this phrase would seem to presuppose an original appointment
of two or more trustees.

At present, the only provision of the Ontario Trustee Act that relates to
an appointment by a sole trustee is section 4, which provides as follows:

4. Subject to the terms of any instrument creating a trust, the sole trustee or
the last surviving or continuing trustee appointed for the administration of the
trust may appoint by will another person or other persons to be a trustee or
trustees in the place of the sole or surviving or continuing trustee after his death.

This section empowers a sole trustee to appoint by will a trustee to succeed
him. In the view of the Commission, such a provision serves a useful function,
and, accordingly, we recommend its inclusion in the revised Act.81 However,
we would point out that section 4 deals only with the power to appoint by
will. It does not relate to a sole trustee who wishes to appoint his replacement
on the occasion of his retirement. In our view, the position of a sole trustee
in this regard should be clarified.

We are of the opinion that, consistent with our previous recommendation
that a retiring trustee should be entitled to join in the appointment of a
substitute trustee, a sole trustee should be able to appoint a substitute trustee
on the occasion of his own retirement. It should be noted that section 3(1)
permits the statutory power to be exercised by the last surviving or continuing
trustee. We agree with this result, and we see no reason to distinguish between
the position of the last surviving or continuing trustee and that of a sole
trustee. As with our previous recommendations, we do not consider that the
appointment power should be conferred upon a sole trustee who refuses to
act, disclaims the trust, or is otherwise removable for cause. Accordingly,
we recommend that the revised Act should expressly provide that, for the
purpose of exercising the non-judicial statutory power to appoint substitute
trustees, a surviving or continuing trustee should include a sole trustee who
expresses in writing a desire to be discharged from all or any of the trusts or
powers reposed in or conferred upon him.82

c. The Personal Representatives of the Last Surviving or
Continuing Trustee

In the absence of a surviving or continuing trustee, section 3(1) of the
Ontario Trustee Act confers the power to appoint a substitute trustee upon

In Re Thompson and Jenkins (1928), 63 O.L.R. 33 (H.C. Div.), at 35, Middleton J. A.
was of the opinion that a sole trustee could appoint his replacement upon his retirement
under the power conferred by the present s. 3(1), while in Re National Trust Co. and
McLaughlin (1925), 57 O.L.R. 319 (H.C. Div.), at 321, Riddell J. was of the opposite
view. In England, it is generally believed that the phrase "the last surviving or continuing
trustee" includes a sole trustee: see Pettit, Equity and the Law of Trusts (4th ed., 1979),
at 242. However, the case cited for this proposition, In re Shafto's Trusts (1885), 29
Ch. D. 247, concerned the question whether the personal representatives of a deceased
sole trustee could appoint as "the personal representatives of the last surviving or
continuing trustee". It may, therefore, be said that this case does not clearly determine
the position of the sole trustee himself.

Draft Bill, s. 20.

Ibid., s. 19(6).

103

"the personal representatives of the last surviving or continuing trustee". It
may be argued that a personal representative could be remote from the conduct
of the trust administration and the circumstances of the trust beneficiaries.
Accordingly, we have considered whether it is appropriate to authorize the
personal representative to appoint a substitute trustee. This power was a
customary express power that was made statutory by Lord Cranworth's Act,*'
and in both Ontario and England it has existed in statutory form without
criticism for over one hundred years. We see, therefore, no reason to depart
from a provision that has operated with apparent efficiency for so long, and
recommend that it be carried forward into the revised Trustee Act.*4 We
would point out that, if our previous recommendations concerning which
trustees should be considered "surviving or continuing" trustees are accepted,
the personal representatives of a refusing or disclaiming trustee, or of a trustee
removable for cause from office, would not be entitled to appoint substitute
trustees.

While we agree that the power to appoint a substitute trustee should
continue to be exercisable by the personal representatives of the last surviving
or continuing trustee, there are three matters that have concerned us. The first
relates to the position of an executor who has not proved his testator's will.
Assume that the last surviving or continuing trustee dies, having by his will
appointed executors, one or more of whom do not join in proof of the will.
Can a non-proving executor be said to be one of the "personal representatives"
of the last surviving or continuing trustee so as to require his participation
with the proving executors in the replacement appointment? An English case
has held that the term "personal representatives", as this term appeared in the
Land Transfer Act, 1897 *5 included all those answering to that description
whether or not they had obtained a grant of probate.86 On the basis of this
decision it was considered that, since the same term appeared in the trustee
legislation,87 all executors would have to join in a replacement appointment,
including any executor who had not proved the will.88 In order to avoid this
situation, section 36(4) of the English Trustee Act, 1925 provides that the
statutory power may be exercised by the executors for the time being "who
have proved the will of their testator or by the administrators for the time
being of such trustee without the concurrence of any executor who has
renounced or has not proved".

The Ontario Trustee Act contains no such provision, although section 40
of the Act does provide, inter alia, that an executor to whom probate is
granted may in all respects act as effectually as though he alone had been
named by the testator as his sole executor. It could be contended that this
section authorizes the proving executors to make a replacement appointment
without the consent of a non-proving executor. Nevertheless, the position

83 Supra, note 1 , s. 27.

84 Draft Bill. s. 19(1).

85 60&61 Vict.,c. 65 (U.K.).

86 In re Pawley and London and Provincial Bank, [1900] I Ch. 58,

Trustee Act, 1893, supra, note 41 . s. 10 (U. K).

See Underhill, The Law relating to Trusts and Trustees (7th ed., 1912). at 380, /*. (r).

104

cannnot be stated with certainty. In the opinion of the Commission, it is not
desirable to cast upon the executors who have proved the will the need to
enlist the cooperation of a non-proving executor in order to effect a valid
replacement appointment. Accordingly, we recommend that the revised Act
should provide that, for the purpose of exercising the non-judicial statutory
power to appoint substitute trustees, the power conferred upon the personal
representatives of a last surviving or continuing trustee should be exercisable
by the executors for the time being of the last surviving or continuing trustee
who have proved the will of the testator, or by the administrators for the time
being of such trustee, without the concurrence of an executor who has ren-
ounced or has not proved.89

The above recommendation is premised on the assumption that one or
more executors have proved the deceased's will and wish to act. The second
matter that requires attention concerns the position where all executors intend
to renounce probate; should they be entitled to exercise the statutory power
to appoint substitute trustees? Section 36(5) of the English Trustee Act, 1925
permits a sole or last surviving executor intending to renounce probate, or all
the executors where they all intend to renounce, to exercise the power to
appoint trustees, if willing to act, any time before renouncing probate and
without thereby accepting the office of executor. This provision is consistent
with section 36(8) of the English Act which, as previously noted, enables a
refusing trustee to appoint a substitute trustee, and reflects the English position
of allowing non-judicial appointment of trustees as much as possible.

It will be recalled that we have previously recommended that a trustee
who refuses to act or who disclaims the office of trustee should not be
permitted to appoint substitute trustees under the statutory power.90 In the
view of the Commission, an executor of a last surviving or continuing trustee
who intends to renounce probate should be in a position no different from a
trustee who refuses to accept the office or to act further as a trustee. In these
circumstances, appointment by the court is preferable. Accordingly, we rec-
ommend that a provision similar to section 36(5) of the English Act should
not be included in the revised Act.

Finally, we refer to the position of a trustee who is appointed by will and
who predeceases his testator. It has been held in England that such a testa-
mentary trustee is not a "surviving or continuing trustee" within the meaning
of the English legislation,91 and that his personal representatives may not
appoint under the statutory power.92 Neither the Ontario Trustee Act nor the
English Trustee Act, 1925 expressly extends to the personal representatives
of a testamentary trustee who predeceases the testator, even if he be the sole

89 Draft Bill, s. 19(7).

90 See supra, this ch., sec. l(b)(i)b.

91 The legislation in question was the Conveyancing and Law of Property- Act, J 88 J , supra,
note 8.

2 Nicholson v. Field, [1893] 2 Ch. 511. The same reasoning would exclude a person
nominated trustee of an inter vivos trust who dies before the instrument takes effect.

105

nominated trustee, the power to appoint a substitute trustee,91 although it may
be argued that section 8 of the Ontario Act would do so. Specifically, section
8 provides as follows:

8. The provisions of this Act relative to the appointment of new trustees apply
to the case of a person nominated trustee in a will but dying before the testator.

By invoking "[t]he provisions of this Act relative to the appointment of
new trustees", namely, section 3(1), not only may the surviving or continuing
trustees appoint a new trustee to replace one of their number who dies before
the testator, but the personal representatives of the last surviving or continuing
trustee may exercise the appointment power where all the persons nominated
trustees predecease the testator.94 Regarding the utilization of section 8 by the
surviving or continuing trustees, we later recommend that the vacancy left
by the death before the testator of a person nominated trustee should be filled
by the exercise of the proposed non-judicial appointment of an additional
trustee,95 thereby obviating the necessity for a section 8-type provision in that
context. In relation to the possible application of section 8 to permit personal
representatives of a person nominated trustee but dying before the testator to
appoint new trustees, the Commission prefers the English position, which
appears to be that the connection between the trust and these particular
personal representatives is too remote, given that the deceased nominated
trustee would never have handled the trust business. Accordingly, we rec-
ommend that the revised Act should expressly state that, for the purpose of
exercising the non-judicial statutory power to appoint substitute trustees, a
surviving or continuing trustee should not include any person appointed a
trustee who predeceases the taking effect of the trust.96 Such a recommen-
dation would also preclude a personal representative of such a person from
exercising the power to appoint trustees.

(ii) Circumstances in Which the Non-Judicial Statutory Power is
Exercisable

One of the vital features of section 3( 1 ) of the Ontario Trustee Act relates
to the circumstances in which the non-judicial power to appoint substitute
trustees may be exercised. The subsection has two broad functions. First, it
provides a means for the replacement of a trustee who dies or who desires to
be discharged; and secondly, it provides a mechanism for the removal of a
trustee for the various causes enumerated in the subsection. The replacement

si 3

This may not have been the intention of Lord Cranworth's Act, supra, note 7. s. 28,
which first expressly permitted the appointment of a new trustee where a trustee nomi-
nated in the will had died in the testator's lifetime. In Ontario. An Act to provide for
certain amendments of the Law, supra, note 9, s. 30(2), reproduced by An Act respecting
Trustees and Executors and the Administration of Estates, supra, note 44. s. 3(2),
enacted the same provision. Had the Act provided that "the personal representatives of
a person nominated trustee in a will, but dying in the testator's lifetime, may appoint".
Nicholson v. Field, supra, note 92, would not have occurred.

See Waters, Law of Trusts in Canada (1974), at 562.

See infra, this ch.. sec. 1(e).

Draft Bill, s. 19(6).

106

or removal is effected by the appointment of another person to be trustee in
the place of the trustee dying, remaining out of Ontario, desiring to be
discharged, refusing to act, being unfit or incapable of acting as trustee, being
convicted of an indictable offence, or being bankrupt or insolvent. This aspect
of the section has generally proved satisfactory in operation and, subject to
certain matters dealt with below, we recommend that it should be carried
over to the revised Act.97

The first matter that we wish to discuss relates to the position of a trustee
who is an infant. Under section 3(1) of the Ontario Trustee Act, infancy of a
trustee is not included as a circumstance that would justify the non-judicial
removal of that trustee by the appointment of a substitute trustee. Although
there are in Ontario distinct legal limitations on the capacity of a person under
the age of majority, there is no general prohibition against such a person
assuming an express trusteeship. Like Ontario, Northern Ireland98 omits in-
fancy as a ground for non-judicial removal. Other Canadian and Common-
wealth jurisdictions have responded differently to this situation.99 For example,
in England a person under the age of majority is incapacitated by statute from
acting as an express trustee.100 Consequently, section 36(1) of the English
Trustee Act, 1925 provides that infancy is a ground for the non-judicial
removal of a trustee by the appointment of a substitute trustee. After careful
consideration, and in view of the fact that the appointment of an infant was
the choice of the creator of the trust, we support the present Ontario position.
If for any reason it should be considered that an infant is unsuitable to act as
a trustee, an application for his removal may be made to the court. The court
may consider that arrangements should be made so that the infant can assume
the trusteeship upon attainment of majority, and such a course of action may
well seem appropriate where the person in question is very near that age. In
our view, it all depends on the circumstances; some persons might be unsuit-
able even when they attain the age of majority, and for this reason we prefer
to leave the matter to the discretion of the court. Accordingly, we recommend
that in the revised Act, as in section 3(1) of the Ontario Trustee Act at present,
minority should not be a circumstance justifying non-judicial removal by the
appointment of a substitute trustee.

The second matter concerns the restrictions, if any, that should be placed
upon the non-judicial removal of a trustee who is unfit or incapable of acting.
At present, section 3(1) of the Ontario Trustee Act provides that, where a
trustee is unfit to act or is incapable of acting as trustee, he may be replaced.
These two circumstances also appear in section 36(1) of the English Trustee
Act, 1925, and in that context "unfit" has been interpreted as including
bankruptcy, liquidation, or conviction of a felony, while "incapable" has
been construed as meaning personal incapacity, such as a physical or mental

100

Ibid.,s. 19(1).

Trustee Act (Northern Ireland), 1958, supra, note 30, s. 35(1).

See, for example, the Manitoba Trustee Act, supra, note 6, s. 10(1), and the New South
Wales Trustee Act, 1925, supra, note 6, s. 6(2)(e), which include infancy as a ground
for non-judicial removal. See, also, the New Zealand Trustee Act 1956, supra, note 6,
s. 43, which does not include infancy as a ground for non-judicial removal.

Law of Property Act, 1925, 15 & 16 Geo. 5, c.20, s. 20 (U.K.).

107

disorder.101 In Ontario, however, seetion 3(1) of the Trustee Act expressly
enumerates conviction of an indictable offence and bankruptcy or insolvency
as circumstances permitting the non-judicial replacement of a trustee. There-
fore, "unfit" to act in the Ontario Act would appear to comprehend other
objectionable conduct. Like the English position, "incapable" of acting would
seem to refer to physical or mental incapacity, but could also include old age
or failing capacities. In effect, what should be sufficient to render a trustee
"unfit" or "incapable" of acting cannot be defined with certainty. Because
these are matters upon which differences of opinion may easily arise, the
Commission has considered whether they should continue to be circumstances
that permit the non-judicial removal of a trustee, or whether resort to the
courts would be the more appropriate means of adjudging whether a trustee
is incapable or unfit to act.

The Commission has concluded that where subjective value judgments
concerning the ability of a person to act as trustee are concerned, these
determinations should be made by a court, where the trustee in question, or
someone on his behalf, can place the trustee's position before an impartial
arbiter for consideration. Accordingly, we would limit the non-judicial re-
moval of a trustee to objectively ascertainable circumstances. In our view
this approach has two advantages. First, as one aim of the Commission's
recommendations is to encourage the employment of the non-judicial appoint-
ment and discharge powers, trustees may more readily utilize a mechanism
that provides clear, easily ascertainable criteria. On the other hand, trustees
might be reluctant to exercise the non-judicial removal power based upon
their subjective finding of incapacity of a co-trustee, especially where the
removed trustee may bring an action for wrongful removal against those who
exercised the non-judicial removal powers improperly;102 the trustees might
as well have applied to the court initially for a determination concerning
whether the co-trustee should be removed because of his incapacity to act.
Secondly, limiting the non-judicial removal power to objectively ascertain-
able circumstances would clearly differentiate the judicial appointment and
removal power from the non-judicial appointment and removal power.

We are strengthened in our view by the fact that the English trustee
legislation has taken the position that determinations of mental incapacity as
a ground for the removal of a trustee should not rest entirely with the co-
trustees. In England, where a trustee is incapacitated by a mental disorder
within the meaning of the Mental Health Act, 1959, l03 section 36(9) of the
Trustee Act, 1925 requires that, if he is also beneficially interested in posses-
sion under the terms of the trust, no substitute appointment may be made
under section 36(1) unless leave to make the appointment is given by "the
authority having jurisdiction under Part VIII of the Mental Health Act, 1959". I,u

101

102
103
104

Lewin on Trusts , supra , note 18, at 4 1 4- 1 5 .

See infra, this ch., sec. 1(d), and Draft Bill, s. 33.

7 & 8 Eliz. 2,c. 72, s. 4(1) (U.K.).

Trustee Act, 1925 , supra, note 5, s. 36(9), as amended by the Mental Health Ad, 1959,
supra, note 103, s. 149(1), and Sch. 7, Part 1.

108

While the Commission does not recommend the adoption of this type of
consent mechanism,103 we agree in principle that a determination of mental
incapacity should be confirmed by an objective source before a trustee may
be removed from office. In our view, the ability to remove non-judicially a
mentally incapacitated trustee should be limited to the case of a mentally
incompetent person so found by a court of competent jurisdiction. Accord-
ingly, we recommend that the non-judicial removal of a trustee and the
appointment of a substitute trustee should be permitted only in objectively
ascertainable circumstances. In particular, incapacity and unfitness to act as
trustee should no longer be circumstances that justify the non-judicial removal
of a trustee, and we recommend that these grounds should not be included in
the revised Trustee Act in this context. Rather, removal for these reasons
should be effected judicially, either under the proposed judicial statutory
power of removal106 or pursuant to the inherent jurisdiction of the court, with
the non-judicial removal power in this regard limited to instances of mentally
incompetent persons so found by a court of competent jurisdiction.107

A further related matter concerns the provision in section 3(1) of the
Ontario Trustee Act for the exercise of the non-judicial power of removal
where a trustee is "bankrupt or insolvent". As with the abovementioned
circumstances of incapacity and unfitness, insolvency is a matter based pri-
marily upon subjective value judgments. Here too, opinions differ concerning
what circumstances would be sufficient to constitute insolvency of a trustee.
Consistent with the Commission's recommendation that the non-judicial re-
moval power should be exercisable only in objectively ascertainable circum-
stances, we are of the view that the court is the more appropriate forum to
determine, having regard to all the circumstances, whether a trustee is insol-
vent and should be removed from office.

Accordingly, we recommend that insolvency should not be a ground for
the non-judicial removal of a trustee and the appointment of a substitute
trustee. Rather, the non-judicial power to remove a trustee should be exercis-
able in cases of bankruptcy alone.108 Further, we recommend that the term

105

106
107
108

Although the equivalent of s. 36(9) of the English Trustee Act, 1925, as amended, has
been adopted in the Manitoba Trustee Act, supra, note 6, s. 10(7), and in the Trustee
Act (Northern Ireland), 1958, supra, note 30, s. 35(9), we reject this approach for
several reasons. First, this exception to the statutory power only applies to a certain class
of mentally disordered persons. Under s. 101 of the Mental Health Act, 1959, supra,
note 103, the person given authority to act under Part VIII is given jurisdiction only over
mentally disordered persons so found. There is no jurisdiction over mentally disordered
persons not so found; that is, those persons who would require a next friend as guardian
ad litem to sue, if they were litigating. Furthermore, it is not obvious why the section
does not show a similar concern for other beneficiaries who are incapacitated for other
reasons. Also, the exception is restricted to trustees with interests in possession, as
opposed to interests in remainder.

Draft Bill, s. 56.

Ibid., ss. 19(1) and [(h).

Ibid., s. 19(l)(«)(vi). It should be noted that s. 159 of Bill C-12, 1980 (32d Pari. 1st
Sess.), the proposed federal legislation to amend the Bankruptcy Act, provides that,
where a bankruptcy order is made against a trustee, he is thereafter replaced by the
bankruptcy trustee, who has all the "rights, powers and duties" in respect of the property
as had the debtor (or bankrupt) trustee. This section, however, also subordinates this

109

"bankrupt" should be defined to mean a person against whom a receiving
order is in force, or who has made an assignment or a proposal under the
Bankruptcy Act (Canada). Itw

It will also be noted that section 3( 1 ) of the present Act is silent concern-
ing a trust company that, while acting as trustee, is dissolved or goes into
liquidation. Under section 36(3) of the English Trustee Act, 1925, such a
corporate trustee is deemed, in the case of dissolution, to be incapable as of
the date of dissolution. We see no reason why in Ontario an application to
the court should be necessary in order to appoint a substitute trustee.110
Accordingly, we recommend that the revised Act should provide that where
a corporate trustee is dissolved or is in liquidation, it may be subject to non-
judicial removal under the statutory power.1"

The third matter that we wish to discuss in connection with circumstances
justifying the exercise of the non-judicial statutory appointment power con-
cerns the absence of a trustee from the jurisdiction. Section 3( 1 ) provides that
a trustee may be replaced if he "remains out of Ontario for more than twelve
months'' . Absence of a trustee from the jurisdiction as a circumstance justi-
fying removal appears in section 36(1) of the English Trustee Act, 1925, but
it does not appear in the trustee legislation of Alberta, Saskatchewan, New
Brunswick, the Yukon, or the Northwest Territories. On the one hand, we
agree that any trustee who leaves the jurisdiction and, implicitly, the admin-
istration of the trust for an extended period of time should be removed from
office. On the other hand, we see little objection to a trustee actively admin-
istering the trust from outside the jurisdiction. Today, for example, a trustee
may have to leave the jurisdiction for business reasons, but may have no
intention of abandoning responsible administration of the trust. If a settlor or
testator was of the view that his trustees should reside in the particular
jurisdiction or should not be absent from the jurisdiction for more than a

procedure to any instrument creating the trust and any other applicable law (emphasis
added). As the property held in trust by the bankrupt trustee does not form part of the
assets that may satisfy his personal debts, and, therefore, prima facie, is not under the
purview of the bankruptcy order, trust law, rather than bankruptcy law. has traditionally
dealt with the problems, if any, created by the personal bankruptcy of a trustee vis-d-vis
his relationship to the trust. Presumably, the phrase "any other applicable law" contained
in s. 159 of Bill C-12 would include provincial trustee legislation, with the result that
proposed section 19(1) of the revised Trustee Act, whereby a bankrupt trustee may be
removed from office and replaced by a person deemed appropriate by those authorized
to remove the trustee, would take precedence over s. 159 of the federal Bankruptcy Bill.

109 Draft Bill. s. Kb).

110 On the dissolution of a corporation any undisposed property is forfeited to the Crown
(Corporations Act, R.S.O. 1980, c. 95. s. 322. and Business Corporations Act, 1982,
S.O. 1982, c. 4, s. 243(1)). Any property held in trust by the corporation would
presumably also pass to the Crown, if the corporation were a sole trustee, so that the
right of survivorship as between co-trustees could not apply. As to whether the Crown
is bound by the trust, see /// re Taylor's Agreement Trusts. [ 1904] 2 Ch. 737. If a new
trustee is non-judicially appointed only upon the dissolution o\ the trust corporation, a
problem arises assuming it was the sole trustee concerning how the new trustee shall
be vested with the trust property: see. for example. Re Canadian fertilizer C o. Ltd. and
Canadian Industries Ltd. . (1938] O.W.N. 335 (H.C.J. ), a ease that predated the passing
of the predecessor of the Corporations Act, S. 322 (namely, The Companies Act, S.O.
1947, c. 15. s. 3).

111 Draft Bill. s. 19(1 )(r).

110

stipulated time period, he could so provide in the trust instrument. Accord-
ingly, we recommend that, unlike the situation under section 3(1) of the
Trustee Act, the fact that a trustee remains out of Ontario for more than twelve
months should not in itself be a circumstance justifying non-judicial removal
under the revised Act. If absence of a trustee from the jurisdiction is creating
difficulties, an application may, of course, be made to the court for his
removal.

The next matter we consider relates to the death of a trustee. One of the
prescribed circumstances in which a substitute appointment may be made
under section 3(1) of the Ontario Trustee Act is where a "trustee dies". This
provision must be read in the light of section 8 of the Ontario Act, which we
referred to previously in the context of the role of the personal representative
exercising the appointment power under section 3(1). "2 Section 8 is designed
to cover the situation where a person who has been appointed a trustee by
will predeceases the testator. In this event, such a person cannot be said to
be a "trustee" who has died within the meaning of section 3(1). However,
section 8 stipulates that the provisions of the Act "relative to the appointment
of new trustees" apply; accordingly, the power to appoint a substitute trustee
under section 3(1) becomes exercisable.

It may be that the remedy provided by section 8 is not frequently invoked
in Ontario. However this may be, the Commission is of the view that the
statutory power to appoint substitute trustees should apply only where a
person may be said to be an actively involved trustee, and a person who
predeceases the testator has never acted as trustee. Also, it would be incon-
sistent to deem such a person a trustee for this purpose, but at the same time
to assert that he should not be considered a "surviving or continuing" trustee,
in order to preclude the personal representatives of such a person from
appointing new trustees."3 We are, therefore, of the opinion that it would be
more appropriate for the vacancy to be filled by the non-judicial appointment
of an additional trustee, a power that we recommend in a later section of this
chapter."4 If a non-judicial statutory power to appoint additional trustees is
accepted, we recommend that section 8 of the present Trustee Act should not
be included in the revised Act.

The fifth matter that we wish to discuss concerns the fact that words are
missing from section 3(1) of the Ontario Trustee Act that are present in other
Commonwealth legislation based upon section 36 of the English Trustee Act,
1925. Section 36(1) states that it applies to any trustee who is to be replaced,
whether he is "original or substituted, and whether appointed by a court or
otherwise"."5 The Trustee Act (Northern Ireland), 1958 adopts more com-
prehensive wording to address this matter, namely, "whether original, sub-
stituted or additional"."6 The meaning in section 3(1) seems clear, even

112 See supra, this ch., sec. l(b)(i)c.

113 See supra, this ch., sec. l(b)(i)c, and Draft Bill, s. 19(6).

114 See infra, this ch., sec. 1(e).

115 Section 36(1) of the English Trustee Act, J 925, supra, note 5, repeats language found
in s. 27 of Lord Cramvorth' s Act, supra, note 7.

116 Supra, note 30, s. 35(1).

Ill

though words of this nature are not included, but, in our opinion, the position
should be placed beyond doubt. Accordingly, we recommend that it should
be possible to remove a trustee under the non- judicial statutory removal power
whether he be an original, substituted, or additional trustee. This recommen-
dation is implemented in our Draft Bill by providing, inter alia, that the Bill
applies to all trustees however and whenever appointed, except as otherwise
expressly provided."7

Another matter that has concerned the Commission relates to a refusing
trustee. Section 3(1) of the Trustee Act permits a substitute appointment when
a trustee "refuses ... to act". The meaning of the word "refuses" cannot be
stated with complete certainty. The implication of section 3(1) seems to be
that a refusing trustee is one who has initially accepted the office, either
expressly or impliedly by participating in trustee affairs, and who subse-
quently refuses to act. It has been stated by text writers, however, that the
term includes a person named as a trustee, but who has disclaimed the office
by conduct or declaration, and thereby never acted in the capacity of trustee
under the particular trust instrument.118 Nonetheless, the case law does not
support this statement unequivocally,"9 and in one sense, it might be said
that such a person has never been a trustee at all. In the opinion of the
Commission, this confusion in terminology should be ended. A person who
has accepted the office of trustee, but who is unwilling to act or to act further,
should be referred to as a refusing trustee, while a person who is named as a
trustee, but who has disclaimed the office and never acted in that capacity
should be referred to as a disclaiming trustee.120 Further, in the view of the
Commission, the non-judicial power of removal by the appointment of a
substitute trustee should apply equally to a trustee who disclaims and to a
trustee who refuses to act. To preclude evidentiary problems and to act as a
caution to the trustee, the disclaimer should be in writing. If a trustee will
neither accept the office, nor supply a written disclaimer, or if he cannot be
traced, the trustees in office would have to apply to the court for removal,
and we are of the view that this would be appropriate. Accordingly, we
recommend that the revised Act should expressly include not only refusal to
act, but also disclaimer of a trust in writing as a circumstance justifying non-
judicial removal, and our Draft Bill so provides.121

Finally, a problem may arise concerning the relationship between express
powers in the trust instrument and the statutory power contained in section

119

120

Draft Bill, s. 2(a).

Lewin on Trusts, supra, note 18, at 414, and Underbill's Law relating to Trusts and
Trustees, supra, note 38, at 625.

See, for example, Re Hadlex (1851), 5 De G & Sm. 67, 64 E.R. 1021, and /// re
Birchall{m9), 40 Ch. D. 436 (C.A.).

Draft Bill, s. 19(l)(«)(iii) and (b).

Ibid. The Commission could have taken the view that a disclaiming trustee, like a named
trustee who predeceases the taking effect of the trust, was never a trustee, and that,
therefore, the trustee or trustees who have accepted office would instead appoint an
additional trustee. However, since section 3( 1 ) permits non-judicial removal by substitute
appointment in the case of a refusing trustee, we arc of the view that it would be more
consistent, in this case, if the subsection were also to extend to disclaiming trustees.

112

3( 1 ) of the Ontario Trustee Act. The instrument may contain a power whereby
specified persons are entitled to remove a trustee, but contain no power
authorizing the appointment of a substitute trustee. In other words, a trust
instrument may provide for part of the matter covered by the subsection, but
not for the whole. Section 36(2) of the English Trustee Act, 1925 provides
that in these circumstances a removed trustee who is an individual is to be
regarded as dead, and a removed corporation as desiring to be discharged. In
this way, the statutory power to appoint substitute trustees becomes exercis-
able. We think that this is a useful provision. Accordingly, we recommend
that, where a trustee has been removed under a power conferred by a trust
instrument, then, subject to the terms of a power of replacement in the trust
instrument, and subject also to our later recommendations concerning the
maximum number of trustees,122 it should be possible to appoint one or more
substitute trustees in the place of the removed trustee as if he had died or, in
the case of a corporate trustee, as if it had expressed in writing a desire to be
discharged from the trust.123

As will be recalled, the removal of a trustee under section 3(1) of the
Ontario Trustee Act can only be accomplished by the appointment of a
substitute trustee. At present, there is no statutory authority authorizing the
non-judicial removal of a trustee without a substitute trustee being appointed
in his place, although the court has an inherent jurisdiction to remove a trustee
without appointing a new trustee.

124

Nevertheless, situations may arise where it would be in the interest of
the trust to remove a trustee without appointing a substitute trustee, as the
co-trustees may be capable of carrying on the management of the trust. The
Commission has considered, therefore, whether the revised Act should con-
tain a provision to this effect, and has concluded that it should.125 This
approach is consistent with our previous recommendation that the revised Act
should retain the non-judicial power to remove a trustee by appointing a
replacement, but in an amended and improved form in order to facilitate the
use of the non-judicial power as much as possible. Our view is that a non-
judicial power to remove a trustee without the appointment of a substitute
trustee is an obvious complementary provision to a comprehensive scheme
of non-judicial powers. As to the circumstances that should permit such
removal, we have concluded that the section in the revised Act should permit
the non-judicial removal of a trustee without replacement in the same circum-
stances that permit non-judicial removal with replacement: namely, where a
trustee refuses to act, is a mentally incompetent person, has been convicted

122
123

See infra, this ch., sec. 1(g).
Draft Bill, s. 19(2).
124 Letterstedt v. Broers (1884), 9 A.C. 371 (P.C.).

125

The Manitoba Trustee Act, supra, note 6, s. 10(5), provides for the non-judicial removal
of a trustee without replacement of that trustee, which is consistent with the Manitoba
legislative intent to prevent where possible the need for application to the court.

113

of an indictable offence, is bankrupt, or where a person appointed a trustee
disclaims the trust or where a corporate trustee is dissolved or is in liquida-
tion.126 Also, as recommended with respect to the situation where a trustee
wishes to retire non-judicially without the appointment of a substitute trustee,127
and as we shall recommend where a trustee is non-judicially discharged and
a substitute trustee appointed,128 we are of the view that the power to remove
a trustee non-judicially without the appointment of a replacement should not
be exercisable unless a trust corporation or at least two individual trustees
would remain to perform the trust. While we have considered whether the
non-judicial removal of a trustee should be permitted where only one individ-
ual trustee would remain in office, for reasons given when we dealt with a
similar question in the context of non-judicial retirement,129 we are of the
view that this should only be possible by application to the court under the
broad judicial power to remove a trustee from office to be recommended at a
later stage of this chapter.130

Accordingly, we recommend that the revised Act should provide that
where a trustee refuses to act as trustee, is a mentally incompetent person,
has been convicted of an indictable offence, is bankrupt, or where a person
appointed a trustee disclaims the trust in writing, or where a corporate trustee
is dissolved or is in liquidation, and does not voluntarily retire from the trust,
his co-trustees should be able by deed to declare him to be removed from the
trust, if a trust company or at least two individuals will then remain to act as
trustees to perform the trust, and that the trustee should be discharged without
any new trustee being appointed in his place.131

(d) Liability of Former and Continuing Trustees

We have previously recommended that a trustee should be able to retire
or be removed with or without the appointment of a substitute trustee. Two
issues of liability arise in these circumstances.

The first issue with which we are concerned is whether a trustee who has
been discharged from office as a consequence of his retirement or removal is
also discharged from liability for his own acts or omissions while in office,
as well as from liability for the acts or omissions of his co-trustees during
their concurrent time in office. Conversely, does the discharge serve to release
the continuing co-trustees from the liability that they might otherwise have
incurred in relation to the acts or omissions of the trustee who has retired or
been removed? Case law does not exclude any such liability,132 and the

126 Draft Bill, s. 19(1), sets out the circumstances in which we recommend non-judicial
removal with replacement should be permitted. See, also, supra, this ch., sec. l(b)(ii).

127 See supra, this ch., sec. 1(a).

128 See infra, this ch., sec. HgHii).

129 See supra, this ch., sec. 1(a).

130 See infra, this ch., sec. 1(0-

131 Draft Bill, s. 25(3).

132 See, generally, Pettit, supra, note SO, at 380.

114

Ontario Trustee Act contains no provisions relevant to this issue when the
power to discharge and appoint trustees is exercised non-judicially. However,
section 5 of the Ontario Act, which provides for the judicial appointment of
new trustees, addresses this issue of liability directly in subsection (2) as
follows:

5. — (2) An order under this section and any consequential vesting order or
conveyance does not operate as a discharge from liability for the acts or omissions
of the former or continuing trustees.

With respect to non-judicial retirement and removal, we see no reason
why a discharge from office should necessarily operate as a discharge from
liability in relation to conduct that occurred prior to the discharge, a view
that does not appear to be inconsistent with the present common law. Al-
though the act or omission may have prompted the discharge from office, the
assessment of liability is a separate issue to be determined on the merits of
the individual situation. We are of the opinion, therefore, that section 5(2) of
the Ontario Trustee Act should be equally applicable to the non-judicial
discharge and appointment of trustees. Accordingly, we recommend that,
unless the court orders otherwise, the non-judicial retirement, removal, or
replacement of a trustee and any consequential vesting order, declaration,133
or conveyance should not discharge any person from liability for his own acts
or omissions or for the acts or omissions of any former or continuing trustee. 134
The issues of trustee rights and indemnification, and the power of the court
to excuse trustees from liability, are canvassed in greater detail in a later
chapter.135

The second issue of liability involves the rights of a discharged trustee
who may have been wrongfully removed from office. Liability may arise
because the circumstance alleged as justification for the removal of the trustee
and the appointment of a substitute trustee under section 3(1) of the Act did
not in fact exist. Similarly, a trustee might be removed without the appoint-
ment of a substitute trustee, as previously recommended,136 for a circumstance
that in fact did not exist. In either case, the trustee would have been removed
improperly, and in our view the revised Act should contain a provision
authorizing recovery of damages against those responsible for the removal,
although this action would not disturb the chain of trusteeship that has been
set up by the appointment or discharge instruments. Accordingly, we rec-
ommend that where a trustee establishes before the court that the alleged
circumstances on the basis of which he was removed as trustee did not in fact
exist, he should be able to claim an appropriate award of damages for wrong-
ful removal against those persons who caused his removal.137

133 See infra, this ch., sec. 3, for a discussion of vesting declarations and vesting orders.

134 Draft Bill, s. 26.

135 See infra, ch. 6.

136 Supra, this ch., sec. 1(c).

137 Draft Bill, s. 33.

(e) Non-Judicial Appointment of Additional Trustees

As we have discussed, section 3(1) of the Ontario Trustee Act provides
for the non-judicial appointment of substitute trustees. When this occurs,
another person or "other persons" may be appointed to replace the trustee
who dies, retires, or is removed. In this way, the number of trustees may be
increased non-judicially. 138 However, no provision exists in the Ontario legis-
lation for the non-judicial appointment of additional trustees where no re-
placement is sought. Unless there is an express power in the instrument to
appoint additional trustees, an application to the court would be required
under section 5 of the Trustee Act for the judicial appointment of additional
trustees.139

By way of contrast, section 36(6) of the English Trustee Act, 1925 does
provide for the non-judicial appointment of additional trustees. The subsec-
tion states as follows:

36. — (6) Where a sole trustee, other than a trust corporation, is or has been
originally appointed to act in a trust, or where, in the case of any trust, there are
not more than three trustees (none of them being a trust corporation) either
original or substituted and whether appointed by the court or otherwise, then and
in any such case -

(a) the person or persons nominated for the purpose of appointing new
trustees by the instrument, if any, creating the trust; or

(b) if there is no such person, or no such person able and willing to act,
then the trustee or trustees for the time being;

may, by writing, appoint another person or other persons to be an additional
trustee or additional trustees, but it shall not be obligatory to appoint any addi-
tional trustee, unless the instrument, if any, creating the trust, or any statutory
enactment provides to the contrary, nor shall the number of trustees be increased
beyond four by virtue of any such appointment.

This power appears in all Commonwealth Trustee Acts that have been revised
since 1925. I40 Its utility seems apparent, as there may well be circumstances
where it would be advantageous to be able to appoint an additional trustee
without an application to the court, for example, to fill a vacancy resulting
from the retirement of a trustee under section 2 of the Ontario Trustee Act.
We, therefore, recommend that a non-judicial power to appoint additional
trustees should be introduced in the revised Act.141

As to who should be empowered to appoint additional trustees, section
36(6) of the English Trustee Act, 1925 provides that the persons so entitled

138 Trustee Act, supra, note 3, ss. 3(1) and 6(a).

139 See In re Gregson's Trusts (1886), 34 Ch. D. 209.

140 See, for example, the Manitoba Trustee Act, supra, note 6, s. 10(4); the New Zealand
Trustee Act 1956, supra, note 6, s. 43(5); and the New South Wales Trustee Act, 1925,
supra, note 6, s. 7.

141 Draft Bill. s. 21.

116

are the persons nominated by the instrument, or, failing such a person, "the
trustee or trustees for the time being", and we recommend that this should
also be the case under the revised Ontario Trustee Act.142 Although this
description of the entitled persons does not appear to have given rise to any
difficulty, consistent with our view concerning which trustees should be
entitled to appoint substitute trustees, we further recommend that a person
who in writing disclaims the trust, or who, having neither disclaimed nor
resigned, refuses to act as trustee, should not be entitled to appoint additional
trustees.143

We also consider that certain other features of section 36(6) of the English
Act should not be adopted. First, section 36(6) of the English Act does not
apply where a trustee is a trust corporation. Therefore, under the English Act
it is not possible to appoint a trustee in addition to a trust corporation. The
English trustee legislation provides that only a trust corporation may act as a
sole trustee, but this does not appear to imply that the corporation must act
alone; nor does it explain why it should not be possible to make a non-judicial
appointment of an additional trustee when one of the trustees is a trust
corporation. It should be noted that the English Law Reform Committee in
its recent Report on the Powers and Duties of Trustees has recommended that
the restriction on the appointment of additional trustees where a trust corpo-
ration is the original sole trustee, or is one of the existing trustees, should be
removed.144 We agree with this position and recommend that, unlike the
position under section 36(6) of the English Trustee Act, 1925, it should be
possible under the revised Act to appoint a trustee in addition to a corporate
trustee.145

Secondly, we wish to refer to a difference between section 36(6) and
section 36(1) of the English Trustee Act, 1925. Under section 36(6) the
nominated persons have power to appoint "another person or other persons"
to be an additional trustee or additional trustees. By way of contrast, section
36(1), like section 3(1) of the Ontario Trustee Act, provides that those who
are entitled to appoint may appoint one or more other persons "whether or
not being the persons exercising the power" to replace a deceased, retiring,
or removed trustee. We see no reason why those entitled to appoint should
be able to name themselves substitute trustees, but unable to appoint them-
selves additional trustees. This distinction was not adopted in Northern Ire-
land,146 and, indeed, may not have been intended in the English legislation.147
In fact, the English Law Reform Committee has recently recommended that
the person or persons who have the power to appoint additional trustees

142 ibid.

143 Ibid. See, also, supra, this ch., sec. l(b)(i).

144 Law Reform Committee, Twenty-third Report: The Powers and Duties of Trustees
(Cmnd. 8733, October, 1982), at 4-5 and 62 (hereinafter referred to as "English Law
Reform Committee Report").

145 Draft Bill, s. 21.

146 Trustee Act (Northern Ireland), 1958, supra, note 30, s. 35(6).

147 See In re Power's Settlement Trusts, [1951] 1 Ch. 1074, [1951] 2 All E.R. 513 (C. A.).
See, also, Sheridan, "The Trustee Act, 1966" (1965), 4 The Solicitor Quarterly 186, at
193 et seq.

117

should be able to appoint themselves as additional trustees.148 Accordingly,
we recommend that, consistent with section 3( 1) of the Ontario Trustee Act,
the revised Act should permit the persons nominated by the trust instrument
to appoint themselves as additional trustees.149

Thirdly, we would point out that section 36(6) of the English Trustee
Act, J 925 provides that, where there is an appointment of an additional
trustee, the number of trustees shall not "be increased beyond four by virtue
of any such appointment". As will be discussed in a later section of this
chapter, the English legislation provides that, as a general rule, no more than
four persons can act as original trustees. However, this limitation is, with
certain exceptions, only applicable to "settlements and dispositions of land,,.15(l
The inclusion of these words in section 36(6) not only carries over this
limitation to the appointment of additional trustees, but also renders it applic-
able to trusts of personalty. We later recommend that, except with the consent
of the court, the number of trustees at any one time should not be greater
than four, a recommendation that applies not only to trusts of land, but also
to trusts of personalty, and however and whenever the trustees are ap-
pointed.151 Accordingly, the section of our Draft Bill that deals with the
appointment of additional trustees does not contain these words of section
36(6) of the English Act, but is governed by a reference to the recommended
provision generally limiting the number of trustees.152 We recommend that
this approach be adopted in the revised Act.

153

(f) Judicial Replacement, Removal, and Appointment of
Trustees

The power of the court to replace, remove, and appoint trustees is set out
in section 5 of the Ontario Trustee Act, which provides as follows:

5. — ( 1 ) The Supreme Court may make an order for the appointment of a new
trustee or new trustees, either in substitution for or in addition to any existing
trustee or trustees, or although there is no existing trustee.

(2) An order under this section and any consequential vesting order or con-
veyance does not operate as a discharge from liability for the acts or omissions
of the former or continuing trustees.

This provision empowers a court in its discretion to appoint substitute and
additional trustees. Section 5 is both similar and dissimilar to section 3(1) of

148 English Law Reform Committee Report, supra, note 144. at 4-5 and 62.

149 Draft Bill, s. 21.

150 Trustee Act, 1925, supra, note 5, s. 34. See, also, infra, this ch., sec. l(g)(i).

151 See infra, this ch., sec. l(g)(i), and Draft Bill. s. 18.

152 Draft Bill, s. 21.

153 Under s. 36(6) of the English Trustee Act, 1925, supra, note 5, the power to appoint
additional trustees is exercisable, inter alia, where "a sole trustee" has been appointed.
or where there are "not more than three trustees". Our later recommendation, that the
number of trustees should not be greater than four, would render these words otiose in
the setting of the revised Act. and we also recommend their omission.

118

the Act. Unlike the non-judicial power contained in section 3(1), the judicial
power contained in section 5 does not list the circumstances in which it
becomes exercisable, but leaves the matter to the discretion of the court. Like
section 3(1), the court may remove a trustee under section 5 only where it
appoints a substitute trustee.

We agree with the retention of a general statutory provision of this nature
as a necessary support to the non-judicial mode of appointment. Accordingly,
we recommend that the revised Act should contain a judicial power of removal
and appointment based upon section 5 of the existing Act, which would
enable the court to appoint one or more trustees where there is no existing
trustee or uncertainty as to the existence or identity of any trustee or in
substitution for or in addition to one or more existing trustees.154 However,
we consider that the present provision requires amendment in several respects
before being carried forward to the revised Act.

The equivalent provision in the English Trustee Act, 1925 is section
41(1). This section enumerates, for greater particularity, several circumstan-
ces in which the court may exercise its power to appoint a trustee, namely,
in substitution "for a trustee who is incapable, by reason of mental disorder
within the meaning of the Mental Health Act 1959, of exercising his functions
as trustee, or is a bankrupt, or is a corporation which is in liquidation or has
been dissolved". It should be noted that the particularity of section 41(1) of
the English Act is expressed to be without prejudice to the generality of the
judicial appointment and removal power authorized by the section. The reason
that bankruptcy, liquidation, and dissolution are enumerated in the English
section may be that these circumstances are not listed specifically in section
36(1) of the English Trustee Act, 1925,155 which contains the non-judicial
power to appoint substitute trustees. On the other hand, the Ontario non-
judicial statutory appointment power that we recommend authorizes removal
in these circumstances. 156 Section 5 of the present Ontario Act does not specify
the circumstances in which the judicial power may be exercised, and, on
balance, we see no useful purpose in the adoption of a particularized approach
in the revised Act.

Another matter that we have considered concerns the scope of the judicial
power. Section 4 1 ( 1 ) of the English Act provides that the court has jurisdiction
only when "it is expedient to appoint a new trustee or new trustees, and it is
found inexpedient difficult or impracticable so to do without the assistance
of the court". The purpose of these words, which do not appear in section 5
of the Ontario Act,157 is not merely to encourage, but rather to compel, the

154
155

156
157

Draft Bill, s. 56(1 )(b).

However, it has been held that a trustee who is bankrupt is unfit to act within the meaning
of s. 36(1) of the English Trustee Act, 1925, supra, note 5: see, In re Hopkins (1881), 19
Ch. D. 61 (C.A.).

Draft Bill, s. 19(1).

The Ontario section once contained this phrase, but it was dropped in the 1926 consol-
idation of The Trustee Act, 1926, 16 Geo. 5, c. 40, s. 6. In England, these words are to
be found in the original enactment of the statutory judicial power: see The Trustee Act,
1850, supra, note 5, s. 32. See, also, The Trustee Act, 1852, supra, note 5, s. 9. These
Acts preceded the introduction of the statutory non-judicial power in 1860.

119

exercise of the non-judicial power by withholding jurisdiction from the court
where inexpedience, difficulty, or impracticability do not exist.158 The Com-
mission has considered whether such an approach should be taken in Ontario.
Of the other eleven common law jurisdictions in Canada, only Prince Edward
Island and New Brunswick do not include in their trustee legislation the words
of the English section.1'9 These words also find their place in the legislation
of Northern Ireland160 and New Zealand,161 and in the legislation of four of
the six Australian states, including Victoria and Western Australia.

162

It can, however, be contended that the Ontario section should remain
unchanged, and that the courts could discourage unnecessary applications by
awarding costs, other than as against the trust estate. On the other hand, if,
as we have earlier recommended, there is to be a non-judicial power in the
revised Act and it is to be made adequate for contemporary needs, application
to the court should be unnecessary unless there exist exceptional circum-
stances. We have concluded that resort should be had to the judicial power
only in exceptional circumstances, and we are of the view that this could be
achieved if the revised Act were to provide that a judicial removal or appoint-
ment of a trustee should be made only where it appears to the court to be in
the best interests of a trust and where appointment or removal would be
inexpedient, difficult or impracticable without the assistance of the court. We
so recommend.163

A third matter that we have considered is whether the power to remove
a trustee under section 5 of the Ontario Trustee Act should be capable of
exercise in the absence of appointment of a substitute trustee. It will be
recalled that, at present, there is no statutory power in the Ontario Act
authorizing either the judicial or non-judicial removal of a trustee without the
appointment of a substitute trustee. Although the court has an inherent juris-
diction to so remove a trustee,164 we are of the view that this power should
be placed in statutory form and incorporated in the revised Act. Such a
provision would be complementary to the recommended non-judicial power
of removal without the appointment of a substitute trustee.165 As with the

l5s An English court invited to remove or appoint under the inherent jurisdiction, the
statutory jurisdiction not being invocable, would probably refuse to order a removal or
make an appointment on the ground that Parliament had made its intention clear.

159 Trustee Act, R.S.B.C. 1979, c. 414, s. 31; Trustee Act, R.S. A. 1980, c. T-10, s. 16(1);
The Trustee Act, R.S.S. 1978, c. T-23, s. 14; Manitoba Trustee Act, supra, note 6, s.
U(l)(a); Trustee Act, R.S.N.S. 1967. c. 317, s. 30; The Trustee Act, R.S.N. 1970.
c. 380, s. 34(1); Trustee Ordinance, R.O.Y.T. 1978, c. T-5, s. 10(1); and Trustee
Ordinance, R.O.N. W.T. 1974, c. T-8, s. 7(1).

160 Trustee Act (Northern Ireland), 1958, supra, note 30, s. 40.

161 Trustee Act 1956, supra, note 6, s. 51.

162 Trustee Act 1958, Vict. Stat. Vol. 8. No. 6401, s. 48; Trustees Act, 1962, supra, note
6, s. 77; Trustee Act, 1936-1974. S. Austl. Stat. 1936-1974, s. 36; and Trustee Act
1898, Tasm. Stat. 1826-1974, s. 32.

163 Draft Bill. s. 56(1).

164 See Letterstedt v. Broers, supra, note 124.

165 Draft Bill. s. 25(3). See. also, supra, this ch.. sec. 1(c).

120

appointment of new trustees, we would seek to encourage the use of the non-
judicial power in the circumstances recommended, and resort to judicial
proceedings only in exceptional cases. Accordingly, we recommend that the
revised Act should provide that, where it appears to the court to be in the best
interests of a trust, the court should be able to remove one or more trustees,
with or without the appointment of substitute trustees.166

With respect to the exercise of the statutory judicial power, we later
recommend that this power should be a power to appoint one or more trustees,
and that there should be no restriction on the number so appointed.167 Also,
we shall recommend that, in exercising the power to remove a trustee, the
court should be given a broad power to determine the permissible minimum
number of trustees that may remain in office after a trustee is removed, having
regard to the best interests of the trust.168

Finally, we support the incorporation in the revised Act of the principles
contained in subsection (2) of section 5 of the present Act, namely, that the
judicial appointment of a new trustee does not operate as a discharge from
liability for the acts or omissions of the former or continuing trustees. Indeed,
we have earlier recommended that this subsection, which in the present Act
is applicable only to the judicial appointment of new trustees, be expanded
in the revised Act to apply also to the non-judicial retirement, removal, or
replacement of a trustee.169 Accordingly, we recommend that in the revised
Act this provision should apply in the event of the court exercising its power
of removal and appointment of trustees.

170

(g) The Number of Trustees

Any reform of the law of trusts must seek to promote efficient manage-
ment of the trust. This goal raises the issue of the number of trustees who
should be permitted to hold office at any one time. First, we shall discuss
whether there should be a limitation on the number of trustees who may act
at any one time, and then we shall turn to consider the issue of the permissible
minimum number of trustees.

(i) Maximum Number of Trustees

The Ontario Trustee Act places no restriction on the number of trustees
who may be originally appointed by the creator of the trust. There is similarly
no limitation on the number of new trustees who may be appointed, either
non-judicially under section 3(1) to replace a trustee who has died, retired,
or has been removed for cause, or judicially under section 5 of the Act, either

166 Draft Bill, s. 56(1 )(a).

167 See infra, this ch., sec. l(g)(i).

168 See infra, this ch., sec. l(g)(ii).

169 Draft Bill, s. 26. See, also, supra, this ch., sec. 1(d).

170 Draft Bill, s. 56(2).

121

in substitution for or in addition to any existing trustee.171 Indeed, seetion
6(a) of the Ontario Trustee Act provides as follows:

6. On the appointment of a new trustee for the whole or any part of trust
property,

(a) the number of trustees may be increased; . . .

This is not the case, however, in certain other Commonwealth jurisdic-
tions, where the number of trustees is limited to four,172 although the rationale
for such a restriction differs among jurisdictions. For example, the English
Trustee Act, 1925 provides, as a general rule, that there can be no more than
four trustees whether by original,173 substitute,174 or additional175 appointment,
and whether the additional appointment is made judicially or non-judicially.
However, in the case of an original appointment, the limitation is, with certain
exceptions, only applicable to "settlements and dispositions of land",17'1 and
does not apply to trusts involving personalty.

177

This limitation on the number of trustees was part of the English move-
ment in 1925 to simplify conveyancing; in England, co-ownership of land
can exist only by way of a trust for sale, and legal title, which can be held
only in joint tenancy, would be concentrated in a few hands if only four
trustees were permitted.178 As we have noted, the reform of land law that took
place in England has not necessarily been followed in other Commonwealth
jurisdictions, and this is particularly true of Ontario and common law Canada,
although in this respect there has been recent legislation of interest in Manitoba1

,179

171 Trustee Act, supra, note 3, ss. 3(1), 5, and 6(a).

172 See, for example, the English Trustee Act, 1925, supra, note 5, ss. 34 and 36(6); New
South Wales Trustee Act, 1925, supra, note 6, s. 6(5); Western Australia Trustees Act,
1962, supra, note 6, s.7(2)(a); Queensland Trusts Act 1973, Queensl. Stat. 1973, No.
24, s. 11; and Victoria Trustee Act 1958, supra, note 162, s. 40.

173 Trustee Act, 1925, supra, note 5, s. 34.

174 Ibid.,s. 36(1).

175 Ibid.,*. 36(6).

176 Ibid. , s. 34(3). Subsection 34(3) further provides for three exceptions to the limitation
imposed on the number of trustees, stating that the limitation does not apply:

(a) in the case of land vested in trustees for charitable, ecclesiastical, or public
purposes; or

(b) where the net proceeds of the sale of the land are held for like purposes; or

(c) to the trustees of a term of years absolute limited by a settlement on trusts for
raising money, or of a like term created under the statutory remedies relating
to annual sums charged on land.

See, also, Victoria Trustee Act 1958, supra, note 162, s. 40.

177 It should be noted, however, that in the case of the appointment of additional trustees
under s. 36(6) of the English Trustee Act, 1925, supra, note 5, the restriction imposed
upon the number of trustees applies equally to trusts of mixed personalty and realty.

178 See Law of Property Act, 1925, supra, note 100, ss. 34-36.

179 See The Perpetuities and Accumulations Act, Bill 46 (32d Leg. 2d Sess.), which, in
addition to repealing the rules against accumulations and perpetuities, provides, in
section 4, that successive legal interests will take effect as interests behind a trust. The
Act (S.M. 1982-83, c. 43) received Royal Assent on August 18, 1983 and was declared
in force October 1, 1983. The Act follows the recommendations of the Manitoba Law
Reform Commission in its Report on the Rules Against Accumulations and Perpetuities
(Report No. 49, February 12, 1982).

122

For example, in Queensland, the limitation with respect to the maximum
number of trustees is applicable to all trusts, and not just those composed of
realty. In that jurisdiction it is provided that trusts made or coming into
operation after the commencement of the Act shall not have more than four
trustees, and where more than four persons are named as trustees, the four
first named shall alone act as the trustees.180

It is interesting to note that the English Law Reform Committee, in its
recent Report on the Powers and Duties of Trustees, has recommended that,
"where the settlor makes no specific provision about the number of trustees,
they should be limited to four regardless of the nature of the trust property,
subject to the existing restrictions in the case of trusts for sale of land and
settled land and to the exceptions presently contained in section 34(3)(#) of
the Trustee Act 1925" . However, unlike the approach adopted in Queensland,
the English Law Reform Committee was of the view that it should be open
to the settlor to provide expressly for as many trustees as he wished subject
to the existing restrictions in the case of trusts for sale of land and settled
land.181

The Commission has considered this matter, and, with regard to the non-
judicial appointment of trustees, is of the view that, except with the consent
of the court, it would be desirable for several reasons to limit the number of
trustees who may be appointed. We are of the opinion that a trustee has a
distinct function to perform in the active management of a trust - that is, to
carry out efficient, objective administration. Accordingly, he should not be
perceived as representing particular interests. To permit an unlimited number
of trustees might be to encourage the appointment of persons who have no
interest in the day to day management of the trust, but whose sole function
would be to represent, for example, numerous beneficial interests with per-
ceived different concerns. In our view, such a situation misconstrues the
function of trusteeship. Moreover, in addition to participating in the active
administration of the trust, trustees are required to consent to all proposals
relating to the management of the trust and its property. An inordinate number
of trustees could make such a task difficult and render the administration of
the trust unnecessarily slow, complex, and expensive. I82 This reasoning seems
equally applicable whether trusts of realty or personalty are involved, and
whether the trustees are original, substitute, or additional.

The Commission is also of the view that the proposed limitation on the
number of trustees should be mandatory; that is, it should apply notwithstand-
ing the expression of a contrary intent in the instrument. We recognize,

180
181
182

Queensland Trusts Act 1973 , supra, note 172, s. 1 1 .

English Law Reform Committee Report, supra, note 144, at 62 and 3.

The Queensland Law Reform Commission, in its Report on the Law Relating to Trusts,
Trustees, Settled Land and Charities (No. 8, 1971), at 13, stated, as the reason for
recommending a limitation upon the number of trustees, that "in practice a multiplicity
of trustees is productive of considerable expense, delay and inconvenience, particularly
where conveyancing is involved and where re-vesting of trust property is necessitated
by successive deaths of trustees". See, also, the English Law Reform Committee Report,
supra, note 144, at 3, where the Committee, in recommending that the number of
trustees should be limited to four regardless of the nature of the trust property, stated
that "when the number of trustees exceeds four, costs, administrative inconvenience and
delays are increased".

123

however, that circumstances may vary greatly. For this reason, we are of the
opinion that any interested party should be able to apply to the court for
consent to appoint more than four trustees under the non-judicial appointment
power. Accordingly, we recommend that the revised Act should contain a
provision to the effect that, except with the consent of the court, and not-
withstanding an expression of a contrary intent in the trust instrument, no
trust shall have more than four trustees at any one time.183 We further rec-
ommend that, if more than four persons are originally named as trustees, the
first four named who are able and willing to act should alone be the trustees,
and the other persons named should not be trustees unless appointed on the
occurrence of a vacancy or with the consent of the court.184 Finally, as these
recommendations represent a substantial departure from present Ontario law,
we are of the view that, if they are accepted, they should only apply to trusts
that take effect after any revised Act containing these recommendations comes
into force, and we so recommend.185

It is apparent that section 6(a) of the Ontario Trustee Act is inconsistent
with the above recommendations, and, in relation to the non-judicial appoint-
ment of trustees, we recommend that the provision should not be carried over
to the revised Act.

With respect to the judicial appointment of new trustees, whether by way
of substitution or addition, we are of the view that the number of trustees so
appointed should be left to the discretion of the court, and we so recom-
mend.186 This recommendation is consistent with our previous recommenda-
tion relating to the court's power to consent to an increase beyond the proposed
statutory limit in the number of trustees appointed non-judicially. We would
also note that this recommendation incorporates the principle of section 6(a)
in relation to the judicial appointment of trustees and, therefore, renders this
provision unnecessary in the revised Act. Accordingly, as with non-judicial
appointments, but for these different reasons, we recommend that section
6(a) not be carried over to the revised Act.

(ii) Minimum Number of Trustees

We now turn to consider the issue of the minimum number of trustees
that should be permitted under the revised Trustee Act. Where judicial inter-
vention is not sought, this issue could arise in two situations: first, where a
trustee is non-judicially discharged and a substitute trustee appointed under
section 3(1) of the present Act; and secondly, where a trustee dies or proposes
to retire non-judicially under section 2(1) of the present Act or, pursuant to
our previous recommendation,187 is removed without the appointment of a
substitute trustee.

183 Draft Bill, ss. 18(1) and 17(2).

184 Ibid.,s. 18(2).

185 Ibid., s. 17(3).

186 Ibid., s. 56(1 )(/?). Section 56( 1 )(/?) provides that the court may appoint "one or more
trustees", and does not limit this judicial power.

187

See supra, this ch., sec. 1(c), and Draft Bill, s. 25(3).

124

At present, section 6(c) of the Ontario Trustee Act addresses the issue of
the minimum number of trustees where a trustee is to be non-judicially
discharged and a substitute trustee appointed. The section provides as follows:

6. On the appointment of a new trustee for the whole or any part of trust
property,

(c) it is not obligatory to appoint more than one new trustee where only
one trustee was originally appointed or to fill up the original number of
trustees where more than two trustees were originally appointed; but,
except where only one trustee was originally appointed, a trustee shall
not be discharged under section 3 from his trust unless there will be a
trust company or at least two individuals as trustees to perform the
trust;

The first portion of this subsection contains general provisions that are ap-
plicable to both judicial and non-judicial appointments. It authorizes the
appointment of only one substitute trustee, where there was only one trustee
originally appointed. The court or the appointor may appoint more, but it is
not necessary to do so. If, on the other hand, there were originally more than
two trustees, the court or the appointor need not appoint the number previ-
ously holding office. The second part of the subsection is more particular in
nature, and only applies where a trustee is to be discharged and a substitute
trustee appointed non-judicially under section 3 of the Act. In that case,
unless there was only one trustee originally appointed, no discharge may be
granted without there being a trust corporation or at least two individual
trustees to perform the trust.

We agree in general with the principles contained in section 6(c) so far
as they relate to the non-judicial discharge and appointment of substitute
trustees, and believe they should be retained in the revised Act.188

It should be noted that section 6(c) of the present Trustee Act does not
deal with the issue of the minimum number of trustees where a trustee dies,
proposes to retire non-judicially, or where it is proposed to remove a trustee
non-judicially, without the appointment of a substitute trustee. In previous
discussions, we have endorsed, in general, the principle that, subject to a
contrary intention in the trust instrument, there should always be not less than
two individual trustees or a trust company to perform the trust.189 We are of
the view that this principle should apply in all cases where two or more
trustees are originally appointed by a trust instrument; that is, we consider
that two individuals or a trust company should be the minimum number of
trustees permitted to administer the trust, unless a contrary intention is ex-
pressed in the trust instrument.190 If the number of individual trustees falls to

188 Draft Bill, s. 23.

189 Concerning the situation where a trustee retires non-judicially without being replaced,
see supra, this ch., sec. 1(a); where a trustee is non-judicially removed without the
appointment of a replacement, see supra, this ch., sec. 1(c); and where a trustee is non-
judicially discharged and a substitute trustee appointed, see supra, this ch., this sec.

190 See discussion supra, this ch.

125

one, for example, upon the death of a co-trustee, the one individual trustee
should be prohibited from acting alone, unless he receives the consent of the
court to continue as a sole trustee.

Accordingly, we recommend that the revised Act should provide that it
is not necessary for more than one trustee to be appointed by way of substi-
tution where only one trustee was originally appointed, but, except where
only one trustee was originally appointed, a non-corporate trustee shall not
act alone, and a trustee is not to be discharged unless there will be either a
trust company or two or more individuals to act as trustees.191 However, we
consider that it should be possible to apply to the court for consent to continue
to act as a sole trustee, and we so recommend.192

It will be noted that we have not incorporated in our draft section that
part of section 6(c) that provides that "it is not obligatory ... to fill up the
original number of trustees where more than two trustees were originally
appointed,\ We are of the view that this provision is not directly related to
the issue of the minimum number of trustees but, rather, may be readily
deduced from the application of the proposed provisions governing the per-
missible maximum and minimum number of trustees.

So far as concerns the judicial removal of trustees, we recommend that
no statutory restrictions should be imposed. Rather, the court in its discretion
should determine the permissible minimum number of trustees that may
remain in office, having regard to the best interests of the trust.

193

(h) Supplementary Provisions Applicable to Non-Judicial and
Judicial Appointment of Trustees

Sections 6 and 7 of the Ontario Trustee Act contain provisions that are
applicable to both the non-judicial and the judicial appointment of new trust-
ees under section 3(1) and section 5 of the Act, respectively. Sections 6(a)
and (c) have been commented upon previously in the context of other rec-
ommendations,194 and they need not concern us here. The remaining provi-
sions require consideration at this time.

First, sections 6(b) and (d) of the Ontario Trustee Act provide as follows:

6. On the appointment of a new trustee for the whole or any part of trust
property,

(b) a separate set of trustees may be appointed for any part of the trust

191

Draft Bill. s. 23. This section is subject to the general provision, contained in s. Kb) of
the Draft Bill, that it applies if and so far only as a contrary intention is not expressed
in the trust instrument.

192
193

Draft Bill, s. 57(1).

Ibid., s. 56(1). Section 56(1 )(a) places no restriction upon the number of trustees that
may be removed by the court.

194 See supra, this ch., sec. l(g)(i) and (ii).

property held on trusts distinet from those relating to any other part or
parts of the trust property, notwithstanding that no new trustees or
trustee are or is to be appointed for other parts of the trust property,
and any existing trustee may be appointed or remain one of such
separate set of trustees; or, if only one trustee was originally appointed,
then one separate trustee may be so appointed for the first-mentioned
part; and

(d) any assurance or thing requisite for vesting the trust property, or any
part thereof, in the person who is the trustee, or jointly in the persons
who are the trustees, shall be executed or done.

Although subsection {d) has not been discussed previously, the principle it
espouses finds its place in the effect that we propose should be afforded a
vesting declaration.

195

Subsection (b) of section 6 concerns the appointment of a separate set of
trustees for any part of the trust property held on trusts distinct from those
relating to any other part of the trust property. Although this subsection has
not been the subject of previous discussion, the principle it embraces was
considered in the context of the retirement of a trustee. We there stated that
the principle of separate trustees for distinct trust assets was a sound one and,
accordingly, recommended that a trustee should be permitted to retire from a
part of the trust, and remain as trustee of the other part or of other parts,
provided that the parts of the trust reflect separate property held on distinct
trust terms.196 The principle contained in section 6(b) now applies to the
appointment of a substitute trustee. We would retain the principle and, in the
revised Act, would apply it to the appointment of both substitute and addi-
tional trustees. We would, however, except with the consent of the court,
restrict the number of trustees appointed for each separate part of the trust to
our previously recommended limit of four.197 Accordingly, we recommend
that the revised Act should contain a provision to the effect that where it
would assist in the administration of the whole or any part of a trust or where
it would benefit beneficiaries of a trust, one or more separate trustees may be
appointed, whether any such person or persons be an original, substitute or
additional trustee or trustees, for any part of the trust property held on trusts
distinct from those relating to any other part, but a separate sole trustee should
be appointed in those circumstances only where a sole trustee was originally
appointed, and for each separately administered part the limitation upon the
number of trustees, earlier recommended, should apply.

198

The second provision that we wish to consider is section 7 of the Ontario
Trustee Act, which concerns the powers of new trustees, and provides as
follows:

195 See infra, this ch., sec. 3(a).

196 See supra, this ch., sec. 1(a).

197 See supra, this ch., sec. l(g)(i).

198 Draft Bill, s. 22.

127

7. Every new trustee so appointed, as well before as after all the trust property
beeomes by law or by assurance or otherwise vested in him, has the same powers,
authorities and discretions, and may in all respects act as if he had been originally
appointed a trustee by the instrument, if any, creating the trust.

The utility of this type of provision is obvious. In the English Trustee Act,
1925, this section appears twice, once for non-judicial appointments and a
second time for judicial appointments.199 We see no particular need for this
duplication, provided that it is clear that section 7 applies to both modes of
appointment. Accordingly, we recommend that the revised Act should contain
a provision to the effect that every substitute or additional trustee appointed
under the Act, both before and after the trust property becomes vested in
him, has the same powers, authorities, and discretions and may in all respects
act as if he had been originally appointed a trustee by the trust instrument.2

200

2. EVIDENCE OF CHANGE OF TRUSTEES

If, as we propose, use of the non-judicial appointment and discharge
power is to be encouraged, third parties must be afforded protection against
improperly appointed trustees. In the exercise of their powers, in particular
the power of investment, trustees have frequent dealings with third parties
involving, for instance, the purchase and sale of securities. A third party
participating in any such transaction will wish to know whether the persons
who purport to convey title, or to give a discharge for the receipt of purchase
money, have been properly appointed trustees. In the case of original trustees,
the trust instrument is available to a third party for this purpose. Further,
where trustees have been judicially appointed under section 5 of the Ontario
Trustee Act, the order of the court can be shown to a third party, and he is
entitled to rely upon the order absolutely.201 The Ontario Act, however,
provides no evidentiary protection to a third party dealing with substitute
trustees appointed under section 3(1), and the third party must satisfy himself
that each of the trustees was properly appointed. The absence of such a
protective provision seems to explain, in part, the apparently modest use that
is made in Ontario of the non-judicial appointment power. No matter how
efficient the procedure is for the replacement, removal, and addition of
trustees, this situation will, no doubt, continue unless a protective provision
is included in the revised Act.

Section 38 of the English Trustee Act, 1925 is a response to the problem,
and provides as follows:

199

200

201

Trustee Act, 1925, supra, note 5, ss. 36(7) and 43.

In the Draft Bill this recommendation appears in Part III. Appointment and Discharge
of Trustees by Act of the Parties, as s. 24. In the event of the court exercising its powers
to remove or appoint new trustees in Part VII of the Draft Bill, s. 24 is rendered applicable
by s. 56(2) of the Draft Bill.

Any order or judgment of the court will protect and indemnify any person acting thereon,
provided that the person is so relying in good faith: see the Judicature Act, R.S.O. 1980,
c. 223, s. 142. See, also, the Conveyancing and Law of Property Act, R.S.O. 19X0,
c. 90. s. 60.

128

38. — ( 1 ) A statement, contained in any instrument coming into operation after
the commencement of this Act by which a new trustee is appointed for any
purpose connected with land, to the effect that a trustee has remained out of the
United Kingdom for more than twelve months or refuses or is unfit to act, or is
incapable of acting, or that he is not entitled to a beneficial interest in the trust
property in possession, shall, in favour of a purchaser of a legal estate, be
conclusive evidence of the matter stated.

(2) In favour of such purchaser any appointment of a new trustee depending
on that statement, and any vesting declaration, express or implied, consequent
on the appointment, shall be valid.

The section makes a deliberate choice in favour of a purchaser, and passes to
the trust beneficiaries the risk that unauthorized persons are acting as trustees.
In favour of a purchaser, a statement of the occurrence of a circumstance
rendering exercisable the replacement power is conclusive evidence of the
matter stated, and any appointment depending on the statement is declared
valid by the section. If, for instance, a trustee has not been absent from the
United Kingdom for twelve months, or if his alleged refusal to act was merely
his unwillingness to agree with a course of action proposed by his co-trustees,
a purchaser may, nonetheless, accept at face value the written statement in
the instrument appointing the new trustee, and the trust beneficiaries cannot
trace the trust property into the purchaser's hands. This protection no doubt
contributes to the use of the non-judicial power as the usual method of
appointment of trustees in England.

After careful consideration, the Commission has concluded that, having
recommended the retention of a non-judicial appointment power, some pro-
tection must be provided to a purchaser of trust property if the non-judicial
power is to be effective. While section 38 of the English Trustee Act, 1925
has been in operation in England for over fifty years, and while a similar
provision has been adopted in a large number of Commonwealth jurisdic-
tions,202 the section, in the view of the Commission, does suffer from certain
shortcomings. Accordingly, we consider that a provision designed to protect
a purchaser against improperly appointed trustees should be made more
comprehensive and, therefore, more effective.

The first deficiency of section 38 of the English Trustee Act, 1925, in
our view, is that it applies only where a trustee is appointed for any purpose
connected with "land", and only in favour of a purchaser of a "legal estate".
The probable explanation for these restrictions, as we have remarked previ-
ously, is that the major objective of the English property legislation in 1925
was to remove all beneficial interests from the concern of a purchaser of the
legal estate and so simplify and reduce the cost of conveyancing. The policy
of the legislation, at least in this context, did not extend either to equitable
interests in land or to personalty. In the case of each of these two property
interests, we consider the section to be deficient for Ontario purposes today.

202 See, for example, the Manitoba Trustee Act, supra, note 6, s. 14; the New Zealand
Trustee Act 1956, supra, note 6, s. 44; the New South Wales Trustee Act, 1925, supra,
note 6, s. 13; and the Victoria Trustee Act 1958, supra, note 162, s. 43.

129

As to the first point, the Manitoba Trustee Act202 and the Trustee Act
(Northern Ireland), 1958204 make the section applicable to both legal and
equitable interests in land, and we agree with this approach. The object of
the section is to protect a bona fide purchaser and, since the revised Act is
not concerned with the policy of conveyancing simplification that was the
object of the 1925 English reformers, we have concluded that the section in
the revised Act should apply to both legal and equitable interests in property.

We also consider the non-application of section 38 to personalty to be
unsatisfactory.205 Today, by far the most familiar form of trust property in
Canada is personalty and, in particular, securities. It is, therefore, important
to establish whether the difficulties that section 38 of the English legislation
was designed to overcome also exist in relation to this kind of property.

By way of illustration, assume that A, B, and C are trustees and the
registered owners of shares of a corporation. Assume also that C is removed
as trustee for one of the reasons set out in section 3(1) of the Ontario Trustee
Act, and that D is appointed in his place. At present, A and B would endorse
the share certificates standing in the names of A, B, and C and present them,
together with a copy of the appointment instrument, to the transfer agent of
the corporation for registration in the names of A, B, and D.

For its part, the corporation is under a duty to register the transfer if a
security is presented to it and, inter alia, it is "endorsed by the appropriate
person" and "reasonable assurance is given that that endorsement is genuine
and effective".206 The Ontario Business Corporations Act, 1982 defines "ap-
propriate person", in the case of a trustee, to mean either the original sole
trustee or his successor or, where there is more than one original trustee, then
the trustees remaining after the discharge of a trustee.207 The corporation is
not obliged to proceed on the signatures of the endorsing trustees unless it
receives "reasonable assurance" that their endorsements are "genuine and
effective".208 "Reasonable assurance" is defined in the Act and includes "ap-
propriate evidence of appointment or incumbency" or "assurance appropriate
to the case equivalent as nearly as may be to those required by this section".209
In the case of a fiduciary, the expression "appropriate evidence of appointment
or incumbency" is further defined and involves the production and deposit of
proof of the transmission of office and vesting of trust property in the new

203 Manitoba Trustee Act, supra, note 6, s. 14.

204 Supra, note 30, s. 37.

205 It is interesting to note that the English Law of Property Act, 1925, supra, note 100,
converted all joint tenancies and tenancies in common of legal interests in land (freehold
or leasehold) into "statutory trusts" for the tenants, but, except in the case of the legal
tenancy in common of a chose in action where a common law rule intervened, the statute
did not extend the same provision to joint tenancies and tenancies in common of pure
personalty. See Tyler and Palmer (eds.), Crosslex Vaines' Personal Property (5th ed.,
1973), at 56-57.

206 Business Corporations Act, 1982. supra, note 110, s. 86(1).

207 Ibid.,s. 53(l)(fc)(ii).

208 Ibid.,%. 86(l)(fc).

209 Ibid.,s. 87(l)(fc)and(</).

130

trustees together with a sworn statement of the facts alleged.210 The requisite
degree of proof of appointment is in the discretion of the corporation and, in
essence, amounts to a reasonable assurance that the appropriate persons have
presented it with a transfer for registration. Once the corporation is satisfied,
the duty to register the transfer arises and, indeed, the corporation is subject
to liability for failure to register or undue delay in registration.2"

It should be noted that these provisions in the Act do not protect the
corporation if, after taking these precautions prior to registration, the infor-
mation proffered turns out to be incorrect; that is, if it becomes apparent that
a trustee was wrongfully removed, thereby negating the validity of the en-
dorsements on the share certificates. In our example, if the corporation reg-
istered the shares in the names of A, B, and D, who now purport to transfer
the shares to a purchaser, and if C has been wrongfully removed as trustee,
C may challenge his removal and the purported disposition of the shares. He
could then demand that the share register be rectified by placing A, B, and C
as the registered owners. C would appear to have a good case since, unless
the trust instrument otherwise provided, A and B, as a majority of trustees,
could not bind the minority trustee, C, or the trust estate in the disposition of
the shares to the purchaser.212 The corporation, in this situation, might argue
that the securities were "wrongfully taken" from C within the meaning of
section 90 of the Act and that, as a consequence, unless the corporation had
received notice of any adverse claim, C has lost his claim against the corpo-
ration for registering the transfer.211 However, the application of this provision
in this context is not clear, and, in the view of the Commission, the proposed
protective provision in the revised Act should extend to this common form
of trust property, in order to provide the conclusive assurance a corporation
seeks. Indeed, we consider that this provision should apply to personal prop-
erty of any description.

Another concern is that section 38 of the English legislation extends
protection to a "purchaser" only. There are, however, other persons who,
while not purchasers, must deal with trustees and the instruments by which
they are appointed and discharged. The Director of Titles and land registrars
under the Land Titles Act2U and corporations maintaining share registers are
obvious examples of persons who have to rely upon statements in instruments
appointing or discharging trustees. In the view of the Commission, persons
who have an obligation to register interests should be protected in the revised
Act in the same manner as a purchaser.

215

210 Ibid.,s. 87(3).

211 Ibid., s. 86(2).

212 See Luke v. South Kensington Hotel Co. (1879), 11 Ch.D. 121 (C.A.), at 125, and
Nuspel v. Lem Foo, [1949] O.W.N. 476 (H.C.J. ). See, also, Stuart v. Hamilton Jockex
Club (1910), 2 O.W.N. 673 (H.C.J. ).

213 Business Corporations Act, 1 982, supra, note 110.

214 R.S.O. 1980, c. 230, ss. 5 and 9.

"' The Queensland Law Reform Commission also recommended this position, which was
adopted by their trustee legislation: see Report on the Law Relating to Trusts, Trustees,
Settled Land and Charities, supra, note 182, draft s. 13(3). and Trusts Act 1973, supra,
note 172, s. 13(3).

131

A further deficiency is that section 38 does not cover all the circumstances
that justify the appointment of a substitute trustee under section 36(1): it
extends only to those circumstances whereby a trustee may be removed from
office, but does not apply to the circumstances of death or retirement of a
trustee. Moreover, even within the context of removal the section is not
comprehensive, as it does not include infancy, which is a ground for the
removal of a trustee under section 36( 1 ) of the English Act. The view appears
to have been taken that documentation to establish death, retirement, or
infancy can be readily obtained. While this may be true, a purchaser must
assure himself that the document proffered relates to the trustee who is being
replaced, and documentation concerning death, retirement, or infancy may
be in a form that is inadmissible in judicial proceedings concerning title.
Further, section 38 has no application to a statement appointing or discharging
a trustee based upon a circumstance contained in a trust instrument. In the
opinion of the Commission, the proposed section of the revised Act that deals
with the protection of a purchaser should be comprehensive in its coverage.

There also seems to be uncertainty about the scope of the protection
contained in section 38(2) of the English Act. It is clear that, if a statement
as to one of the circumstances authorizing the removal of a trustee is in fact
false, section 38(2) will nevertheless deem the appointment of a new trustee
"depending on that statement" to be valid in favour of a purchaser. In the
absence of authority, it is, however, possible to suggest that the protection
offered by subsection (2) may be even broader; that is, as long as the appoint-
ment of a new trustee depends upon a statement of circumstance contained
in the statute, not only will the aspect of the appointment related to the
circumstance be valid, but all other aspects of the appointment will be valid
in favour of a purchaser. Under the first interpretation, if a purchaser sees an
instrument of appointment of a new trustee, he may assume the validity of
the appointment only in so far as the circumstances authorizing the appoint-
ment are concerned, and he will be at risk if other aspects of the appointment
procedure were not properly exercised. The latter interpretation, however,
would allow a purchaser, on seeing an instrument of appointment that con-
tained a statement of circumstance authorizing the appointment, to rely upon
the validity of the appointment in all respects.

However this may be, in our opinion purchasers would be reluctant, in
all probability, to rely upon a non-judicial instrument of appointment or
discharge if only certain aspects of the instrument could be relied upon
conclusively while other aspects of the appointment procedure required veri-
fication by the purchaser. As a result, the utility of our proposed non-judicial
appointment and discharge power would be lessened considerably. Appoint-
ment and discharge by the court would still be sought so that trustees could
produce the court order to purchasers as conclusive evidence of their appoint-
ment. We have concluded, therefore, that the latter possible interpretation of
the protection offered by section 38(2) of the English Act is preferable. Such
an approach best achieves our objective of encouraging the use of the non-
judicial appointment and discharge power. Finally, in our view, this approach
should not be restricted to the appointment of a substitute trustee, but should
be of general application.

Accordingly, we recommend that the revised Act should provide that,
subject to our recommendation concerning the effect of actual notice, a deed

132

of appointment or a deed of discharge of a trustee, whether pursuant to the
Act or the trust instrument, should be conclusive evidence of the validity of
the appointment or discharge in favour of a purchaser of trust property. 2I(' It
should be noted that our recommendation, unlike section 38 of the English
Act, discussed previously, places no restriction on the type of trust property
included within the protection. Our proposed protection for purchasers applies
to legal and equitable interests in land217 and personal property of any descrip-
tion.218

In relation to the scope of the protection recommended above, a question
arises concerning the effect of notice to a purchaser of any impropriety in the
appointment or discharge of a trustee. Should such notice affect a transaction
between a purchaser and an improperly appointed trustee and, if so, what
type of notice should be sufficient? It could be contended that, as the intention
of such a protective provision is to favour the safety of commercial dealings
by protecting subsequent purchasers of trust property, even actual knowledge
by the purchaser ought to be irrelevant. On the other hand, the interests of
the trust beneficiaries would seem to demand that if a purchaser actually
knows that any improper act or omission has occurred in an appointment or
discharge, including the falsity of a statement contained in an appointment
instrument, no protection should be provided that purchaser against claims
of the beneficiaries. We have concluded, therefore, that actual notice should
prevent a purchaser from relying upon the validity of an instrument of ap-
pointment or discharge. We are not of the same view with respect to construc-
tive or implied notice, however, in view of the inherent problems attendant
upon proof of such knowledge.

We are also of the view that the issue of actual notice of impropriety
concerning the appointment and discharge of trustees should be examined in
relation to persons who purchase trust property subsequent to the original
purchaser. First, in order to protect subsequent innocent purchasers of the
property in later transactions, we are of the view that an innocent party who
purchases from a non-innocent purchaser should obtain good title to the
property; that is, an innocent purchaser, whether he be an original or subse-
quent purchaser of the trust property, should not be concerned with the status
of his predecessor in title. Secondly, we have concluded that, where an
innocent purchaser subsequently transfers the property to a purchaser with
actual notice of any impropriety, the latter should also take clear title; to
provide otherwise would be to render, in practice, the property of the innocent
purchaser inalienable. In other words, unless the title to the trust property is
transferred to, or has been held by, a purchaser without actual notice of an
improper act or omission in relation to the appointment or discharge of
trustees, the property is held subject to the terms of the trust. However, in
order to ensure that a trustee who has been improperly appointed cannot
subsequently take the trust property in a later transaction, we are of the
opinion that such a person should not be able to take valid title from a
purchaser without actual notice of any impropriety. Finally, we have decided,

216 Draft Bill, s. 27(1).

217 See supra, this sec., and Draft Bill, s.27(l).

218

Ibid.

133

on analogous reasoning, that protection should be afforded to a donee of
property which, though originally trust property, has passed through the hands
of a purchaser without actual notice of any impropriety.

Accordingly, we recommend that the revised Trustee Act should provide
that a purchaser of trust property who at the time of the purchase has actual
notice that an improper act or omission has occurred in the appointment or
discharge of a trustee is not entitled to rely upon the validity of the deed of
appointment or the deed of discharge unless title to the trust property has
been held by a purchaser without actual notice of the improper act or omis-
sion.219 However, a subsequent purchaser who purported to act as a trustee
in the original transfer of any trust property and who had actual notice of the
impropriety should not be able to take valid title from a purchaser without
actual notice of any impropriety.220 In addition, we recommend that a donee
of property that was once trust property should be able to take valid title if
the title to the property has been held by a purchaser without actual notice of
any impropriety.221

Finally, in view of the Commission's earlier conclusion that the proposed
protection for purchasers against improperly appointed trustees should apply
to persons who have an obligation to register interests, we recommend that
the revised Act should contain a provision to the effect that any official,
including the Director of Titles, a land registrar, and any other person regis-
tering or certifying instruments or titles, who makes an entry in a book or
other record in reliance upon an instrument of appointment or of discharge
of a trustee or upon any vesting declaration, express or implied,222 consequent
upon an appointment or discharge of a trustee, should be afforded protection
equivalent to the protection afforded a third party against improperly ap-
pointed trustees.223 As discussed previously, this protection would not apply
where the registering authority has actual notice that any improper act or
omission has occurred in the appointment or discharge.224 However, actual
notice should not be deemed to be obtained by the abovementioned persons
merely because the trust instrument or part thereof or a copy thereof is
attached to or otherwise accompanies the deed of appointment or the deed of
discharge, or because an express vesting declaration225 is contained in the
deed of appointment or discharge, and we so recommend.-

226

3. VESTING OF TRUST PROPERTY IN NEW TRUSTEES

While the mechanism for the non-judicial or judicial appointment or
discharge of a trustee may be efficient and while a purchaser may have

219 Ibid., s. 27(2).

220 Ibid.,s. 210)(b).

221 Ibid., s. 27(3)(a).

222 See infra, this ch., sec. 3.

223 Draft Bill, s. 27(4).

224 Ibid., s. 27(2).

225 See infra, this ch., sec. 3.

226 Draft Bill, s. 27(5).

134

obtained evidence of the proper appointment or discharge of a trustee, either
from production of the deed of appointment or discharge or the court order,
he must also be assured that the trustees have been vested with the trust
property. However proper their appointment, trustees cannot convey title to
any asset that is still outstanding in the names of their predecessors.

When a new trustee is appointed, either as the sole replacement for a
former trustee, or as a substitute or an additional trustee who is joining an
existing team of trustees who are continuing to act, it is obvious that the
trustees have changed. The sole replacement trustee will need to have title to
the trust property vested in his name; likewise, a new team of trustees,
whether composed entirely or in part of new appointees, must also have title
vested in the names of the new team. Similarly, if a trustee is discharged
without the appointment of a new trustee, title must be vested in the names
of the continuing trustees. A purchaser taking title from trustees must be able
to determine quickly and easily that title to the trust assets has been vested in
the trustees with whom he is dealing. We shall discuss first the situation
where a change in the composition of the trustees occurs non-judicially, and
the trust property is vested in the new trustees by means of either an express
or implied vesting declaration. Secondly, we shall consider the position where
trustees are appointed and discharged by the court, and the trust property is
vested in the new trustees by a vesting order.

(a) Non- Judicial Vesting Declarations

(i) Express Vesting Declarations

When the court appoints or discharges a trustee, an order vesting the
property in the new trustees or team of trustees will be made, and this provides
the assurance that a purchaser seeks.227 If, on the other hand, the appointment
or discharge of a trustee is effected non-judicially, a purchaser will wish a
similar assurance that the new trustees have been vested with the trust prop-
erty. Section 9 of the Ontario Trustee Act attempts to meet this problem, and
provides as follows:

9. — (1) Where an instrument, executed after the 1st day of July, 1886, by
which a new trustee is appointed to perform any trust, contains a declaration by
the appointor to the effect that any estate or interest in any land subject to the
trust, or in any personal estate so subject, shall vest in the person or persons
who, by virtue of such instrument, shall become and be the trustee or trustees
for performing the trust, that declaration shall, without any conveyance or as-
signment, operate to vest in him, or in them as joint tenants, and for the purposes
of the trust, that estate, interest or right.

(2) Where such an instrument, by which a retiring trustee is discharged under
this Act, contains such a declaration as is in this section mentioned by the retiring
and continuing trustees, and by the other person, if any, empowered to appoint
trustees, that declaration shall, without any conveyance or assignment, operate

227

Trustee Act, supra, note 3, ss. 10-13. See, also, infra, this ch., sec. 3(b),

135

to vest in the continuing trustees alone as joint tenants, and for the purposes of
the trust, the estate, interest or right to which the declaration relates.

(3) This section does not extend to land conveyed by way of mortgage for
securing money subject to the trust, or to any share, stock, annuity, or property
transferable only in books kept by a company or other body, or in manner
prescribed by or under an Act of the Parliament of Canada or of the Legislature.

(4) For the purpose of registration the person or persons making the declaration
shall be deemed the conveying party or parties, and the conveyance shall be
deemed to be made by him or them under a power conferred by this Act.

This section, adopted in Ontario in 1886,228 and modelled on section 34 of
the English Conveyancing and Law of Property Act, 1881,229 deals with
express vesting declarations. It provides that a declaration contained in an
instrument of appointment or an instrument of discharge without appointment
to the effect that the trust property, whether real or personal, vests in the new
trustee or team of trustees, shall, without conveyance or assignment, operate
to carry out the necessary vesting. Provisions based upon section 34 of the
English Conveyancing and Law of Property Act, 1881, which now appears
as section 40 of the English Trustee Act, 1925 2M) have been incorporated in
the legislation of other Commonwealth jurisdictions.231

The purpose of an express vesting declaration is to place the new trustees
in the same position they would have occupied had they received a convey-
ance, transfer, or assignment from the former trustees. In this way, difficulties
of conveyancing or other modes of transfer, and of omissions, are overcome.
We think that a provision of this kind serves a critical function, and that an
improved form of express vesting declaration based upon section 9( 1 ) of the
present Act should be contained in the revised Act. Accordingly, we recom-
mend that the revised Act should provide that a deed by which one or more
substitute or additional trustees are appointed, or by which a trustee is dis-
charged without another trustee being appointed, may contain an express
declaration that the trust property vests in the one or more trustees who shall
perform the trust as of the date of the instrument or such other date as is
stated in the instrument for that purpose. Our Draft Bill so provides.232

The present section 9 of the Ontario Trustee Act, however, does suffer
from a possible weakness. As drafted, it is open to the interpretation that
each trust asset, in order to be the subject of an express declaration, must be
listed seriatim. If this interpretation were to govern, the section would lose
its potential power to convey to the new trustees assets that might be over-
looked in the declaration. To guard against this eventuality, section 40(3) of

228 The Conveyancing and Law of Property Act, 1886, 49 Vict., c. 20, s. 17.

229 Supra, note 8.

230 Supra, note 5.

231 Manitoba Trustee Act, supra, note 6, s. 15; Trustee Act (Northern Ireland), 1958, supra,
note 30, s. 39; New Zealand Trustee Act 1956, supra, note 6, s. 56; Western Australia
Trustees Act, 1962, supra, note 6, s. 10; New South Wales Trustee Act, 1925. supra,
note 6, s. 9; and Victoria Trustee Act 1958, supra, note 162. s. 45.

232 Draft Bill, s. 28(1).

136

the English Trustee Act, 1925 provides that an express vesting declaration,
whether created before or after 1925, should be deemed to vest in the new
trustee or trustees "such estates, interests and rights as are capable of being
and ought to be vested in those persons", notwithstanding the lack of an
express reference in the instrument. We are of the opinion that a similar
provision should be contained in the revised Act and, accordingly, recom-
mend that, subject to certain qualifications dealt with below, an express
vesting declaration should take effect as to all trust property, notwithstanding
that any estate, interest, or right forming the whole or part of the trust property
is not expressly referred to in the instrument.233

(ii) Implied Vesting Declarations

It should be noted that section 9 of the Ontario Trustee Act applies only
where a trust instrument "contains" an express vesting declaration. It follows,
therefore, that if, through error or omission, a declaration does not appear in
the instrument, there is no statutory conveyance of trust assets to the new
trustees. Section 40 of the English Act makes provision for an implied vesting
declaration to guard against errors or omissions that might cause an express
declaration not to appear in the instrument. This section provides that, where
an instrument of appointment or retirement without replacement does not
contain a vesting declaration, it shall, subject to any express provision to the
contrary therein contained, operate as if it had contained such a declaration
extending to all the estates, interests, and rights with respect to which a
declaration could have been made. A similar provision has been introduced
into the Manitoba Trustee Act and a significant number of other Common-
wealth Trustee Acts.234

The Commission is of the view that such an enabling provision would be
useful and should be introduced in the revised Act. Accordingly, we recom-
mend that where a deed by which one or more substitute or additional trustees
are appointed, or by which a trustee is discharged without another trustee
being appointed, does not contain an express vesting declaration, a declara-
tion that the trust property vests in the one or more trustees who shall perform
the trust should be implied as of the date of the instrument.235 As with the
express vesting declaration, the implied vesting declaration should - again
subject to certain qualifications dealt with below - take effect as to all trust
property.236

(iii) Matters Common to Both Express and Implied Vesting
Declarations

We now turn to consider matters that are common to both express and
implied vesting declarations.

233 Ibid.,s. 29(1 )(a).

234 Supra, note 231.

235 Draft Bill, s. 28(2).

236 Ibid.,s. 29(1 )(a).

a. Effect of Vesting Declaration

A preliminary issue concerns the general effect of an express or implied
statutory vesting declaration. The purpose of a vesting declaration is to place
the new trustees in the same position as if they had received a conveyance,
transfer, or assignment from the former trustees. The various Acts that have
introduced the vesting declaration have assumed that the term is self-explan-
atory and have not attempted to specify how it is to operate. At present,
section 9 of the Ontario Trustee Act provides, without further elaboration,
that an express declaration "shall, without conveyance or assignment, operate
to vest" the estate, interest, or right in the new trustees. Section 49 of the
English Trustee Act, 1925, on the other hand, sets forth, in greater specificity,
the effect of the vesting concept with respect to judicial vesting orders, and
provides as follows:

49. A vesting order under any of the foregoing provisions shall in the case of
a vesting order consequential on the appointment of a trustee, have the same
effect -

(a) as if the persons who before the appointment were the trustees, if any,
had duly executed all proper conveyances of the land for such estate or
interest as the court directs; or

(b) if there is no such person, or no such person in full capacity, as if such
person had existed and been of full capacity and had duly executed all
proper conveyances of the land for such estate or interest as the court
directs;

and shall in every other case have the same effect as if the trustee or other person
or description or class of persons to whose rights or supposed rights the said
provisions respectively relate had been an ascertained and existing person of full
capacity, and had executed a conveyance or release to the effect intended by the
order.

We are of the view that, for greater clarity, it would be desirable to set
forth in the revised Act a provision, modelled on section 49 of the English
Act but expanded to cover all types of property, specifying the effect of an
express or implied vesting declaration. The section should provide that the
vesting declaration is a substitute for a properly executed or endorsed con-
veyance, transfer, or assignment that would otherwise have been appropriate
and required to transfer the former trustees' title to the new trustees. Further-
more, consistent with our previous recommendation that an instrument of
appointment or discharge of a trustee should be valid in favour of a pur-
chaser,237 we are of the opinion that any vesting declaration, whether ex-
pressed in the instrument, or, as recommended, otherwise implied therein,
consequent upon any such appointment or discharge should be valid and
conclusive evidence in favour of a purchaser, subject to actual notice to the
contrary, that the trust property has vested in the new trustees.

Accordingly, we recommend that the revised Act should contain a pro-
vision to the effect that, subject to certain qualifications discussed below, a

237

See supra, this ch., sec. 2.

138

vesting declaration, express or implied, should take effect as if the estate,
interest or right in the property had been actually conveyed or transferred by
deed or otherwise to the one or more persons in whom the trust property is
declared, expressly or impliedly, to be vested, or, in the case of a chose in
action, as if it had been actually assigned to the last-mentioned person or
persons. 2™ As this provision would incorporate the principle of section 6(d)
of the Trustee Act set out previously,239 section 6(d) need not be carried over
to the revised Act.

In order to protect third parties concerned with the proper vesting of trust
property in the trustees, we recommend that a vesting declaration, express or
implied, consequent upon any appointment or discharge of a trustee, should
be conclusive evidence of the validity of vesting of trust property in favour
of a purchaser of trust property;240 however, a purchaser of trust property who
at the time of the purchase has actual notice that an improper act or omission
has occurred in the vesting of the trust property should not be entitled to rely
upon the validity of the vesting declaration unless title to the trust property
has been held by a purchaser without actual notice of the improper act or
omission.241 In addition, we recommend that the proposals made previously
in the context of the appointment and discharge of trustees concerning the
protection that should be afforded to donees of trust property,242 persons who
have an obligation to register interests,243 and subsequent purchasers who
purported to act as trustees in the original transfer of trust property,244 should
apply with respect to the conclusive evidence of a vesting declaration, express
or implied.245

There are several specific matters that require further clarification in the
revised Act in relation to the operation of an express or implied vesting
declaration, and it is to these that we now turn.

b. The Scope of the Declaration

There would appear to be some ambiguity concerning the scope of the
term "vest" as this word appears both in section 9 of the Ontario Trustee Act
and in section 40 of the English Trustee Act, 1925. As previously stated, the
purpose of a vesting declaration seems to be to place new trustees in the
position they would have occupied had they received a conveyance from the
former trustees. It could be argued, however, that the statutes vest in the new
trustees not only the title to assets held by the former trustees, but also titles
outstanding in third parties to or in which the former trustees had a right or

238 Draft Bill, s. 29(\)(b). See, further, infra, this ch., sec. 3(a)(iii)c and d.

239 See supra, this ch., sec. 1(h).

240 Draft Bill, s. 29(2).

241 lbid.,s. 29(3).

242 See supra, note 221 and accompanying text.

243 See supra, notes 223-26 and accompanying text.

244 See supra, note 220 and accompanying text.

245 Draft Bill, s. 29(4).

139

interest. Indeed, the statutory language has been held in Ontario to take a
legal estate from a third party and place it in the new trustees, even where
the former trustees had only an equitable right to call for the legal estate.246

A good case may be made for conferring upon the courts power to gather
in such outstanding titles; a court can ensure that all the equities of the
situation, and in particular the position of a third party, are taken into account.
Nonetheless, as convenient as such a sweeping up may be for the new trustees
and any subsequent purchaser or mortgagee, we are concerned that the posi-
tion of a third party might be detrimentally affected if an automatic vesting
of all outstanding titles followed from a non-judicial appointment or discharge
of a trustee: for example, a third party might have a right of lien or charge
over the property in question. To take title in the property from such a third
party and vest it in the new trustees might unfairly prejudice the third party
by depriving him of his security. We have decided, therefore, that an express
or implied vesting declaration should vest in the new trustees only such rights,
titles, and interests as the former trustees might have conveyed, transferred,
or assigned. This would mean, for example, in the case of an outstanding
legal title, that the new trustees would be vested not with the legal title itself,
but with the equitable right that the former trustees had to call for the legal
estate. Accordingly, we recommend that the revised Act should make it clear
that a vesting declaration, express or implied, should convey, transfer, or
assign to the new trustees the same estate or interest in the property as held
by the former trustees.247

c. Assignment ofChoses in Action

The meaning of the word "vest" as it appears in section 9(1) of the
Ontario Trustee Act and section 40 of the English Trustee Act, 1925 is also
ambiguous with respect to both express and implied vesting declarations
relating to choses in action. We preface our comments by a short statement
on this area of the law.

Briefly stated, the assignment of a chose in action may be either legal or
equitable. The legal assignment of either a legal or equitable chose in action
is only permissible pursuant to statutory authority. In Ontario, section 53 of
the Conveyancing and Law of Property Act™ governs legal assignments and
provides, as a constituent element of the assignment, that written notice must
be given to the debtor; that is, if there is no notice there is no legal assignment,
and the assignment will be at most equitable. An equitable assignment is
valid without notice to the debtor and, as with legal assignments, both legal
and equitable choses may be assigned in this manner. However, the conse-
quences of failing to give notice in the case of an equitable assignment are
twofold: first, a later assignee of the chose will have priority if he is the first
to give notice; and secondly, the debtor may acquire further equities against

246 Re Hunter and Patterson (1892), 22 O.R. 571 (H.C.J.). See, also, Pettit, supra, note
80, at 254, n. 11.

247 See Draft Bill, s. 29( ])(&).

248

Supra, note 201

140

the assignor and have them attach to the chose in action, until he receives
notice of the assignment. In the case of a legal assignment, whether of a legal
or an equitable chose, the assignee may sue the debtor without joining the
assignor, and the same is true for the equitable assignee of an equitable chose.
However, an equitable assignee of a legal chose has to join the assignor, and
it must be remembered that a would-be legal assignment is at most equitable
until written notice has been given to the debtor and there has been compliance
with the other requirements of section 53 of the Conveyancing and Law of
Property Act.

It will be noted that section 9 of the Ontario Trustee Act applies to any
''personal estate". These words are defined in the Act to include choses in
action.249 Accordingly, an express declaration in a trust instrument pursuant
to the section would constitute an assignment of choses in action that are
included in the trust assets. Two questions arise, however: first, does this
mode of assignment, like an assignment under section 53 of the Conveyancing
and Law of Property Act, enable the successor trustees to sue the debtor in
their own names without joining the assignors, the former trustees; and,
secondly, does this mode of assignment dispense with the need to give notice
to the debtor?

Prior to the introduction into Ontario of the express vesting declaration,
assignments of choses in action between former and successor trustees had
to take the form of either a legal or equitable assignment,250 and whether the
assignor had to be joined and notice given to the debtor depended upon the
form of assignment and the nature of the chose. In Ontario, the effect on this
position of the introduction into the trustee legislation of an express vesting
declaration cannot be stated with any certainty. In relation to a differently
worded Trustee Act, and at a time when there was no legal, or statutory,
assignment in New South Wales, the Australian High Court decided that the
trustee assignees were enabled to sue without joining the assignor trustees.251
But that decision clearly says nothing about whether a vesting declaration
dispenses with the need to join the assignors where there is also a statutory
legal assignment procedure in existence.

It will be recalled that we have recommended that the revised Act should
contain provisions for an improved form of express vesting declaration, as
well as introduce into Ontario the concept of the implied vesting declaration.
As is apparent from the foregoing discussion, when new trustees are appointed
or discharged under the revised Act, two types of statutory assignment pro-
cedure would be available with respect to any chose in action subject to the

249 Trustee Act, supra, note 3, s. !(/).

250

In England, prior to the introduction of the express vesting declaration in 1881 , the only
statutory provision relevant to this issue was contained in Lord Cranworth's Act, supra,
note 7, s. 27, which merely required assignments to be carried out following private
appointment. This presumably referred to the assignment procedures applicable for all
assignments by any person. In Ontario, see, also, in this regard An Act to provide for
certain amendments of the Law, supra, note 9, s. 30, subsequently incorporated into An
Act respecting Trustees and Executors and the Administration of Estates, supra, note
44, s. 3.

251

Loxton v. Moir (1914), 18 C.L.R. 360, at 373.

141

trust: first, an assignment effected by the express or implied vesting declara-
tion of the revised Act; and secondly, an assignment pursuant to section 53
of the Conveyancing and Law of Property Act. Therefore, it is important to
determine whether an assignment pursuant to the provisions of the revised
Act relating to express or implied vesting declarations should have the same
effect as an assignment pursuant to the Conveyancing and Law of Property
Act.

It would set aside all doubts and avoid confusion if the revised Act were
to provide that the vesting declaration, whether express or implied, operates
as an assignment in writing under the hand of the assignor within the meaning
of section 53 of the Conveyancing and Law of Property Act.252 As a conse-
quence of such a provision, the successor trustees would be entitled to sue
the debtor in their own names without joining the assignors, the former
trustees. The incorporation of such a provision would necessitate, however,
the giving of notice to the debtor of the vesting declaration as prescribed by
section 53. We are of the view that this should be the case, as assignment
materially affects the debtor's rights in relation to the assignors, and imposes
upon him transferred debt obligations to the assignees, of whose existence he
may only become aware when he has paid the assignors. From an abundance
of caution, therefore, we are of the opinion that the notice requirement should
be expressly stated in the revised Act.

Accordingly, we recommend that a provision should be included in the
revised Act to the effect that where the estate, interest or right takes the form
of a chose in action, a vesting declaration, express or implied, should be
deemed an absolute assignment within the meaning of section 53 of the
Conveyancing and Law of Property Act, and until express notice in writing
is given by the newly vested persons to the debtor or other person obligated
under the chose in action, the vesting declaration should have effect only as
an assignment in equity from the formerly vested persons to the newly vested
persons.253

d. Exceptions to Vesting Declarations

By section 9(3) of the Ontario Trustee Act, two types of trust asset are
excluded from the operation of the express vesting declaration: first, land
conveyed by way of mortgage for securing money subject to the trust; and
secondly "any share, stock, annuity, or property transferable only in books
kept by a company or other body, or in manner prescribed by or under an
Act of the Parliament of Canada or of the Legislature". These two exceptions
were adopted from the English legislation that introduced the express vesting
declaration in 1881, 254 and their basis may be shortly stated. With respect to
mortgages, where land was conveyed by way of mortgage to trustees, Parlia-
ment wished to recognize the practice among conveyancers of not mentioning

252

253
254

Such a provision would also solve difficulties that could arise where a person nominated
in the instrument appoints and expressly or impliedly makes a vesting declaration,
whereby the choses in action, together with all trust assets, arc taken from the outgoing
trustees and vested in the new trustees. In these circumstances, who are the assignors?

Draft Bill, s. 29(6).

Conveyancing and Law of Property Act, IHH1 . supra, note 8. s. 34(3).

142

the trust in the deed of conveyance, so that subsequent purchasers of the
mortgage or of the land after a foreclosure or discharge of the mortgage, and
their successors, would have no reason to investigate the trust document in
order to verify the validity of the proffered title. Concerning stocks and shares,
English company legislation permitted title to pass to new owners by one
means only: namely, the recording of a change of ownership in the particular
company's register after completion of an appropriate transfer document, a
system not to be disturbed by the introduction of express vesting declarations.
In 1925, a further exception was introduced into English trust law concerning
leasehold land, an exception that was not carried over to the Ontario Act.255

For reasons that will be mentioned, we leave discussion of the mortgage
exception to the final section of this chapter. We turn at this point to discuss
exceptions that relate to property transferred in a manner prescribed by leg-
islation, including registration, and to leasehold land.

(1) Property Transferred in a Manner Prescribed by
Legislation, Including Registration

As stated, section 9(3) of the Ontario Trustee Act expressly excludes
from the statutory effect of an express vesting declaration "any share, stock,
annuity, or property transferable only in books kept by a company or other
body, or in manner prescribed by or under an Act of Parliament of Canada
or of the Legislature".

The original purpose of this exception was to prevent the vesting decla-
ration from interfering with any statutorily established system for the transfer
of title to property. When this exception was adopted in Ontario in 1886,256
the most notable trust property in this regard was corporate securities, the
title to which could only be transferred by registration in the company's
books.257 Unlike the present English companies scheme,258 the rule governing
the passage of title has been changed in both the Canada Business Corpora-
tions Act259 and the Ontario Business Corporations Act, 1982.2M Under these

256
257
258

259
260

Trustee Act, 1925, supra, note 5, s.40(4)(b). Prior to 1925, the English Parliament
excepted from the statutorily declared effect of the express vesting declaration any legal
estate or interest in copyhold or customary land for the reason that manorial records
were the basis of the title to these types of interest, and this system was not to be
disturbed. In 1925, as the major land law reforms abolished these interests, reference to
them was deleted from the trustee legislation.

The Conveyancing and Law of Property Act, 1886, supra, note 228, s. 17(3).

The Ontario Joint Stock Companies' Letters Patent Act, R.S.O. 1877, c. 150, s. 44.

Under the present English companies scheme, there are at least two separate transactions
required in a transfer of shares: first, a contract for the sale of the shares between the
transferor and transferee and pursuant thereto the delivery to the buyer of the document
of title and the share certificate; and secondly, the agreement between the transferee and
the company to register the buyer on the books of the company in order for the transferee
to become a member and shareholder and be recognized as such by the company. See,
further, Gower, Cronin, Easson, and Wedderburn (eds.), Gower's Principles of Modern
Company Law (4th ed., 1979), at 448-55.

S.C. 1974-75-76, c. 33, s. 56. See, also, s.57(2).

Supra, note 1 10, s. 69. See, also, s. 70( 1 )(/?). However, under the Ontario Corporations
Act, supra, note 1 10, s. 50, a transfer of shares is valid only after registration in the
books of the company.

143

Acts, registration in the books of the corporation is no longer required to
transfer title. It follows, therefore, that corporate securities are no longer
interests "transferable only in books kept by a company" within the meaning
of section 9(3) of the Trustee Act. However, the corporations Acts continue
to specify the method by which title to securities is to pass; namely, the
delivery of a duly endorsed share or bond certificate from the transferor to
the transferee.261 It would seem, therefore, that corporate securities are still
probably excepted from the effect of a vesting declaration under section 9(3)
of the Trustee Act as "property transferable ... in manner prescribed by"
legislation. The question that arises, therefore, is whether, in the revised Act,
corporate securities should continue to be exempt from the operation of a
vesting declaration. Indeed, this question applies equally to all property, the
title to which passes by a statutory scheme that does not entail registration.

We are concerned about the fact that, if the exception contained in section
9(3) were retained, the whole system of express and implied vesting decla-
rations might be reduced considerably in value, as by far the most significant
type of modern trust property is corporate securities. On the other hand,
would repeal of the exception damage the integrity of the statutory schemes
set up by the federal and provincial business corporations Acts? If the vesting
declaration were itself to transfer title, then delivery of a duly endorsed share
or bond certificate would not be the act that would cause the transfer as
between the transferor and the transferee. The issuing corporation or the
transfer agent would be required to register the transfer on the production of
the discharge or appointment instrument, whether or not the new body of
trustees had taken delivery of the share or bond certificate and produced it to
the registering authority.

We have concluded that the transfer of title to securities by a vesting
declaration would not undermine the present statutory scheme. Rather, the
appointment or discharge instrument, either containing an express vesting
declaration, or with a declaration implied therein, would merely be a substi-
tute for the usual endorsements and physical delivery of share certificates.
The registering authority would be able to rely upon the declaration, whether
express or implied, as conclusive evidence that the trust property has vested
in the new trustees. In these circumstances, the vesting declaration would not
replace the requirement for registration in the books of the corporation.
Registration would continue to be necessary for the transferee to claim the
fruits of title as a security holder; namely, the right to notice, voting rights,
the payment of dividends, and other benefits of shareholding and bond-
holding.262 Indeed, in any case where registration is not required to transfer
title, although it may be a supplemental requirement for the protection of title
or for the beneficial enjoyment of title, we are of the view that the vesting
declaration should effect the transfer of the property to the new trustees.
Accordingly, we recommend that the exception in section 9(3) of the Trustee
Act with respect to any property transferable in manner prescribed by legis-
lation, but where registration is not required to transfer title, should not be

261 Canada Business Corporations Act, supra, note 259, ss. 62, 66(1), and 67, and Busi-
ness Corporations Act, 1982, supra, note 1 10, ss. 73, 74, 78, and 79.

262 Business Corporations Act, 1982, supra, note 110, s. 67(1).

144

carried over to the revised Act. Rather, title to such property should be
transferred by the operation of our recommended express or implied vesting
declaration.263

It should be noted, in particular, that the effect of this recommendation
would be to substitute an express or implied vesting declaration for the
physical act of delivery, where delivery of some tangible thing, such as a
duly endorsed share certificate or bar of gold, would be required to pass legal
title. In this regard, two separate points should be considered. First, it is
obvious that the new trustees should be placed in possession of the tangible
thing where title has so vested; for example, certain registering authorities
may require production of the tangible thing for inspection, cancellation, or
endorsement. We are of the view that the revised Act should impose a duty
upon both the former and the new trustees to ensure that the new trustees are
put in possession of that thing, if it is within their power to do so. We are
also of the opinion that if for some reason possession cannot be vested in the
new trustees, the registering authority, when shown the instrument that con-
stitutes the vesting declaration, should proceed to register the new trustees'
interest on the same basis as if the tangible thing had been lost. Accordingly,
we recommend that it should be the duty of both the formerly vested persons
and the newly vested persons to ensure that the trust property is actually
delivered to the newly vested persons, but where inspection, cancellation, or
endorsement is required by any registering authority and the property cannot
be produced, the newly vested persons should be able to apply for registration
or recording in the same manner and subject to the same terms and conditions
as if the property had been lost.264

The second point concerns the position of a third party in lawful posses-
sion of the tangible thing at the time a vesting declaration is made. We are
of the view that no such third party should be prejudiced by the effect that
we have recommended be afforded a vesting declaration. While the require-
ments of any registering authority with respect to the tangible thing should
not be compromised, any rights of a third party in the tangible thing, or in
property represented or evidenced by it, must also be protected. Accordingly,
we recommend that where actual delivery of trust property has not taken
place but transfer has occurred by operation of a vesting declaration, express
or implied, no right of security or other personal interest of any person in that
property should be destroyed by reason only of the operation of a vesting
declaration.265

263 Draft Bill, s. 29(1). We acknowledge that an issue might be raised concerning the
constitutionality of our proposed vesting declaration to effect a transfer of shares of a
federally incorporated company to new trustees. However, in light of the Supreme Court
of Canada's decision in Canadian Indemnity Co. v. A.G.B.C. (1976), 73 D.L.R. (3d)
111, where the Court held that provincial legislation could validly apply to federal
companies as long as it does not impair their status and essential powers, we are of the
view that our recommended vesting provisions, in so far as they are in relation to trusts,
a matter within provincial jurisdiction, and in no way discriminate against or substantially
impair the operation of any federally incorporated company, would be upheld as valid.

Draft Bill, s. 29(7).

Draft Bill, s. 29(8).

264
265

145

Our discussion to this point has related only to property the title to which
is not transferable by registration. Where, by legislation, registration is es-
sential for the acquisition of title, as in the case of property held under the
Land Titles Act,266 the issue arises whether property of this kind should be
excluded entirely from the statutory effect of a vesting declaration, express
or implied. We are of the opinion that a vesting declaration could have a
useful, if limited, operation in these circumstances. A vesting declaration,
while not transferring legal title, could operate as a substitute for the usual
documentation necessary for registration purposes, and could, prior to reg-
istration, confer such rights upon the new trustees as they would have in
equity. Accordingly, we recommend that, where an estate, interest or right
in property can only be transferred by a registration or recording in a book or
similar record, the vesting declaration, express or implied, prior to the reg-
istration or recording, should confer such rights upon the person so vested as
he would have in equity, and it should be the duty of such person to apply
for the required registration or recording. 2(

267

(2) Leasehold Land and Covenants Against Assignment

As will be recalled, in 1925 a further exception to the operation of a
vesting declaration was introduced into the English Trustee Act, 1925. ,268 This
exception, contained in section 40(4)(b), provides that section 40, which is
the section that makes provision for express and implied vesting declarations,
does not extend to certain kinds of lease. The section provides as follows:

40. — (4) This section does not extend -

(b) to land held under a lease which contains any covenant, condition or
agreement against assignment or disposing of the land without licence
or consent, unless, prior to the execution of the deed containing ex-
pressly or impliedly the vesting declaration, the requisite licence or
consent has been obtained, or unless, by virtue of any statute or rule of
law, the vesting declaration, express or implied, would not operate as
a breach of covenant or give rise to a forfeiture;

It may be that the trust assets include a lease that contains a covenant not
to assign without consent. The purpose of section 40(4)(Z?) is to avoid a
vesting declaration operating as a statutory assignment of such a lease without
the required consent, thereby exposing the lease to the possibility of forfei-
ture. Section 40(4)(b) of the English Act has no counterpart in the Ontario
Trustee Act and, therefore, a lease containing a covenant against assignment
is not excepted from the operation of section 9( 1 ) of the Ontario Act.

266

267
268

Supra, note 214. This would also be the case for those corporations governed by the
Corporations Act, supra, note 1 10, where, by s. 50, a transfer of shares is valid only
after registration in the books of the company.

Draft Bill, s. 29(5).

Supra, note 5, s. 40(4)(/?).

146

While it seems clear that an assignment by operation of law does not
constitute a breach of a covenant against assignment,269 we do not think that
the application of this principle to an express - or, indeed, an implied -
vesting declaration under the revised Act can be predicted with complete
certainty. In the view of the Commission, this issue should be addressed
expressly in the revised Act. There would appear to be two alternative ap-
proaches: first, as with the English Act, the revised Act could make an
exception for leases that contain a covenant against assignment; or secondly,
the revised Act could provide that a vesting declaration, express or implied,
should extend to such leases, but that the vesting in the new trustees should
not constitute a breach of covenant.

Under the law of Ontario, the right of a landlord to control an assignment
of a lease depends on whether the premises are residential or non-residential.
In the case of residential premises, there is a statutory right to assign under
the Landlord and Tenant Act, and, although a tenancy agreement may provide
that the right to assign is subject to the consent of the landlord, such consent
may not be arbitrarily or unreasonably withheld.270 Where the premises are
non-residential, a covenant against assignment without consent is deemed,
unless the lease contains an express provision to the contrary, to be subject
to a proviso that such consent is not to be unreasonably withheld.271

In favour of the first alternative, it can be argued that the rights of a
landlord should not be abrogated by an automatic assignment, which would
occur if the leased premises were subject to a vesting declaration, express or
implied. However, as a practical matter, it is not easy to see how an assign-
ment resulting from a vesting declaration would be prejudicial to the interests
of a landlord: such an assignment would probably not cause a change in the
actual occupation of the leased premises, but rather in the management of the
premises by a new team of trustees, a consequence that would not be as vital
a concern to a landlord as an actual change of tenancy resulting from an
ordinary assignment of a lease to a new tenant. It is true, however, that,
unless there exists privity of contract between the landlord and the former
trustees, the latter will not be liable for breaches that occur after the assign-
ment. In turn, the new trustees would be entitled to be indemnified out of the
trust fund for successful claims brought against them if they have acted
properly.

After careful consideration, the Commission has concluded that leasehold
property should not be excepted from the operation of a vesting declaration
under the revised Act. However, in order to avoid the possibility that an
assignment might constitute a breach of covenant, the revised Act should
provide that no vesting declaration should operate as a breach of covenant

269 Doe d. Goodbehere v. Bevan{\%\5), 3 M. & S. 353, 105 E.R. 644.

270 Landlord and Tenant Act, R.S.O. 1980, c. 232, s. 91. Although not as yet proclaimed,
s. 16 of the Residential Tenancies Act, R.S.O. 1980, c. 452, is to the same effect.

271 Landlord and Tenant Act, supra, note 270, s. 23.

147

not to assign; nor should such an assignment cause a forfeiture of a lease.272
Accordingly, we recommend that, where leasehold property is subject to a
trust, the vesting of the property in one or more substitute or additional
trustees pursuant to a vesting declaration, express or implied, should not
constitute a breach of any covenant or condition against assignment, sub-
letting, or parting with possession of the property, whether absolute or with
consent, made by one or more former trustees and, notwithstanding any term
in the lease to the contrary, should not give rise to any forfeiture, right of re-
entry, or other claim for breach of such covenant or condition.273

(b) Judicial Vesting Orders

In the previous sections of this chapter, we have discussed and recom-
mended procedures for the retirement, removal, replacement, and appoint-
ment of trustees, either by non-judicial means or, where it appears to be in
the best interest of the trust, by the court. We have noted that, where trustees
are appointed or discharged non-judicially, third parties who deal with the
new trustees must be assured that the appointment or discharge of the trustee
or trustees was proper and that the present trustees have been vested with the
trust property. Accordingly, we have made recommendations concerning the
evidence required to verify the proper appointment or discharge of a trustee
and the procedures for the vesting of trust property in the new trustees by
means of either an express or implied vesting declaration.

Where trustees are appointed and discharged judicially it is similarly vital
that third parties who deal with the new composition of trustees are assured
of the proper appointment and discharge of the trustees and that the title to
the trust assets is vested in the present trustees, so that the assets may be
conveyed from the trustees to third parties. With respect to evidence of the
proper appointment and discharge of trustees, the order of the court that
removes and/or appoints the new trustees will be conclusive evidence that the
trustees with whom a third party deals are properly appointed. As to the title
to the trust assets, the court must also possess the means to vest the trust
property in the new trustee or the new group of trustees. This is the function
of the jurisdiction of the court to make vesting orders,274 which we now turn
to consider.

By order, the court, having appointed a new trustee, or removed or
accepted the retirement of a trustee without making further appointment,
vests the trust property in the new trustee or trustees. There may also be
occasions where the court is asked to vest the trust property in a person who
has not been appointed by the court, because, under an express or statutory

272

273
274

This was also the recommendation of the Queensland Law Reform Commission in its
Report on the Law Relating to Trusts, Trustees, Settled Land and Charities, supra, note
182, draft s. 15(4)(b). Such a provision is contained in the Queensland Trusts Act 1973,
supra, note 172, s. 15(6).

Draft Bill, s. 29(9).

For a full account of vesting orders, see Lewin on Trusts, supra, note 18, ch. 27;
Underhili s Law relating to Trusts and Trustees, supra, note 38, at 638-48; and Waters,
supra, note 94, at 761 and Appendix C.

148

power to appoint or discharge trustees, doubt may have existed whether title
was transferred to the new trustee or trustees.

The history of the judicial vesting order is, of course, older than that of
the non-judicial vesting declaration. Under its inherent jurisdiction, the Court
of Chancery had the power to vest title in trustees, and in the nineteenth
century this authority was made statutory before Parliament moved on to the
next step, which was to enable the parties to appoint and discharge trustees
and vest trust property by their own act without the need to invoke the aid of
the court.

Vesting orders are currently provided for in sections 10 to 16 of the
Ontario Trustee Act. They have been in the Act for many years, amended
only in small particulars from time to time, and they bear the familiar marks
of their nineteenth century origin in English trustee legislation.275 They not
only deal with the vesting of realty and personalty in new trustees or new
bodies of trustees, but they also enable the court to make vesting orders where
for any reason one or more trustees cannot act, or where a trustee is refusing
to act in accordance with his obligations. In addition, they empower the court
to vest land in third parties where the would-be transferors cannot transfer
the land because minors or unborn persons have interests in the land. The
court is enabled to vest land or otherwise deal with land on behalf of minors
and charitable bodies. In other words, the court has vesting authority to
complement its powers to appoint trustees, pursuant to both the inherent
jurisdiction and the Trustee Acr,276 and also to come to the parties' rescue
where non-judicial powers of conveyance and vesting fail.

We have asked ourselves whether these sections of the Trustee Act should
now be revised. Again, it is not our purpose to change anything that is working
effectively, even if we might ourselves have chosen other language to express
the same intent. The issue concerning vesting orders is whether the statutory
jurisdiction is comprehensive of all those situations where the courts could
be called upon to facilitate the sound administration of a trust, and whether,
at present, vesting orders protect adequately the interests of third parties who
acquire title from parties who themselves acquired title to the property by
way of a vesting order.

(i) Present Law

The general power of the Supreme Court of Ontario to make vesting
orders is to be found in the Judicature Act.211 Section 79 of that Act enables

>75

276

277

The origin of sections 10 to 16 of the present Ontario Trustee Act lies in The Trustee
Act, 1850, supra, note 5, and The Trustee Act, 1852, supra, note 5. They were developed
through later English Trustee Acts, and, when enacted as part of the Trustee Act, 1893,
supra, note 41 , they were introduced in Ontario in The Trustee Relief Act, R.S.O. 1897,
c. 336, ss. 5 et seq.

Trustee Act, supra, note 3, s. 5, provides for the appointment of trustees by the court.
See supra, this ch., sec. 1(0. for a discussion, of judicial replacement, removal, and
appointment of trustees.

Supra, note 201. See, also, the Ontario Courts of Justice Act, 1983, Bill 100 (32d Leg.
3d Sess.), s. 1 12, which would take the place of s. 79 of the Judicature Act.

149

the Court to vest real or personal property in any person, thus effecting a
transfer of the title from another person in whom it has previously been
vested. Section 79 of the Judicature Act provides as follows:

79. Where the court has authority to direct the sale of any real or personal
property or to order the execution of a deed, conveyance, transfer or assignment
of any real or personal property, the court may by order vest the property in such
person and in such manner and for such estates as would be done by any such
deed, conveyance, assignment or transfer if executed; and the order has the same
effect as if the legal or other estate or interest in the property had been actually
conveyed by deed or otherwise, for the same estate or interest, to the person in
whom the property is so ordered to be vested or, in the case of a chose in action,
as if it had been actually assigned to the last-mentioned person.

The section confers the power to vest property in two cases: first, where the
Court has authority to direct a sale of property; and secondly, where the Court
is authorized to order the execution of a deed or other appropriate mode of
transfer of real or personal property. The section then provides for the effect
of such a vesting order, namely, that it places the property as fully in the
transferee's hands as if there had been a conveyance or transfer in the usual
manner.

There are also two sections in the Trustee Act that give power to make
vesting orders, and these provisions provide for circumstances outside the
scope of section 79 of the Judicature Act. Sections 10 and 13 of the Trustee
Act provide as follows:

10. — (1) In any of the following cases:

(a) where the Supreme Court appoints or has appointed a new trustee; or

(b) where a trustee entitled to or possessed of any land, or entitled to a
contingent right therein, either solely or jointly with any other person
is a minor, or is out of Ontario, or cannot be found; or

(d) where it is uncertain whether the last trustee known to have been entitled
to or possessed of any land is living or dead; or

(e) where there is no heir or personal representative of a trustee who was
entitled to or possessed of land and has died intestate as to that land,
or where it is uncertain who is the heir or personal representative or
devisee of a trustee who was entitled to or possessed of land and is
dead; or

if) where a trustee jointly or solely entitled to or possessed of any land, or
entitled to a contingent right therein, has been required by or on behalf
of a person entitled to require a conveyance of the land or a release of
the right, to convey the land or to release the right, and has wilfully
refused or neglected to convey the land or release the right for fourteen
days after the date of the requirement,

the Supreme Court may make an order, vesting the land in any such person in
any such manner, and for any such estate, as the court may direct, or releasing,
or disposing of the contingent right to such person as the court may direct.

(2) Where the order is consequential on the appointment of a new trustee the
land shall be vested for such estate as the court may direct in the persons who,
on the appointment, are the trustees.

(3) Where the order relates to a trustee entitled jointly with another person,
and such trustee is out of Ontario or cannot be found, the land or right shall be
vested in such other person, either alone or with some other person.

13. — (1) In any of the following cases:

(a) where the Supreme Court appoints, or has appointed, a new trustee; or

(b) where a trustee entitled alone, or jointly with another person, to stock
or to a chose in action,

(i) is a minor, or

(ii) is out of Ontario, or

(iii) cannot be found, or

(iv) neglects or refuses to transfer stock, or receive the dividends or
income thereof, or to sue for or recover a chose in action, according
to the direction of the person absolutely entitled thereto, for four-
teen days next after a request in writing has been made to him by
the person so entitled, or

(v) neglects or refuses to transfer stock, or receive the dividends or
income thereof, or to sue for or recover a chose in action for
fourteen days next after an order of the Supreme Court for that
purpose has been served on him; or

(c) where it is uncertain whether a trustee entitled, alone or jointly with
another person, to stock or to a chose in action is alive or dead,

the Supreme Court may make an order vesting the right to transfer, or call for a
transfer of stock, or to receive the dividends or income thereof, or to sue for or
recover a chose in action, in any such person as the court may appoint.

(2) Where the order is consequential on the appointment by the court of a new
trustee, the right shall be vested in the persons who, on the appointment, are the
trustees.

(3) Where the person whose right is dealt with by the order was entitled jointly
with another person, the right shall be vested in that last-mentioned person either
alone, or jointly with any other person whom the court may appoint.

(4) Where a vesting order may be made under this section the court may, if it
is more convenient, appoint some proper person to make, or join in making, the
transfer.

(5) The person in whom the right to transfer or call for the transfer of any
stock is vested by an order of the court under this Act may transfer the stock to

151

himself, or any other person, according to the order, and all incorporated banks
and all companies shall obey every order made under this section.

(6) After notice in writing of an order under this section, it is not lawful for
any incorporated bank or any company to transfer any stock to which the order
relates, or to pay any dividends thereon except in accordance with the order.

(7) The Supreme Court may make declarations and give directions concerning
the manner in which the right to any stock or chose in action, vested under this
Act, is to be exercised.

(8) The provisions of this Act as to vesting orders apply to shares in ships
registered under the Acts relating to merchant shipping as if they were stock.

These sections of the Trustee Act particularize circumstances arising in
the course of the administration of a trust where the Supreme Court of Ontario
can usefully assist in the discharge of that administration. Both sections are
concerned with three kinds of situation: first, where there is a change in the
composition of the trustees; secondly, where circumstances exist that disable
a trustee from acting or acting effectively; and thirdly, where a trustee is
refusing to deal with the trust property as his duties require. Section 10
authorizes the court to make a vesting order where the trust property in
question is land, and section 1 3 authorizes such orders where the trust property
is stock, the right to receive dividends, or choses in action. The two sections
are not otherwise identical, however, although one might expect this to be
so. For instance, under section 10 a vesting order may be made where it is
uncertain who is the survivor of two or more trustees,278 while under section
13 there is no such jurisdiction. Again, under section 10 an order can be
made where there is no personal representative of a sole trustee or it is
uncertain who such person is,279 but under section 13 the Court is given no
such authority.

We now turn to consider three aspects of the power of the Court to make
vesting orders pursuant to these statutory provisions: first, the types of trust
property that should be comprehended by a statutory authority to make vesting
orders; secondly, the circumstances in which vesting orders should be made;
and thirdly, the persons in favour of whom vesting orders should be made.

(ii) Types of Trust Property Comprehended by Vesting Orders

The jurisdiction to make vesting orders concerning land, and also con-
cerning stock and choses in action, is contained in separate sections in the
Trustee Act, 1925, 28n in England. Although we can understand that, histori-
cally, these sections came into existence in England at different times, and
that each in its time was drafted to take account of the particular property
with which there was then concern, we can see no reason for the non-
consolidation of these sections today. Accordingly, we are of the view that

278 Trustee Act, supra, note 3, s. 10(1 )(r).

279 Ibid.,s. 10(l)(e)

280

Supra, note 5, s. 44 (land) and s. 51 (stock and choses in action).

152

the amalgamation of sections 10 and 13 of the Ontario Trustee Act would be
logical.

We have noted that four of the Australian states have amalgamated the
sections in their current trustee legislation, and have made the new section
applicable to any property.281 Manitoba282 and Prince Edward Island283 have
also brought the sections together, but the trustee legislation of these prov-
inces refers expressly to land, and to stock and choses in action, instead of
to all property.

While there may be few trusts for which land, stock and choses in action
is not an adequate description of the trust property, the revised Trustee Act
should not be found inadequate if the trust property includes such items as
jewellery, paintings, gold and silverware, musical instruments, or antique
furniture. We therefore recommend that sections 10 and 13 of the present
Ontario Trustee Act should be amalgamated, and that the new section should
empower the court to make vesting orders in relation to any kind of trust
property or interest in trust property.284

(Hi) Circumstances in Which Vesting Orders May Be Made

We are also of the view, that, as in the Australian states we mentioned
previously,283 the revised Trustee Act should empower the court to make
vesting orders in similar circumstances whatever the nature of the trust prop-
erty. Not only are sections 10 and 13 of the present Ontario Trustee Act not
identical as to the circumstances in which vesting orders may be made, but
there are some obvious lacunae. The 1925 Act in England, and the subsequent
Australian legislation, provide for these gaps arising from the nineteenth
century language contained in Ontario's Trustee Act.

Generally speaking, vesting orders are required in three situations. First,
where a change in the composition of the trustees has occurred, the trust
property must be vested in the new trustee or trustees. Secondly, where there
is uncertainty concerning the existence or identity of a trustee, or where a
trustee is incapable of acting, or refuses to act, the property must be vested
in the capable trustees or other persons. Thirdly, where a trustee is unable to
act, but only for a temporary period of time, the property must be vested,
temporarily, in the capable trustees or other persons. We turn now to discuss
these three situations.

As to the first situation, sections 10(l)(a) and 13(l)(a) of the Trustee Act
empower the Court to make a vesting order only where it has appointed a

281 New South Wales Trustee Act, 1925, supra, note 6, s. 71; Victoria Trustee Act 1958,
supra, note 162, s. 51 ; Queensland Trusts Act J 973, supra, note 172, s. 82; and Western
Australia Trustees Act, 1962, supra, note 6, s. 78.

282 The Trustee Act, supra, note 6, s. 16.

283 Trustee Act, R.S.P.E.I. 1974, c. T-9, s. 4.

284 Draft Bill, s. 58(1).

285 Supra, note 281.

153

new trustee. However, a change in the composition of the trustees may occur
not only where a trustee is appointed by the court, but also where an appoint-
ment is made under any express or statutory power.286 We have recommended
previously that vesting declarations should be implied in these circumstances
if the declaration is not express,287 and we are of the view that the court
should be equipped to deal with any anomalous situations for which our
recommendations concerning vesting declarations are found not to provide.
Sections 10 and 13 of the present Act also fail to take into account the occasion
where a trustee has retired or has been removed from the trust without a new
trustee being appointed.288 In our opinion, the revised Act should provide the
court with authority to make vesting orders in these circumstances.

With respect to the second situation, that is, where there is uncertainty
concerning the existence or identity of a trustee, or where the trustees are
incapable of acting, or refuse to act, sections 10(l)(b) and 13(1)(/?) of the
present Trustee Act provide for judicial vesting orders where a trustee is a
minor, or is out of Ontario, or cannot be found. Section 10(1 )(c) also covers
the situation where it is uncertain who is the survivor of two or more trustees
jointly entitled to or possessed of any land, a provision not duplicated in
section 13, or whether the last trustee known to have been entitled to or
possessed of land is living or dead, which appears in section 13(l)(c) as well.
The court is empowered under section 10( 1 ){e) to make a vesting order where
there is no heir or personal representative or devisee of a deceased trustee, or
it is uncertain who that person is, a power that is not found in section 13.
Finally, the sections contemplate instances where a trustee is refusing to
convey land289 or transfer stock, to receive dividends or income, or to sue for
or recover a chose in action fourteen days after a request or demand has been
made of him by an entitled person or the court.2-

290

Two approaches to reform are available to deal with the above-noted,
and any other, circumstances in which vesting orders may be required. First,
we could adopt a comprehensive list of the factual situations that may occur
and that call for vesting. This was the approach adopted in 1962 and 1973
respectively by the Western Australia Trustees Act, 1962 and the Queensland
Trusts Act J973.291 Alternatively, we could remove the existing enumerations,
and replace them with a provision conferring a general jurisdiction upon the

286

There is. at present, no jurisdiction in the court in these circumstances: see /// re Vicat
(1886), 33 Ch. D. 103 (C.A.), and In re Dewhirst's Trusts (1886). 33 Ch. D. 416
(C. A.), concerning earlier similar legislative language in England. The matter is referred
to in Lewin on Trusts, supra, note 18, at 437. /*. 4.

287
288

See supra, this ch.. sec. 3(a)(ii).

Section 37 of the Ontario Trustee Act, supra, note 3, provides for the vesting of the
deceased person's estate in the surviving personal representatives when one of their
number is removed by the court, but the section is silent as to vesting when the court
does replace, as well as remove, a personal representative. Although a personal repre-
sentative is included within the statutory meaning of "trustee", the competence of the
court to make a vesting order in these circumstances should be put beyond doubt.

Trustee Act. supra, note 3. s. I()( 1 )(/).

290 Ibid., s. 13(1 )(/>)( iv) and (v).

291 Supra, note 281.

28M

154

court to make vesting orders with respect to any trust property in favour of
such persons and on such terms as the court thinks fit with a view to the more
efficient administration of the trust in question.

It may be argued that the court should be able to discover from the revised
Trustee Act precisely those circumstances in which the legislature intends that
vesting orders should be available in lieu of the normal mode of transfer by
means of the express or implied vesting declaration. In this way, vesting
orders would be regarded as an exceptional mode of transfer. However, a
legislative approach along these lines inevitably involves a listing of the
circumstances in which vesting orders may be made, and in the Western
Australia Trustees Act, 1962, for instance, no less than thirteen situations are
listed. Nor is this by any means an exceptional Act. It reflects the general
pattern of Australian vesting order sections that have been revised since 1924.

For our part, we prefer the second approach, namely, a general judicial
authority to make vesting orders.292 Since the object of this judicial jurisdiction
is to enable the court to further the proper administration of trusts where the
trustees or the beneficiaries cannot help themselves, we are not persuaded
that the revised Act need list the circumstances in which the court may provide
that assistance. As we have said, we consider that the powers of the court to
appoint or remove trustees should be resorted to only where the non-judicial
powers of appointment, removal, or retirement prove inadequate.293 In the
same way, vesting orders should be available where non-judicial conveyance
or transfer by the parties is not possible, and the provisions of the revised
Trustee Act concerning express and implied vesting declarations prove inade-
quate. We would therefore prefer to leave the choice of occasions for the
making of vesting orders to the discretion and judgment of the courts. Ac-
cordingly, we recommend that, rather than provide a specific list of circum-
stances in which the court is empowered to make vesting orders, the revised
Trustee Act should contain a provision to the effect that, where it appears to
the court to be in the best interests of the trust, the court may vest the trust
property or an interest therein in one or more persons in such manner, for
such estate or interest and on such terms as the court orders.294

While our recommendation concerning vesting orders would confer a
broad discretionary power upon the court, we wish to discuss one aspect of
the present use of vesting orders that, in our view, should be discontinued.

292

293
294

A general jurisdiction of the type we have in mind, namely, "where property is vested
in a trustee and it appears to the Court to be expedient to make a vesting order1' appears
as the fourteenth entry, as s. 78(h), in the Western Australia Trustees Act, 1962, supra,
note 6. This subsection is an amalgamation of s. 44(vii) and s. 51(l)(v) of the English
Trustee Act, 1925, supra, note 5.

See supra, this ch., sec. 1(f).

Draft Bill, s. 58(1). Another circumstance that we have not dealt with expressly, but
where the court may be required to make a vesting order, is where trust property has
been forfeited to the Crown either because the trustee has died intestate and with no next
of kin, or because, with trust property undisposed of, a corporate trustee is in liquidation
or is dissolved. Although it appears that this situation will rarely arise, it should be noted
that our Draft Bill provides in s. 89 that the Crown should be bound by the revised Act,
which would permit the court to exercise its powers to make vesting orders against the
Crown if necessary.

155

In particular, those provisions of sections 10 and 13 that provide for vesting
orders where a trustee is incapacitated, unascertained, or refuses to act appear
to give the court the power to make a vesting order that would divest a trustee
of trust property or an interest therein without removing him from office.
Under the equivalent provision in section 44 of the English Trustee Act, 1925,
it has been held that exactly this position can occur.295 The Western Australia
Trustees Act, 1962 lists such trustee neglect or refusal as one of the enumer-
ated thirteen situations in which the court may make a vesting order.296 As
we noted earlier, these statutory provisions of Commonwealth Trustee Acts
have a long history, dating from the English Trustee Act, 1850 and The
Trustee Act, 1852.291 Although they have mostly been employed to vest
property in new trustees,298 occasionally they have been used to give benefi-
ciaries title where trustees have delayed in winding up a trust.299

As a general proposition, and subject to our later recommendations con-
cerning the situation where a trustee is temporarily unavailable and it is not
desired to remove him, we do not consider that the revised Act should
encourage the courts to solve the problem of non-existent, unidentifiable,
absent, incapable, or refusing trustees by vesting the trust property in one
trustee, who can then convey it, while another apparently continues to act as
trustee. Judicial vesting orders, like non-judicial vesting declarations, should
go hand in hand with the appointment or recomposition of the body of
trustees. If persons can be left holding the office of trustee, but not be vested
with the trust property, vesting orders may create uncertainty for third parties
dealing with trustees concerning who has the authority to deal with the trust
property - the very difficulty that vesting orders are designed to avoid.

We are therefore of the view that problems of uncertainty concerning the
existence or identity of a trustee should not be dealt with by vesting the trust
property in known and identified persons, but by the removal of the prob-
lematic trustee, and the appointment of a new trustee, where necessary, which
itself would be followed by the vesting of the trust property in the newly
constituted trustees. To facilitate this, we have recommended previously that
the revised Trustee Act should expressly authorize the court to remove trustees
and to make substitutional or additional appointments of trustees "where there

295 See In re Harrison's Settlement Trusts, [1965] 1 W.L.R. 1492, [1965] 3 All E.R. 795
(Ch.D.), where the earlier authorities on this point are also discussed. In that case, the
trustee sought to be displaced by a vesting order in favour of the three other trustees was
a mental patient whose affairs were being administered on her behalf. Cross J. refused
to make the order precisely because it would have left the mental patient still a trustee,
and he was of the view that only exceptional circumstances justified this. See, also,
Underhili s Law relating to Trusts and Trustees, supra, note 38, at 644, n. 4.

296 Trustees Act, 1962, supra, note 6, s.78(2)(h). However, s. 78(2)(h) requires the neglect
or refusal to have continued for 28 days, which is the period adopted by the English
Trustee Act, 1925, supra, note 5, ss. 44(vi) and 5(d) and (e), rather than the 14 days
that the Ontario Trustee Act adopts.

297 Supra, note 275.

298 See, for example. Re Cane's Trusts, [1895] 1 I.R. 172, and Re Ellis' Settlement ( 1857),
24 Beav. 426, 53 E.R. 422.

299 In re Knox's Trusts, [1895] 2 Ch. 483 (C.A.). In this case, the refusal was wholly
unjustifiable.

156

is no existing trustee or uncertainty as to the existence or identity of any
trustee".100 Similarly, where a trustee is incapable of acting or where he
refuses to act, we are of the view that the trustee should be removed and the
trust property vested in the capable and willing trustees. Our recommenda-
tions made previously concerning the power of the court to remove trustees
would permit this to be done.301 On the other hand, neglect aside, it is likely
today that a trustee who refuses to act is in doubt concerning the entitlement
of the claimant to receive the property he seeks. Such a trustee is not "wilfully
refusing" within the meaning of the Act,302 and, therefore, the appropriateness
of a vesting order to deal with this situation would not arise.

Accordingly, we recommend that the authority contained in sections 10
and 13 of the present Trustee Act to vest trust property where there is uncer-
tainty concerning the existence or identity of a trustee, or where a trustee is
incapable of acting or refuses to act, should not be carried over to the revised
Trustee Act. Rather, these matters should be dealt with by the court pursuant
to its authority to remove and appoint substitute or additional trustees.

Where, however, the absence or incapacity of the trustee is only for a
temporary period of time, we are of the view that different considerations
should apply. We have attempted to emphasize in our proposed reforms our
view that, generally speaking, where a trustee is unascertained, absent, in-
capacitated, or otherwise not available to act, a vesting order should be made
only after the trustee has been removed and other persons, able and willing
to act, have been constituted as the trustees. Vesting of the trust property
would then take place in the names of those persons.

However, circumstances may arise where, notwithstanding the fact that
a trustee is temporarily not available to act, one does not wish to remove him
from office. Assume, for example, that one of the trustees is not available to
act, or is under a disability, and he has not appointed the other trustees as his
agent or given a power of attorney. Assume also that the trustees must act
jointly, and not by majority, and the necessity arises for the trustees to act at
once with regard to the trust property, for instance, because a market oppor-
tunity should be exploited. Under the general vesting power that we have
proposed in lieu of a seriatim listing of permitted vesting situations, it would
admittedly still be possible for the court to make a vesting order in favour of
someone who is not a trustee, or in favour of those persons who constitute
only a part of the body of trustees, but we are of the view that the use of the
proposed general power in this manner should be discouraged.

Instead, we would make express provision for the emergency situation
where a trustee is temporarily unable or unavailable to act. The statutory
provision that we propose would confer jurisdiction upon the court to make
a vesting order where there is a temporarily unavailable trustee, a desire not
to remove him from office, and a need for the remaining trustees to deal with

300 See supra, this ch., sec. 1(f), and Draft Bill, s. 56(1)0).

301 See supra, this ch., sec. 1(f), and Draft Bill s. 56(1)0).

302 In re Mills' Trusts (1888), 40 Ch. D. 14 (C.A.). See, also, Lewin on Trusts, supra, note
18, at 437,/?. 12.

157

the trust property. The court's order would provide full vesting of the trust
property in the remaining trustees as though they were all the trustees, so that
a third party transferee would acquire an unchallengeable title. It would also
be expressly provided that a dealing with the trust property by the remaining
trustees, further to the order, would not constitute a breach of trust. Finally,
the revised Act would authorize the court to make a further order vesting the
trust property, if any remains, in the names of all the trustees when the
unavailable or disabled trustee is again available to act.

Accordingly, we recommend that the revised Act should provide that,
where a trustee is under a disability that temporarily precludes his participa-
tion in the administration of the trust, or where a trustee is, by reason of
temporary absence, unable to participate in the administration of the trust,
and it appears to the one or more other trustees that it would be desirable to
proceed immediately to deal with the whole or a part of the trust property,
and the circumstances, in the opinion of the court, do not justify the removal
of the trustee who is under the disability or who is absent, the court may vest
the whole or such part of the trust property in the trustee or trustees, other
than the trustee who is under the disability or is absent, in such manner, for
such estate or interest, and on such terms as the court orders.303 We further
recommend that, where an order has been made vesting trust property in the
able and remaining trustees, persons acquiring any trust property vested in
the remaining trustees by such order should acquire the title thereto that they
would have acquired if the trustee under disability or absent had been sui
juris and had executed and joined in the delivery to them of the conveyance,
transfer, or assignment of the trust property, or had joined in the delivery to
them of the trust property itself, as the case may be.

304

In addition, we recommend that the revised Act should provide that a
dealing with trust property vested temporarily in remaining trustees by a
vesting order should not be a breach of trust merely because the trustee under
disability or absent did not join or concur in the dealing.305 Finally, we
recommend that, on the cessation of the disability or absence of a trustee, the
court should be able to make an order revesting the trust property, or such of
it as remains subject to the trust, and any property received in exchange for
it, in all of the trustees.306

(iv) Persons in Favour of Whom Vesting Orders May Be Made

In every Commonwealth common law jurisdiction, it is usual for the
trustee legislation to enable the court to vest the trust property in any person
the court thinks fit,307 and sections 10 and 13 of the Ontario Trustee Act are
no exception, although differing language is employed in each section. Vest-
ing orders are normally used to vest trust property on a change of the trustee

303 Draft Bill, s. 59(1).

304 lbid.,s. 59(2).

305 lbid.,s. 59(3).

306 Ibid., s. 59(4).

307 See supra, note 281 .

158

or trustees, or of the composition of the body of trustees. Existing trustees,
if any, are divested, and title is then vested in the new trustee or body of
trustees.

Generally speaking, we are of the view that a separation of those persons
who are trustees and those who are vested with title to trust property is
undesirable. However, circumstances may arise where the court may find it
a more effective or direct procedure to vest the trust property in question in
a person other than the trustees, such as a trust beneficiary30* or a third party
purchaser.309 This would seem to happen rarely, but, realizing the value of
the court's jurisdiction being wide with respect to vesting orders, we are of
the opinion that it would be useful to retain this feature in the revised Act.
We have also observed that the four Australian states that have amended and
updated the power with respect to vesting orders permit the court to vest the
trust property in persons other than the trustees.310 The general vesting pro-
vision that we have recommended for inclusion in the revised Trustee Act
would enable the court to continue to make orders vesting trust property in
such persons as it thinks fit.

311

We would, however, retain one restriction on the power of the court to
vest trust property in any person. This restriction is contained at present in
sections 10(3) and 13(2) of the Trustee Act, and applies where there is a
change in the composition of the trustees either because of the removal or
retirement of a trustee from office or the appointment of a new trustee. We
are of the view, and recommend, that where a vesting order is consequential
on the appointment of one or more new trustees, or on the retirement or
removal of a trustee without the appointment of a new trustee in place of the
trustee retiring or removed, the court should vest the trust property in the
person or persons who, on the appointment, retirement, or removal, are the
trustees.312

(v) Effect of Vesting Orders

It is essential that a vesting order transfer property as effectively as if the
appropriate mode of transfer had been carried out. We are dealing here with
a problem that we earlier considered in connection with vesting declarations.

308

309

310
311
312

See In re Grayson, [1879] W.N. 52 (Ch. D.). In this case, a life tenant was vested with
title where he had become entitled to the fee simple remainder and the trustees refused
to concur in a sale of the property.

See In re New Zealand Trust and Loan Co., [1893] 1 Ch. 403 (C.A.), explained in In
re Gregson, [1893] 3 Ch. 233 (C.A.), where a third party had acquired shares by way
of an order vesting in trustees the right to call for a transfer of the shares into the third
party purchasers' names. The reason for such a vesting order was that the trustees
themselves did not wish to become the registered owners; the shares were subject to a
call. But see//? re Deans, [1954] 1 W.L.R. 332 (Ch. D.), where the Trustee Act, 1925,
supra, note 5, s. 51(1), was held not to apply.

Supra, note 281.

Draft Bill, s. 58(1).

Draft Bill, s. 58(2).

159

In relation to the vesting order, we have considered section 79 of the Judi-
cature Act, the text of which we set out previously.313

After close examination of the alternatives, and in particular the possi-
bility of introducing in the revised Act a number of provisions setting out the
effect of vesting orders in a series of situations, we have concluded not only
that the language of section 79 of the Judicature Act continues to be effective
and adequate for the purposes of vesting orders, but also that it should apply
to all vesting orders under the revised Trustee Act. In our view, a provision
akin to section 79 should be contained in the revised Act. Accordingly, we
recommend that the revised Trustee Act should contain a provision to the
effect that a vesting order under the Act has the same effect as if the legal or
other estate or interest in the property had been actually conveyed by deed or
otherwise for the same estate or interest to the person in whom the property
is ordered to be vested or, in the case of a chose in action, as if it had been
actually assigned to the last-mentioned person.314

It will also be recalled that, in relation to the effect of a vesting declara-
tion, we recommended that any vesting declaration, whether express or im-
plied, consequent upon the appointment or discharge of a trustee should be
valid and conclusive evidence in favour of a purchaser, subject to actual
notice to the contrary, that the trust property has vested in the new trustees.315
In the context of the appointment and discharge of trustees and the vesting of
trust property by the court, we would merely state the obvious - that the
judicial vesting order is sufficient and conclusive evidence in favour of third
parties that the trust property is properly vested in the trustees. We would
also note that section 142 of the Judicature Act provides that any order of the
court made under any statute effectually protects and indemnifies any person
acting thereon in good faith. Accordingly, any third party relying upon a
vesting order made by the court pursuant to the revised Trustee Act would be
protected.

We wish to note one proposed provision, recommended in relation to
non-judicial vesting declarations, that we think should be applicable in the
context of vesting orders. Specifically, it should be provided that any vesting
of trust property in new trustees further to a vesting order does not constitute
a breach of any covenant in a lease held by the trust, or of any condition
against assignment, subletting or parting with possession of the property. The
reasoning for such a provision was discussed previously,316 and is equally
applicable to the vesting of trust property by the court. Accordingly, we
recommend that, where leasehold property is subject to a trust, the vesting
of the property in one or more new trustees pursuant to a vesting order should
not constitute a breach of any convenant or condition against assignment,
subletting or parting with possession of the property, whether absolute or
with consent, made by one or more former trustees and, notwithstanding any

313 Supra, this ch. sec, 3(b)(i).

314 Draft Bill, s. 60.
See supra, this ch., sec. 3(a)(iii), and Draft Bill. s. 29(2).
See supra, this ch.. sec. 3(a)(iii)d(2).

315
316

160

term in the lease to the contrary, should not give rise to any forfeiture, right
of re-entry or other claim for breach of such covenant or condition.

317

(vi) Appointment of Persons to Convey in Lieu of a Vesting
Order

Section 1 3(4) of the Ontario Trustee Act enables the court, if it is thought
more convenient, to appoint a person to transfer, or to join in transferring,
the stock or chose in action in question, rather than vesting the property in
that person for the purpose. In effect, deeds of conveyance or other appro-
priate means of transfer are employed in the usual manner, and no vesting
order is made. Strangely enough, no similar jurisdiction to appoint a person
to convey, rather than vesting the property, is conferred upon the court by
section 10 of the Act, which authorizes vesting orders in relation to land.

The English trustee legislation,318 the Australian and New Zealand leg-
islation,319 and other contemporary Acts of the Commonwealth, each contain
a general power to appoint a person to convey in lieu of a vesting order
authorized by the legislation concerned. There can be little doubt that the
court in Ontario today should have the benefit of such a general power.
Accordingly, we recommend that section 13(4) of the present Act should be
carried over, in an expanded form, to the revised Trustee Act. The revised
Act should state that, where the revised Act provides for the making of a
vesting order, the court may, in lieu thereof, appoint a person to make or to
join in making the transfer of the trust property.

320

(vii) Special Classes of Vesting Order

At present, the Ontario Trustee Act contains three sections that provide
for vesting orders in special circumstances. The first of these provisions is
section 1 1 , which states as follows:

1 1 . Where any land is subject to a contingent right in an unborn person, or a
class of unborn persons, who, on coming into existence, would, in respect
thereof, become entitled to or possessed of the land on any trust, the Supreme
Court may make an order releasing the land from the contingent right, or may
make an order vesting in any person the estate to or of which the unborn person,
or class of unborn persons, would, on coming into existence, be entitled or
possessed in the land.

Section 11, like section 45 of the English Act, is concerned with the
contingent rights of unborn persons in land "who, on coming into existence,
would, in respect thereof, become entitled to or possessed of the land on any
trust". In particular, the purpose of the section is to facilitate dealing with

317 Draft Bill, s. 62.

318 Trustee Act, 1925, supra, note 5, s. 50. This statutory authority also has a nineteenth
century origin.

319 Supra, note 281 .

320 Draft Bill, s. 58(3).

land where contingent rights of unborn persons in that land would make it
impossible for purchasers to get a conveyance from living persons of the
whole interest, including that of the unborn. The court is authorized, by
order, to release those rights, or to vest them in others on behalf of the
unborn. However, the Ontario Trustee Act does not contain a provision
equivalent to section 47 of the English Act, which, in effect, deems all persons
having an interest in the land, including the unborn, to be trustees for the
purposes of the Act, in order that a vesting order giving clear title may be
made as to any land in which there is any interest or contingent right belonging
to such persons.

These sections have their origin in the English Trustee Acts of 1850 and
1852,321 and have been retained and broadened in subsequent revisions of the
Trustee Act in England. The technique of declaring persons, including unborn
persons, who have an interest in land directed by a court to be conveyed, to
be trustees, or to be persons who on coming into existence would be trustees,
is continued, as we have said, in section 47 of the English Trustee Act, 1925.
This technique was also introduced into Ontario legislation in 1897 by The
Trustee Relief Act, n2 but disappeared in the 1926 statutory revision. As a
result, section 1 1 of the present Ontario Act is deprived of its explanatory
underpinnings.

In the absence of its former statutory context, the utility and purpose of
section 1 1 are not readily apparent, and it is difficult to see much value in
section 11 today. Although the language of the section applies whenever
interests of the unborn are held on trust,323 the section was originated to deal
with the problem of the legal future interest of the unborn. Today, most if
not all, contingent interests will be equitable interests behind a trust, and the
problem therefore disappears, because the trustees will be able to overreach
such interests in the exercise of their powers of sale and transfer.

It is also worthy of note that any land in which an unborn person holds a
contingent interest would inevitably be a "settlement" within the meaning of
the Settled Estates Act, and the court would have the power under that Act to
authorize a sale of the whole or any part of the settled estate.324 We shall
recommend in a subsequent chapter of this Report the repeal of that part of
the Settled Estates Act that deals with settled land held on trust, and that the
powers of administration over such land should be contained in the revised
Trustee Act and exercisable by the trustees.325 However, because it remains
possible to create successive legal interests in Ontario without the imposition
of a trust, we also recommend that, insofar as the Settled Estates Act deals
with this type of interest, that Act should remain in force. Accordingly, there
would appear to be little need for section 1 1 of the Trustee Act, given the

321 Supra, note 275.

322 Supra, note 275, ss. 1 1 and 12.

323 The section expressly applies to unborn persons "who . . . would . . . become entitled
to or possessed of that interest on any trust". Originally, the section was intended to
mean a deemed trust for the purposes of the statute. See the English Trustee Act, 1H50,
supra, note 5, ss. 29 and 30.

324 Settled Estates Act, R.S.O. 1980, c. 468, s. 13(1 )(b).

325 See infra, ch. 4, sec. 3(c).

162

jurisdiction of the court to deal with successive contingent legal interests of
unborn persons under the Settled Estates Act. Nonetheless, as with that aspect
of the Settled Estates Act that we recommend should remain in force, we are
of the view that, pending a review of this area of the law in the context of a
general study of land law, section 1 1 of the Trustee Act should be retained.

The connection of section 1 1 with the law of trusts is, however, remote.
The provisions of section 1 1 are more naturally associated with, and might
be expected to be found in, either the Children's Law Reform Actnft or the
Conveyancing and Law of Property Act321 We have concluded that it should
be relocated in the latter Act; it essentially ensures that conveyances of land
can be made with clear title.

In transferring section 1 1 to the Conveyancing and Law of Property Act,
we are of the view that the meaning of the words "entitled to or possessed of
the land" should be clarified so that all conditions precedent are provided for.
We would also broaden the usual meaning of "unborn persons" to include
other classes whose identity has not yet been ascertained. Finally, we would
insert a subsection stating specifically that, where the right of any unborn
person is an equitable interest, an application to the court to release or
otherwise deal with such an interest shall take the form of an "arrangement",
approval for which must be sought under the terms of the Variation of Trusts
Act.32* It would there be expressly stated that the section of the revised
Conveyancing and Law of Property Act now proposed shall not otherwise
apply to such an interest. Accordingly, we recommend that section 1 1 of the
present Trustee Act should be retained, but placed in the Conveyancing and
Law of Property Act with the above-noted amendments.

The second provision of the Trustee Act that deals with specialized
vesting orders is section 12, which provides as follows:

12. Where any person entitled to or possessed of land, or entitled to any
contingent right in land, by way of security for money, is an infant, the Supreme
Court may make an order vesting or releasing or disposing of the land or right
in like manner as in the case of a minor trustee.

Section 12 has a similar history to that of section 1 1. Like its counterpart in
the English Trustee Act, 1925, section 46, section 12 utilizes the same
technique as section 1 1 in order that land that is subject to a court order for
sale or mortgaging may be transferred to the purchaser or mortgagee free of
the interests of others; namely, that the minor mortgagee is deemed a trustee
so that the mortgaged land can be vested in another person free of the
mortgage. Although the purpose of section 12 of the present Trustee Act
continues to be of value, it is also to be found in the Trustee Act solely
because of the deemed trust. We would associate this provision with the

326 R.S.O. 1980, c. 68, as am. by the Children's Law Reform Amendment Act, 1982, S.O.
1982, c. 20.

327 Supra, note 201.

8 R.S.O. 1980, c. 519. See infra, ch. 7, concerning the Commission's recommendations
on the Variation of Trusts Act.

163

Children's Law Reform Act, where we would expect a practitioner to look
for it.

We would, however, amend the section so as to provide expressly that
the court should have jurisdiction to order the minor, or another person named
by the court, to execute a discharge or assignment of the mortgage. Where
the court has ordered the minor, or another person, to execute the relevant
documents, section 60(7) of the Children s Law Reform Act (which was added
by the Children's Law Reform Amendment Act, 1982*29), to the effect that
"[e]very document executed [by the minor] is as effectual as if the child by
whom it was executed was eighteen years of age or, if executed by another
person in accordance with the order, as if the child had executed it and had
been eighteen years of age at the time", should apply in these circumstances
as well. Accordingly, we recommend that section 12 of the present Trustee
Act should be retained, and should appear in the Children's Law Reform Act,
subject to the above-noted amendments.

The final special class of vesting orders that we would mention deals
with the vesting of property in trustees of any charity or society over which
the court has jurisdiction. This matter is provided for, at present, by section
14 of the Ontario Trustee Act, the counterpart of which is section 52 of the
English Trustee Act, 7925.330 Section 14 of the Ontario Act provides as
follows:

14. The Supreme Court may exercise the powers herein conferred for the
purpose of vesting any land or personal estate in the trustee of any charity or
society over which the court would have jurisdiction upon action duly instituted.

Provisions are made in the Religious Organizations' Lands Act, for
example, for the vesting of land in successor trustees of a religious organi-
zation, which must be charitable according to the law of Ontario.331 Nonethe-
less, apart from religious organizations, a charitable trust may exist where
there is no one who is able to accept title to property donated to the charity,
or who has the necessary authority to sell assets belonging to the charity.332
Accordingly, the court should possess a general power to vest property in
trustees of any charity, and we would retain section 14 in the revised Act for
this purpose. We therefore recommend that, for the purpose of vesting any
property in the trustees of any charity, the court should be empowered to
exercise any of the powers recommended previously for the making of vesting
orders.333

4. THE EXERCISE OF POWER BY TRUSTEES

Even if we assume that the revised Act will facilitate the appointment
and discharge of trustees, and provide evidence of both the proper appoint-
ment and discharge of trustees and the vesting of the trust property in the new

329 Supra, note 326, s. 8.

330 Supra, note 5.

331 R.S.O. 1980, c. 448, ss. 3(5) and (6). and \(b)(i).

332 Waters, supra, note 94, at 761 .

333 Draft Bill, s. 78.

164

trustees, either by means of produetion of the deed of appointment or dis-
charge or a court order, a purchaser will nevertheless need to be assured that
the trustees, whether appointed judicially or non-judicially, have the parti-
cular power that they purport to exercise and that they are properly acting
within the scope of that power. This issue raises several difficulties.

At present, a purchaser may deal with persons who are properly appointed
trustees and vested with the trust property. Nonetheless, if the purchaser has
actual, constructive, or imputed notice that the parties are trustees, rather
than owners in their own right, he is obliged to satisfy himself that the trustees
have the power to act and that they are acting within the scope of that power
in order to avoid the consequences of an ultra vires act by trustees."4 A
purchaser is expected to protect himself to this extent, and the risk of loss in
these circumstances is allocated to the purchaser rather than to the benefi-
ciaries.335 However, if trustees, acting within the scope of their powers,
convey property to a purchaser for a fraudulent purpose of their own and
receive purchase money, the purchaser is secure in all respects if, having
given value, he neither knew nor reasonably could have known of the trustees'
fraudulent intent. Should the trustees prove unable to compensate the trust
for any loss incurred by their fraudulent act, it will be the trust beneficiaries
who suffer the loss.336 At this point, the policy of existing case law is to prefer
the interests of a purchaser for value acting without actual or constructive
notice of the trustees' intended wrongdoing to those of the beneficiaries. In
other words, the law prefers to support commercial dealings in the ordinary
and, so far as the purchaser is concerned, honest course of business. Indeed,
equity's introduction of the concept of the bona fide purchaser for value
without notice, and its rejection of the common law doctrine of nemo dat
quod non habet, was intended to facilitate the ordinary and honest course of
business, even though this caused loss to the beneficiaries.

If the instrument by which trustees are non-judicially appointed and
vested with trust property, or the court order that appoints or discharges and
vests property in the trustees, were viewed as giving notice of the trust to a
purchaser, the purchaser would have no alternative but to investigate the
terms of the trust in order to ensure that the trustees were acting within their
powers. This is certainly a laborious and often hazardous task for a purchaser;
his construction of the trust instrument may later prove to have been incorrect.
Various approaches have been taken to the solution of this problem. For

334
335
336

See Waters, supra, note 94, at 880-97.

Underbill s Law relating to Trusts and Trustees, supra, note 38, at 762 et seq.

If the tracing of the trust property by beneficiaries is in equity (which will most likely
be the case, as their title under an express trust is purely equitable, and common law
does not recognize or enforce equitable rights), they cannot claim the property from a
bona fide purchaser for value: see Harrison v. Matbieson (1916), 36 O.L.R. 347, 30
D.L.R. 150 (App. Div.). If, however, a legal remedy is available to the beneficiaries
for the recovery of the trust property (which may be the case if the trust is imposed by
operation of law), a bona fide purchaser for value will not gain title unless he comes
within an exception to the rule of nemo dat quod non habet. In either case, if a purchaser
for value knew of the true facts surrounding the disposition of the trust property, the
property would be subject to recovery: see Chandler & Massex Ltd. v. Irish (1911), 24
O.L.R. 513, aff'd (191 1), 25 O.L.R. 211 (Div. Ct.), affd(1913), 29 O.L.R. 112, 13
D.L.R. 829 (App. Div.). See, generally. Waters, supra, note 94, at 880-97.

165

example, certain American jurisdictions declare that trustees, properly ap-
pointed and vested with title to trust property, shall be deemed to be acting
properly in furtherance of their powers so far as a third party who enters into
a contract with the trustees is concerned."7 Actual notice alone deprives the
third party of this protection. The Ontario Trustee Act, however, like legis-
lation in other jurisdictions that have followed the English Trustee Act tra-
dition, is silent on this issue.

Generally, the English property law reformers of 1925 wished to ensure
that a purchaser dealing for value with trustees was afforded the same protec-
tion when a non-judicial change of trustees occurred as when there had been
a judicial appointment of trustees and a court order vesting trust property in
the new team of trustees. A purchaser, therefore, was granted the right to
rely upon the non-judicial instrument of appointment as a valid appoint-
ment.338 In the absence of an express vesting declaration, a purchaser was
also granted the right to rely upon the validity of a vesting declaration implied
in the non-judicial instrument of appointment.339 As a general principle, the
reformers did not intend to go beyond this point. That is to say, if a purchaser
had actual, constructive, or imputed notice of the trust, he would continue,
as before the 1925 reforms, to proceed at his peril if he did not assure himself
that the trustees had the power they were purporting to exercise and that they
were acting within the scope of that power. It is evident that a court order,340
or a non-judicial instrument appointing trustees and vesting trust property,
might have the effect of giving notice to a purchaser that trustees were
involved with the property in question. But having equated the effect of a
judicial and non-judicial change of trustees, the reformers decided to leave
the matter there.

However, in one specific instance, the 1925 English legislation did ad-
dress this problem. As previously stated, in 1881 , Parliament at Westminster
expressly omitted from the statutorily declared effect of an express vesting
declaration, among other types of property, land conveyed to trustees by way
of mortgage to secure money loaned by the trust.341 This exception resulted
from the practice among conveyancers of not mentioning any trust in the
conveyance of land as mortgage security, so that subsequent purchasers of

337 Uniform Trustees' Powers Act, National Conference of Commissioners on Uniform
State Laws (73d Annual Conference, 1964), Uniform Laws Ann. (1978), Vol. 7A, at
761, and Cum. Supp. 1982, at 365, §7 (hereinafter referred to as "American Uniform
Act"). The Uniform Act was approved by the National Conference of Commissioners
on Uniform State Laws, together with the American Bar Association, in 1964, and has
been adopted to date by eleven states: namely, Florida (1974), Idaho (1965), Kansas
(1968), Kentucky (1976), Maine (1979), Mississippi (1966), Montana (1974), New
Hampshire (1969), Oregon (1977), Utah (1975), and Wyoming (1965).

Trustee Act, 1925, supra, note 5, s. 38.

Ibid., ss. 40(1 )(£) and 40(2)(fc).

As to a court vesting order giving notice of the trust to subsequent purchasers dealing
with the trustees, s. 142 of the Judicature Act, supra, note 201, would not appear to
give protection against such notice. This is consistent with the position in England: see
Lewin on Trusts, supra, note 18, ch. 27.

341 Conveyancing and Law of Property Act, 1HHI , supra, note 8. s. 34. See, now. Trustee
Act, 1925, supra, note 5, s. 40(4)(a). See, also, supra, this ch., sec. 3(a)(iii).

338
339
340

166

the mortgage, or of the land after a foreclosure or discharge of the mortgage,
and their successors, would not have to investigate the trust document in
order to verify the validity of the proffered title, or the powers of the trustees
to give receipts for purchase moneys.

During the latter decades of the nineteenth century, however, and con-
tinuing until 1925, conveyancers in England had great difficulty in keeping
the trust deed off title, should a change of trustees occur. Methods of con-
cealing the trust were condoned by the courts, but should any purchaser of
formerly mortgaged land receive notice of the trust by an inadvertent disclo-
sure, the purchaser, for his own protection, had to examine the terms of the
trust.342 Section 1 13 of the Law of Property Act, 1925M* was a response to
this problem, and provides as follows:

113. — (1) A person dealing in good faith with a mortgagee, or with the
mortgagor if the mortgage has been discharged released or postponed as to the
whole or any part of the mortgaged property, shall not be concerned with any
trust at any time affecting the mortgage money or the income thereof, whether
or not he has notice of the trust, and may assume unless the contrary is expressly
stated in the instruments relating to the mortgage -

{a) that the mortgagees (if more than one) are or were entitled to the
mortgage money on a joint account; and

(b) that the mortgagee has or had power to give valid receipts for the
purchase money or mortgage money and the income thereof (including
any arrears of interest) and to release or postpone the priority of the
mortgage debt or any part thereof or to deal with the same or the
mortgaged property or any part thereof;

without investigating the equitable title to the mortgage debt or the appointment
or discharge of trustees in reference thereto.

(2) This section applies to mortgages made before or after the commencement
of this Act, but only as respects dealings effected after such commencement.

(3) This section does not affect the liability of any person in whom the
mortgage debt is vested for the purposes of any trust to give effect to that trust.

By this section, the trustees for the time being are authorized to act as if they
are absolute owners of the moneys that they, or their predecessors in title,
have lent on the security of mortgaged land.344

342

343
344

See, generally, Lewin on Trusts, supra, note 18, at 374-75. See, also, Underbill s Law
relating to Trusts and Trustees, supra, note 38, at 640. Case law has extended to
conveyances and sales the principle of no notice: see Underhill's Law relating to Trusts
and Trustees, ibid., at 770

Supra, note 100.

See, generally, Megarry and Wade, The Law of Real Property (4th ed., 1975), at 953-
54. It should be noted, however, that the debt as a chose in action, apart from the
mortgage aspect, does vest in the new trustees as a result of a vesting declaration: see
Webb v. Crosse, [1912] 1 Ch. 323, at 329.

Although section 9(3) of the Ontario Trustee Act incorporates the excep-
tion to an express vesting declaration for land subject to a mortgage, no
provision similar to section 1 13 of the English Law of Property Act, 1925
exists in Ontario. However, it is clear that section 113 is of much wider
import than the exception in section 9(3) of the Ontario Act. Section 113
provides a conveyancing shield against notice of the trust in relation to
subsequent transactions involving the mortgage loan, or the land after a
foreclosure or discharge of a mortgage, and it applies not only where the
mortgage has been transferred to new trustees, but also in every case where
trustees are dealing with a mortgage. It also protects third parties entering
into transactions concerning land that was once subject to a mortgage security
held by trustees. The issue that now arises is whether the Ontario mortgage
exception should be legislatively expanded in the manner adopted in England
by section 113, or whether the revised Act should utilize the approach of
section 1 13 not merely for all those concerned with mortgages held, or to be
held, by the trust, but for all third parties involved in any dealings with
trustees.

The Uniform Trustees' Powers Act, proposed by the National Conference
of Commissioners on Uniform State Laws in the United States,345 does,
indeed, generalize this no notice concept. Section 7 provides as follows:

7. With respect to a third person dealing with a trustee or assisting a trustee
in the conduct of a transaction, the existence of trust powers and their proper
exercise by the trustee may be assumed without inquiry. The third person is not
bound to inquire whether the trustee has power to act or is properly exercising
the power; and a third person, without actual knowledge that the trustee is
exceeding his powers or improperly exercising them, is fully protected in dealing
with the trustee as if the trustee possessed and properly exercised the powers he
purports to exercise. A third person is not bound to assure the proper application
of trust assets paid or delivered to the trustee.

The protection afforded a purchaser by this provision is very broad. A third
party is not bound to inquire whether the trustees have the power to act or
are properly exercising that power, and a third party without actual knowledge
to the contrary is fully protected.

We are impressed with the argument that, if practitioners are to be
encouraged to use the non-judicial appointment and discharge power, they
should not be exposed to the risk of inadvertently making the trust part of the
title of the investment assets, a result that could occur by the use of a vesting
declaration, express or implied. Similarly, even where trustees are appointed
and vested with the trust property by a court order, production of the order
to a third party would be notice that he is acquiring trust property and,
therefore, would require him to investigate the terms of the trust to ensure
that the trustees have the power they are purporting to exercise and that they
are exercising the power properly, a task that may well prove a hindrance to
sales, leases, mortgages, and other transactions entered into by the trustees.

345 American Uniform Act. supra, note 337.

168

In other words, we have asked ourselves whether a "sheltering provision"
should be introduced in the revised Act whereby a bona fide purchaser would
not be deemed to have notice of the trust by reason only of the production or
registration of a vesting declaration, express or implied, or a court order
appointing, discharging, or vesting trust property in trustees. This provision
would apply whenever a purchaser deals with trustees in relation to any asset
held, or to be acquired, by the trust. If such a sheltering provision were
introduced, it would be of no concern to a bona fide purchaser who has no
other notice of the trust whether or not the trustees have the particular power
they are purporting to exercise or whether they are properly exercising that
power. The effect of this approach would be that, if the purchaser knew of
the trust solely through the production or registration of an instrument of
appointment of trustees (or an express vesting declaration, if one exists), or
a court order, he would be taken to have no actual, constructive, or imputed
notice of the terms of the trust.

The shortcoming of a sheltering provision of this scope, however, is that
a purchaser who acts in good faith throughout, but who learns of the existence
of a trust other than through the production or registration of an appointment
or vesting instrument, even if he otherwise knows of the trust by reason of
such a production or registration, would not be within the protection of the
provision. He would be bound to inquire into the trustees1 powers, because
he would be bound by constructive and imputed notice of the terms of the
trust. Given the ease with which, through oral and documentary reference
during the making of an agreement, a purchaser may become aware of the
existence of a trust, it is highly questionable whether a sheltering provision
of this limited scope is either practicable or justifiable. Moreover, it will have
been seen from the previous discussion that neither section 1 13 of the English
legislation, nor section 7 of the American Uniform Act, takes this approach.
Section 113 confers protection upon the purchaser "whether or not he has
notice of the trust", and section 7 protects the purchaser unless he has actual
notice that the trustees lack the power they are purporting to exercise. Both
section 1 13 of the English legislation and section 7 of the American Uniform
Act, therefore, relieve a purchaser of liability for constructive or imputed
knowledge.

346

The purpose of a sheltering provision, in our view, should be to prevent
an innocent purchaser, who at the time of entering into a transaction with
trustees does not know of trustee wrongdoing or improper action, from having
to inquire about the provisions of the trust instrument, so that it cannot be
said afterwards that had he inquired he would have obtained information from
which a reasonable man would have known that wrongdoing or impropriety
had occurred or was occurring.

After careful consideration, the Commission has concluded that a pro-
vision dealing with the protection of third parties should be introduced in the

346 It is not clear whether section 113 of the English Act also protects a purchaser who
actually knows that the trustees do not have the power they represent themselves as
having; whereas section 7 of the American Uniform Act specifically withdraws protection
from such a purchaser.

169

revised Act, and that the approach of the American Uniform Trustees' Powers
Act is the correct one. The elimination of constructive or imputed notice in
relation to trustees' powers would complete the elimination of such notice
with respect to all aspects of third party interaction with trustees. It will be
recalled that we have previously recommended that a purchaser should be
able to rely upon the validity of both the appointment and discharge of trustees
and the vesting of trust property, unless the purchaser has actual knowledge
of any impropriety relating to the appointment, discharge, or vesting. Actual
notice by a third party of trustees' wrongful or otherwise improper acts or
omissions would prevent him obtaining good title from the trustees, as the
third party would be obliged to investigate the terms of the trust. Such a
provision, in our view, properly balances the need to protect the interests of
the beneficiaries and the administrative desirability of an effective and real-
istic non-judicial appointment and discharge procedure.

Accordingly, we recommend that a purchaser of trust property who relies
upon the production or registration of a deed of appointment or a deed of
discharge that contains a vesting declaration, express or implied,347 whether
or not he otherwise has notice of the trust, should be able to assume without
inquiry that the former trustees and the substitute or additional trustees pos-
sessed or possess and properly exercised or are properly exercising every
power which they purported or purport to exercise over the property.348
However, this recommendation should only apply where the purchaser does
not have actual notice that the trustees lack the power to act or are acting
improperly. We, therefore, recommend that a purchaser of trust property who
at the time of the purchase has actual notice that the trustees do not possess
the power they purport to exercise, or that they are exercising a power
improperly, should take the property subject to the trust unless title to the
trust property has been held by a purchaser without actual notice that the
trustees do not possess the power or that they are exercising the power
improperly.349 We also recommend that the provisions proposed previously
in the context of the appointment and discharge of trustees concerning the
protection that should be afforded to donees of trust property,350 persons who
have an obligation to register interests,351 and subsequent purchasers who
purported to act as trustees in the original transfer of trust property352 should
apply in this area as well.353 In addition, we are of the view that these
recommendations should apply equally where a purchaser of trust property
relies upon the production or registration of a court order appointing or
discharging a trustee or vesting trust property in the trustees

354

347

See supra, this ch., sec. 3, for a discussion of vesting declarations, and Draft Bill, s.
28.

348 Draft Bill, s. 30(1).

349 lbid.,s. 30(2).
See supra, note 221 and accompanying text.
See supra, notes 223-26 and accompanying text.
See supra, note 220 and accompanying text.

350
351
352

353 Draft Bill, s. 30(3).

354 Ibid., s. 61(1), (2), and (3)

170

If these recommendations are accepted, it will no longer be necessary to
except "land conveyed by mortgage for securing money subject to the trust"
from the operation of a vesting declaration. We, therefore, further recommend
that this exception, now contained in section 9(3) of the Ontario Trustee Act,
should not be carried over to the revised Act.

It should be recalled that we have recommended that a vesting declaration
should either be express or implied in a deed of appointment or discharge of
trustees. It follows, therefore, that our recommendations to this point have
been confined to adoption of the sheltering provision in those circumstances
only where transactions are entered into by trustees who are different, in
whole or in part, from the former or the original trustees. Original trustees
would still be required to produce the trust instrument, and third parties, as
at present, would carry out their self-protecting inquiries as to trustees'
powers, because such parties would remain subject to the effects of construc-
tive and imputed as well as actual notice.

We have given serious thought to whether this distinction between the
position of original trustees and any subsequent trustee or different set of
trustees can be justified, and we have concluded that it cannot. The reasons
for our conclusion are as follows. Because of the relatively short duration of
many trusts created today, or because a sole trustee may be corporate, there
will often be no change of trustees during the lifetime of the trust. Many
other trusts will be in effect for a substantial period of time before there will
be any change. Although no problem concerning the change of trustees arises
in these cases, we nevertheless are of the opinion that, if dispensing with the
need for trustees to establish their powers is justifiable in some instances,
there has to be a convincing argument for not dispensing with the need in all
instances where trustees are engaged with third parties in transactions involv-
ing trust property. We do not think that such an argument exists given the
character of section 1 13 of the Law of Property Act, 1925, in England, and
section 7 of the Uniform Trustees' Powers Act now in effect in a number of
American states - legislation that applies to all trustees' transactions.

Moreover, we do not consider that parties who deal with trustees should
be subject to actual notice only in some instances, but actual, constructive,
and imputed notice in other instances involving similar transactions. The
result might well be confusion, and not a little irritation, among those who
deal regularly with trustees. In short, we have concluded that either the
sheltering provision should be adopted in toto, or should be rejected totally.

We are, therefore, of the view that the principle of sheltering, as rec-
ommended, should apply equally where there has been no change of trustees.
We recommend that the revised Act should provide that, where a sole trustee
or one or more trustees have been appointed by a trust instrument to act on
the initial taking effect of the trust, and all or some of them have continued
to act in the absence of an appointment of a substitute or additional trustee,
they may by deed declare that they were appointed by the trust instrument,
and the deed should have effect as if it were a deed of appointment containing
a vesting declaration for the purposes of the application of the sheltering
provisions.355

355

Draft Bill, s. 31

171

Finally, we wish to address the difficulties that may arise where trustees
assert to a purchaser that the trust instrument permits a majority to bind all
the trustees and that they constitute a majority. Verification of this assertion
by the purchaser with the minority trustees, who may not understand the
implications of a majority clause in the trust instrument, may produce vague
or unreliable responses. To insist that a purchaser in these circumstances
inspect the trust instrument would defeat the purpose of providing that he
may rely conclusively upon the vesting declaration. On the other hand, a
purchaser would be proceeding at his peril if he relied solely upon the oral
representations of the majority trustees concerning their ability to bind the
trust, in the absence of a statement to this effect contained in the vesting
declaration. Accordingly, we recommend that the revised Act should provide
that, if original, substitute, or additional trustees assert to a purchaser that the
trust instrument permits a majority to bind all the trustees and that they
constitute a majority, the deed of appointment or the deed of discharge, or a
deed executed by the original trustees, or, in either case, a supplemental
deed, should contain a recital quoting the provision of the trust instrument to
that effect, and that the recital is conclusive evidence of the facts so stated
and shall operate to bind the trust in favour of a purchaser of trust property.
However, the recital should not have the abovementioned effect in favour of
a purchaser who at the time of the transaction has actual notice to the contrary,
unless title to the trust property has been held by a purchaser without such
acutal notice.356

5. PROTECTION OF THIRD PARTIES: SHOULD THE PROPOSED
PROVISIONS BE MANDATORY?

Another matter that requires attention is whether the proposed provisions
designed to protect third parties against improperly appointed trustees, the
improper vesting of trust property, or trustees who lack the power to act or
who are acting improperly should apply notwithstanding the expression of an
intent to the contrary contained in the trust instrument. The Commission has
considered this question and has concluded, for reasons set out below, that
the proposed provisions should be mandatory.

It has been a fundamental premise of our recommendations relating to
the non-judicial appointment and discharge power that, if use of this power
is to be encouraged, third parties must be able to rely upon the mechanism
as to the validity of appointment and discharge of trustees, the vesting of trust
property, and the proper exercise of powers conferred upon trustees. This
would be accomplished under our recommendations through the production
of an instrument of appointment or discharge containing a vesting declaration,
either express or implied; the instrument would assure the third party doing
business with the trustees that the trustees are effectively appointed, vested
with the trust property, and authorized to act in the way they are so doing. If
our proposals were enacted as legislation, we believe that it would become
the regular mode of business for trustees to employ the non-judicial power,
and for persons doing business with trustees, other than the beneficiaries, to

356

Ibid., s. 32(3) and (4).

172

rely solely upon the appointment or discharge instrument. Such persons would
seek to know no more of the trust, because they would need to know no
more. Moreover, such an instrument would mean that trustees would not
have to produce the trust instrument, something that would eliminate much
paper work, and afford privacy to trust beneficiaries concerning their property
interests.

It is obvious that the concept of an instrument of appointment and dis-
charge containing a vesting declaration, express or implied, upon which third
parties can rely absolutely is fundamental to our recommendations. If our
proposed provisions designed to protect third parties were subject to a contrary
intent contained in the trust instrument, the purchaser of trust property,
notwithstanding these provisions, would not be able to rely upon a proffered
appointment or discharge instrument. Rather, upon seeing the instrument, or
becoming aware of the registration of such an instrument, he would have to
examine the trust instrument in order to assure himself that the protection
offered by the statutory provisions had not been excluded. Accordingly, we
recommend that our proposed provisions that deal with the protection of third
parties against improperly appointed trustees,357 or trustees who do not have
the power to act or are acting improperly,358 and the provisions that deal with
the vesting of trust property359 should be mandatory, and our Draft Bill
contains provisions to this effect.

360

Finally, having regard to the significant scope of the proposed provisions
that deal with the protection of third parties in their dealings with trustees,
we are of the view that, except for an express vesting declaration having
effect only as set out in section 9 of the present Ontario Trustee Act, the
proposed sheltering provisions should only apply to deeds of appointment
and of discharge and to vesting orders executed or made after the revised Act
has come into force.361

Recommendations

The Commission makes the following recommendations:

Non-judicial appointment and discharge of trustees should be encouraged
in Ontario and appointment and discharge by means of court application
discouraged. Accordingly, the revised Trustee Act should retain the sta-
tutory non-judicial powers of retirement without replacement and replace-
ment or removal by the appointment of a substitute trustee, but in an
amended and improved form, so that they may be easily invoked and
relied upon as to the validity of appointment, the vesting of trust property,
and the proper exercise of powers conferred upon trustees.

357 Supra, this ch., sec. 2, and Draft Bill, s.27.

358 Supra, this ch., sec. 4, and Draft Bill, ss.30, 31, 32, and 61

359 Supra, this ch., sec. 3, and Draft Bill, ss.28 and 29.

360 Draft Bill, ss. 17(2) and 61(5).

361

Ibid., ss. 17(4) and 61(4).

173

2. The right of a trustee to retire non-judicially without replacement should
continue to be subject to such consents as are now required under section
2 of the present Trustee Act.

3. The revised Trustee Act should permit non-judicial retirement without
replacement where, after such retirement, there would remain a trust
company or at least two individual trustees to act as trustees.

4. A trustee should be able to retire non-judicially, without the appointment
of a substitute trustee, from a part of the trust and remain as trustee of
the other part or of other parts, provided that the parts of the trust reflect
separate property held on distinct trust terms.

5. The revised Act should provide that nothing in a trust instrument should
withhold from a trustee the right to retire from the trust or a part thereof
or make the requirements for retirement more onerous than otherwise
provided by statute, and that any such provisions should be invalid for
all purposes.

6. The statutory power to remove a trustee non-judicially by the appointment
of a substitute trustee should continue to be subject to a contrary intent
of the creator of the trust expressed in the trust instrument.

7. Notwithstanding the expression of a contrary intention by the creator of
a trust, all instruments of appointment and of discharge of trustees,
whether pursuant to a statutory authority or the trust instrument, should
be by deed.

:8. For the purposes of the revised Act, a deed of appointment or of discharge
of trustees should be an instrument signed by those persons who have the
power to appoint or discharge the trustees, attested by one witness and
accompanied by an affidavit of execution, but should not require a seal.
In addition, a deed of appointment or of discharge should contain the
following two recitals. First, where the appointment or discharge of a
trustee is pursuant to a power contained in the trust instrument, the deed
should set out the terms of the trust instrument that authorize the act.
Secondly, where the trust instrument permits a majority of the trustees
to bind all, this authority should be set out in the deed of appointment or
of discharge (see, further, infra, Recommendation 84).

9. Where the appointment or discharge of a trustee does not comply with
the provisions contained in Recommendations 7 and 8, the appointment
or discharge should be invalid for all purposes.

10. With respect to the exercise of the non-judicial appointment power, the
revised Act should provide that where a person is nominated in a trust
instrument for the purpose of appointing substitute or additional trustees,
he should be deemed to be nominated for the purpose of appointing

* See, however, the comments of Dr. Derek Mendes da Costa, Q.C., Chairman of the
Commission, supra, note 54.

174

substitute trustees in any of the circumstances set forth in the statute. The
fact that the circumstances, if any, set forth in the trust instrument that
empower the person therein nominated to act in the appointment of
substitute trustees do not include all or any of the circumstances set forth
in the statute should not itself constitute a contrary intent on the part of
the person creating the trust that the statute is not to apply.

1 1. The section in the revised Act analogous to section 3(1) of the Trustee
Act should retain the word "willing" with respect to the qualifications of
a person nominated to appoint a substitute trustee.

12. The revised Act should contain a provision to the effect that, where
jointly nominated persons are unable to agree in naming an appointee,
they should be deemed to be unable to act within the terms of the section
authorizing the non-judicial appointment of trustees.

13. For the purpose of exercising the non-judicial statutory power to appoint
a substitute trustee, a surviving or continuing trustee should include:

(a) a trustee who expresses in writing a desire to be discharged from all
or any of the trusts or powers reposed in or conferred upon him; and

(b) a sole trustee who expresses in writing a desire to be discharged from
all or any of the trusts or powers reposed in or conferred upon him.

14. For the purpose of exercising the non-judicial statutory power to appoint
a substitute trustee, a surviving or continuing trustee should not include:

(a) a trustee who in writing disclaims the trust, or who, having neither
disclaimed nor resigned, refuses to act as trustee, unless the trust
instrument expressly authorizes such a person to make an appoint-
ment; or,

(b) a trustee who is to be involuntarily removed.

15. Section 4 of the present Ontario Trustee Act, which empowers a sole
trustee or the last surviving or continuing trustee to appoint by will a
trustee to succeed him, should be retained in the revised Act.

16. The power to appoint a substitute trustee non-judicially should continue
to be exercisable under the revised Act by the personal representatives
of the last surviving or continuing trustee.

17. For the purpose of exercising the non-judicial statutory power to appoint
a substitute trustee, the power conferred upon the personal representatives
of a last surviving or continuing trustee should be exercisable by the
executors for the time being of the last surviving or continuing trustee
who have proved the will of the testator, or by the administrators for the
time being of such trustee, without the concurrence of an executor who
has renounced or has not proved.

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18. The revised Trustee Act should not contain a provision similar to section
36(5) of the English Trustee Act, 1925 , permitting a sole or last surviving
executor intending to renounce probate, or all the executors where all
intend to renounce, at any time before renouncing, to exercise the non-
judicial power to appoint a substitute trustee conferred by statute upon
the personal representatives of a last surviving or continuing trustee.

19. To ensure that a personal representative of a person who is appointed a
trustee, but who predeceases the taking effect of the trust, cannot exercise
the non-judicial power to appoint substitute trustees, the revised Act
should expressly state that a surviving or continuing trustee does not
include a person appointed a trustee who predeceases the taking effect of
the trust for the purpose of exercising the non-judicial statutory power to
appoint substitute trustees.

20. Subject to Recommendations 22 to 25, the circumstances, contained in
section 3(1) of the present Trustee Act, in which the non-judicial power
of removal and appointment of substitute trustees may be exercised
should be carried over to the revised Trustee Act.

21. In the revised Act, as in section 3(1) of the Ontario Trustee A ct at present,
minority should not be a circumstance justifying non-judicial removal by
the appointment of a substitute trustee.

22. The non-judicial removal of a trustee and the appointment of a substitute
trustee should be permitted only in objectively ascertainable circum-
stances. In particular, incapacity and unfitness to act as trustee should no
longer be circumstances that justify the non-judicial removal of a trustee,
and they should not be included in the revised Trustee Act. Rather,
removal for these reasons should be effected judicially, either under the
proposed judicial statutory power of removal contained in Recommen-
dation 35 or pursuant to the inherent jurisdiction of the court, with the
non-judicial removal power in this regard limited to instances of mentally
incompetent persons so found by a court of competent jurisdiction.

23. Insolvency should not be a ground permitting the non-judicial removal
of a trustee and the appointment of a substitute trustee. Rather, the non-
judicial power to remove a trustee should be exercisable in cases of
bankruptcy alone. The term "bankrupt" should be defined to mean a
person against whom a receiving order is in force, or who has made an
assignment or a proposal under the Bankruptcy Act (Canada).

24. The revised Act should provide that where a corporate trustee is dissolved
or is in liquidation, it may be subject to non-judicial removal under the
statutory power.

25. Unlike the situation under section 3(1) of the Ontario Trustee Act, the
fact that a trustee remains out of Ontario for more than twelve months
should not in itself be a circumstance justifying non-judicial removal
under the revised Act.

26. If, as proposed in Recommendation 33, a non-judicial power to appoint
additional trustees is incorporated in the revised Act, it should no longer

176

be possible to appoint a substitute trustee under the non-judicial appoint-
ment power in circumstances where a person nominated trustee in a
testamentary trust instrument predeceases the testator of the trust. Ac-
cordingly, a provision equivalent to section 8 of the Ontario Trustee Act
should not be included in the revised Act.

27. To ensure that the non-judicial statutory power of removal is sufficiently
comprehensive to include an original, substitute, or additional trustee,
the revised Act should provide that it applies to all trustees however and
whenever appointed.

28. The non-judicial statutory power of removal should apply equally to a
person who is named a trustee but who has disclaimed in writing the
office of trustee and never acted in that capacity (disclaiming trustee),
and to a person who has accepted the office but who is unwilling to act
or to act further as a trustee (refusing trustee).

29. The revised Act should provide that, where a trustee has been removed
under a power conferred by a trust instrument, then, subject to the terms
of a power of replacement in the trust instrument and subject also to
Recommendation 37 concerning the maximum number of trustees, one
or more substitute trustees may be appointed in the place of the removed
trustee as if he had died or, in the case of a corporate trustee, as if it had
expressed in writing a desire to be discharged from the trust.

30. The revised Act should provide that where a trustee refuses to act as
trustee, is a mentally incompetent person, is convicted of an indictable
offence, is bankrupt, or where a person appointed a trustee disclaims the
trust in writing, or where a corporate trustee is dissolved or is in liqui-
dation, and he does not voluntarily retire from the trust, his co-trustees
may by deed declare him to be removed from the trust, if a trust company
or at least two individuals to act as trustees to perform the trust will then
remain, and he should be thereby discharged without any new trustee
being appointed in his place.

31 . With respect to the non-judicial statutory power, unless the court orders
otherwise, the retirement, removal or replacement of a trustee and any
consequential vesting order, declaration or conveyance, should not dis-
charge any person from liability for his own acts or omissions or the acts
or omissions of any former or continuing trustee.

32. Where a trustee establishes before the court that the alleged circumstances
on the basis of which he was removed as trustee did not in fact exist, he
should be able to claim an appropriate award of damages for wrongful
removal against those persons who caused his removal.

33. As is the case under section 36(6) of the English Trustee Act, 1925:

(a) the revised Act should contain a non-judicial power to appoint ad-
ditional trustees;

177

(b) the persons entitled to appoint additional trustees should be the one
or more persons nominated by the trust instrument for the purpose
of appointing new trustees, or, if there is no such person or if there
is no such person able and willing to act, then the trustee or trustees,
other than a person appointed a trustee who in writing disclaims the
trust or who, having neither disclaimed nor resigned, refuses to act
as trustee; and

(c) the non-judicial power to appoint additional trustees should be sub-
ject to Recommendation 37 concerning the maximum permissible
number of trustees.

34. Unlike the position under section 36(6) of the English Trustee Act, 1925:

(a) it should be possible under the revised Act to appoint a trustee who
would be additional to a corporate trustee; and

(b) the revised Act should permit the persons nominated by the trust
instrument for the purpose of appointing additional trustees to appoint
themselves as additional trustees.

35. The revised Act should contain a judicial power of removal and appoint-
ment based on section 5 of the Ontario Trustee Act, which would enable
the court to appoint one or more trustees where there is no existing trustee
or uncertainty as to the existence or identity of any trustee or in substi-
tution for or in addition to one or more existing trustees. In addition, the
court should be able to remove one or more of the trustees, with or
without the appointment of substitute trustees. However, in order to
encourage use of the non-judicial power of appointment and discharge,
the judicial power should be exercisable only in exceptional circum-
stances; that is, where it appears to the court to be in the best interests of
a trust, and where appointment or removal would be inexpedient, difficult
or impracticable without the assistance of the court.

36. The principles contained in section 5(2) of the Ontario Trustee Act should
be retained, and the revised Act should provide that the judicial removal
or replacement of a trustee, and any consequential vesting order, decla-
ration, or conveyance should not discharge any person from liability for
his own acts or for the acts or omissions of any former or continuing
trustee.

37. (1) With regard to the non-judicial appointment of trustees, the revised

Act should contain a provision to the effect that, except with the
consent of the court and notwithstanding an expression of a contrary
intent in the trust instrument, no trust shall have more than four
trustees at any one time. If more than four persons are originally
named as trustees, the first four named who are able and willing to
act should alone be the trustees, and the other persons named should
not be trustees unless appointed on the occurrence of a vacancy or
with the consent of the court.

(2) This recommendation should apply only to trusts that take effect after
the revised Act has come into force.

38. With respect to the judicial appointment of new trustees, whether substi-
tute or additional, the number of trustees so appointed should be left to
the discretion of the court.

39. Section 6(a) of the present Ontario Trustee Act should not be carried over
to the revised Act.

40. The principles contained in section 6(c) of the Ontario Trustee Act relating
to the non-judicial discharge and appointment of substitute trustees should
be retained and expanded in the revised Act to apply to all cases where
two or more trustees are originally appointed by the trust instrument; that
is, two individuals or a trust company should be the minimum number
of trustees permitted to administer the trust. Accordingly, the revised Act
should provide that it is not necessary for more than one trustee to be
appointed by way of substitution where only one trustee was originally
appointed, but, except where only one trustee was originally appointed,
a non-corporate trustee shall not act alone, and a trustee is not to be
discharged unless there will be either a trust company or two or more
individuals to act as trustees. However, the revised Act should provide
that a person may apply to the court for consent to continue to act as a
sole trustee.

41. In relation to the judicial discharge of a trustee, the court should be
empowered to determine the permissible minimum number of trustees
that may remain in office having regard to the best interests of the trust.

42. Section 6(b) of the Ontario Trustee Act should be retained in relation to
the appointment of a substitute trustee, but should be extended in the
revised Act to apply to the appointment of an additional trustee. The
revised Act should contain a provision to the effect that, where it would
assist in the administration of the whole or any part of a trust or where it
would benefit beneficiaries of a trust, one or more separate trustees may
be appointed, whether any such person or persons be an original, substi-
tute or additional trustee or trustees, for any part of the trust property
held on trusts distinct from those relating to any other part, but a separate
sole trustee should be appointed in those circumstances only where a sole
trustee was originally appointed, and for each separately administered
part the limitation upon the number of trustees to four, except with the
consent of the court, should apply.

43. The revised Act should contain a provision to the effect that every
substitute or additional trustee appointed under the Act, before and after
all trust property becomes vested in him, has the same powers, authori-
ties, and discretions and may in all respects act as if he had been originally
appointed a trustee by the trust instrument.

44. A comprehensive provision designed to protect a purchaser of trust prop-
erty against improperly appointed or discharged trustees should be intro-
duced. Accordingly, the revised Act should provide that, subject to the
provisions of Recommendation 45, a deed of appointment or a deed of
discharge of a trustee, whether pursuant to the Act or the trust instrument,

179

should be conclusive evidence of the validity of the appointment or
discharge in favour of a purchaser of trust property.

45. The revised Trustee Act should provide that a purchaser of trust property
who at the time of the purchase has actual notice that an improper act or
omission has occurred in the appointment or discharge of a trustee is not
entitled to rely upon the validity of the deed of appointment or the deed
of discharge unless title to the trust property has been held by a purchaser
without actual notice of the improper act or omission.

46. The revised Act should contain a provision to the effect that the provisions
of Recommendation 44 apply to

(a) a subsequent purchaser who purported to act as a trustee in the
original transfer of trust property, except that such a purchaser does
not take valid title from a purchaser without actual notice of any
impropriety referred to in Recommendation 45; and

(b) a donee of property that was originally trust property, if the title has
been held by a purchaser without actual notice of any impropriety
referred to in Recommendation 45 .

47. The revised Act should contain a provision to the effect that any official,
including the Director of Titles, a land registrar, and any other person
registering or certifying instruments or titles, who makes an entry in a
book or other record in reliance upon an instrument of appointment or of
discharge of a trustee or upon any vesting declaration, express or implied,
consequent upon an appointment or discharge of a trustee, shall be
afforded protection equivalent to the protection afforded a third party
against improperly appointed trustees as proposed in Recommendation
44.

48. Actual notice should not be deemed to have been obtained by a person
referred to in Recommendation 47 merely because the trust instrument
or a part thereof or a copy thereof is attached to or otherwise accompanies
the deed of appointment or the deed of discharge, or because an express
vesting declaration is contained in the deed of appointment or discharge.

49. There should be introduced into the revised Act an improved form of
express vesting declaration based upon section 9( 1 ) of the Ontario Trustee
Act to the effect that a deed, by which one or more substitute or additional
trustees are appointed, or by which a trustee is discharged without another
trustee being appointed, may contain an express declaration that the trust
property vests in the one or more trustees who shall perform the trust as
of the date of the instrument or such other date as is stated in the
instrument for that purpose.

50. The concept of an implied vesting declaration should be introduced into
Ontario. Accordingly, the revised Act should provide that where a deed
by which one or more substitute or additional trustees are appointed, or
by which a trustee is discharged without a new trustee being appointed,
does not contain an express vesting declaration, a declaration that the

180

trust property vests in the one or more trustees who shall perform the
trust should be implied as of the date of the instrument.

51. Subject to Recommendations 57, 59, 60 and 61, a vesting declaration,
express or implied, should take effect as to all trust property, notwith-
standing that any estate, interest or right forming the whole or part of the
trust property is not expressly referred to in the instrument.

52. A provision, modelled on section 49 of the English Trustee Act, 1925,
but expanded to cover all types of property, specifying the effect of an
express or implied vesting declaration should be introduced in the revised
Act. The revised Act should provide that, subject to Recommendations
57, 59, 60 and 61 , a vesting declaration, express or implied, should take
effect as if the estate, interest or right in the property had been actually
conveyed or transferred by deed or otherwise to the one or more persons
in whom the trust property is declared, expressly or impliedly, to be
vested, or, in the case of a chose in action, as if it had been actually
assigned to the last-mentioned person or persons. As this recommenda-
tion incorporates the principle of section 6(d) of the Ontario Trustee Act,
section 6(d) should not be carried over to the revised Act.

53. The revised Act should contain a provision to the effect that, subject to
the provisions of Recommendation 54, a vesting declaration, express or
implied, consequent upon any appointment or discharge of a trustee, is
conclusive evidence of the validity of vesting of trust property in favour
of a purchaser of trust property.

54. A purchaser of trust property who at the time of the purchase has actual
notice that an improper act or omission has occurred in the vesting of the
trust property should not be entitled to rely upon the validity of the vesting
declaration unless title to the trust property has been held by a purchaser
without actual notice of the improper act or omission.

55. For the purpose of Recommendation 53, the proposals contained in
Recommendations 46, 47, and 48 should apply, mutatis mutandis.

56. The revised Act should make it clear that a vesting declaration, express
or implied, should convey, transfer, or assign to the new trustees the
same estate, interest or right in the property as held by the former trustees.

57. The revised Act should provide that where the estate, interest or right
takes the form of a chose in action, a vesting declaration, express or
implied, should be deemed an absolute assignment within the meaning
of section 53 of the Conveyancing and Law of Property Act, and until
express notice in writing is given by the newly vested persons to the
debtor or other person obligated under the chose in action, the vesting
declaration should have effect only as an assignment in equity from the
formerly vested persons to the newly vested persons.

58. The exception from the operation of an express vesting declaration con-
tained in section 9(3) of the Ontario Trustee Act with respect to any
property transferable in a manner prescribed by legislation, but where

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registration is not required to transfer title, should not be carried over to
the revised Act. Rather, title to such property should be transferred by
the operation of the proposed express or implied vesting declaration as
provided in Recommendations 49 and 50.

59. It should be the duty of both the formerly vested persons and the newly
vested persons to ensure that the trust property is actually delivered to
the newly vested persons, but where inspection, cancellation, or endorse-
ment is required by any registering authority and the property cannot be
produced, the newly vested persons should be able to apply for registra-
tion or recording in the same manner and subject to the same terms and
conditions as if the property had been lost.

60. Where actual delivery of trust property has not taken place but transfer
has occurred by operation of a vesting declaration, express or implied,
no right of security or other personal interest of any person in that property
should be destroyed by reason only of the operation of a vesting decla-
ration.

61. Where an estate, interest or right in property can be transferred only by
a registration or recording in a book or similar record, the vesting dec-
laration, prior to the registration or recording, should confer such rights
upon the person so vested as he would have in equity, and it should be
the duty of such person to apply for the required registration or recording.

62. Leasehold property should not be excepted from the operation of a vesting
declaration, express or implied, under the revised Act. However, in order
to avoid the possibility that an assignment might constitute a breach of
covenant, the revised Act should provide that, where leasehold property
is subject to a trust, the vesting of the property in one or more substitute
or additional trustees pursuant to a vesting declaration, express or im-
plied, should not constitute a breach of any covenant or condition against
assignment, subletting, or parting with possession of the property, whether
absolute or with consent, made by one or more former trustees and,
notwithstanding any term in the lease to the contrary, should not give
rise to any forfeiture, right of re-entry, or other claim for breach of such
covenant or condition.

63. Sections 10 and 13 of the present Ontario Trustee Act should be amal-
gamated, and the new section in the revised Trustee Act should empower
the court to make vesting orders in relation to any kind of trust property
or interest in trust property.

64. Rather than provide a specific list of circumstances in which the court is
empowered to make vesting orders, the revised Trustee Act should pro-
vide that, where it appears to the court to be in the best interests of the
trust, the court may vest the trust property or an interest therein in one
or more persons in such manner, for such estate or interest, and on such
terms as the court orders.

65. The authority contained in sections 10 and 13 of the present Trustee Act
to vest trust property where there is uncertainty concerning the existence

182

or identity of a trustee, or where a trustee is incapable of acting, or
refuses to act should not be carried over to the revised Act. Rather, these
matters should be dealt with by the court pursuant to its authority to
remove and appoint substitute and additional trustees contained in Rec-
ommendation 35.

66. The revised Trustee Act should provide that, where a trustee is under a
disability that temporarily precludes his participation in the administra-
tion of the trust, or where a trustee is, by reason of temporary absence,
unable to participate in the administration of the trust, and it appears to
the one or more other trustees that it is desirable to proceed immediately
to deal with the whole or a part of the trust property, and the circum-
stances, in the opinion of the court, do not justify the removal of the
trustee who is under the disability or who is absent, the court may vest
the whole or such part of the trust property in the trustee or trustees,
other than the trustee who is under the disability or is absent, in such
manner, for such estate or interest, and on such terms as the court orders.

67. The revised Trustee Act should provide that, where an order has been
made vesting trust property in the able and remaining trustees, persons
acquiring any trust property vested in the remaining trustees by such
order acquire the title thereto that they would have acquired if the trustee
under disability or absent had been sui juris and had executed and joined
in the delivery to them of the conveyance, transfer, or assignment of the
trust property, or had joined in the delivery to them of the trust property
itself, as the case may be.

68. The revised Trustee Act should provide that a dealing with trust property
vested temporarily in remaining trustees by a vesting order is not a breach
of trust merely because the trustee under disability or absent did not join
or concur in the dealing.

69. The revised Trustee Act should provide that, on the cessation of the
disability or absence of a trustee, the court may make an order revesting
the trust property, or such of it as remains subject to the trust, and any
property received in exchange for it, in all of the trustees.

70. Subject to Recommendation 71 , the revised Trustee Act should empower
the court to make orders vesting trust property in such persons as it thinks
fit.

71 . The revised Act should provide that, where a vesting order is consequen-
tial on the appointment of one or more new trustees, or on the retirement
or removal of a trustee without the appointment of a new trustee in place
of the trustee retiring or removed, the court should vest the trust property
in the person or persons who, on the appointment, retirement, or removal,
are the trustees.

72. The revised Trustee Act should contain a provision, similar to section 79
of the Judicature Act, to the effect that a vesting order under the Act has
the same effect as if the legal or other estate or interest in the property
had been actually conveyed by deed or otherwise for the same estate or

183

interest to the person in whom the property is ordered to be vested or, in
the case of a chose in action, as if it had been actually assigned to the
last-mentioned person.

73. The revised Trustee Act should provide that, where leasehold property is
subject to a trust, the vesting of the property in one or more new trustees
pursuant to a vesting order does not constitute a breach of any covenant
or condition against assignment, subletting, or parting with possession
of the property, whether absolute or with consent, made by one or more
former trustees and, notwithstanding any term in the lease to the contrary,
does not give rise to any forfeiture, right of re-entry, or other claim for
breach of such covenant or condition.

74. Section 13(4) of the present Trustee Act should be carried over, in an
expanded form, to the revised Trustee Act. The revised Act should state
that, where the revised Act provides for the making of a vesting order,
the court may, in lieu thereof, appoint a person to make or to join in
making the transfer of trust property.

75. Section 1 1 of the present Trustee Act should be retained, but should be
relocated in amended form in the Conveyancing and Law of Property
Act.

76. Section 12 of the present Trustee Act should be retained, but should be
relocated in amended form in the Children's Law Reform Act.

77. The revised Trustee Act should provide that for the purpose of vesting
any property in the trustees of any charity, the court may exercise any of
the powers proposed in Recommendations 63 to 73.

78. A sheltering provision based on section 7 of the American Uniform
Trustees' Powers Act should be introduced in Ontario. The revised Act
should provide that, subject to Recommendation 79, a purchaser of trust
property who relies upon the production or registration of a deed of
appointment or a deed of discharge that contains a vesting declaration,
express or implied, whether or not he otherwise has notice of the trust,
should be able to assume without inquiry that the former trustees and the
substitute or additional trustees possessed or possess and properly exer-
cised or are properly exercising every power which they purported or
purport to exercise over the property.

79. The revised Trustee Act should provide that a purchaser of trust property
who at the time of the purchase has actual notice that the trustees do not
possess the power they purport to exercise, or that they are exercising a
power improperly, takes the trust property subject to the terms of the
trust unless title to the trust property has been held by a purchaser without
actual notice that the trustees do not possess the power or that they are
exercising the power improperly.

80. For the purposes of Recommendation 78, the proposals contained in
Recommendations 46, 47, and 48 should apply.

81. Recommendations 78, 79, and 80 should apply where a purchaser
of trust property relies upon the production or registration of a court
order appointing or discharging a trustee or vesting trust property in the
trustees.

82. The exception, now contained in section 9(3) of the Trustee Act, relating
to "land conveyed by mortgage for securing money subject to the trust"
should not be carried over to the revised Act.

83. The revised Act should provide that, where a sole trustee or one or more
trustees have been appointed by a trust instrument to act on the initial
taking effect of the trust, and all or some of them have continued to act
in the absence of an appointment of a substitute or additional trustee,
they may by deed declare that they were appointed by the trust instrument,
and the deed should have effect as if it were a deed of appointment
containing a vesting declaration for the purposes of the application of the
proposed sheltering provisions.

84. The revised Act should contain a provision to the effect that, if original,
substitute or additional trustees assert to a purchaser that the trust instru-
ment permits a majority to bind all the trustees and that they constitute a
majority, the deed of appointment or the deed of discharge, or a deed
executed by the original trustees, or, in either case, a supplemental deed,
should contain a recital quoting the provision of the trust instrument to
that effect, and that the recital is conclusive evidence of the facts so
stated and shall operate to bind the trust in favour of a purchaser of trust
property. However, where, at the time of the transaction, the purchaser
has actual notice to the contrary, the recital should not have the recom-
mended effect unless title to the trust property has been held by a pur-
chaser without such actual notice.

85. The recommendations that deal with the protection of third parties against
improperly appointed trustees and against trustees who lack the power to
act or who are acting improperly, and the recommendations that deal
with the vesting of trust property should be mandatory and therefore not
subject to exclusion by a contrary intent expressed in the trust instrument.

86. Except for an express vesting declaration having effect only as set out in
section 9 of the present Ontario Trustee Act, the proposed sheltering
provisions should only apply to deeds of appointment and of discharge
and to vesting orders executed or made after the revised Act has come
into force.

CHAPTER 4

ADMINISTRATIVE
POWERS OF TRUSTEES

1. INTRODUCTION

A trustee, although vested with title to trust assets, is denied the powers
of disposition and management that are enjoyed by an absolute owner. The
trustee must manage the trust assets on behalf of others according to the
authority conferred upon him by the trust instrument or by statute, and must
act with "vigilance, prudence and sagacity".1 Generally, the administrative
powers conferred upon a trustee by the trust instrument will complement the
intended object of the trust. However, over the years, the purposes for which
trusts are created have undergone significant change.

In England in the eighteenth and nineteenth centuries, the usual object of
a trust was the preservation of an estate of land, including a "mansion house",
for successive generations of the family of the creator of the trust. Trustees
needed the power to manage the property as would an estate holder. In a
well-drawn instrument, trustees would have been empowered to mortgage,
lease, carry out repairs to the buildings, erect buildings, enter into agreements
concerning easements and covenants, and engage in a number of similar acts.
However, it is unlikely that the trustees would have been empowered to sell
the land or, indeed, any part of it, since the whole purpose of the trust was
to preserve that particular land and house for the family.

With the growth of mercantilism in the eighteenth century, the so-called
"traders' trust" became familiar. As with the settlement of land, the creator
of this trust would usually have had in mind the welfare of his family, but,
unlike the strict settlement, the assets conveyed to trustees would have been
mixed in kind, comprising both land and securities. The task of the trustees
would have been to invest those assets in such a way that they would be as
productive as possible for the beneficiaries, within the criteria of sound
investment. Such trustees would have needed powers not only to ensure that
land and other assets held by the trust were properly managed, but also to
sell the trust assets when this would have been a wise course of action.
Trustees would also have needed the power to deal with securities as an
investment; that is, to buy and sell, to exchange, to agree to the reorganization

1 Fates, Wohlleben v. Canada Permanent Trust Co. , [1977] 2 S.C.R. 302, at 3 1 8. ( 1977),
70 D.L.R. (3d) 257, at 270, [ 1976] 6 W.W.R. 10, at 22 (S.C.C.).

85]

186

of companies and to amalgamations, and, generally, to handle a portfolio of
securities as would any investor.

Today, trust instruments have different objects in many respects from
those drawn in the nineteenth and early part of the twentieth century. In
particular, tax-saving has become an increasingly significant object of inter
vivos trusts. Such trusts, and testamentary trusts faced with the same incidence
of high taxation, often confer upon trustees extensive discretionary powers
in relation to the administration of trust property, powers that would possibly
have been unknown and, indeed, unacceptable in earlier times. Even if tax-
saving is not a primary reason for the creation of a trust, changed economic
circumstances and new taxation provisions have rendered largely obsolete
certain administrative powers that were widely employed only a few years
ago.2

Legislation did not intervene in the area of trustee administrative powers
until almost the middle of the nineteenth century.3 At that time, legislators
began to confer upon trustees certain administrative powers that well advised
settlors and testators typically gave to their trustees. These powers applied to
the management of both land and securities, but they were not imposed upon
those creating trusts. The object of the legislation was to ensure that powers
normally contained in trust instruments would not be denied trustees if, by
inadvertence, they had been omitted from the trust instrument. The legislators
foresaw that some settlors and testators might not wish to have any of these
statutory powers apply to their trusts, and the legislation provided, therefore,
that the powers would be read into each trust instrument only so far as they
were not expressly or impliedly excluded.

This practice, initiated by the trustee legislation of England, was adopted
in most Commonwealth jurisdictions. Today, for example, the trustee legis-
lation of the common law provinces and the territories of Canada, the states
of Australia, and New Zealand incorporates, in some form, an extensive set
of administrative powers, which the creator of a trust is free to amend or
reject, expressly or impliedly, as he desires. However, with the development
of the trust from an instrument concerned with the preservation of an estate
in land to a complex device of tax-saving and investment management, the
administrative powers that are widely employed today are conferred, for the
most part, by the trust instrument and bear little resemblance to many of the
powers contained in trustee legislation.

The questions that arise, therefore, are whether the revised Act should
continue the tradition of enumerating specific administrative powers and, if
so, the powers that should be specified, and the form that they should take.
In addressing these questions, this chapter will examine the following topics:

For example, in light of the taxation provisions concerning spousal trusts, the insertion
in the trust instrument of a power of advancement in favour of the remainderman with
the consent of the life tenant, where the latter is the surviving spouse, would now taint
the spousal trust.

Trustee administrative powers first became the subject matter of legislation in England
in An Act for better securing Trust Funds, and for the Relief of Trustees (1847), 10 &
11 Vict.,c. 96 (U.K.).

187

(1) the power of investment; (2) ancillary powers of property management;
and (3) the power to allocate receipts and disbursements between income and
capital beneficiaries.

2. THE POWER OF INVESTMENT

(a) Introduction

The investment policy of modern trustees, whether the trust owns one
asset, such as a mortgage debt, or a portfolio of securities, can have a
profound effect on the degree of real benefit obtained from the trust by its
beneficiaries. Generally, every trustee has the duty to conduct all trust affairs
with "vigilance, prudence and sagacity".4 In relation to trust property, unless
the trust instrument provides to the contrary, trustees must ensure that all
trust assets are productive to the maximum degree that the market permits,
short of speculation. As a result, trustees are required to sell, purchase, and
invest assets in the same manner as would a prudent man of business in the
circumstances. Trustees must be aware both of income return and of capital
appreciation, a factor that will be of particular significance if the trust is in
favour of both income and capital beneficiaries. They must have in mind not
only the objects that the trust seeks to achieve, but also that they are investing
the assets of others for their benefit. These considerations require conserva-
tism and forbid speculation.

In Ontario, the statutory power of investment has, since its inception
over one hundred years ago, permitted investment by trustees only in certain
kinds of securities, commonly referred to as the legal list.5 The statutory legal
list of authorized investments applies to all trustees, unless the trust instrument
provides otherwise, that is, unless the settlor or testator chooses either to
confer upon his trustees broader powers of investment or to restrict the
application of the statutory powers.6 In this portion of the chapter, we shall
examine the utility of retaining the statutory legal list in the revised Act, and,
in this regard, the following topics will be discussed: (1) the statutory legal
list investment power, its history and status today; (2) the "prudent man" rule
of investment; (3) the objectives and problems of contemporary trustee in-
vestment; and (4) the alternative approaches to, and recommendations for,
reform.

(b) The Legal List

(i) The Ontario Trustee Act

The legal list of authorized investments is contained in sections 26 and
27 of the Ontario Trustee Act. These sections prescribe a range of securities

4 Supra, note 1 .

1 The legal list of authorized investments was first introduced in Ontario by An Act to

Confer certain Powers on Trustees and Executors ( 1 868-69), 32 Vict. , c. 37, s. 1
Trustee Act, R.S.O. 1980, c. 512, ss. 26, 27, 67, and 68.

188

in which trust assets may be invested, and provide that a trustee may invest
trust money in his hands in these classes of securities, but only if the invest-
ment is "in other respects reasonable and proper".7 In this way the sections
incorporate the common law rule of prudence.8

The investments contained in section 26 include the securities of the
Canadian federal government, any provincial government, the United King-
dom government, and any Canadian municipal corporation, including taxa-
tion secured bonds within Canada. Section 26 also lists as authorized investments
first mortgages on real estate in Canada, Government of Canada subsidy
bonds, loan company debentures, trust company guaranteed investments,
securities of the International Bank for Reconstruction and Development, and
finally deposit documentation issued or endorsed by any Canadian chartered
bank.

Section 27 provides that, in addition to the investments authorized by
section 26, a trustee holding trust money for investment may invest such
money in the classes of investment authorized by the section. These invest-
ments include bonds or similar securities issued by any corporation incorpo-
rated in Canada, provided that the issue is secured by a trust deed on specified
assets of the corporation or by a federal or provincial guarantee of payment.
Debt securities or preferred shares of any corporation are also authorized by
this section, provided that in either case the interest set has been paid for each
year of the five years preceding any investment by the trustee, and a dividend
of at least four percent has been paid on the corporation's common shares for
each year of the previous five years. Common shares may be the subject
matter of investment, but only on the condition that the corporation in question
has paid a dividend of at least four percent on those shares in each year of
the previous seven years.

While each section lists authorized investments, the greater part of the
trust assets must be invested in section 26 securities. This is required by
section 27(2) of the Act, which prescribes that no more than thirty-five percent
of the trust assets may be invested in section 27 securities. However, section
27(3) adds that no sale or liquidation of investments is called for by reason
only of any change in the ratio between the market value of section 27
investments and the market value of the whole of the trust estate. Aside from
this restriction, the Ontario Trustee Act does not specify further how the
investment of trust assets should be distributed between section 26 and 27
securities: that is, the Act imposes no express duty to diversify investments,
and it is not clear whether case law insists upon diversification as a measure
of prudence.9 It may be argued therefore that, whether trustees are limited to

Trustee Act, ibid., ss. 26-27

See Waters, Law of Trusts in Canada (1974), at 685-87, for an analysis of the common
law standard of care required of trustees in relation to their investment powers.

See Re Smith, [1971] 1 O.R. 584, 16 D.L.R. (3d) 130, affd [1971] 2 O.R. 541, 18
D.L.R. (3d) 405 (C.A.). Although the case was decided and upheld on the ground that
the trustee had failed to hold an even hand between the income and capital beneficiaries,
Keith J. noted that the trustee had not failed to exercise prudence and reasonable care
when he had failed to diversify the investment of the fund. In the case, however, while
the single investment had a low income return, there was a significant capital gain for
the trust. As Waters points out, one wonders whether a trustee would be liable for,
among other things, a failure to diversify, if both the income and capital return of the
investment had declined substantially: see Waters, supra, note 8, at 688.

189

statutorily authorized investments, or are given a wider power of investment
under the trust instrument, if the investment is held to be "in other respects
reasonable and proper" within the meaning of the Act, trustees will not have
acted improperly even if they invest the whole of the trust assets in section
26 bonds.

Sections 28 to 32 contain supplementary provisions on the subject of
trustee investment. Section 28 designates the institutions in which trustees
may deposit trust money prior to investment. Section 29 empowers trustees
to vary or transpose any trust investment into or for any other security
authorized by the statutory legal list. Section 30, in effect, prohibits trustees
from investing in mortgages or other secured loans until they are advised on
each occasion by a valuator; in this event, they may advance no more than
three-quarters of the valuation given. If they do advance more, and the
investment is otherwise proper, section 31 provides that they are only liable
for breach to the extent by which the amount advanced is in excess of the
authorized amount. Lastly, section 32 provides that trustees shall not be liable
for breach by reason only of continuing to hold an asset that has ceased to be
an investment authorized by the instrument or by the statute.

Before considering what types of change, if any, should be made to the
Ontario Trustee Act investment powers, it will be useful to examine the
historical background of the legal list in both England and the Common-
wealth.

(ii) The History of the Legal List

a. England

The investment role of trustees developed in England during the late
seventeenth and early eighteenth centuries. The overseas territories that Eng-
land began to acquire in the early seventeenth century, and the growth in that
century of the chartered trading companies,10 were both factors in the expan-
sion of trade. These companies brought with them the concept of stock and,
as the seventeenth century came to a close, the English government - the
government of Great Britain, as it was to become in 1707 - also issued
securities against the indebtedness that it had incurred for national expenditure
purposes. The existence of government, Bank of England, and trading com-
pany securities encouraged investment by residents of Britain in assets other
than land.

In the first decade of the eighteenth century, those with funds to invest
took advantage of the new and exciting prospects of rapidly acquired wealth
that the novel investments appeared to offer. Indeed, there is evidence from
the law reports that the courts saw no reason why trust funds should not also

10 The East India Company was founded in 1600, and the Hudson's Bay Company in 1670.
The Bank of England was established in 1694, and 1693 marked the beginning of the
National Debt.

190

be invested in the same manner." To modern eyes the stock organization of
these early companies was unsophisticated. Security existed only so long as
successful trading continued. If a company were to falter, the outcome was
usually irrecoverable loss to the investors. At that time there was a lack of
reasonable caution concerning investment of funds in these trading ventures.

A sketch of the history of this period, however brief, would not be
complete without mention of the South Sea Company, founded in 1710, and
the governmental sanction that was given to the company's plan to buy out
the holders of the National Debt through the issue of its stock. I2 The Company
was formed to trade in the Pacific Ocean area and in the Americas, an
attractive market. However, speculation was so intense and the issue of stock
so considerable that, although Parliament at Westminster attempted to curb
the early flood of speculative buying,13 the "Bubble" burst. The ruin for many
investors was complete, and investments that were lost included the funds of
many trust beneficiaries. The ultimate collapse, ending the boom, left a tide
of apprehension regarding any trustee investment in trading companies, which
was to last until well into the nineteenth century.

The liberal approach of the courts to the investment of trust funds was
dramatically reversed as soon as the South Sea Bubble collapsed.14 This
reaction resulted in the "court-made list" of authorized investments for trust-
ees, which was the forerunner of the statutory "legal list". Unless expressly
permitted by the trust instrument,15 or authorized by Parliament, the English
courts thereafter did not allow trustees to invest in the stocks of private
enterprises. After the collapse, the courts allowed investment only in Bank
of England three percent Consolidated Annuities.16 The stock of the Bank
itself was excluded, even though it was a perfectly safe security.17 Also

11 See, for example, Trenchard v. Wanlex (1723), 2 P. Wms. 166, at 168, 24 E.R. 685,
at 685-86 (Ch.), and Jackson v. Jackson (1737), 1 Atk. 513, at 514, 26 E.R. 324, at
325 (Ch.).

12 South Sea Company Act (1710), 9 Anne, c. 21 (U.K.). The South Sea Company was
thereafter incorporated as "The Governors and Company of Merchants of Great Britain
trading to the South Seas and other Parts of America and for encouraging the Fishery".
That the government encouraged fiduciaries to invest in the stock of the South Sea
Company is evidenced by An act for enabling the South-Sea Company to encrease their
present capital stock and fund etc. (1719), 6 Geo. 1, c. 4, s. 23 (U.K.).

13 Royal Exchange and London Assurance Corporations Act (1719), 6 Geo. 1, c. 18
(U.K.). The so-called "Bubble Act" was designed to end the problem, but it caused such
a panic that the company was saved from oblivion only by further governmental inter-
vention: see, generally, Gower, Cronin, Easson, and Wedderburn (eds.), Gower's Prin-
ciples of Modern Company Law (4th ed., 1979), at 28-32.

14 See, for example, Trafford v. Boehm (1746), 3 Atk. 440, at 444, 26 E.R. 1054, at 1056
(Ch.), and Adye v. Feuilleteau (1783), 1 Cox 24, at 26, 29 E.R. 1045, at 1046 (Ch.),
where Baron Hotham called investment in private securities "a species of gambling".

15 Even where the trust instrument permitted investment in private securities, the courts
construed the enabling power strictly: see Trafford v. Boehm, supra, note 14, at 444
(Atk.), 1056 (E.R. ).

16 This was the investment traditionally employed by the courts for the investment of funds
in court: see Peat v. Crane, cited in Hancom v. Allen (1774), Dick. 498, at 499, 21
E.R. 363 (Ch.).

17 Howe v. Lord Dartmouth (1802), 7 Ves. Jun. 138, at 150, 32 E.R. 56, at 61 (Ch.), per
Lord Eldon (subsequent references are to 32 E.R.).

excluded were all public annuities that were not government annuities and,
indeed, government or bank annuities other than the Bank of England three
percent Consolidated Annuities.18 Even first mortgages, although favoured
by some Chancery courts,19 did not receive general judicial approval.20 How-
ever, if loss ensued by reason of investment in Bank of England three percent
Consolidated Annuities, trustees might effectively defend themselves on the
ground that they had invested in the "court-made list".21

As late as the mid-nineteenth century, when confidence in investments
other than Bank of England three percent Consolidated Annuities began to
return, the courts condoned, but did not encourage, mortgage investment.22
The fear was still that the security, the land, might diminish in value. Grad-
ually, government securities began to earn judicial consent. Nonetheless,
Parliament was consistently looked to as the only body that should authorize
change in permissible trustee investment practice, unless, of course, the
settlor or testator had seen fit to confer additional investment powers upon
his trustees.

In 1859, Parliament intervened to broaden the investment power of trust-
ees by the introduction of the "legal list" of trustee investments. An Act of
that year, commonly known as Lord St. Leonard' s Act ,23 authorized as trustee
investments the stock of the Bank of England and Ireland, thereby reversing
the judicial prohibition against investment in bank stock. Further, the Act
settled the difference of judicial opinion concerning mortgage investment in
that it permitted trustees to invest in mortgages of real property in England,
Wales, and Ireland. In addition, the Act approved as an authorized investment
the stock of the highly successful East India Company. Parliamentary action
continued and, in I860,24 the Court of Chancery was empowered to authorize
investment "in three percent Consolidated or Reduced, or New Bank Annu-
ities, or in such other stocks, funds or securities" as it thought fit.25 However,
in 1888, the interest on Consolidated Annuities was statutorily reduced to
two and one-half percent,26 an event that prompted the demand for real change
in the range of trustee investments. Trustees and their advisers looked to
Parliament to authorize investment in the new commercial wealth of the
country. As a result, in 1889, the debentures and preference shares of railway

18 Bank of England three percent Consolidated Annuities were presumably preferred be-
cause their low rate of interest made them least likely to be redeemed. As a result, even
four and five percent annuities would be ordered to be sold and reinvested in the three
percent annuities: see Howe v. Lord Dartmouth, ibid., at 61-62.

19 See, for example. Brown v. Litton (1711), 1 P. Wms. 140, 24 E.R. 329 (Ch.); Knight
v. Earl of Plymouth (1747), Dick. 120, 21 E.R. 214 (Ch.); and Pocock v. Reddington
(1801), 5 Ves. Jun. 794, 31 E.R. 862 (Ch.).

20 Exp. Cathorpe(\185), 1 Cox 182, 29 E.R. 1 1 19 (Ch.).

21 Howe v. Lord Dartmouth, supra, note 17, at 61.

22 Rahy v. Ridehalgh (1855), 7 De G.M. & G. 104, 44 E.R. 41 (Ch. D.); Howe v. Lord
Dartmouth, supra, note 17, at 61 .

23 Law of Property Amendment Act, 1859, 22 & 23 Vict., c. 35, s. 32 (U.K.).

24 Law of Property Amendment Act, 1X60, 23 & 24 Vict., c. 38, s. 1 1 (U.K.).

25 See, generally, Mowbray (ed.). Lewin on Trusts ( 16th cd.. 1964), at 322.

26 National Debt (Conversion) Act, 1888. 51 & 52 Vict., c. 2 (U.K.).

192

•

companies, provided those companies had paid at least a three percent divi-
dend on their common stock in each of the two previous years, were added
to the legal list.27 In 1893, the two year dividend requirement was extended
to ten, due to the heavy post- 1889 investment in railways.28 Also in 1893,
the legal list was increased by the addition of securities of large municipalities,
certain utilities, and Indian government and railway securities.29 By this latter
addition, trustees could invest for the first time in the wealth generated by
the Empire, a process that gathered momentum in 1900, when trustees were
allowed to invest in a large number of colonial stocks, as long as the stocks
were registered in England.

These authorized investments were consolidated in the English Trustee
Act, 1925, n and the character of the legal list remained substantially in this
form until the Trustee Investments Act, 1961 .32 During the intervening years,
the securities of new public authorities were added on an ad hoc basis.33
Although the inclusion of private company securities in the English Trustee
Act, 1925 was considered, it was rejected in favour of the established policy
of permitting only fixed-interest securities

The weakness of this policy began to emerge in the 1930's. As full
independence came to Dominion and former Colonial territories, their secu-
rities no longer qualified under the legal list, and, as a result, the number of
authorized overseas securities lessened significantly.35 The economic conse-
quences of the Depression also resulted in the disqualification of many other
investments within the United Kingdom. After 1945, the pace of conferment
of independence upon dependent territories quickened. Moreover, other fac-
tors appeared at this time that were deleterious to the legal list philosophy,
namely, a sinking pound sterling, high inflation, and the conversion of com-
mercial stock into government securities as a consequence of the nationali-
zation of major industries, which thereafter rapidly declined in value.36

The economic ravages wrought by two successive world wars further
beggared nations and their citizens alike. In the significant commercial re-
covery of the 1950's, it was common stock that provided the best hedge

27 Trust Investment Act, 1889, 52 & 53 Vict., c. 2 (U.K.).

28 Trustee Act, 1893, 56 & 57 Vict., c. 53 (U.K.).

29 Ibid.,s. 1.

30 Colonial Stock Act, 1900, 63 & 64 Vict., c. 62 (U.K.).

31 Trustee Act, 1925, 15 & 16 Geo. 5, c. 19, s. 1 (U.K.).

32 Trustee Investments Act, 1961, 9 & 10 Eliz. 2, c. 62 (U.K.).

3 See, generally, Keeton, The Law of Trusts (9th ed., 1968), at 247 et seq., and Lewin on
Trusts, supra, note 25, at 322 et seq., for a review of the historical development of trust
investment powers in England.

34 See Keeton, supra, note 33, at 250.

35 Ibid.

36 See Keeton, The Investment and Taxation of Trust Funds (1964), at 1 1 . Shareholders
were compelled by the government to convert their holdings into government stock at
low interest rates. The stock was usually irredeemable, and it declined to about forty
percent of its nominal value.

193

against inflation, and most well advised testators and settlors conferred upon
their trustees considerably greater investment freedom than that authorized
by the Trustee Act, 1925. Those trusts that were restricted to the legal list,
especially charitable trusts, suffered greatly.

In 1952, the Nathan Committee37 recommended to Parliament that the
concept of a legal list be retained. The Committee gave no reason for this
view, beyond saying that trustee investments were outside its mandate, which
was solely to inquire into the law concerning charitable trusts. However, it
did recommend that common stock should be included in the legal list, subject
to certain qualifications. The Committee considered that not more than fifty
percent of a total trust fund should be capable of investment in other than
listed gilt-edged stocks,38 and that before the debentures, stocks, and shares
of a financial, industrial, or commercial company could qualify, the company
must have paid at least four percent on its common shares in each year over
the period of the previous ten years, and issued shares, quoted on the London
Stock Exchange, to the value of at least one million pounds sterling. More-
over, the company's qualifying debentures and preference shares had to be
first priority securities.

This recommendation did not receive statutory implementation, and hard-
pressed trustees tied to the legal list continued to look to Parliament to add
further investments to the restricted list contained in the Trustee Act, 1925.
A partial solution to this unsatisfactory situation was provided by the Varia-
tion of Trusts Act, 1958™ which facilitates the amendment of trustees' in-
vestment powers under the trust instrument, but only if there are minor or
incapacitated beneficiaries and all adult and capacitated beneficiaries consent.
Otherwise, trustees had to rely on the court to confer upon them, in particular
situations, an investment power found to be desirable, but not included in the
trust instrument.40 It was not until the introduction of the Trustee Investments
Act, 196141 that the statutory investment power was recast.

As a result of several studies, debates, and requests for reform,42 Parlia-
ment passed the Trustee Investments Act, 1961 . Briefly stated, its first object
was to increase the categories of investment available to trustees who had not
been given a wider power of investment by the trust instrument, and its
second object was to ensure that trustees would take advice from qualified
persons before making investment decisions. We shall examine the specific
contents of the Act in a later section of this chapter.

37 The Committee on the Law and Practice relating to Charitable Trusts (Cmd. 8710,
1952).

38 Ibid., para. 289, at 67.

39 6&7Eliz. 2, c. 53 (U.K.).

40 Trustee Act, 1925, supra, note 31, s. 57(1). See, also, infra, this ch., sec. 3(b)(i)a.

41 Supra, note 32.

42 See, for example, the Committee on the Law and Practice relating to Charitable Trusts.
supra, note 37, and Latham, "Trustee Investments and American Practice" (1954), 7
Curr. Legal Prob. 139, 153.

43 See infra, this ch., sec. 2(b)(iii)b.

194

b. Canada

The development of trust investment in Canada began at a time later than
the South Sea Bubble disaster in England. As a consequence, the Canadian
provinces and territories adopted from the beginning the concept of the court-
made list and later the legal list.

With only minor differences, the Canadian provinces and territories fol-
lowed English developments in this area, gradually liberalizing the legal list.
In Ontario, legislation was first enacted in 1868,44 when Canadian federal and
Ontario provincial securities were approved for trustee investment. In 1879,45
the debentures of certain trust and loan companies were added as authorized
investments, and, in 1886, a Statute Amendment Act46 permitted trustees to
invest in first mortgages, thus recognizing a long-time practice among Ontario
trustees. From this time forward a series of Acts expanded the legal list.47 In
general, the character of investments authorized by the legislation of the
Canadian provinces and territories was similar to that of the investments
contained in the legal list in England: fixed-interest securities issued or guar-
anteed by federal, provincial, or municipal governments; first mortgages on
land, in a gradually increasing list of provinces; and securities issued or
guaranteed by the United Kingdom government. As previously noted, these
investments are now contained in section 26 of the Ontario Trustee Act.

It was not until 1960 that Ontario added a new provision to the Trustee
Act, now section 27, to permit trustees restricted to the legal list to invest in
corporate debt obligations and preference and common shares.48 In adding
corporate securities to the legal list, the legislature was, it seems, influenced
by the Uniform Trustee Act adopted in 1957 by the Conference of Commis-
sioners on Uniformity of Legislation in Canada.49 Responding in 1951 to
criticism of the restrictive legal lists that prevailed in Canadian jurisdictions
at that time, the Commissioners commenced work on a Uniform Act. Al-
though their first draft made no reference to corporate preferred or common
shares, two later drafts included such securities, with the qualification that a
four percent dividend on preferred shares of qualified corporations must have

An Act to Confer certain Powers on Trustees and Executors, supra, note 5.

An Act respecting Investment of Trust Funds ( 1 879), 42 Vict. , c. 2 1 , s. 1 .

The Statute Amendment Act , 1886, 49 Vict., c. 16, s. 24.

47 An Act amending The Trustee Investment Act (1900), 63 Vict., c. 18, s. 1; The Statute
Law Amendment Act, 1907, 7 Edw. 7, c. 23, s. 2; The Trustee Acr (1911), 1 Geo. 5,
c. 26, s. 21;The Trustee Act, 1919, S.O. 1919, c. 31, s. 2; The Statute Law Amendment
Act, 1933, S.O. 1933, c. 59, s. 17; The Trustee Act, 1934, S.O. 1934, c. 60, s. 3; The
Trustee Amendment Act, 1952, S.O. 1952, c. 109, s. 1; The Trustee Amendment Act,
I960, S.O. 1960, c. 126, s. 1; The Trustee Amendment Act, 1965, S.O. 1965, c. 134,
s.l; and The Trustee Amendment Act, 1970, S.O. 1970, c. 39, s. 1.

The Trustee Amendment Act, 1960, supra, note 47, s. 1 . At that time, the consent of the
Supreme Court was required for investment in the securities listed in s. 27, a requirement
that was dropped in 1969: see The Trustee Amendment Act, 1968-69, S.O. 1968-69,
c. 134, s. 1.

Proceedings of the Thirty-Ninth Annual Meeting of the Conference of Commissioners
on Uniformity of Legislation in Canada (1957), at 24 and 82-86. It should be noted that
in 1974 the Conference changed its name to the Uniform Law Conference of Canada.

195

been paid in each year of the five preceding years, and that a similar dividend
for each year of the previous seven years must have been paid on common
shares. However, the Commissioners were unable to agree upon this matter,
and the final draft Act in 1957 included only the debt securities of qualifying
corporations.

In the very year of the approval of the Act, 1957, Nova Scotia enacted
the Uniform Act,30 with one important difference. The difference was that
the Nova Scotia legislation followed the earlier drafts of the Commissioners
and permitted trustees to invest in preferred and common shares. This statu-
tory initiative started a trend that spread across Canada. In 1960, as we have
seen, Ontario enacted section 27 of the Trustee Act to allow investment in
corporate debentures, preferred and common shares,51 provided that the con-
sent of the Supreme Court had been obtained on application by trustees
wishing to invest in this manner. During the period between 1957 and 1970,
one Canadian jurisdiction after another amended its trustee legislation to
permit investment in corporate securities.52 In 1969, Ontario dropped the
requirement of judicial consent.53

In 1965, the Conference of Commissioners on Uniformity of Legislation
in Canada returned to the subject of trustee investment in view of the fact
that most provincial trustee legislation had gone beyond the 1957 Uniform
Act.54 In 1970, a new Uniform Act was adopted that departed entirely from
the concept of the legal list.55 This Act proposed a new investment power,
namely, the prudent man concept, an approach that will be discussed in
greater detail in a later section of this chapter. -

Trustee Amendment Act , S.N.S. 1957, c. 54.

Ontario adopted a varied form of the drafts of the Uniformity Commissioners that had
specified the dividends and the length of time prior to an investment that the dividend
must have been paid. For investment in preference shares, Ontario required only a
dividend at the set rate on all the issued preference shares and adopted the period of five
previous years; it required as an alternative a four percent dividend on all the company's
issued common shares, but required only a previous five years of such payment. For
investment in common shares, Ontario adopted the Commissioners' earlier drafts - four
percent on all its common shares over the preceding seven years.

It is also a possible explanation of its actions that in 1960 Ontario simply followed
the then formulae for authorized investments contained in Part III of the Canadian and
British Insurance Companies Act, S.C. 1932, c. 46, s. 63(b)(ii), (iii), and (v), then
enacted as R.S.C. 1952, c. 31, s. 63(1 )(/), (k), and(/). The latter Act was later amended
(S.C. 1964-65, c. 40, s. 5(5)) to permit investment in common shares, if the qualifying
company had paid a four percent dividend in each of the preceding five years, or had
earnings in each such year available to pay such a dividend.

For a comprehensive summary of those Canadian jurisdictions that permit trustee in-
vestment in corporate securities, see Waters, supra, note 8, at 987-95.

The Trustee Amendment Act, 196H-69, supra, note 48, s. 1.

Proceedings of the Forty-Seventh Annual Meeting of the Conference of Commissioners
on Uniformity of Legislation in Canada ( 1965), at 31 .

Uniform Trustee Act, Proceedings of the Fifty-Second Annual Meeting of the Confer-
ence of Commissioners on Uniformity of Legislation in Canada (1970), at 35 and
115-17.

See infra, this ch., sec. 2(c)(ii)b.

196
(iii) The Legal List Today

a. Canada

Today, eight provinces possess in their trustee legislation a list of per-
mitted investments.57 New Brunswick and Manitoba,58 the Northwest Terri-
tories,59 and the Yukon60 are the exceptions, and instead have adopted the
investment power proposed in 1970 by the Conference of Commissioners on
Uniformity of Legislation in Canada, namely, the prudent man concept. Of
the jurisdictions that retain a legal list approach to trustee investments, we
have already examined in detail the provisions that are contained in the present
Ontario Trustee Act.61 The remaining jurisdictions follow, in substance, the
Ontario pattern. However, they differ from Ontario in that there is no com-
plete matching of authorized investments, nor of qualifying conditions. For
example, Newfoundland does not permit investment in corporate preferred
shares, and, together with Saskatchewan, does not permit investment in
common shares. All of the legal list jurisdictions place restrictions upon the
percentage of trust funds that may be invested in a particular range of invest-
ment, but differ both as to the securities that are included within the percent-
age and as to the level of percentage prescribed.'

Finally, it should be noted that legislation, other than trustee legislation,
employs a legal list concept for investment purposes. An example of such a
list is contained in the federal Canadian and British Insurance Companies
Act,63 designed for the investment of the funds of life and other insurance
companies. It is interesting to note that in private trusts the investment power
of trustees is frequently expressed by reference to this Act. However, in such
cases of incorporation by reference, the Act's percentage limitation, which
brings about diversification within the authorized list, is usually made ex-
pressly inapplicable by the trust instrument.

b. England

It will be recalled that in 1961 England recast the statutory investment
power with the enactment of the Trustee Investments Act, 1961 ,64 The Act,
which constitutes the statutory investment power for trustees in England

7 See Waters, supra, note 8, at 987-95, for a comparative survey of the investment powers
under the investment sections of the provincial Trustee Acts.

58 See, respectively, the Trustees Act, R.S.N.B. 1973, c. T-15, s. 2, and An Act to Amend
The Trustee Act, infra, note 182. For a discussion of the recent Manitoba legislation,
see infra, sec. 2(c)(ii)b.

59 Trustee Ordinance, R.O.N.W.T. 1974, c. T-8, s.3.

60 Trustee Ordinance, R.O.Y.T. 1978, c. T-5, ss.3 and 4, as am. by O.Y.T. 1980 (1st),
c. 33, s. 1(1).

61 See supra, this ch., sec. 2(b)(i).
See Waters, supra, note 8, at 993-95.
R.S.C. 1970, c. 1-15, s. 63.
Trustee Investments Act, 1961, supra, note 32.

197

today, was intended to confer upon trustees a wider power of investment than
had previously existed and to ensure that trustees sought advice from invest-
ment experts before investing in a particular security.

To secure the first objective, the Act classifies investments into narrower-
range and wider-range investments.65 Narrower-range investments are divided
into two lists. The first, Part I investments, consists of various kinds of
savings bonds and savings accounts.66 The second, Part II investments, con-
tains the investments that were authorized by the Trustee Act, 1925, with
some additions of a similar nature.67 The wider-range investments, Part III
investments, consist of debentures, stocks, and shares issued in the United
Kingdom, including the common stock and shares of financial, industrial,
and commercial companies registered in the United Kingdom.68 A qualifying
company must have at least one million pounds sterling of issued and paid-
up capital and have paid a dividend on all its shares in each of the five years
previous to the investment,69 although the Act does not state that the dividends
must satisfy any particular percentage requirement. Also included in Part III,
the wider-range investments, are unit trusts and shares in designated building
societies.

A trustee may invest up to fifty percent of the trust assets in Part III,
wider-range, investments. Specifically, section 2(1) of the Act provides that
a trustee who wishes to invest in wider-range securities must first divide the
total fund into two equal parts. Thereafter, for investment purposes, the two
halves must be kept completely distinct, one half being invested in the
narrower-range investments and the other half being invested in the wider-
range investments. Although subsequent accruals to either portion may re-
main in that half, any transfer of investments from one half to the other must
be accompanied by an equivalent value transfer in the reverse direction. New
funds coming to trustees may always be invested entirely in the narrower-
range investments, but only one half of such funds may be invested in the
wider-range investments. The powers contained in the Act are in addition to
and not in derogation from any other investment powers conferred upon
trustees by the trust instrument, or otherwise by statute, or by a court order.70
The Act contains complex provisions to deal with these other investment
powers that trustees might possess. These powers are known under the Act
as "special powers", and property acquired pursuant to such powers is desig-
nated "special-range property".71

The second objective of the Trustee Investments Act, 1961 , namely, to
ensure that trustees act only upon proper advice, is secured by prescribing

65 Ibid., s. 1(4). See, also, Pettit, Equity and the Law of Trusts (4th ed., 1979), at 277-90,
for a detailed examination of the English trustee investment powers.

66 Trustee Investments Act, 1 961 , supra, note 32, Schedule 1, Part I'-

67 Ibid., Schedule I, Part II.

68 Ibid. , Schedule 1, Part III.

69 Ibid., Schedule 1, Part IV.

70 Ibid.,s. 3(1).

71 Ibid., s. 3(3). Schedule II, para. 1. See, also, Pettit. supra, note 65, at 279-80.

198

the investment considerations that trustees are to entertain, and when they
must seek advice.72 Trustees are to consider the types of investment they
should acquire and the suitability of the proposed investment to the needs of
their particular trust.73 The relevant provisions seem to do no more than
specify the common law duty of care. Quite new to English trustee legislation,
however, is the requirement that trustees shall have regard to the need for
diversification of investments of the trust, "in so far as is appropriate to the
circumstances of the trust".74 As a result, it would appear that trustees oper-
ating under the Act can no longer invest heavily in one or two authorized
investments, such as narrower-range investments, and, to a charge that they
have permitted the value of the portfolio to fall substantially, later raise the
defence that the investments are statutorily authorized.

The Act further stipulates that trustees who plan to invest in Part II and
Part III investments must first seek advice in writing from a person they
reasonably believe "to be qualified by his ability in and practical experience
of financial matters".75 Moreover, after the initial investment, before any
selling or further purchase may take place, trustees must again seek advice.
In either case, advice is not required by the Act if one of the trustees is
qualified in investment matters.76 The loan of trust money on the security of
real estate requires the additional advice of a valuator or appraiser,77 so that
a trustee who contemplates such an investment needs preliminary advice from
two quarters, an investment adviser and a valuator or appraiser.

It should be noted that the Trustee Investments Act, 1961 permits the
addition of new investments to the legal list by Order-in-Council, instead of
by statutory amendment,78 and that by a statutory order of the Treasury the
fifty percent maximum investment in the wider-range investments can be
adjusted as prevailing circumstances require.

In 1982, the English Law Reform Committee published its Report on the
Powers and Duties of Trustees. m One of the matters that was examined was
the Trustee Investments Act, 1961 . The Law Reform Committee concluded
that the statutory powers contained in the Act were out of date and should be
revised.81 In arriving at this conclusion, the Committee noted that, in the
"vast majority of cases the Act is either modified or wholly excluded in the
trust instrument", as it has "proved to be tiresome, cumbrous and expensive

72 Trustee Investments Act, J 961, supra, note 32, s. 6.

73 Ibid.,s. 6(l)(b).

74 Ibid.,s. 6(l)(a).

75 Ibid., s. 6(2) and (4). However, having sought expert advice, trustees are not obliged to
follow it. They must only "obtain and consider proper advice".

76 Ibid., s. 6(3) and (6).

77 Trustee Act, 1925, supra, note 31, s. 8 (U.K.).

78 Supra, note 32, s. 12.

79 Ibid.,s. 13.

0 Law Reform Committee, Twenty-third Report: The Powers and Duties of Trustees
(October, 1982) (hereinafter referred to as "English Law Reform Committee Report").

81 Ibid., at 16.

199

in operation".82 The English Law Reform Committee considered several
approaches to reform.

The Committee considered, but rejected, making minor alterations to the
proportions of trust assets that could be invested in narrower-range and wider-
range investments, on the basis that such changes would not protect the trust
assets from inflation in the long term.83 The Committee also reviewed the
possibility of removing all restrictions on the power of investment, or, at a
minimum, limiting the power to invest only by broad discretionary principles
such as the duty to maintain a proper balance between income and capital
and the duty to ensure that the risk involved in investment is sufficiently
diversified.84 While the Committee acknowledged that "a general freedom to
invest within the framework of ... a duty of care has its attractions and
might reflect current practice",85 it was of the view that "such a solution would
create considerable difficulties particularly for smaller trust funds".86 Gener-
ally speaking, the Committee favoured an approach whereby the law would
provide guidance and protection for trustees. The Committee was of the
opinion that trustees should be required "to exercise all due care and skill and
that this duty would be fulfilled either by investment in a scheduled list of
'safe' investments or by taking professional advice".

The English Law Reform Committee therefore recommended the repeal
of the Trustee Investments Act, 1961 and set forth ten new powers that should
govern the power of investment by trustees. In particular, the Committee
recommended that investments should be divided into those that could be
made without advice and those that could be made only with advice; the
former category would be the present narrower-range investments and the
latter category would consist of any other investments.88 In the Committee's
view, trustees should be free to invest in such proportions as they choose,
subject to an express statutory duty to maintain a balance between income
and capital and the need for diversification.89 The Committee recommended
that the provisions contained in the present Act concerning advice should be
retained.90 In addition, the Committee was of the view that trustees should
continue to be able to apply to the court under section 57 of the Trustee Act,
1925 to make otherwise unauthorized investments, and that trustees should
be entitled to make an application under the Variation of Trusts Act, 1958 for
a widening of their investment powers generally under the trust instrument.91

82 Ibid.

83 Ibid.

84 Ibid.

85 Ibid.

86 Ibid., at 17.

87 Ibid.

88 Ibid., at 63.

89 Ibid.

90 Ibid.

91 Ibid., at 63-64.

200

c. Australia and New Zealand

Like Canadian common law jurisdictions, the Australian states and New
Zealand have traditionally followed English trustee legislation, and have
generally adopted English case law in the area of trustee investment powers.
As a consequence, each of the Australian jurisdictions introduced at the
inception of its trustee legislation a legal list of fixed-interest securities that,
for the most part, took the form of the debt securities of public authorities.
To a greater or. lesser extent, this policy has prevailed to the present day.
Indeed, as late" as 1976, Tasmania adopted a newly composed list of trustee
investments that makes no mention of securities of corporate business enter-
prises.92

The effect of inflation has been as relentless in Australia and New Zealand
as elsewhere. Consequently, trustees of family and charitable trusts, restricted
to statutory legal lists, have sought to escape from inflationary pressures by
applying to the courts for authorization to invest in common shares of cor-
porations.93 Although these applications have met with some success,94 there
is no reason to suggest that the Australian jurisdictions or New Zealand are
thinking in terms of abandoning the legal list policy of investment. Recent
legislation in Western Australia95 and in New Zealand96 has done no more
than follow the pattern, familiar in both Canada and England, of adding to
the legal list debentures and preferred and common shares.

In 1962 Western Australia enacted the Trustees Act, 1962. 91 The invest-
ment power contained in this legislation is modelled upon several principal
features of the English Trustee Investments Act, 1961 . The concept of the
legal list is retained in the Act, and the categories of authorized investments
include preferred shares, debentures, stocks and bonds, corporate deposit
arrangements or notes, as well as common shares of corporations.98 In order
for the securities of a corporation to qualify as investments under the Act,
the company must be incorporated in Australia, its shares must have been
issued and registered in Australia, the prices of qualifying shares and deben-
tures must be quoted on an Australian stock exchange, and all shares must

92 Trustee Act 1976, Tasm. Stat. 1976, No. 55.

See Meagher and Gummow, Jacobs' Law of Trusts in Australia (4th ed., 1977), at 306-
08.

Commenting upon one such successful application in National Trustees Executors &
Agency Co. of Australasia Ltd. v. A.G. of Victoria, [1973] V.R. 610 (S.C.), Griffith,
in "Trusts and Trustees - Enlargement of Investment Powers - Guarding Against Infla-
tion" (1973), 47 A.L.J. 610, at 61 1 , concluded:

■»

The law which defines the investment powers of trustees is long overdue for reform;
and it is something of a scandal that steps have not been taken to amend the Trustee
Act in Victoria (as there have been, for example, in Western Australia) so as to
avoid the very substantial expense of making applications for enlargement of
powers- in cases where no special or unusual powers are sought.

Trustees Act, J 962, W. Austl. Acts 1962, No. 78.

Trustee Amendment Act, 1974, Stat. N.Z. 1974, No. 15.

Supra, note 95.

Ibid., s. 16(1). Unit trusts are also included as authorized investments by s. 16(l)(n).

201

be fully paid up, or, under the terms of the issue, t>6 fully paifl up within nine
months of issue.99 Further, no corporation qualifies unless if has a share
capital of not less than one million pounds, and has paid a dividend on all its
common stock and shares in each year of the fifteen years immediately
preceding the investment.100 It will be observed that, while the number of
years of dividend payment is much longer than the five years prescribed by
the English Trustee Investments Act, 1961 , both the English Act and the
Western Australia Act follow the policy of abandoning the percentage divi-
dend requirement.101

The Western Australia Act adopts the approach taken in the English Act
of setting out the duties of trustees in selecting investments.102 As in the
English Act, trustees must consider diversification and the suitability of each
investment that they contemplate. l03 Accordingly, they must seek advice from
qualified persons, unless one of their number possesses the required skills.104
Moreover, certain matters that would otherwise be within the trustees' dis-
cretion and the general case law duty of care are translated into specific duties
in the Western Australia Act. For example, there are provisions concerning
the purchase of stocks redeemable at a premium or discount, investment in
bearer securities, the loan of trust funds on the security of real estate, and the
release of part of that security.

105

A substantial difference exists, however, between the structure of the
investment power in the Western Australia Act and in the English Act, which
marks a significant development in legal list philosophy. Unlike the English
Act, the Western Australia Act does not classify the permitted investments
into narrower-range and wider- range investments. In fact, the Act makes no
division of legal list investments, and imposes no percentage maximum on
the amount of the fund that may be invested in corporate securities. The
thinking of the Western Australia Parliament appears to be that the diversifi-
cation and choice requirements, together with the advice requirement, are
sufficient safeguards to secure wise investment. To prevent speculative in-
vestment in corporate securities, the Act relies upon the qualifications, re-
ferred to previously, that corporations must satisfy before their securities may
become authorized investments.

99 Ibid., s. 16(3). In 1968, the problems of the small trust fund were met when amending
legislation permitted trustees to invest in the common trust funds of trust companies: see
Trustees Act Amendment Act, 1968, W. Austl. Acts 1968, No. 18, s. 2(c).

100 Trustees Act, 1962, supra, note 95, s. 16(4). This figure is now expressed in Australian
dollars.

101 It will be recalled that under the Ontario Trustee Act, supra, note 6, s. 27( l)U/)(ii), a
dividend of at least four percent must have been paid for each year of the five years
preceding any investment by the trustees.

Trustees Act, 1962, supra, note 95, s. 16(5), and Trustee Investments Act, J 961 , supra,
note 32, s. 6.

03 Trustees Act, 1962, supra, note 95, s. 16(5).

Ibid.

Ibid., ss. 18, 21, and 24.

102

104
105

202

The Law Reform Commission of Western Australia has recently pub-
lished a Working Paper on Trustees' Powers of Investment. ,06 The Commis-
sion had been asked to consider whether the range of authorized trustee
investments should be expanded, in view of comments that these investments
were "inadequate in the prevailing economic circumstances" and that "trustees
[should] be given further powers of investment to enable them to take advan-
tage of certain new forms of investment now available".107 In the Working
Paper, the Commission canvassed the arguments for and against the list
approach and the prudent man rule. On the one hand, the Commission noted
that the prudent man rule would allow "trustees far greater flexibility to
respond to changing economic circumstances which would assist in protecting
the trust estate",108 and would mean that an "honest and diligent trustee who
made prudent investments in good faith would be less likely to commit
technical breaches of the trust by accident".109 On the other hand, the Com-
mission was concerned that wide powers of investment "may not provide
sufficient guidance to inexperienced trustees".110 The Commission also noted
that no other jurisdiction in Australia has conferred a general power of
investment on trustees. Accordingly, the Commission has invited comment
on this issue."1 While emphasizing that it has not formulated a final conclu-
sion, the Commission states that "it is tentatively of the view that the present
list approach to authorized investments should be preserved although perhaps
in an expanded form".112

In New Zealand, the Property Law and Equity Reform Committee re-
ported on Trustees' Statutory Powers of Investment in 1 970. ' ,3 The Committee
was unanimously of the view that, as between the American "prudent man
rule","4 the English Trustee Investments Act, 1 96 1 , and the Western Austra-
lian Trustees Act, 1962, the last was the approach that New Zealand should
adopt in reforming its legal list. The Committee was of the opinion that the
prudent man rule "offered too little guidance to trustees who [are] not expe-
rienced in investing money","5 and that the English Act was too restrictive

106

Law Reform Commission of Western Australia, Working Paper on Trustees' Powers of
Investment (Project No. 34 - Part V, 1981) (hereinafter referred to as "Western Australia
Working Paper").

107 Ibid., at 5.

108
109
110
111

Ibid., at 4\

Ibid.

In this regard, the Law Reform Commission of Western Australia also published a
Questionnaire on Trustees' Powers of Investment to accompany the Working Paper. The
questionnaire, consisting of 19 multi-part questions, relates to the tentative proposals
that are set out in the Working Paper.

12 Western Australia Working Paper, supra, note 106, at 42.

New Zealand Property Law and Equity Reform Committee, Trustees' Statutory Powers
of Investment (1970) hereinafter referred to as "New Zealand Report"). For a comment
on the Report, see Burgess, "Trustee Investments and Inflation', [1971] N. Z.L.J. 497.

See infra, this ch., sees. 2(c)(i) and 2(c)(ii)a.

New Zealand Report, supra, note 113, at 5, para. 1 1 .

113

114
115

203

and unnecessarily complicated.1"1 On the other hand, the Committee felt that
the Western Australia approach "provided flexibility while at the same time
laying down guidelines which, if followed, would exempt a trustee from
liability for any loss"."7

The Committee's reasoning is worth noting.118 Although the Committee
members realized that the common practice was for trust instruments to give
trustees wide powers of investment, often accompanied by an exoneration
clause absolving trustees from liability for loss occasioned by the use of these
powers, they considered that the statutory adoption of such a policy would
provide an insufficient safeguard against abuse. However, the Committee
pointed out that wide powers, whether conferred by the instrument or by
statute, do not affect trustees' overall duties: trustees remain subject to the
duties to keep an even hand between successive beneficiaries and to act with
care and diligence. The inference that may be drawn from the Report is that
the Committee believed that the Western Australia approach imposes a useful
measure of protection by listing authorized investments and by specifying the
rules of conduct trustees should follow."9 It is interesting to note that, al-
though the Committee recommended the adoption of the requirements that
trustees obtain advice and consider the suitability of investments, l2° it rejected
placing in statutory form a requirement of diversification of investments.121
The reason advanced was that "in some cases diversification might be un-
warranted and even unsuitable", and that a trustee "is, in any event, under a
general duty to act prudently".122

The New Zealand Parliament enacted the Committee's recommendations
in the Trustee Amendment Act, 1974,in with certain variations. The Com-
mittee, for example, had recommended that the securities of a company,
whether or not incorporated in New Zealand, should qualify if the company
possessed a paid-up share capital of at least one million New Zealand dol-
lars. 124 It had originally favoured confining investment to companies that were
incorporated in New Zealand and that had a paid-up capital of two million

116 Ibid. The reason given for this conclusion was that the trust fund has to be divided into
two equal halves. It is not clear from the New Zealand Report whether this is an objection
to a percentage rule, or also an objection to the devices of the 1961 Act, such as
equalizing cross-transfers, aimed at maintaining the division. It seems to be the former.

117 Ibid.

118 Ibid., at 6, para. 13.

119 Trustees Act, 1962, supra, note 95, s. 16(5).

120 New Zealand Report, supra, note 113, at 9, para. 21, and Draft of Proposed Trustee
Amendment Bill, s. 3(1D).

121 New Zealand Report, supra, note 1 13, at 10, para. 22. This recommendation is contrary
to the English and Western Australia approach, which requires trustees to have regard
to the need for diversification of investments of the trust, where appropriate: see Trustee
Investments Act, 1961 , supra, note 32, s. 6(1 )(a), and Trustees Act, 1962, supra, note
95, s. 16(5).

122 New Zealand Report, supra, note 1 13, at 10, para. 22.

123 Trustee Amendment Act, 1974, supra, note 96.

124 New Zealand Report, supra, note 1 13, at 6-7, para. 14, and Draft of Proposed Trustee
Amendment Bill, s. 3(lA)(a) and (lC)(a).

204

dollars, but rejected this proposal as there were, at that time, only fifty-eight
companies that would have qualified.^5 Parliament, however, increased the
paid-up share capital requirement to two and a half million dollars, and further
stipulated that the capital must have been paid up in the three years preceding
the investment.126 Moreover, the Act requires incorporation in New Zealand
in order for a company's securities to qualify as authorized investments.127

Although the New Zealand Act is in many respects similar to the Western
Australia Act, certain significant differences do exist. Like the Western Aus-
tralia Act, the New Zealand Act places no explicit restriction on the percent-
age of the trust fund that may be invested in common shares or other corporate
securities. Rather, the Act relies upon the imposition on companies of the
above-noted qualifications that must be satisfied before their securities may
be authorized as investments, and upon the general common law duties and
specific statutory duties imposed upon trustees. However, unlike the Western
Australia Act, the New Zealand Act adopted the Committee's proposal not
to make diversification a statutory rule of law.128 Further, unlike the English
and Western Australia Acts, the New Zealand Act retains a percentage re-
quirement for dividends: a company must have paid a dividend of at least
five percent on all its issued shares in each of the five years immediately
preceding the investment.

129

d. United States

As will be discussed in greater detail later in this chapter,130 certain
American jurisdictions adopted, at the beginning of the twentieth century,
statutory legal lists of authorized investments. Some of the jurisdictions still
retain the legal list approach to trustee investment, and, at this point, it may
be useful to outline the form of the legal list that exists today in the United
States.

In respect of legal lists, there is no uniformity in the American scene. In
the Canadian and Commonwealth tradition, some American jurisdictions
adhere to a mandatory legal list that permits investment outside the list only
if the trust instrument so authorizes.131 However, other American jurisdictions

125 New Zealand Report, supra, note 1 13, at 7, para. 14.

126 Trustee Amendment Act, 1974, supra, note 96, s. 3.

127 Ibid

128

New Zealand Report, supra, note 113, at 10, para. 22.

129 Ibid., at 7, para. 16, and Trustee Amendment Act, 1974, supra, note 96, s. 3. Other
differences include the exclusion of unit trusts by the New Zealand Act, adopting the
position of the New Zealand Report that such trusts are not necessarily limited to
authorized investments: see New Zealand Report, supra, note 1 13, at 9, para. 20. Also,
if shares are not already paid up, the New Zealand Act specifies that corporate shares
must, by the terms of the issue, be fully paid up within 12 months, rather than the 9
month requirement in the Western Australia Act: see New Zealand Report, supra, note
113, at 7, para. 16; Trustee Amendment Act, 1974, supra, note 96, s. 3; and Trustees
Act, 1962, supra, note 95, s. 16(3)(b).

130 See infra, this ch., sec. 2(c)(i).

131 See, for example, Alabama Code 1940, tit. 58, § 47.

205

have adopted a permissive legal list philosophy, which, by statute, allows
trustees to invest outside the list. Virginia132 and New Jersey,133 among others,134
are examples of jurisdictions that utilize a permissive legal list for trustee
investment. These jurisdictions retain the legal list, but statutorily permit
investment of a certain percentage of the trust fund in corporate stocks on the
basis of the prudent man rule.135 Such an approach recognizes that the case
law duty of care, skill, and caution requires trustees to consider the suitability
of each investment and probably the need to diversify investment. I36 Trustees,
in exercising the investment power, are thus given a measure of discretionary
authority, while, on the other hand, a measure of control is imposed by the
limitation on the extent to which the prudent man approach may be employed.

The prudent man rule is, in essence, a statement of the common law
general duty of care and skill required of trustees in the discharge of all their
tasks on behalf of the trust and its beneficiaries. In the absence of the legal
list, the general duty of care remains.137

(i) History of the Rule

In England, the investment duty of a trustee prior to the collapse of the
South Sea Company was to act as a prudent man. However, the South Sea
Bubble and the resultant court-made list occurred early in the history of the
trust, and it is probably the case that the general duty of care was not as
clearly formulated then as it is today. Therefore, it may be said that from
early days the legal list effectively constituted the investment duty of trustees.
Indeed, it may be for this reason that in many legal list jurisdictions it is
presumed, even today, that trustees will be protected automatically from
liability for negligence if the trust funds are placed in authorized legal list
investments.138

132
133

134

135
136

137

138

Va. Code 1950, §§ 26-40 to 26-45, as am. L. 1956, c. 83.

N.J. Stats. Ann., § 3A: 15-18 to 15-29.

See, also, Georgia Code Ann., §§ 108-417 to 108-421; Kentucky Rev. Stats. 1962,
§ 386.020; Ohio Rev. Code, tit. 21, § 2109.37; and Tennessee Code Ann., §§ 35-302
to 35-318, as am. Tenn. L. 1951, c. 125.

See infra, this ch.. sec. 2(c)(ii)a.

See, for example, Appeal of Dickinson, 25 N.E. 99 (Mass. Sup. Jud. Ct. 1890), and In
re Mueller's Trust, 135 N.W.2d 854 (Wis. Sup. Ct. 1965).

See Waters, supra, note 8, at 685-90, for an analysis of the common law standard of
care required of trustees in relation to the investment of trust funds.

The relevance of the general duty of care to a legal list investment power has always
confused trustees and their advisers. The English and Western Australia Acts attempt to
deal with the problem by setting out the more specific duties of trustees to seek advice
concerning the suitability of investments and the need for diversification of investment,
while the New Zealand Act only sets out the advice and suitability requirements. There
would seem to be something more that the investing trustee has to do than choose at
random a legal list investment. However, there appears to be a lack of consensus on this
important point. See, also, Pettit, supra, note 65, at 280-81 .

206

After the collapse of the South Sea Company, an adequate supply of non-
commercial investments made a legal list viable in England. But the same
situation did not exist in Massachusetts in the early part of the nineteenth
century. Moreover, a thriving economy made commercial investments doubly
attractive. Largely for these reasons, the Massachusetts rule, or "prudent
man" rule, was first formulated by Justice Putnam in 1830 in Harvard College
v. Amory.139 His words, which in one form or another were ultimately to
become the investment duty throughout many jurisdictions of the United
States, were as follows:140

All that can be required of a trustee to invest, is, that he shall conduct himself
faithfully and exercise a sound discretion. He is to observe how men of prudence,
discretion and intelligence manage their own affairs, not in regard to speculation,
but in regard to the permanent disposition of their funds, considering the probable
income, as well as the probable safety of the capital to be invested.

The prudent man rule, as formulated by the Amory case, contemplated that
if trustees invested trust assets with the prudence, discretion, and intelligence
that ordinary businessmen would employ in the management of their own
affairs, the exercise of the investment power by the trustees would be consid-
ered proper. The prudent man, as defined by Justice Putnam, would not
speculate, but would have regard to the permanent disposition of the trust
funds considering both the probable income and the probable safety of the
capital.

In subsequent decisions, however, it occurred to some courts that there
was a manner in which a trustee ought to invest, as opposed to how an
ordinary businessman would invest. One of the earliest formulations of this
principle is to be found in King v. Talbot141 in 1869, where Justice Woodruff,
after referring to the Amory case, announced the so-called "New York" rule,
or "prudent trustee" rule.142 The judicial decisions that thereafter propounded
this "prudent trustee" rule appeared to draw a distinction between the pru-
dence expected in investment matters of a trustee, as opposed to that expected
of an ordinary businessman, based upon the assumption that an ordinary
prudent man might sometimes take chances in making an investment that a
prudent trustee would not take.143 A classic statement of this rule is set forth
in In re Buhl's Estate, where Sharp J. stated as follows:1

144

139 Harvard College v. Amory. 9 Pick. 446 (Mass. Sup. Jud. Ct. 1830).

140 Ibid., at 461. See, further, Scott, The Law of Trusts (3d ed., 1967), §§ 227-31, at 1805-
85.

141 40N.Y. 76 (Ct. App. 1869).

142 Woodruff J., ibid., at 85-86, stated the "prudent trustee" rule as follows:

[T]he just and true rule is, that the trustee is bound to employ such diligence and
prudence in the care and management, as in general, prudent men of discretion and
intelligence in such matters, employ in their own like affairs.

As Scott, supra, note 140, § 227.5, at 1814. points out, while "[a]t first blush it
would appear that the rule applied [in Massachusetts and New York] is the same, [a]s a
matter of fact, ... the New York courts have been far more strict in the application of
the rule than have the Massachusetts courts".

143 See, further, Scott, supra, note 140, § 227.5, at 1813-15.

144 In re Buhl's Estate. 178 N.W. 651 (Mich. Sup. Ct. 1920), at 654.

207

A trustee has not unlimited authority to invest as an ordinary prudent man would
invest his own; he must take such risks only as an ordinary prudent man would
take who is a trustee of the money of others.

The "prudent trustee" formulation emerged at a time when there was
available to trustees an adequate supply of public authority securities and
sound mortgages. Further, failures in private ventures, such as railroads and
banks, and the destruction of many private enterprise securities during the
Civil War, encouraged the view that the securities of private companies were
not suitable investments for trustees. Moreover, as trustees were often mem-
bers of the family of the creator of the trust, it was the view that these persons
should be guided by a conservative investment position. Consequently, in the
second half of the nineteenth century, a number of American jurisdictions145
followed the example of New York and adopted a more cautious and con-
servative approach in the area of trustee investment powers. These jurisdic-
tions exhibited a tendency to rely upon precedent concerning the appropriateness
of a security for trustee investment, a process that resulted in the formulation
of court-made lists.

As the above discussion indicates, until the beginning of the twentieth
century, except for those few states that had judicially adopted the prudent
man rule,146 investments were defined and gradually collected in court-made
lists. However, due to the often inflexible and restrictive nature of court-
made lists, legislation intervened and statutory legal lists began to appear.147
These statutory legal lists usually permitted investment in sound corporate
bonds, in addition to federal and state issues, but investment in corporate
equities, except for specified bank and utility stock, was prohibited. The
fiduciary investment statutes were subject to frequent amendment in order to
accommodate specific businesses, such as railways and utilities, or to promote
a particular industry for economic reasons. The result was a national patch-
work quilt of trustee investment lists intended to provide trustees with safe
investments.

The stock market crash of 1929 revealed that many of the safe investments
on these statutory lists were clearly unsafe. There followed a realization that
the statutory lists no longer provided an appropriate guide for trustee invest-
ments and were, in addition, unjustifiably restrictive. With the emergence of
a new financial scene after 1933, pressure mounted, not for wider lists, but
for trustees to have the right to choose the best investments for their particular

145 Several state constitutions prohibited the legislature from passing laws to authorize
fiduciaries to invest in the securities of private corporations: see, for example, Pennsyl-
vania, Pa. Constit. (1873), Art. Ill, § 22, as am. in 1933. The Alabama and Montana
constitutions still retain this prohibition: see Ala. Constit. (1901), Art. IV, § 74, as am.
in 1939; Mont. Constit. Art. V, § 37.

146 Massachusetts formulated the prudent man rule in 1830 in Harvard College v. Amorx,
supra, note 139, and the rule was adopted by Maryland in 1884 in McCoy v. Horwitz,
62 Md. 183 (Ct. App. 1884); in Rhode Island in 1886 in Peckham v. Newton. 4 A. 758
(R.I. Sup. Ct. 1886); and in Vermont in 1908 in Scoville v. Brock, 70 A. 1014 (Vt.
Sup. Ct. 1908).

147 For a commentary on the inception of the statutory legal list, sec Friedman, 'The
Dynastic Trust" (1963-64), 73 Yale L.J. 547, at 563 et seq.

208

trust. I4X Up to this time, only five states had adopted the prudent man rule as
formulated in the Amory case.149 However, as a result of the economic
upheaval and the fact that high grade common stocks were yielding at least
twice as much as good bonds, various states enacted by statute the prudent
man concept of investment in one form or another. Michigan, for example,
chose to codify the "prudent trustee" formulation of the concept in 1937,l5,)
and was followed by Minnesota in 1943.151 On the other hand, Missouri
judicially adopted the "prudent man" statement in 1940.

152

Meanwhile, the Trust Division of the American Bankers Association
adopted, in 1942, a Model Prudent Man Investment Act,151 which reflects the
"prudent man" formulation. Section 1 of the Model Act provides, in part, as
follows:

Section 1 . In acquiring, investing, reinvesting, exchanging, retaining, selling
and managing property for the benefit of another, a fiduciary shall exercise the
judgment and care under the circumstances then prevailing, which men of prud-
ence, discretion and intelligence exercise in the management of their own affairs,
not in regard to speculation but in regard to the permanent disposition of their
funds, considering the probable income as well as the probable safety of their
capital.

From 1943, when California154 and Delaware155 enacted the Model Act, to
the present, twenty-eight jurisdictions have passed legislation based in whole
or in part upon this model.

(ii) The Prudent Man Rule Today

a. United States

Today, the total number of jurisdictions in the United States that have
adopted some form of a prudent man concept for the trustee investment power
is forty-two.156 It is true that not all states have adopted the rule in the same

148 See Jennett, "Changing Concepts of Trust Investments" (1955), 94 Trusts & Es. 843, at
844.

149 Supra, note 139. North Carolina judicially adopted the prudent man rule in 1928 in
Sheets v. J. G. Flynt Tobacco Co., 141 S.E. 355 (N.C. Sup. Ct. 1928).

150 Michigan codified the rule as enunciated In re Buhl's Estate, supra, note 144. See, now,
Mich. Comp. L. 1967, § 555.201.

151 Minn. L. 1943, c. 635.

152 Rand v. McKittrick, 142 S.W.2d 29 (Mo. Sup. Ct. 1940).

153 Prudent Man Investment Act, Trust and Estate Legislation, published by the Division,
and reproduced in Proceedings of the Forty-Ninth Annual Meeting of the Conference of
Commissioners on Uniformity of Legislation in Canada (1967), at 223-24.

154 Cal. Civ. Code, § 2261 (West), as am. by 1943 Cal. Stat., c. 811.

155 Del. Code Ann., tit. 12, § 3302, added by Del. Laws 1943, § 171, as am. by Del. Laws
1947, c. 268.

156 See Scott, supra, note 140, § 227.13, at 1841-42, n. 1, for a list of the state statutes
governing trust investments.

209

form; some have preferred the prudent trustee formulation to the prudent man
statement, while others have limited the full effect of the rule in one way or
another. 157 Nevertheless, the fact that more than four-fifths of the jurisdictions
in the United States have moved toward a prudent man concept is a definite
indication that the legal list philosophy has failed to meet the requirements
of the constantly changing field of possible trustee investments, in which
flexibility is essential to proper management of a trust portfolio. Because of
inflation and high tax, it was felt that trustees needed the power to adjust the
balance between their fixed-interest securities and their growth stock as cir-
cumstances required, without waiting for legislative amendments or regula-
tory permission. The stability of markets dealing in modern securities, the
sounder structures of contemporary corporate management and financing,
and the development of mutual funds and common trust funds all played their
part in producing overwhelming support for the adoption of the prudent man
concept in the various jurisdictions of the United States.

Over the past forty years, considerable literature has been published in
the United States on the operation of the prudent man concept in a wide range
of investment situations, especially in terms of the obligations that the various
formulations of the concept impose upon trustees.158 Without analyzing the
finer distinctions and limitations upon the concept that have been adopted by
certain jurisdictions, in general terms, it may be said that the standard of
care, skill, and caution required by a trustee is that of the ordinary man of
business.159 Insofar as this rule is a statement of a trustee's overall duty of
care, couched in an investment context, it is sufficient at this point if we
merely allude to the investment duties that the rule involves.

Trustees' investment duties cover a wide range of activities. As previ-
ously noted, the Model Prudent Man Investment Act specifies these activities
as "acquiring, investing, reinvesting, exchanging, retaining, selling and man-
aging".160 A trustee must ensure that in his investment selections there is no
conflict between his duty to the trust and his own personal interests. He may

157

158

159

160

For example, Hawaii applies the concept to trust companies only. New Jersey and
Virginia retain the legal list but, on the basis of the prudent man rule, permit investment
in corporate stocks up to specified limits. New Hampshire allows investment in stocks
under a modified rule. Wisconsin has adopted the rule for all trust investments, but limits
the proportion of the trust assets that may be invested in stocks. North Dakota has also
adopted the rule for all trust investments, but requires a proportion of the trust funds to
be invested in United States bonds.

A list of articles is given by Scott, supra, note 140, Vol. 3, § 227.13, n. 1. See, also,
Wilcox, "Trusts - Trustee Investments - The Return of the Prudent Investor Rule"
(1973), 24 Mercer L. Rev. 513.

Reasonable care and caution remain the requirement, although some American jurisdic-
tions require a higher standard of care of the professional trustee. The higher standard
means that a professional will be required to show that he adhered to the office procedures
and standards of proficiency that would be followed by members of that profession. To
compensate for the higher standard of care, it is argued that, even if non-professional
trustees are restricted to the legal list, professional trustees should have the prudent man
power of investment: see Buek, " 'Qualified' Trustee Performance Calls for Full In-
vestment Freedom" (1960), 99 Trusts & Es. 194. The subject of the professional trustee
was discussed in greater detail supra, ch. 2, sec. 2(c).

Supra, note 153, at 223, § 1.

210

employ advisers, but the ultimate investment decisions cannot be delegated.
So far as one can generalize, a trustee investing as a prudent man would avoid
unproductive property, real estate outside the jurisdiction, unsecured loans,
and investment in unincorporated businesses, as well as in temporary, high-
risk, and wasting assets. Although the security may be sound, second mort-
gages would commonly be avoided, because the trustee loses control of the
investment: the first mortgagee may foreclose, and the trustee may not have
the funds to redeem. Moreover, under the prudent man rule, loss of control,
improper delegation, commingling of funds, and questionable marketability
account for the avoidance of shared investments by trustees. The same objec-
tions can be made with respect to investments in mutual funds, common trust
funds, life insurance annuities left with insurance companies, and similar
commingled investments. However, recent legislation, by permitting invest-
ment in mutual funds and common trust funds, has overridden these objec-
tions with respect to some modern securities.161 Diversification of investment
is a factor that the prudent man would always consider, and most often judge
to be wise, but the prudent man rule itself does not make diversification
mandatory.162 Finally, if there are successive beneficiaries, the prudent man
rule requires that the trustee maintain an even hand between the interests of
income beneficiaries and those of capital beneficiaries.163

b. Canada

As previously mentioned in our discussion of the historical development
of trustee investment powers in Canada,164 the Conference of Commissioners
on Uniformity of Legislation in Canada adopted, in 1970, a new Uniform
Trustee Act165 that departed entirely from the concept of the legal list. This
Uniform Act, creating a new investment power, has only three short sections.
The first and most important section provides as follows:

1 . Unless a trustee is otherwise authorized or directed by an express provision
of the law or of the will or other instrument creating the trust or defining his
powers and duties, he may invest trust money in any kind of property, real,
personal or mixed, but in so doing, he shall exercise the judgment and care that
a man of prudence, discretion and intelligence would exercise as a trustee of the
property of others.

This section places in statutory form the prudent man concept,166 and is
based in part on the American Model Act.167 However, the section is couched

161 See statutes collected in Scott, supra, note 140, § 227.9, at 1830-32, n. 26.

162 See, generally, In re Buhl's Estate, supra, note 144. Some courts have decided that
there is a duty to diversify (for example. In re Muellers' Trust, supra, note 136) whereas
even those jurisdictions that are more inclined to investment list thinking have not thought
diversification should be mandatory: see In re Mendleson s Will, 261 N.Y.S.2d 525
(Sur. Ct. Alb. Ct. 1965).

163 Harvard College v. Amory, supra, note 139.

164

165
166
167

See supra, this ch.. sec. 2(b)(ii)b.

Uniform Trustee Act, supra, note 55, at 35 and 1 15-17.

See supra, this ch., sec. 2(c).

Supra, note 153.

211

in the language of the prudent trustee and, to this extent, it adopts the prudent
trustee formulation of the Michigan108 and Minnesota169 statutes. The Quebec
Commissioners were of the opinion that this standard, namely, the prudence
that would be shown by a person who is handling someone else's property,
was to be preferred to the prudence that would be shown by a person in the
handling of his own affairs, since the latter "might speculate with some of
his own funds in a way that he would not with funds he was administering
for others".170 The formulation of the prudent man concept in this way,
therefore, recognizes the existence of a trust and beneficiaries as a constant
in the varying circumstances that confront the prudent man in the office of
trustee.171 In the year of adoption by the Commissioners, the Uniform Act
was adopted by New Brunswick172 in place of its legal list, and the Northwest
Territories and the Yukon173 followed suit.

In 1982, the Manitoba Law Reform Commission issued its Report on
Investment Provisions under "The Trustee Act" .l74 Until recently, the Mani-
toba Trustee Act, like the Ontario Act, adhered to the legal list approach to
trustee investments. 175 In its Report, the Commission canvassed the arguments
in favour of the retention of the legal list and those supporting the prudent
man approach to trustee investments. The Commission concluded that the
legal list does not accomplish the two major objectives of most trustees,
namely, preserving the capital and generating income. Today, as the Com-
mission noted, "[i]nvestors who wish to strike a fair balance between pres-
ervation of capital and suitable income must be flexible, sophisticated and
aggressive".176 As to the proponents of the legal list, the Manitoba Commis-
sion was of the view that support for the legal list is based primarily on two
misconceptions: first, "that if a trustee follows the legal list he will be immune
from being sued";177 and secondly, "that if there is a prudent man rule, every
time the trustee makes a bad investment, he will have to make good the

168

Mich. Comp. L. 1967, § 555.201

169 Minn. Stats. Ann., §501.125.

170

171
172
173

174

175
176

Report of Pigeon & Durnford, "Trustee Investments", in Proceedings of the Forty-Ninth
Annual Meeting of the Conference of Commissioners on Uniformity of Legislation in
Canada (1967), at 222. The grounds for the original recommendation of the prudent man
rule by the Quebec Commissioners in 1966 are set out in Proceedings of the Forty-
Eighth Annual Meeting of the Conference of Commissioners on Uniformity of Legisla-
tion in Canada (1966), at 106-13. The recommendation was adopted at the 1966 Con-
ference. For the subsequent reports concerning the form of the Uniform Act, see 1967
Proceedings, at 222-40; 1968 Proceedings, at 169-71; and 1969 Proceedings, at 181-84.

Waters, supra, note 8, at 687.

An Act to Amend The Trustee Act , S.N.B. 1971, c. 73.

See the Northwest Territories Trustee Ordinance, supra, note 59, and the Yukon Trustee
Ordinance, supra, note 60.

Manitoba Law Reform Commission, Report on Investment Provisions under "The Trustee
Act" (Report No. 50, February 12, 1982) (hereinafter referred to as "Manitoba Report").

The Trustee Act, R.S.M. 1970, c. T160, s. 70(2).

Manitoba Report, supra, note 174, at 7.

I hid., at 8.

212

loss".178 After an examination of the relevant law, the Commission was of
the opinion that neither of these positions could be supported. I7y

Accordingly, the Manitoba Law Reform Commission recommended that
the legal list contained in The Trustee Act should be repealed and replaced
by the prudent man rule. The Commission favoured the formulation of the
rule contained in the Uniform Trustee Act, subject to eliminating the tautology
of defining a trustee as a trustee.180 In addition, rather than listing general
guidelines in the Act that would assist trustees in making investment decisions
under the prudent man rule, the Manitoba Commission recommended that a
Trustee's Handbook and Guide should be prepared and made available to the
general public to assist and instruct trustees in this area. Finally, the Manitoba
Commission recommended that an additional section should be enacted stat-
ing that, "if a trustee is sued for imprudence, it shall be a defence for that
trustee to show that while a particular investment viewed in isolation may
have been speculative or imprudent, the trustee nonetheless followed a pru-
dent investment policy and that this total policy was not speculative and not
imprudent".181 In 1982, the Manitoba Legislature enacted legislation, amend-
ing The Trustee Act, which replaces the existing investment provisions with
new provisions that implement the recommendations of the Manitoba Law
Reform Commission.182

(d) Objects and Problems of Contemporary Trust Investment

The overview of the historical development of trustee investment powers
in England, Canada, other Commonwealth countries, and the United States
reveals that the permissible scope of trustees' investment powers has often
been a function of the economic and financial conditions of the time. As we
have seen, at the beginning of the twentieth century, in both England and
Canada, and in some jurisdictions of the United States, statutory legal lists
set forth the securities thought to be appropriate for the purpose of investment
by trustees. These legal lists tended to reflect the philosophy that a trustee
should be a conservator of the trust fund and, as such, investment was limited

178 ibid.

179 Ibid., at 9-14.

180 Ibid. , at 14-15. The formulation of the Manitoba Law Reform Commission is as follows,
at 37:

Unless otherwise authorized or directed by an express provision of the law or of
the will or other instrument creating the trust or defining the duties and power of
the trustee,

(a) subject to paragraph (b), a trustee is authorized to invest in every kind of
property, real, personal or mixed; and

(b) in investing money for the benefit of another person, a trustee shall exercise
the judgment and care that a man of prudence, discretion and intelligence
would exercise if he were administering the property of others.

181 Ibid., 2X21.

is:

An Act to Amend The Trustee Act, Bill 35, 1982 (33d Leg. 2d Sess.), ss. 5 and 6,
repealing ss. 70 to 77 and substituting new ss. 70 to 77 and 79. 1 . The Act (S.M. 1982-
83, c. 38) received Royal Assent on August 18, 1983 and was declared in force October
1, 1983.

213

to those securities that were considered "safe", namely, fixed-interest gov-
ernment and public authority bonds and debentures. A trustee was not viewed
as a creator of wealth, so that any form of speculative investment that would
place the capital at risk, such as investment in common shares, was considered
at that time to be imprudent. This policy of investment served trusts well for
a time, as fixed interest securities produced not only a steady annual income,
but also guaranteed the return of the dollar value at par on maturity, thereby
enabling a trustee to preserve the dollar amount of the corpus. However, the
attractiveness of the policy was largely dependent upon the exceedingly low
or non-existent inflationary factor and the stability of currency values of that
period. These conditions are now historic.

Today, the problem of inflation, the erosion of the real value of currency,
that has developed especially since the Second World War shows every sign
of being a constant factor in our economy. The impact of inflation upon the
policy that trustees should invest in "safe" fixed-income securities has been
devastating. Practically speaking, where trust assets are invested in fixed-
income securities, the trust beneficiary's income will not rise in proportion
to the increase in the cost of living. In fact, a beneficiary's real income will
probably decline, especially if he is tied to long-term, low-yield bonds. The
remainderman may suffer as well, because, at the time of distribution, the
real value of the trust fund may have decreased to only a fraction of its
purchasing power at the time of investment. Consequently, as a result of
inflation, any policy that limits trust investments to fixed-income securities,
or at best requires that a major portion of the trust fund be invested in such
securities, no longer serves to protect the interests of the trust beneficiaries.

The problem of inflation and its impact on trustee investment policy was
one of the more important reasons for the rapid ascendancy of the prudent
man concept in the United States. The adoption of this approach to trustee
investments, permitting as it does flexibility in choice of investments to meet
changing economic conditions, reflects the realization that there is no longer
any single investment upon which even the most conservatively inclined
investor can rely. This approach recognizes that every investor must take
account of the economic cycles and market movements and be in a position
to adjust his portfolio to meet not only periods of rapid growth in the economy,
but also static and slow growth periods. As various types of investment
perform differently during each cycle in the economy, experience shows that,
today, flexibility and a diversified portfolio are the best weapons in an inves-
tor's hands.

For example, during an inflationary period, trustees of a testamentary
trust in favour of a surviving spouse and children may be well advised to
include in their portfolio both high grade, short term bonds and well seasoned
and well diversified common shares: the bonds will ensure a regular and
adequate income for the life beneficiary, while the common shares will
preserve the purchasing power of the fund for the benefit of the remainder-
men. Even if the trust is solely in favour of infant children, for example,
liquidity will be needed for such purposes as tax payments and powers of
maintenance. Further, assets must be chosen with marketability in mind for
the expected date of trust termination, and trust objects will exist where
capital growth, rather than a high income yield, is the desirable policy to

214

pursue. Moreover, a trustee of a family trust needs to be in a position to
acquire sound stocks when the occasion arises to make the investment. The
existence today of so many large pension trusts, constantly in search of such
stocks, necessitates that trustees of the family trust at least have that flexibil-
ity.

(e) The Future: Legal List or Prudent Man

In determining the investment powers that should be included in the
revised Act, it is evident that the essential choice for reform is between a
legal list philosophy and the prudent man approach. We now turn to consider
the advantages and disadvantages of each approach.

(i) Legal List Approach

It will be recalled that Ontario is a legal list jurisdiction; indeed, a "pure"
legal list philosophy may be said to be reflected in the present Ontario Trustee
Act. Under the Act, additions to the legal list may only be made by statutory
amendment, which is also required to vary the percentage of trust funds that
trustees are permitted to invest in corporate securities, including common
shares - a percentage fixed, at present, at thirty-five percent,183 which may
be inappropriate in periods of high inflation. Moreover, having adopted a
legal list as the Ontario Act has done, it is difficult to know what other criteria
a trustee should take into account in the exercise of his investment powers.
For example, diversification of investment is not required expressly by the
Ontario Trustee Act, and it is not clear whether case law insists upon it as a
measure of prudence.

184

As the previous discussion illustrates, there is no single concept known
as the legal list, and there are a number of variations that could be introduced
in the revised Act.

First, the revised Act could adopt the scheme of the English Trustee
Investments Act, 1961 . I85 This Act, however, has been criticized on the
grounds of complexity.186 The provisions of the Act concerning narrower,
wider, and special property ranges, combined with the compensating cross-
transfer requirement, do, indeed, appear complex. Further, the Act seems
unduly suspicious of the efficiency of the case law duty of care, skill, and
caution. While the Act does require trustees to consider the need for diver-
sification of investment, it continues to impose a restriction on the percentage
of assets that may be invested in corporate securities. The Act has also been

183

184
185
186

Trustee Act, supra, note 6, s. 27(2).

Supra, note 9.

Supra, note 32. See, supra, this ch., sec. 2(b)(iii)b.

See English Law Reform Committee Report, supra, note 80, at 16. See, also, Samuels,
"Trustee Investments Act, 1961" (1961), 25 Conveyancer (N.S.) 372, and (1962), 26
Conveyancer (N.S.) 351; Keeton, supra, note 36, at 19 et seq.; Trew, "The Trustee
Investments Act, 1961 -Three Years After", [1965] J. Bus. L. 22; and Oerton, 'Trustee
Investments Act Problems" (1970), 120 New L.J. 240.

215

criticized for the ease with which companies who wish their shares to qualify
as authorized investments may by-pass the Act's provisions intended to give
security to beneficiaries in relation to equity investments. For example, the
shares of a corporation that pays dividends out of reserves rather than profits
may qualify as an authorized investment, while the shares of a more profitable
corporation, which for good business reasons chooses not to pay a dividend
in one particular year, would not so qualify.

An attractive aspect of the present English Act is that new investments
may be added to the legal list by Order-in-Council,187 and the percentage of
assets to be invested in particular securities may be varied by an Order of the
Treasury.188 The advantage of these provisions is that they do not compete
for legislative time. Accordingly, in this fashion, the legal list and the per-
mitted percentage can more readily respond to a significant change in eco-
nomic and hence market conditions. However, the provisions do no more
than provide an alternative procedure - they are not directed to policy con-
siderations. For example, the task of selecting additions to the legal list is
made no easier, whether the additions are made by Order-in-Council or by
statutory amendment. Moreover, it may be questionable whether a change in
the legal list or a variation of the permitted percentage, by whatever means,
would assist trustees to respond satisfactorily to economic conditions that
have already occurred.

The proposals for reform made by the English Law Reform Committee189
would modernize and simplify considerably the statutory power of investment
in England. Nevertheless, the insistence upon advice for certain types of
investment, while perhaps beneficial to the inexperienced trustee, may, none-
theless, involve more than a nominal cost. Moreover, the suitability of the
investment often will depend upon the quality of the advice; for his part a
trustee must be able to discern between good and bad advice, while the
adviser must understand the difference between advising a person investing
his own assets and advising a fiduciary.

Secondly, the revised Act could adopt a variation of the legal list similar
to that contained in both the Western Australia190 and New Zealand191 Acts.
As we have seen,192 although these Acts retain a list of authorized investments,
they impose no ceiling percentage upon the amount of the trust fund that may
be invested in corporate securities, including common stock. Rather, the Acts
rely upon the imposition of qualifications that companies must satisfy before
their securities may be authorized as investments, and upon specific statutory
duties imposed upon trustees, namely, a duty to consider the suitability of
each investment, to seek advice, and, in the case of Western Australia, to
diversify investments. Beyond these statutory requirements, a trustee is left

187 Trustee Investments Act, 1961 , supra, note 32, s. 12.

188 lbid.,s. 13

189
190
19
192

English Law Reform Committee Report, supra, note 80, and accompanying text.
Trustees Act, 1962, supra, note 95.
1 Trustee Amendment Act, 1974, supra, note 96.
See supra, this ch., sec. 2(b)(iii)c.

216

to invest on the basis of the case law duty of care, a duty that may be of great
significance since, as we noted in relation to the English Act, the notion of
"qualified company", with the inference of profitability and stability, may be
illusory: a company can satisfy the statutory requirements by issuing paid-up
shares to existing shareholders, and by declaring dividends out of reserves
where profits are inadequate. However, the deletion of a percentage ceiling
for investment in corporate debentures and preferred and common stock may
not be an effective improvement, if it serves to restrict trustees to investment
in companies that merely have to satisfy nominal rules.

A further variation of the legal list philosophy that could be adopted in
the revised Act would be to provide a broader and more liberal list than that
contained at present in sections 26 and 27 of the Ontario Trustee Act. An
example of such a list, designed for the investment of the funds of life and
other insurance companies, is contained in the federal Canadian and British
Insurance Companies Act. I93 In private trusts, the investment power of trust-
ees is not infrequently expressed with reference to this list. However, the
Act's percentage limitations, which bring about diversification within the
authorized list, are usually made expressly inapplicable by the trust instru-
ment. The advantage of this practice is that the creator of the trust can impose
his own restraints upon possible future speculation, and yet bring a broader
class of investments within the trustee's power. The disadvantage is that this
list was designed for the considerable funds of insurance companies, and may
not be appropriate for adoption by smaller sized funds of private trusts.

Finally, the revised Act could adopt the approach found in the American
jurisdictions that employ a permissive legal list. This approach, as previously
discussed,194 offers a legal list, but statutorily permits investment of a certain
portion of the trust fund according to the prudent man rule. Accordingly, it
imposes a measure of control on trustees by limiting the extent to which they
may invest outside the legal list. However, the other side of the coin is that
this restriction may work to the disadvantage of trustees by denying them the
flexibility to invest, as would a prudent man, more than the stipulated portion.

The fundamental rationale of a legal list approach, whatever be its vari-
ations, is constant. In general terms, the argument for a legal list is essentially
that private trustees, as opposed to professional trustees, are often chosen for
their personal character and knowledge of the family of the creator of the
trust, whose members would usually be selected as beneficiaries. Such per-
sons may tend to have limited investment knowledge. For these trustees the
legal list offers a range of investments that have received the sanction of the
legislature, and provides statutory guidelines regarding the permitted per-
centage of trust assets that may be invested in particular securities. Further,
non-professional trustees may take comfort in the knowledge that, in all
probability, they will not incur liability for breach of trust on the grounds of
improper investment, if they keep to the legal list and give thought to the
choice of investments that they make. Moreover, testators and settlors may

193 Supra, note 63.

194 See supra, this ch., sec. 2(b)(iii)d.

217

well desire a restricted investment power to protect their trusts from specu-
lation; once significant loss has occurred, there may be no quarter from which
it can be recouped. In addition, some personal trustees may find that the list
provides protection against a beneficiary who is anxious to see the trust funds
invested in an asset that the trustees consider unwise in the circumstances.

Balanced against these considerations it may be contended that the adop-
tion of a legal list encourages trustees, even if they have a wider power of
investment under the instrument, to "play safe" by keeping to the legal list.
As a result, unless there exists a statutory duty to diversify, trustees may
decide to invest the whole portfolio of trusts assets in legal list bonds. In
economic conditions of low inflation, such an investment would produce a
reasonable income as well as secure the dollar value of the capital invested,
so that trustees administering a trust with successive beneficiaries would have
met their duty to act impartially as between income and capital beneficiaries.
However, during periods of high rates of inflation such an investment would
not sufficiently compensate for the erosion of purchasing power of the dollar
and would result in considerable loss to the capital beneficiaries. At such
times, a more substantial investment in common shares, for example, may
be called for in order to overcome the effects of inflation. The essential
problem, therefore, with the legal list is that it is "a list for all seasons", and,
as diversification of investment seems to be an optional policy for trustees,
trust beneficiaries may be exposed to a real risk of nonrecoverable loss when
the statutorily authorized investments are employed in unsuitable economic
times.

(ii) Prudent Man Approach

The final approach to reform of trustee investment powers is the prudent
man concept. As we have discussed at length in an earlier section of this
chapter,195 this concept, expressed in various forms, requires a trustee in
making or otherwise dealing with trustee investments to act with the care and
discretion of a prudent man. Further, we pointed out that the growth of this
investment concept, especially in the United States, was largely a result of
the economic factors of inflation and instability of currency values, and the
realization that the legal list approach to investment was not capable of
adapting to these ever-changing economic forces. Consequently, jurisdictions
turned towards the prudent man concept of investment, a concept that enables
trustees to respond quickly to changed economic and financial conditions.
Further, it is argued that the even hand rule may be more easily applied by
trustees if they possess an investment power restricted only by the requirement
of prudence.

However, the prudent man rule has been criticized. A number of com-
mentators have taken the position that the concept places too much emphasis
on the preservation of the dollar value of the principal, whereas inflation is a

195

See supra, this ch., sec. 2(c).

218

phenomenon that hurts the life tenant as much as the eventual capital remain-
derman.I96 This factor may be particularly significant where the primary object
of a trust is to maintain a sufficient income for the life tenant, and where it is
the maintenance of income rather than of capital that is the real investment
problem. In response, it may be said that the intention of the prudent man
concept is not only to permit investment in equities at times of high inflation
in order to protect capital, but also to permit diversification of investment to
meet the various needs of a trust during all kinds of changing economic and
financial conditions.

It has also been pointed out that advice may be needed by those who
formerly could have relied upon the legal list for guidance. Investment advice
can be said to be costly to obtain and may not be readily available to trustees
outside large urban centres. However, it is arguable that this state of affairs
only reveals the true situation that fiduciaries face in modern investment
conditions, namely, that there is a need for guidance and specific advice, and
even legal list jurisdictions recognize that expert advice is now essential.197
As to the availability and cost of advice, it may be contended that in present
day investment circumstances these are factors that the creator of a trust
should consider when he is initially selecting his trustees. For example, it
might be wise for the creator of a trust to select a trustee, possibly a profes-
sional trustee, who has access to investment advice. I98 If the creator of a trust
also desires to appoint a member of his family or a friend as trustee, the
trustee with access to investment advice could be given exclusive responsi-
bility and liability for investment decisions.

Finally, it has been suggested that the prudent man concept requires a
trustee to guess in advance the kind of investments that the courts may later
determine to be suitable for the investment of trust assets if an action for
breach of duty is commenced.199 However, if this argument had any validity
in practice, it would surely have surfaced by now in those many American
jurisdictions that employ the prudent man concept. Further, experience has
shown that, in the early 1930's in the United States, when there was a national
patchwork quilt of investment lists and when trustees were frequently sued
for having made unwise investments, the courts were scrupulous in examining
each case from the vantage point of the trustees vis-a-vis the particular
investment decision, and in considering the trustee's position when the chal-
lenged investment was made.200 There is no reason why this judicial approach

196

197

198

[99

200

See, for example, Blair and Heggestad, "The Prudent Man Rule and Preservation of
Trust Principal", [1978] U. 111. L. F. 79; McSwain, "A Modern Analysis of The Prudent
Man Rule" (1967), 106 Trusts & Es. 742; and Langbein and Posner, "Market Funds and
Trust-Investment Law", [1976] ABF Res. J. 1.

See English Trustee Investments Act, 1961 , supra, note 32, s. 6(2) and (4); Western
Australia Trustees Act, 1962, supra, note 95, s. 16(5); and New Zealand Trustee
Amendment Act, 1974, supra, note 96, s. 3.

It should be remembered that all trustees are statutorily entitled to remuneration by order
of the court, unless the trust instrument specifies otherwise: see the Ontario Trustee Act,
supra, note 6, s. 61.

Aspects of this issue are examined in a useful discussion by Professor J.F. Burrows,
"Statutes and Judicial Discretion" (1976), 7 N.Z. U. L. Rev. 1.

See Scott, supra, note 140, § 227, at 1808-09.

219

should not continue. Moreover, it is arguable that, as most legal lists are
subject to a duty of care, a trustee may not be completely relieved from the
need to speculate in advance what a court's response will be to a concentration
of trust assets in a particular investment contained in the legal list. The listed
investments were not intended to give automatic protection to trustees.201 The
utilization of the prudent man concept, it is said, reveals the true position,
namely, that every trustee must exercise individually his duty of care in
making investment decisions.

(iii) Conclusion

Having reviewed the various formulations of the legal list philosophy
and the prudent man approach to trustee investment powers, and having
regard to the objectives and problems of modern trust investment, is there a
sufficient case for change from the present Ontario position? The Commission
is of the opinion that there is such a case, and, although there is much force
in both arguments - for legal list and prudent man - we have concluded that
there is greater force in the combined disadvantages of a legal list and the
advantages of the prudent man approach to trustee investment powers. We
are, therefore, in general agreement with the views, previously set forth, that
advocate the prudent man concept.

It is clear to the Commission that the flexibility and diversification that
the prudent man concept brings to investment choices are characteristics that
are vital to the well-being of any trust in today's economy. Essentially, given
modern economic conditions, we have concluded that the safeguards of the
legal list are illusory. We also agree with the Western Australia and New
Zealand position that any explicit restriction on the percentage of trust funds
that may be invested in corporate securities is unsatisfactory because market
conditions change. We are further impressed with the fact that express in-
vestment clauses, conferring upon trustees a discretionary investment power,
are so widely employed by trust instruments that the present legal list is
effectively ignored. Furthermore, we note that the duty to maintain an even
hand between income and capital beneficiaries, so far as it is not excluded by
the trust instrument, is an obligation imposed upon trustees quite apart from
the nature of their power of investment. A legal list can be viewed merely as
an extra hurdle for trustees, who must ensure in any event that income
beneficiaries and capital beneficiaries are equitably treated by their investment
policy.

We are also influenced by the fact that both what is now the Uniform
Law Conference in Canada, and the American Bankers Association have
endorsed the prudent man concept. Operating as Ontario does in the North
American economic structure, we are impressed with the fact that over four-
fifths of the United States jurisdictions, not to mention four jurisdictions in
Canada, have adopted the prudent man concept in one form or another. The
American jurisdictions have had long practical experience with this concept,
and we have been unable to find any appreciable comment to the effect that
it has significant defects in practice.

See Pettit. supra, note 65, at 280-81

220

We have considered closely the various legal list approaches, but we
have concluded that the logical end result is the position of the prudent man,
a result at which the majority of American jurisdictions have already arrived.
It is evident that among legal list jurisdictions no two jurisdictions can agree
entirely upon the nature and structure of the statutory requirements, and that
each such jurisdiction is compelled within a period of time to review the
matter yet again.

Given the fact that any revision of the Ontario Trustee Act will, if past
experience is any indication, endure for a considerable number of years, we
have concluded that the time is proper for a change to the prudent man
concept of investment. Accordingly, the Commission recommends that sec-
tions 26 and 27 of the Ontario Trustee Act should be deleted, and that in their
place the revised Act should adopt a version of the prudent man concept for
trustee investment powers.

The secondary issue that arises is the formal expression that should be
given to this concept. The Commission finds itself in agreement with the
formulation adopted by the Uniformity Commissioners of Canada in 1970,
and now in force in New Brunswick, Manitoba, the Yukon, and Northwest
Territories,202 as well as in several jurisdictions in the United States.203 We
are persuaded by the argument that the courts may take the view that the
prudent man formulation, to some uncertain degree, may reduce a trustee's
fiduciary obligations. We do not intend this result, and we wish to emphasize
that trustees must at all times realize that they are investing funds belonging
not to themselves, but to the beneficiaries.

We are aware of the criticism that has been made of the prudent trustee
formulation, namely, that since a trustee is a fiduciary, "prudent trustee" is a
tautologous expression.204 We have also taken note of the argument that the
prudent trustee rule may encourage innate conservatism and adherence to
previously approved investments, whereas trustees should examine their own
trust situations when they make investment decisions. However, the Com-
mission is of the opinion that a statutory expression of a discretionary invest-
ment rule should place stress on the caution, as well as the care and skill,
that trustees should employ. The Commission recommends therefore that the
duty of care previously recommended205 should govern the power of invest-
ment.206 It will be recalled that the basic duty of care proposed by the
Commission would require that trustees exercise that degree of care, dili-
gence, and skill that a person of ordinary prudence would exercise in dealing
with the property of another person.

With respect to the investment power that should be contained in the
revised Trustee Act, we are of the view, and accordingly recommend, that,

202 See supra, this ch., sec. 2(c)(ii)b.

203 See, for example, Michigan Comp. L. 1948, § 555.201, and Minnesota Stats. Ann.,
§ 501.125.

204 See Waters, supra, note 8, at 687.

5 Draft Bill, s. 4. See, also, this Report, ch. 2, sec. 2, for a more detailed discussion of a
trustee's general duty of care and recommendations concerning the professional trustee.

206 Draft Bill, s. 34(1).

221

subject to the basic duty of care and the terms of the trust instrument, trustees
should be able to invest trust money in any kind of property. :n7 We would
note that we have provided in our Draft Bill a broad definition of the term
"property" to mean real property, personal property or any estate, share or
interest in property, and to include any debt, chose in action, and any other
right or interest in property, whether in possession or not.2'

208

The final point that the Commission wishes to discuss is whether the
above-recommended general duty imposed upon trustees should be bolstered
by a list of criteria that trustees may consult when making investment deci-
sions. The list that appears in the Restatement on Trusts, Second209 provides
a ready example of the approach we have in mind.

Against this approach, it may be contended that criteria intended to be
guidelines may in effect become mandatory. A trustee who, in an action for
breach of investment duty, admits that he did not consider any particular
criterion may, in practice, be admitting negligence. We do not think that this
outcome would be desirable. However, we have concluded that the presence
of statutory criteria would be helpful to trustees. It would provide basic
investment guidelines that may be useful, particularly where expert advice is
not readily available, or where the size of the trust fund does not justify the
cost of such advice. Further, we are of the opinion that clear legislative
language can preclude our intended statutory guidelines from achieving the

207 Ibid. In order to avoid confusion concerning the applicability of our proposed investment
power to trust instruments that direct trustees by various general terms regarding the
nature of their investment power, s. 34(4) of the Draft Bill provides that the expressions
"legal investment", "authorized investment", "investment authorized by law", or words
of similar import as used in a trust instrument should be taken to mean any investment
that is authorized by the revised Act.

208 Draft Bill, s. \{m).

209 American Law Institute, Restatement of the Law, Second, - Trusts, 2d (1959), § 227,
comment o, lists the following criteria as matters that should be considered by trustees
in determining whether or not a particular investment is prudent:

(1) the marketability of the particular investment;

(2) the length of the term of the investment, for example, the maturity date, if
any, the callability or redeemability, if any;

(3) the probable duration of the trust;

(4) the probable condition of the market with respect to the value of the particular
investment at the termination of the trust especially if at the termination of
the trust the investment must be converted into money for the purpose of
distribution;

(5) the probable condition of the market with respect to reinvestment at the time
when the particular investment matures;

(6) the aggregate value of the trust estate and the nature of the other investments;

(7) the requirements of the beneficiary or beneficiaries, particularly with respect
to the amount of the income;

(8) the other assets of the beneficiary or beneficiaries including earning capacity;

(9) the effect of the investment in increasing or diminishing liability for taxes;
( 10) the likelihood of inflation.

222

character of mandatory directives. Accordingly, the Commission recom-
mends that the revised Act should provide that in investing trust money under
the statutory power of investment, among the matters that it is appropriate
tor trustees to consider are,

(a) the marketability of the investment;

(/;) the length of the term of the investment, including its maturity date, calla-
bility and redeemability;

(d) the probable condition of the market with respect to the value of the invest-
ment at the termination of the trust, especially if at the termination of the
trust the investment must be converted into money for the purpose of
distribution;

(e) the probable condition of the market with respect to reinvestment at the time
when the investment matures;

(/) the aggregate value of the trust estate and the nature of the other investments;

(g) the effect of the investment in increasing and diminishing liability for taxes;
and

(/?) the likelihood of inflation.210

To ensure that the guidelines do not obtain the character of mandatory
directives, we further recommend that the revised Act should expressly stipu-
late that the trustees are not obliged to consider each of the abovementioned
criteria before deciding upon any investment.211

3. OTHER POWERS OF PROPERTY MANAGEMENT

(a) Introduction

Trustees must regard all trust assets as investments unless otherwise
instructed by the trust instrument. Their duty is to preserve the fund, rather
than the assets that constitute the trust fund at any particular moment. In order
to accomplish this purpose, a trust instrument should confer upon trustees
powers of sale, purchase, and exchange. In addition, trustees must manage
the assets. In the case of land, they require authority to maintain and repair
buildings, to insure, to mortgage, and to lease. With respect to securities,
trustees should be able, for instance, to take up bonus issues and options, to
vote at company meetings, and to agree or otherwise respond to proposals
for reorganizations and mergers. If trust property constitutes or includes a

"10 Draft Bill, s. 34(2). It will be noted that we have not recommended the adoption of
criteria 7 and 8 of the American Restatement. We are of the opinion that these criteria,
which focus upon the requirements of beneficiaries, are more applicable to considerations
of even-handedness than of investment.

211 Draft Bill, s. 34(3).

223

business, trustees should have the authority to carry on the business, if that
is what the creator of the trust intended. For their efforts in administering the
trust property, trustees should usually be entitled to compensation from the
trust. These are, of course, only the basic authorities that trustees require; the
purpose of the trust and the nature of the initial trust assets will differ from
instrument to instrument and, to a degree, each trust will require its own set
of authorities or powers. If, for example, land or securities initially transferred
to trustees are to be retained, this position will be reflected by the trust
instrument; the power of sale will be withheld, even if an express duty to
retain is not otherwise apparent in the instrument.

In other words, the powers conferred by a well-drawn trust instrument
will reflect the individuality of the trust, its purpose and character. However,
not all instruments are so designed, and the question that arises is whether
there is a set of standard powers that should be incorporated in the revised
Act. The object of such an incorporation would be to ensure that trustees are
not deprived of a vital power, and that no trust is put to the expense and
inconvenience of an application to the court because, through inadvertence
in drafting, a necessary power has been omitted. We are of the view that,
consistent with our proposal that the revised Act should provide supportive
and facultative powers for trustees,212 there should be included in the revised
Act of a list of ancillary trustee administrative powers that could be amended
or denied by the creator of the trust.

Before considering proposals for reform, we think it desirable to review
briefly the existing statutory provisions in Ontario and other jurisdictions.
We shall refer first to the position under trustee legislation, and thereafter the
provisions of settled estates legislation will be discussed.

(b) Existing Statutory Position in Ontario and Other
Jurisdictions

(i) Trustee Acts

a. Ontario

At present, the Ontario Trustee Act213 confers a variety of administrative
powers upon trustees. Some of these powers deal with matters that are
discussed elsewhere in this Report.214 Of the other powers, the following may
be briefly mentioned. Section 17 confers upon trustees who already have a
duty or power of sale under the terms of the trust instrument a wide discretion
concerning the mode of sale. Section 19 empowers trustees, with the approval
of the Ontario Municipal Board or a judge of the Supreme Court, to dedicate

212 Sec supra, ch. 1 .
21 ^ Supra, note 6.

214

The power of investment is dealt with supra, this ch., see. 2. and the power to allocate
receipts and disbursements between income and capital beneliciarics is dealt with infra,
this ch.. sec. 4.

224

or sell land for highway purposes. Section 21 authorizes trustees to insure
trust property against loss or damage by fire, tempest, or other casualty to an
amount not exceeding three-fourths of the value of the property. Section 22
extends to trustees who hold renewable leasehold property the power to renew
the lease or leases in question. Section 24 makes a receipt issued by trustees
an effective discharge to the payor.

The Act also contains two further powers, which relate to the investment
provisions. First, section 28 empowers trustees to deposit funds with a bank
or trust company pending investment of any trust money. Secondly, section
29 authorizes a trustee to "vary or transpose any securities in which money
in his hands is invested . . . into or for any other securities of any nature
authorized by this Act". The remaining administrative powers contained in
the Act cover diverse matters: section 33 empowers trustees to reimburse
themselves for expenses incurred in the administration of the trust; section
36 confers upon trustees the power, under court order, to pay money into
court; and section 48 authorizes trustees to compromise claims by or against
the trust.

Finally, regarding the implementation of these various powers, section
60 provides that trustees may apply to the court for directions "on any question
respecting the management or administration of the trust property". It has
been held that, while this section enables trustees to secure a ruling concerning
the legal nature and extent of their duties and powers under the instrument,
it does not entitle trustees to obtain directions from the court concerning how
they should exercise the discretion that arises from the employment of their
powers.215 Nor does the section enable trustees to obtain a judicial extension
or enlargement of their powers under the instrument.

If trustees require a power that is not contained in either the trust instru-
ment or the Act, they may seek relief in one of two ways. First, the court,
pursuant to its inherent jurisdiction, may confer upon trustees enlarged pow-
ers. However, this is only an emergency, or salvage, authority and is limited
to situations where it can be demonstrated that the lack of a particular power
will place the trust in severe jeopardy.216 Secondly, applications for a grant
of additional powers may be brought under the Variation of Trusts Act,211 a
statute designed primarily for the variation of the beneficial interests created
by the instrument. This Act requires that all beneficiaries who are sui juris
consent to a proposed variation of the trust instrument, and that the court
determine that the variation is for the benefit of infant, unborn, and unascer-
tained beneficiaries.

All the statutory administrative powers contained in the Ontario Trustee
Act are subject to the expression of a contrary intention in the instrument by

215

216

See Re Collins (1927). 61 O.L.R. 225, [1927] 4 D.L.R. 770 (App. Div.). See. also.
Waters, supra, note 8, at 753-59.

See Waters, supra, note 8, at 905 and 906-07.

Variation of Trusts Act, R.S.O. 1980. c. 519. See, infra, ch. 7. for a more detailed
discussion and recommendations concerning the Variation of Trusts Act.

225

the creator of the trust;218 that is, the trust instrument may extend, add to,
limit, or abrogate the powers created by the Act.

b. Other Canadian Jurisdictions

The Trustee Acts of other provinces, and the Ordinances of the two
territories, contain many of the same administrative powers as those existing
in the Ontario Trustee Act.219 However, the Acts of other Canadian jurisdic-
tions have been more extensively revised than the Ontario Act and, therefore,
contain some powers that do not appear in the Ontario legislation. For ex-
ample, the Manitoba Trustee Act220 contains a power to lease trust property,221
and a power to take back a mortgage on the sale of trust property.222 The
British Columbia Trustee Act22* provides for the repair or improvement of
land, or for the erection or improvement of buildings.224

To respond to circumstances where additional administrative powers are
sought, four provinces and the two territories have adopted a provision,
modelled upon section 57 of the English Trustee Act, 1925.225 This section
confers upon the court much wider power than it possesses pursuant to its
inherent jurisdiction,226 and authorizes the court to confer upon trustees,
applying for the same, power to sell, lease, mortgage, surrender, release,
dispose, purchase, invest, acquire, or otherwise deal with the trust property
where "in the opinion of the court" such a power is "expedient" for the
"management or administration" of the property. Trustees in the remaining
Canadian common law jurisdictions must either rely upon the inherent juris-
diction of the court or apply under variation of trusts legislation, which is in
force in all common law provinces but Newfoundland, for conferment of
additional administrative powers.

c. Other Commonwealth Jurisdictions

For the most part, Commonwealth Trustee Acts, like those of Ontario
and other Canadian jurisdictions, have been influenced by the successive

218 Trustee Act, supra, note 6, ss. 67-68.

2|y These jurisdictions also follow the same policy as Ontario of permitting the creator of
the trust to exclude or amend the statutory provisions. However, only Ontario and
Manitoba subordinate the provisions of their Acts in a general manner. The other
jurisdictions subordinate the Act to the trust instrument on a section by section basis.

220 Supra, note 175.

221 Ibid., s. 29.

222 lbid.,s. 27(4).

223 R.S.B.C. 1979, c. 414.

224 Ibid., s. 1 1 . The section requires a petition to be made to the Supreme Court of British
Columbia.

225 Supra, note 31. The six Canadian jurisdictions that have adopted the English provision
are as follows: Alberta (The Trustee Act, R.S.A. 1980. c.T-10, s. 21); Manitoba (The
Trustee Act, supra, note 175. s. 60); New Brunswick (Trustees Act, supra, note 58. s.
25); Nova Scotia (Trustee Act, R.S.N.S. 1967. c. 317. s. 50); Northwest Territories
(Trustee Ordinance, supra, note 59. s. 20); and Yukon Territory (Trustee Ordinance,
supra, note 60. s. 23). See. further, infra, this ch.. sec. 3(e).

226 See Waters, supra, note 8. at 905 and 906-07.

226

trustee statutes of England. With respeet to trustee administrative powers, the
legislation o( the Australian jurisdictions and of New Zealand has followed a
similar pattern, that is, the legislation has provided a limited number of
powers that may be excluded or modified by the trust instrument.

However, in 1956, New Zealand227 extended considerably its statutory
list o( powers. Western Australia22* modelled this aspect of its revised legis-
lation upon the New Zealand changes, and, in the Trusts Act 1973, 229 Queens-
land based its revised provisions largely upon those of Western Australia.
These jurisdictions confer upon trustees a number of powers that are absent
from the Ontario Trustee Act, including, in general terms, the following
powers: to sell trust property; to exchange trust property; to concur in the
partition of, and to lease, or sublease, trust property; to purchase or rent a
house or apartment as a home for a life tenant and family, and to build a
house for that purpose.230 The recent legislation of New Zealand, Western
Australia, and Queensland contains, as well, powers of a management nature.
Without attempting at this stage to be specific, these powers may be sum-
marized as follows: to maintain the trust property; to improve or develop the
trust property; to renew or vary any mortgage that is part of the trust property,
or to which the trust property is subject; to give a new mortgage, or otherwise
raise money on the security of trust property; to carry on the testator's business
for a period after his death; to convert the business into a corporation; and to
concur in a plan for the reorganization, amalgamation or sale of the under-
taking of a corporation whose shares are part of the trust property.231 In line
with existing policy, all these powers may be added to, excluded, or modified
by the trust instrument.232

d. United States

In the United States, the Uniform Trustees' Powers Act233 has departed
somewhat from the Commonwealth tradition. The Uniform Act was approved

227 Trustee Act 1956, Repr. Stat. N.Z. 1977. No. 61.

228 Trustees Act, 1962, supra, note 95.

229 Trusts Act 1973, Queensl. Stat. 1973, No. 24.

230 See New Zealand Trustee Act 1956, supra, note 227, s. 14( 1 ) and (2); Western Australia
Trustees Act, 1962, supra, note 95, ss. 27(1) and 17; and Queensland Trusts Act 1973,
supra, note 229, ss. 22 and 32.

231 See New Zealand Trustee Act 1956, supra, note 227, ss. 15,21, 32, 33, and 12; Western
Australia Trustees Act, 1962, supra, note 95, ss. 30, 43, 55, and 56; and Queensland
Trusts Act 1973, supra, note 229, ss. 30 and 33.

232 See New Zealand Trustee Act 1956, supra, note 227, s. 2(5), and Western Australia
Trustees Act, 1962, supra, note 95, s. 5(2). However, the Queensland Trusts Act 1973,
supra, note 229, states in s. 31(1) that Part IV of the Act, which contains general
administrative powers, except when otherwise provided, "shall apply whether or not a
contrary intention is expressed in the instrument (if any) creating the trust". A testator
or settlor may, however, confer additional or larger powers upon trustees.

National Conference of Commissioners on Uniform State Laws (73d Annual Conference,
1964), Uniform Laws Annotated (1978), Vol. 7A, at 761 (hereinafter referred to as
"American Uniform Act").

227

by the National Conference of Commissioners on Uniform State Laws, to-
gether with the American Bar Association, in 1964, and has been adopted to
date by eleven states.234 As with the Commonwealth legislation, the Uniform
Act provides a long list of administrative powers, capable of exclusion or
modification by the trust instrument.235 However, one of the novel features
of the Uniform Act is the addition of two provisions relating to a trustee's
general duty and discretion. The first provision states that "a trustee has the
power to perform, without court authorization, every act which a prudent
man would perform for the purposes of the trust including but not limited to
the powers specified . . .".236 It follows, therefore, that the "prudent man"
standard of behaviour not only governs the employment by trustees of the
specific powers that are enumerated in the Uniform Act, but also defines a
broad administrative power to perform "every act which a prudent man would
perform for the purposes of the trust". The second provision states that, in
the exercise of his powers, "a trustee has a duty to act with due regard to his
obligation as a fiduciary".

237

A further unique feature of the Uniform Act is that it deals with cases of
conflict of interest. As a general rule, the Uniform Act allows a trustee to
apply to the court for consent to act whenever a conflict of interest and duty
could arise in the exercise of a trust power.238 By the terms of the Act, conflict
occurs not only when a trustee's personal interests are involved, but also
when the potentially opposing interest is that of another trust of which he is
trustee.239 However, the Uniform Act does specify five situations that may
potentially involve technical conflicts of interest, but that are viewed as
necessary for securing good estate management. In these situations, trustees
need not obtain the prior consent of the court.240 By way of illustration, the
Act provides that a trustee may retain assets received from the creator of the
trust until, in the judgment of the trustee, disposition of the assets should be
made, even though they include an asset in which the trustee is personally
interested.241 Further, a trust company as trustee may, without the prior

234 Florida (1974), Idaho (1965), Kansas (1968), Kentucky (1976), Maine (1979), Missis-
sippi (1966), Montana (1974), New Hampshire (1969), Oregon (1977), Utah (1975),
and Wyoming (1965). See, also, Scott, supra, note 140, § 186, at 1496-1500, and N.Y.
Est., Powers &Trusts Law, §§ 1 1-1. 1 to 1 1-4.7 (McKinney). See, also, for commentary
on the American Uniform Act, Fratcher, 'Trustees' Powers Legislation" (1962). 37
N.Y.U. L. Rev. 627; Horowitz, "Uniform Trustees' Powers Act" (1966), 41 Wash. L.
Rev. 1; Hallgring, "The Uniform Trustees' Powers Act and the Basic Principles of
Fiduciary Responsibility" (1966), 41 Wash. L. Rev. 801; Haskell, "Some Problems
with the Uniform Trustees' Powers Act" (1967). 32 Law & Contemp. Prob. 168; and
Report of Subcommittee of Committee on Estate and Tax Planning on "Administrative
Clauses: Incorporation by Reference" (1967), 2 Real Prop. Prob. & Tr. J. 524.

235 American Uniform Act. supra, note 233, §§ 2 and 3.

236 Ibid., §3(a).

237 Ibid., § 3(b).
23K Ibid., § 5(b).

239 Ibid.

240 Ibid. Trustees may exercise the powers in § 3(c)( 1 ). (4). (6). (18). and (24) without the
consent of the court, although they may involve a conflict of interest situation.

241 Ibid., § 3(c)(1).

228

consent of the court, determine bona fide that a sound course would be to
deposit trust funds in "a bank operated by the trustee1'.242

Finally, the Uniform Act introduces other novel features: it enables the
court "to relieve a trustee from any restrictions on his power that would
otherwise be placed upon him by the trust or by this Act";243 it permits a
majority of the trustees, when there are three or more, to exercise any of the
listed administrative powers;244 and there is a broad provision for the protec-
tion of third parties dealing with trustees.245

( ii ) The Settled Estates A ct

a. Ontario

The Ontario Settled Estates Act246 governs "all estates or interests in land
that are the subject of a settlement".247 Under the Act, a "settlement" occurs
where land stands "limited to or in trust for any persons by way of succes-
sion".248

Accordingly, the Act applies in two situations. First, where land is limited
"to" persons in succession, for example, where X grants land to A for life,
remainder to B in fee simple. The Act also applies where land stands limited
"in trust" for persons in succession. This would occur where land is conveyed
unto and to the use of T, and T2 to hold in trust for A for life, remainder in
trust for B in fee simple. In the first situation, A and B acquire legal interests;
the settlement takes effect at common law and no trust of land is created. The
second situation to which the Act applies involves a settlement of land by
way of trust. The latter interests of A and B sound only in equity, legal title
being vested in the trustees, T, and T2.

The purpose of the Settled Estates Act is to empower the Supreme Court
of Ontario, upon application, to authorize more extensive powers of dispo-
sition than would otherwise exist. To refer to our first example, the example
of a common law settlement, A can, at common law, alienate his interest,
the life estate, but no more; all the grantee would acquire would be an estate
piir autre vie, an estate for the life of A. Likewise, in our second example, a
settlement of land by way of trust, the only interest that A can alienate, absent
statute, is his equitable life estate. The Act empowers the court to confer
upon those persons authorized by the Act to apply for such relief249 - generally

242 Ibid. , § 3(c)(6). The issues raised by these provisions that deal with conflict of interest
situations have been discussed in greater detail supra, ch. 2, sec. 4.

243 American Uniform Act. supra, note 233, § 5(a).

244 Ibid., § 6(a).

5 Ibid., § 7. This section has been discussed previously supra, ch. 3, sec. 4.

246 Settled Estates Act, R.S.O. 1980, c. 468.

247 Ibid.,s. \{e).

248 Ibid.,s. \{f).

249 Ibid.,s. 18.

229

the life tenant or other limited owner entitled to possession of the land:MI -
certain powers, including the power to lease, to sell, and to mortgage, in the
exercise of which all interests will be bound. Thus, in our earlier examples,
A, as the holder of either a legal or equitable life estate, can apply to the
court for power to alienate the estate in fee simple and bind successors in
title. The point we wish to stress is that, even where there is a settlement of
land by way of trust, although there is judicial authority that would permit an
application by trustees for a grant of an administrative power in appropriate
circumstances,251 for the most part, it is the life tenant or limited owner in
possession who may be the recipient of powers of administration and man-
agement.

The life tenant or other limited owner in possession is also given the
power "without any application to the courf' to lease the settled estate for
any term not exceeding twenty-one years, unless the settlement expressly
denies the power.252 The Act further provides that the court shall not make
an order "beyond the extent to which, in the opinion of the court, the same
might have been authorized in and by the settlement by the settlor".253 This
provision appears to imply that a court should not act contrary to the likely
wishes of the settlor, although it is not clear254 whether the provision is to the
same effect as sections 68 and 69 of the Ontario Trustee Act, which specifi-
cally subordinate the provisions of that Act to a contrary intent expressed in
the trust instrument.

Settled estates legislation was introduced in Ontario by The Settled Es-
tates Act, 7#95,255 which was taken, in the main, from the English Settled

250 Section 18(1) of the Ontario Settled Estates Act permits "any person entitled to . . . the
receipt of the rents and profits of a settled estate" to apply to the court. It appears,
therefore, that an application under the Act may, in appropriate circumstances, be made
by a person who is not a life tenant or other limited owner. For example, in Vine v.
Raleigh (1883), 24 Ch. D. 238, the Court, in interpreting the equivalent provision
contained in the English Settled Estates Act, 1877, 40 & 41 Vict., c. 18 (U.K.), held
that, where an estate was vested in trustees and there was no beneficial owner of the
rents and profits for the time being, the trustees, as persons entitled to collect the rents
and profits, were persons who might apply to the court for a grant of a power conferred
by the Act.

251 See Vine v. Raleigh, supra, note 250.

252 Settled Estates Act, supra, note 246, s. 32.

253 Ihid.,s. 28.

254 See, for example. In re Currie and Watson's Trusts (1904), 7 O.L.R. 701 (H.C.J. ).

255 58 Vict., c. 20. Earlier Imperial legislation was in force in Ontario pursuant to The
Judicature Act, R.S.O. 1887, c. 44, s. 32(1), which provided that the High Court should
have the same jurisdiction as the Court of Chancery in England had on the 18th March,
1865, inter alia, "in regard to leases and sales of settled estates"; s. 32(2) and (5) also
contained provisions regarding settled estates. Further, An Act to amend the law respect-
ing the Lease and Sale of Settled Estates ( 1890). 53 Vict., c. 14. contained provisions
regarding renewal clauses in leases of settled estates. Section 50 of the Act of 1895
amended s. 32 of The Judicature Act, R.S.O. , 1887, by striking out the words of s. 32(1)
just quoted, and by striking out s. 32(2) and (5). Section 50 also repealed (1890), 53
Vict., c. 14. See. generally. Re Bishoprick (1874), 21 Gr. 589. and Re Watson's Trusts
(1892), 21 O.R. 528 (H.C.J. ). The Imperial Settled Estates Act. 1856, 19 & 20 Vict.,
c. 120, has been held to be in force in Saskatchewan: sec Re Moffat Estate ( 1955), 16
W.W.R. 314(Sask. Q.B.).

230

Estates Act, 1877.2S6 The Ontario legislation was intended to enable the court
to authorize such powers to be exercised "as were ordinarily inserted in a
well-drawn settlement".257 It is of interest to note that, while the English Act
of 1877 was superseded five years later by the Settled Land Act, 7##2,25H and
was further refined by the Settled Land Act, 1925, 259 the present English
legislation, these developments were never adopted in Ontario. As the Ontario
Settled Estates Act originated from English legislation, it may be instructive,
in order to understand the purpose of the Act, to consider briefly the history
of the legislation in England.

b. England

In England, by the nineteenth century, nearly all large landholdings of
the upper classes were held in "strict settlement". This form of settlement
was designed to keep the ancestral home and property intact and within the
family for succeeding generations, and while this purpose was achieved,
other, often adverse, consequences were created. Specifically, as we have
mentioned,260 at common law a life tenant in possession could alienate his
own life estate, but no more. He could not sell or mortgage the fee simple
estate in even a part of the land, no matter how financially advantageous that
might have been. Moreover, traditionally, settlors either conferred inadequate
management powers upon the life tenant, or withheld such powers entirely.
Although this was sometimes the result of inadvertence or poor drafting,
more often it was due to the settlor's apprehension that, if extensive powers
were conferred, the land, the subject matter of the settlement, might be sold
or partitioned, thereby destroying the purpose of the settlement. By the mid-
nineteenth century, it was becoming apparent that many life tenants had
neither the funds nor the powers to manage their estates adequately.

As a result of this position, legislation intervened.261 Between 1840 and
1 877 a series of statutes empowered the Court of Chancery to confer upon
the life tenant or other limited owner in possession various powers to improve
settled land, involving such matters as drainage, fencing, building, and road-
making.262 The Settled Estates Act, 187726* granted to the Court of Chancery

256 Supra, note 250.

257 Re Hooper (\S96),2S O.K. 179 (H.C.J. ), at 181 , per Meredith C. J., citing Macnaghten
L.J. in Lord Henry Bruce v. Marquess ofAilesbury, [1892] A.C. 356 (H.L.).

258 Settled Land Act, 1882, 45 & 46 Vict., c. 38 (U.K.).

259 Settled Land Act, 1925, 15 & 16 Geo. 5, c. 18 (U.K.).

See supra, this ch., sec. 3(b)(ii)a.

For an account of the history of the strict settlement legislation, see Underhill, "Changes
in the Law of Real Property", in A Century of Law Reform (1901), at 280-97; Megarry
and Wade, The Law of Real Property (4th ed.. 1975), ch. 6; and Burn (ed.), Cheshire's
Modern Law of Real Property (12th ed., 1976), at 166-69.

Settled Estates Drainage Act, 1840, 3 &4 Vict., c. 55 (U.K.); The Land Drainage Act,
1845, 8 & 9 Vict., c. 56 (U.K.); Settled Estates Act, 1856, 19 & 20 Vict., c. 120;
Settled Estates Act, 1858, 21 & 22 Vict., c. 77 (U.K.); and Settled Estates Act, 1864,
27 & 28 Vict., c. 45 (U.K.).

Supra, note 250.

260
261

262

263

231

more extensive powers with respect to both common law settlements and
settlements of land by way of trust and, as we have noted, this statute provided
the model for Ontario's current Settled Estates Act. The English 1877 Act
was superseded in 1882 by the Settled Land Act, 1882, 2M which departed
significantly from past practice by conferring directly upon the life tenant,
without leave of the court, extensive powers of sale, exchange, partition, and
leasing. The life tenant of settled land thus acquired a freedom of disposition
that was comparable to that of an absolute owner. As part of the general
reform of property law in England in 1925, the 1882 Act was replaced by the
Settled Land Act, 1925, 265 which continues the policy of the 1882 Act in a
more direct form, by vesting the legal estate in fee simple absolute in posses-
sion in the tenant for life or other limited owner. In the result, as the legal
estate and the statutory powers are vested in the person entitled in equity to
a life or other limited interest, the Act does not apply to settlements of land
where the legal estate is vested in trustees.266

c. Other Canadian Jurisdictions

The experience of other Canadian provinces and territories with the
English settlement legislation may be briefly mentioned. British Columbia
adopted settled estates legislation similar to the 1877 English Act, and this
legislation remains in force today.267 New Brunswick's Trustees Act2™ confers
upon the trustees of settled land, with the concurrence of the life tenant, the
power to sell, exchange, or join in the partition of the land. Apart from these
jurisdictions, none of the other provinces, other than Ontario, whose legis-
lation we discussed earlier,269 has a Settled Estates Act or equivalent provi-
sion. However, it has been held in Nova Scotia that the wording of the
Judicature Act confers upon the Supreme Court of the Province the powers
granted to the English Court of Chancery by the Settled Estates Act, 1877 '.27<)
It is possible that a similar argument, or an argument based upon the reception

264 Supra, note 258.

265 Supra, note 259.

266 In 1884, Parliament partially excluded the "trader's trust", the popular trust for sale.
from the provisions of the Settled Land Act, 1882. The Settled Land Act, 1884, 47 & 48
Vict., c. 18. s. 6(1) (U.K.), provided that, in the case of a trust for sale, the tenant for
life could not exercise the powers of the Settled Land Act, 1882, unless an order of the
court had been obtained, and pending such order, the Act further provided, trustees
could sell the land without the consent of the tenant for life. However, the 1884
legislation only conferred the power of sale on trustees, and did not grant to trustees
other powers of management in respect of land held on a trust for sale. These powers
remained with the tenant for life. The process of excluding land held on a trust for sale
from settled land legislation was completed in 1925. The Settled Land Act, 1925. supra.
note 259. s. 1(7), provides that a settlement does not include land held upon trust for
sale, and. under English law, land held upon a trust for sale is governed not by the
Settled Land Act, 1925, but rather by the Law of Property Act, 1925. 15 & 16 Geo. 5,
c. 20 (U.K.) and by the Trustee Act, 1925. supra, note 31.

267 Land (Settled Estate) Act. R.S.B.C. 1979. c. 215.
Supra, note 58, ss. 44-48.
See supra, this ch., sec. 3(b)(ii)a.
ReBauxild. 1 1954] 3 D.L.R. 586 (N.S.S.C. ).

26K

269

270

232

of English law, could be made also with respect to other provinces that have
not enacted settled estates legislation.271

d. Other Commonwealth Jurisdictions

The English settled estates legislation was adopted in all the states of
Australia and in New Zealand. As in Ontario, the present legislation in New
South Wales272 and South Australia273 is essentially the same as the 1877
English Act. The present Tasmanian Act274 is closer to the English Settled
Land Act, 18X2, and Victoria's Settled Land Act, 795#27<s is more akin to the
English Settled Land Act, 1925. The revision of the New Zealand Trustee
Acf1(" in 1956 was accompanied by the repeal of its settled land legislation,
and Western Australia followed a similar course when it enacted the Trustees
Act, 1962.211 Similarly, when Queensland enacted the Trusts Act 197 311* it
repealed its Settled Land Act of 1886. Although the trustee legislation of New
Zealand, Western Australia, and Queensland differs somewhat, these juris-
dictions confer upon trustees in respect of any trust property vested in them,
including land, the powers of sale, exchange, partition, and lease.

Despite the repeal of the settled land legislation in Western Australia,
Queensland, and New Zealand, their Trustee Acts contain two provisions that
reflect settled land concepts. The first, which occurs only in the Western
Australia legislation, requires trustees to sell land subject to a trust, if the
person or all the persons beneficially entitled to an interest in possession
express the desire in writing that they do so.279 This means that, in this context,
trustees can be directed as to the exercise of their powers. The second
provision, to be found in the Acts of all three jurisdictions, is to the effect
that, where there is no trustee of any land, but there is a life tenant, or other
person with an interest less than an estate in fee simple in possession, that
person may exercise all the powers conferred by the trustee legislation upon
trustees.280 This provision is intended to deal with the rare situation where
successive interests in land are created without the imposition of a trust.

271 Re Moffat Estate, supra, note 255.

272 Conveyancing and Law of Property Act, 1898, Pub. Acts N.S.W. 1824-1957, Vol. 2.
No. 17, Part IV.

273 The Settled Estates Act. 1880, Stat. S. Austl. 1837-1936, No. 182.

274 Settled Land Act 1884, Stat. Tasm. 1826-1959, No. 10.
273 Acts Vict. 1958, Vol. 7, No. 6367.

276 Supra, note 227, s. 89(1). This Act repealed the Settled Land Act 1908, Repr. Stat.
N.Z. 1931, Vol. 8, No. 175.

277 Supra, note 95. s. 4(1). This Act repealed the Settled Land Act, 1892, 55 Vict., No. 10.

278 Supra, note 229, s. 3(1). This Act repealed the Settled Land Act 1886, 50 Vict., No.
13.

279 Trustees Act, 1962. supra, note 95, s. 27(4).

280 Ibid., s. 109; New Zealand Trustee Act 1956. supra, note 227, s. 88; and Queensland
Trusts Act 1973, supra, note 229, s. 6(a).

233

Having reviewed briefly the present position in Ontario and elsewhere,
two questions arise for consideration. The first is whether trustee administra-
tive powers should continue to be the subject matter of legislation. If an
affirmative answer is given to this question, the second question that must be
answered is whether, in settlements of land by way of trust, administrative
powers should continue to be located in the Ontario Settled Estates Act and
should continue to be conferred upon the tenant for life or other limited
owner, as now occurs under this Act.

As to the first question, the Commission is aware that it is standard
practice in Ontario for practitioners to include in trust instruments all the
powers that trustees will need, or seem likely to need, during the lifetime of
the trust. Such a practice permits the powers in question to be tailored to the
particular objects of the trust. Also, it may be said that it is convenient,
especially for non-professional trustees, to have an exhaustive list of admin-
istrative powers contained in the trust instrument to which they have ready
access. Further, it may be argued that certain types of power may relate to a
subject matter that is inappropriate for legislation. This is especially true of
the important powers that relate to the operation of the federal Income Tax
Acf,281 and that are usually tailor-made for particular tax situations. It is
doubtful whether there are standard powers across the Province in this area
of the law, and experience has shown that such powers have to be revised
frequently due to changes in the tax laws. As taxation considerations affect
many other powers conferred upon trustees,282 it is contended that these other
powers would also be subject to constant review and amendment. Moreover,
dealing with situations where powers conferred by the trust instrument prove
to be inadequate, those who do not favour the inclusion in the revised Act of
administrative powers point to the growing tendency to supplement the in-
herent jurisdiction of the court by legislation that authorizes the court to
confer upon trustees any power thought to be necessary.283

On the other hand, the inclusion of administrative powers in trustee
legislation was intended, from the beginning, to benefit trustees and their
beneficiaries whose trust instruments did not contain a power commonly
inserted. If a settlor or testator omitted a power later found to be essential,
no recourse was available, unless it could be demonstrated that an emergency
situation existed that justified invoking the inherent jurisdiction of the court.
To meet this situation, it became the legislative practice to provide that
familiar powers should be read into trust instruments, unless the settlor or
testator had expressly or impliedly excluded or modified their operation.

282

283

Income Tax Act, S.C. 1970-71-72, c. 63.

For example, the power of trustees to make a joint election with any preferred beneficiar)
as to the tax treatment of that beneficiary's interest.

See. for example, the English Trustee Act, 1925. supra, note 31 , s. 57; Alberta Trustee
Act. supra, note 225, s. 21; Manitoba Trustee Act. supra, note 175, s. 60: New
Brunswiek Trustees Act, supra, note 58, s. 25: Nova Scotia Trustee Act. supra, note
225, s. 50; Northwest Territories Trustee Ordinance, supra, note 59. s. 20; and Yukon
Trustee Ordinance, supra, note 60, s. 23.

234

Furthermore, although the jurisdiction of the court to confer additional ad-
ministrative powers upon trustees has been expanded by statute in some
jurisdictions,284 it is questionable whether judicial intervention should be the
only means by which trustees can seek assistance. Court application involves
cost, time loss, and inconvenience to the trust, and it may be argued that in
many instances statutory powers could obviate the necessity of court appli-
cation when usual administrative powers have been omitted from the trust
instrument.

In considering these competing arguments, the Commission notes that
trusts drafted today are very different from those that were drawn when the
powers contained in the present Ontario Trustee Act were first included in the
Act, and that as a result some of the powers now contained in the Act have
little relevance to contemporary circumstances. Moreover, the fact that these
statutory powers have not been revised for so long, without apparent com-
plaint from the profession, suggests that this area is not one that is urgently
in need of attention. Nevertheless, although these arguments have merit, the
Commission has had little difficulty in concluding that it would be useful for
the revised Act to contain a set of administrative powers that are customary
in well-drawn contemporary trust instruments, and we so recommend. We
further recommend that the settlor or testator should be able to exclude or
modify any of the statutory administrative powers conferred upon trustees.285
It will also be noted that the administrative powers contained in the Ontario
Trustee Act are scattered throughout the Act, and we recommend that the
current arbitrary placement of powers should be replaced by a thematic list
in the revised Act.

The second question that arises concerns the position where there is a
settlement of land by way of trust. It will be recalled that, where land stands
limited in trust for any persons by way of succession, administrative powers
are located in the Ontario Settled Estates Act, and the court is authorized to
confer these powers upon the life tenant or other limited owner in posses-
sion.286 The question that the Commission has considered is whether a settle-
ment of land by way of trust should continue to be subject to this distinct
treatment. There are, in the opinion of the Commission, two possible ap-
proaches: first, to continue the present scheme of the Settled Estates Act with
a modernized list of powers; or secondly, to repeal the Act so far as it relates
to settlements of land by way of trust, and to render the administrative powers
in the revised Act applicable to all trusts, including trusts of this nature.

284
285

286

Ibid.

Draft Bill, ss. 35 and 2{b). Consistent with our view expressed in Chapter 1 that the
revised Act should contain supportive and facultative powers, we have not been per-
suaded that any statutory administrative power should be exercisable by trustees whether
or not a contrary intent is expressed in the trust instrument. This is the policy of the
Queensland Trusts Act 1973. supra, note 229, which provides in s. 31(1) that, except
when otherwise provided, the statutory administrative powers contained in Part IV of
the Act shall apply whether or not a contrary intention is expressed in the instrument
creating the trust. In only a few instances is the instrument allowed to exclude the
statutory powers.

See supra, sec. 3(b)(ii)a.

235

The Commission has had little difficulty in concluding that the latter of
these options is the more appropriate policy to adopt. From a practical aspect,
we are of the view that the continued distinction between settlements of land
by way of trust and all other trusts cannot be justified in Ontario today. Our
primary reason, however, for concluding that administrative powers for all
trusts, including settlements of land by way of trust, should be subject to the
revised Trustee Act is that we are of the opinion that the policy of conferring
powers of management and administration upon a life tenant or other limited
owner in possession is no longer appropriate. Rather, we consider that ad-
ministrative powers in relation to all trusts should be conferred directly upon
trustees. Indeed, where there is a trust of mixed assets, the conferment of
administrative powers in relation to land upon the life tenant, rather than
upon the trustees, only serves to complicate the task of administering the trust
as a whole. In such a case, it is also probably fair to say that separation of
administrative powers would not normally be desired by a testator or settlor,
who would have selected as trustees persons whom he believed to be the
most competent to manage his entire estate.

Accordingly, the Commission recommends that, where land is settled on
trust for successive beneficiaries, the powers of management and administra-
tion should not be conferred upon the life tenant or other limited owner in
possession. Rather, the revised Act should confer such powers directly upon
the trustees, in order that they may exercise necessary administrative powers
for all trust assets.287

We would point out that this recommendation does not necessarily ex-
clude the life tenant or other limited owner in possession from participating
in the administration of the trust. If any settlor or testator wishes such a person
to exercise certain administrative powers, this could, in accordance with our
earlier recommendation,288 be stated in the trust instrument. Further, the
creator of the trust could appoint the life tenant to be the sole trustee, or one
of two or more trustees. In the latter case, the retention of the unanimity rule,
which we have recommended,289 would mean that the life tenant, by with-
holding his consent from the proposed exercise of an administrative power
with which he did not agree, could preclude the exercise of the power.

As we have mentioned, the Ontario Settled Estates Act applies where
land stands limited "to" or "in trust for" persons by way of succession; that
is, it applies both to common law settlements of land and to settlements of
land by way of trust. The implementation of the above recommendation could
be accomplished by amending the Ontario Settled Estates Act so as to restrict
its application to common law settlements and by rendering the revised Act
applicable to all trusts, including settlements of land by way of trust. Unlike
the position in England,290 it is still possible in Ontario, although rare, to

7 Draft Bill, s. 35, and s. 2(a), which makes the provisions of the revised Act applicable
to all trusts, unless otherwise provided in the Act.

288 See supra, this sec, and Draft Bill, s. 2(b).

289 See supra, ch. 2, sec. 5.

290 Since the Law of Property Act, 1925 . supra, note 266, it has no longer been possible to
create successive legal interests in land in England.

236

create successive legal interests without the imposition of a trust, and, in such
circumstances, the provisions of the Ontario Settled Estates Act are necessary
to confer administrative powers upon the life tenant or other limited owner
in possession.291 Therefore, the complete repeal of the Settled Estates Act
would leave a void that would not be filled by our earlier recommendation.

We are aware that, as noted previously, Western Australia,292 Queens-
land,2'M and New Zealand294 have addressed this issue by inserting in their
trustee legislation a provision that enables a life tenant, or other person with
an interest less than a fee simple, to exercise all the powers conferred upon
trustees by that legislation. The Commission has concluded, however, that
the revised Act should not contain such a provision. Rather, we are of the
view that it would be more appropriate to deal with the common law settle-
ment of land in the context of a comprehensive review of land law. Accord-
ingly, we recommend that the Settled Estates Act should be amended so as
to exclude from its operation settlements of land by way of trust. We further
recommend that that Act, insofar as it confers administrative powers in
relation to common law settlements of land, should remain in force, pending
a review of the basic principles of land law.295

(d) Specific Administrative Powers

Having recommended that the revised Act should continue to contain
trustee administrative powers, we now turn our attention to the specific
powers that should be included. In making this determination, we have
followed two basic principles. First, we believe that the statutory list should
comprehend those administrative powers that are likely to be useful in the
execution of common trusts. Secondly, we consider that each power should
be relatively simple in concept and briefly expressed. As we have recom-
mended that the creator of the trust should be free to exclude, modify, or add
to any of the proposed statutory powers, draftsmen who prefer to use their
own administrative powers need not be concerned with the revised Act.

To ensure that the proposed list of statutory powers is comprehensive,
we have considered powers that are commonly contained in trust instruments
in Ontario. In addition, we have reviewed the trustee legislation of other
Canadian jurisdictions, of New Zealand, Western Australia, and Queensland,
and we have considered the American Uniform Trustees' Powers Act. The
model that we have found most useful for our purposes is that contained in

291 As has been pointed out in Chupryk v. Haykowski, [1980] 4 W.W.R. 534 (Man. C.A.),
in the absence of settled estates legislation, the courts have no jurisdiction to authorize
the exercise of an administrative power by the life tenant when settlements of land
otherwise than by way of trust are involved, that is, unless the inherent jurisdiction of
the court, which is limited to affording relief in situations of emergencies, can be
invoked.

292 Trustees Act, 1962, supra, note 95, s. 109.

293 Trusts Act 1973, supra, note 229, s. 6(a).

Trustee Act 1956, supra, note 227, s. 88.

The Commission has on its agenda a project on Basic Principles of Land Law, which
will deal with this topic in greater detail.

294

295

237

the American Uniform Act, and our proposed statutory list bears the influence
of this Act.

However, it will be noted that we have omitted certain administrative
powers from our statutory list. First, the powers to allocate or apportion
receipts and expenses between capital and income beneficiaries, 29(' and to
employ agents,297 are not discussed in this part of the Report. We are of the
view that these complex topics should be dealt with separately and, accord-
ingly, have afforded them distinct treatment in this Report and our Draft Bill.
Further, we have decided to exclude from our statutory list other administra-
tive powers which, although often found in trust instruments, contemplate
action somewhat removed from the traditional functions of trustees. Provi-
sions of this nature include the following powers: to lend money, except as
authorized for the purposes of investment; to give guarantees; to take out life
insurance; and, as a general power, to incorporate companies. We have also
omitted from our proposed statutory list powers that would authorize acts
pursuant to the Income Tax Act (Canada); for example, the familiar and
important power of trustees to make a joint election with any "preferred
beneficiary" as to the tax treatment of that beneficiary's interest. It is evident
to us that such powers require that the creator of the trust should have given
thought to their appropriateness and scope.

As indicated, in formulating our list of statutory powers, the second basic
principle that we have followed is that each power should be relatively simple
in concept and briefly expressed. In our opinion, complex and verbose ad-
ministrative powers would invite literal judicial interpretation. Courts would
be encouraged not infrequently to read statutory language strictly, and to hold
that any act not expressly specified as included in the power would necessarily
be excluded. Very detailed statutory powers would also invite amendments
by the legislature should gaps in language be exposed, and, should amend-
ment not be forthcoming, draftsmen might conclude that the statutory power
should be modified by the instrument, if indeed it was to be employed at all.

As we have stated, our proposed statutory list reflects the influence of
the American Uniform Trustees' Powers Act. We have been impressed by
the Act's simplicity and brevity of expression, although we have been careful
to avoid the mechanical adoption of terminology and concepts not familiar to
Ontario. Although we are aware that it might be thought desirable, we do not
consider it necessary to detail exhaustively every aspect of what trustees may
properly do in the exercise of each power. In our view, the general duty of
care imposed upon trustees can be relied upon to curtail the extravagant
exercise of administrative powers by trustees. Accordingly, we recommend
that the revised Act should provide expressly that the exercise of the listed
statutory administrative powers should be subject to the duty of care, dili-
gence, and skill that a person of ordinary prudence would exercise in dealing
with the property of another person, 29X a duty that we have recommended

296 See infra, this eh., see. 4.

297 See supra, eh. 2, sec. 3.
29K Draft Bill, ss. 35 and 4.

238

should be placed in statutory form and made applicable to the discharge and
exercise of all a trustee's duties and powers. 2W

We now turn to discuss the specific powers that we recommend should
be included in the revised Act.

(i) Deposit of Trust Funds

Section 28 of the Ontario Trustee Act enables trustees to deposit trust
money in banking institutions, and provides as follows:

28. A trustee may, pending the investment of any trust money, deposit it
during such time as is reasonable in the circumstances in any chartered bank of
Canada, or in the Province of Ontario Savings Office, or in any trust company
or loan corporation that is registered under the Loan and Trust Corporations Act,
or in any credit union as defined in the Credit Unions and Caisses Populaires
Act.

It will be noted that section 28 applies only to the deposit of trust funds
pending investment of those funds. We are of the opinion that trustees should
be able to deposit funds so far as is necessary for the purpose of operating a
current account. This would be a temporary deposit, and would assist trustees
with their cash-flow. We would rely upon the general duty of care to prevent
trustees from holding large sums in a current account unnecessarily or from
keeping funds on deposit for an unreasonable period of time. Accordingly,
we recommend that the revised Act should provide that trustees may, pending
investment, or for the purposes of paying the ongoing expenses of the trust,
deposit trust money in a chartered bank, trust company, or any other depo-
sitory empowered by law to accept moneys for deposit.

300

(ii) Power of Sale

At present, the Ontario Trustee Act does not confer upon trustees a power
of sale, although the Act does contain a provision respecting the mode of
sale, if a power of sale otherwise exists. Section 17 of the Act provides as
follows:

17. Subject to the Estates Administration Act, where a trust for sale or a power
of sale of land or personal estate is vested in a trustee he may sell or concur with
any other person in selling all or any part of the property, either subject to prior
charges or not, and either together or in lots, by public auction or by private
contract subject to such conditions respecting title or evidence of title or other
matter as the trustee thinks fit, with power to vary any contract for sale, and to

299

300

See supra, ch. 2, sec. 2.

Draft Bill. s. 35(a). Regarding the institutions in which trust funds may be deposited, it
will be recalled that the American Uniform Trustees' Powers Act permits a trustee,
without the consent of the court, to deposit trust funds in a bank, including a bank
operated by the trustee: see supra, this ch., sec. 3(b)(i)d. At this juncture, we would
point out that we agree in principle with this provision. The range of issues involved
where a trustee's interest may conflict with his duty, including this situation in particular,
has been canvassed in greater detail supra, ch. 2, sec. 4.

239

buy in at any auction, or to rescind any contract for sale and to resell, without
being answerable for any loss.

A power of sale may arise either expressly or by implication. An express
power of sale arises where the creator of the trust vests certain assets in his
trustees and, in relation to these assets, confers upon trustees a power of sale,
or a power to sell or retain at their discretion.™1 Secondly, where the trust
instrument is silent, trustees have an implied power of sale, established by
case law, in those circumstances where their duty to maintain an even hand
between income and capital beneficiaries necessitates that they sell wasting,
hazardous, or speculative assets, or assets that unduly favour capital benefi-
ciaries.302 In addition, a power of sale may be implied to enable trustees to
carry out the powers conferred upon them by the trust instrument or by trustee
legislation, for example, the power of investment. It seems to be only in
those instances where the trust instrument expressly or by construction im-
poses upon trustees a duty to retain assets that a power of sale is precluded.

The Commission is of the view that the effective management of a trust
requires that trustees should possess the power to sell trust assets, unless such
a power is excluded or modified by the trust instrument. Indeed, the trustee
legislation of Queensland,303 Western Australia,304 and New Zealand,305 as
well as the American Uniform Trustees' Powers Act,306 contain a provision
empowering trustees to sell trust property. Further, while we would carry
over to the revised Act the mode of sale by private contract or public auction,
we would include a feature that is not present in section 17 of the Ontario
Act. We would permit trustees to sell trust property for credit on appropriate
security, an authority that we understand to be commonly inserted in trust
instruments in this Province. Accordingly, we recommend that the revised
Act should provide that trustees may sell trust property by public auction or
private contract for cash or credit on appropriate security.

307

Before leaving this topic, we wish to note one other section of the present
Trustee Act that deals with the power of sale, namely, the power of the court
to order a sale of land held by trustees for charitable purposes. Section 15 of
the Act provides as follows:

15. — (1) Where land is held by trustees for a charitable purpose and it is made
to appear that the land can be no longer advantageously used for such charitable
purpose or that for any other reason the land ought to be sold, a judge of the
Supreme Court may make an order authorizing the sale thereof and may give

301 An express statutory power of sale also arises under the Estates Administration Act,
R.S.O. 1980, c. 143, s. 2, whereby executors, as trustees, may sell property for the
purpose of paying the debts of the deceased testator.

302 See Re Smith, supra, note 9. See, generally, Waters, supra, note 8, at 745-49.

303 Trusts Act 1973, supra, note 229, ss. 32(1 )(a), 34, 35, 36. and 37.

304 Trustees Act, 1962, supra, note 95. ss. 27(1 )(a). 31, 32, 33. and 34.

305 Trustee Act 1956, supra, note 227, ss. 14(1 )(a), 16, 17, and 18.

306 American Uniform Act, supra, note 233. § 3(c)(7).

307 Draft Bill, s. 35(b).

240

such directions in relation thereto and for securing the due investment and
application of the money arising from the sale as may be considered proper.

(2) No such order shall be made unless notice of the application has been
given to the Public Trustee.

Although, as stated in chapter 1 , we are of the view that the revised Act
should not apply generally to charitable trusts, except insofar as concerns the
matters that we shall discuss in chapter 8, nevertheless section 15 of the
present Act appears to be a useful provision. Because the land is held by the
trustees for charitable purposes, and therefore involves the public interest,
there is justification for requiring the court to authorize any sale of the land
and for the requirement that the Public Trustee be notified. Accordingly, we
would retain section 15 in the revised Act, and recommend that, where land
is held by trustees for a charitable purpose and it appears that the land can be
no longer advantageously used for such charitable purpose or that for any
other reason the land ought to be sold, the court should be empowered to
authorize its sale and give such directions in relation to the sale and for
securing the due investment and application of the money arising from the
sale as are appropriate.308 In addition, we recommend that no order should be
made by the court under the above recommendation unless notice has been
given to the Public Trustee.309

(iii) Exchange and Partition

The Ontario Trustee Act contains no provision that would allow trustees
to dispose of trust property by way of exchange, or to concur in the partition
of the trust property. Such powers are to be found, for example, in the trustee
legislation of New Zealand,310 Western Australia,3" and Queensland,312 and
in the American Uniform Act.313 We are of the view that the ability to dispose
of trust property by way of exchange is a useful alternative to the power of
sale, and that a trustee should also be entitled to consent to a partition of
property in which the trust holds an undivided share. The New Zealand,
Queensland, and Western Australia Acts also stipulate that the property
received in exchange must be of a "like nature and a like or better tenure".
However, we are of the opinion that the nature of property received in
exchange need not be so stipulated; in our view, the trustee's general duty of
prudence is adequate to safeguard the interests of the trust. Accordingly, we
recommend that the revised Act should contain a provision to the effect that
trustees may dispose of trust property by way of exchange for other property,

8 Ibid. , s. 79. For an additional power in the Public Trustee to sell land held for a charitable
purpose in specified circumstances, see the Charities Accounting Amendment Act, 1982,
SO. 1982, c. 11, s. 1.

309 Ibid.,s. 80.

310 Trustee Act 1956, supra, note 227, s. 14(l)(b).

311 Trustees Act, 1962, supra, note 95, s. 27(1 )(b).

312 Trusts Act 1973, supra, note 229, s. 32(1 )(b).

313 American Uniform Act, supra, note 233, § 3(c)(7).

241

or, where the trust property consists of an undivided share, concur in the
partition of the property in which the share is held.314

(iv) Power to Lease

The Ontario Trustee Act authorizes trustees, where trust assets include
leasehold property, to renew the lease and, for that purpose, to raise money
by way of a mortgage of the lease.315 We are of the view that a general power
to renew leases held by the trust should be carried over to the revised Act.
Accordingly, we recommend that trustees, as lessees, should be able to renew
a lease held by the trust.316

The present Act, however, contains no provision authorizing trustees to
grant a lease of trust property. If the trust property in question comprises a
"settled estate" within the meaning of the Ontario Settled Estates Act, the
Act, as we have noted, confers upon the life tenant or other limited owner in
possession the power to apply to the court for a grant of administrative
powers, including the power to lease. The Act further confers on these parties
the power, without any such application, to lease the settled estate, or any
part thereof, for any term not exceeding twenty-one years.317 In our earlier
discussion of the Settled Estates Act, we recommended that, where land is
settled by way of trust, the powers of administration and management should
be conferred directly upon the trustees.

We are of the view that the revised Act should empower trustees to grant
or renew a lease of any trust property.318 However, we do not consider that
trustees should be granted complete discretion in this regard, as beneficiaries
might be seriously affected if, for example, trustees were to grant a lease of
ninety-nine years, or if, for example, a lease granted by trustees was to
contain an option to renew the lease or to purchase the reversion. Accordingly,
we would limit the scope of the statutory power to leases that do not contain
an option to renew or purchase, and to leases that provide for the grant of a
term not exceeding three years in the case of a residential lease, and seven
years in the case of any other lease. If a longer term is thought to be desirable,
or if it is wished to include in the lease an option to renew or to purchase the
reversion, the trustees should seek the consent of the court. We recommend,
therefore, that the revised Act should contain a provision to the effect that
trustees may, as lessors, grant or renew a lease or sublease of trust property
for a term not exceeding, in the case of residential property, three years, or,
in the case of any other type of property, seven years, or with the consent of

314 Draft Bill, s. 35(c).

315 Trustee Act, supra, note 6. s. 22.

316 Draft Bill, s. 35(J).

317 Settled Estates Act, supra, note 246. s. 32. See, also, supra, this ch., sec. 3(b)(ii)a.

A power to lease is also contained in the Western Australia Trustees Act, 1962, supra,
note 95, s. 27(1 )(d). (e). (f), (2), and (3); the New Zealand Trustee Act 1956. supra,
note 227, s. 14(1 )(d), (e), and (f); the Queensland Trusts Act 1973, supra, note 229,
s. 32(1 )(d), (e). (f), (2), and (3); and the American Uniform Act, supra, note 233,
§ 3(c)(10).

242

the court, grant or renew a lease or sublease of trust property for longer
periods or grant an option to renew the lease or sublease or to purchase the

reversion.319

(v) Power to Maintain and Repair

The Ontario Trustee Act contains no provision that authorizes trustees,
in a general manner, to maintain, repair, improve, or develop trust property,
although section 19 of the Act does contain a specific power enabling trustees
to dedicate or sell land for municipal highway purposes. The American
Uniform Act,320 and the New Zealand/21 Western Australia,322 and Queensland323
Acts, on the other hand, do contain such powers. The Commission is of the
view that a general power permitting trustees to manage, maintain, repair,
renovate, improve, or develop trust property is useful, if not essential. How-
ever, unlike the situation under the New Zealand, Western Australia, and
Queensland legislation, we do not propose the imposition of pecuniary limits
upon the cost of any such repairs or improvements; rather, we prefer to leave
this matter to be controlled by the trustee's duty of prudence. Accordingly,
we recommend that the revised Act should provide that trustees may manage,
maintain, repair, renovate, improve, or develop trust property, including in
the case of land subdividing, erecting buildings, dedicating for any public
purpose, granting easements, profits a pendre, or licences, and entering into
agreements with respect to boundaries, party walls, fencing, or other matters
in connection with trust property.

124

(vi) Power to Insure

Section 21 of the Ontario Trustee Act confers upon trustees a power to
insure trust property, and provides, in part,325 as follows:

21 . — (1) A trustee may insure against loss or damage by fire, tempest or other
casualty, any building or other insurable property to any amount, including the
amount of any insurance already on foot, not exceeding three-fourths of the value
of such building or property, . . .

(2) This section does not apply to any building or property that a trustee is
bound forthwith to convey absolutely to any beneficiary upon being requested to
do so.

It will be noted that the section is limited to insurance in respect of "loss or
damage" to the trust property, and that the property may be insured to any
amount not exceeding three-fourths of the value of the property.

3,9 Draft Bill, s. 35(f).

320 American Uniform Act. supra, note 233, § 3(c)(8) and (9).

321 Trustee Act 1956, supra, note 227, s. 15(1 )(a), (b), (c), and (e).

322 Trustees Act, 1962, supra, note 95, s. 30(1 )(a), (b). (c). and (f).

3 Trusts Act 1973, supra, note 229, s. 33(1 )(a), (b), (c), (e), (f), and (h).

Draft Bill, s. 35(f).

The section further authorizes the payment of premiums out of the income of trust
property, a power that we will examine in greater detail, infra, this ch., sec. 4(b).

324
325

243

In general, it may be argued that there is no need to include in the revised
Act a specific power to insure, as the duty to insure in appropriate cases forms
part of the general duty of trustees to preserve the trust assets.326 However,
this duty is not incontrovertibly established, and, in view of the customary
inclusion of this power in trust instruments, it seems wise to include it in the
statutory list. As with all the statutory powers, the exercise of the power to
insure would be subject to the general duty of care and prudence, which
would govern when, and the manner in which, trust property is insured.
While we consider that section 21 provides a useful model, in our view the
provision should be altered in two respects. First, in accordance with equiv-
alent provisions in the legislation of New Zealand,327 Western Australia,328
Queensland,329 and in the American Uniform Act,330 we are of the view that
the proposed power to insure should permit trustees to obtain liability insur-
ance, as well as insurance for "loss or damage" to the trust property. Sec-
ondly, again in accordance with these four Acts, we have concluded that the
limitation of insurance coverage to three-quarters of the value of the property
should not be carried over to the revised Act. Rather, this power of trustees
should be stated in unqualified form. Accordingly, we recommend that the
revised Act should provide that trustees may insure against loss or damage to
trust property and against any other risk or liability.331

(vii) Power to Carry on a Business

Assume that, when a trust takes effect, the trust assets include a business.
At present, there is no express provision in the Ontario Trustee Act that
enables the trustees to carry on the business. Moreover, unless it can be said
that a business constitutes an investment, so that trustees can carry it on under
the power of investment, there is doubt whether a general power in the
instrument to postpone sale authorizes trustees so to act.332 Since an express
power to carry on a business is very familiar in contemporary trust instru-
ments, and is also contained in the trustee legislation of several jurisdic-
tions,333 we are of the view that the revised Act should similarly include such
a useful provision. Accordingly, we recommend that the revised Act should
contain a provision to the effect that trustees may carry on any business,
whether as sole proprietor, partner, limited partner or otherwise, and may

326 See Re Gamble i\925), 51 O.L.R. 504, [ 1925] 4 D.L.R. 768 (Ont. H.C. Div.).

327 Trustee Act 1956, supra, note 227, s. 24.

328 Trustees Act, 1962, supra, note 95, s. 46.

329 Trusts Act 1973, supra, note 229, s. 47.

330 American Uniform Act, supra, note 233, § 3(c)(17).

331 Draft Bill, s. 35(g).

332 See Meagher and Gummow, supra, note 93, at 455-56.

3 See, for example, the American Uniform Act, supra, note 233, § 3(c)(3); New Zealand
Trustee Act 1956, supra, note 227. ss. 32 and 33; Western Australia 'Trustees Act, 1962.
supra, note 95, ss. 55 and 56; and Queensland Trusts Act 1973. supra, note 229. ss. 57
and 58.

244

incorporate or otherwise ehange the form of the business, and dispose of or
wind up the business.

J34

(viii) Shareholding Obligations

The Ontario Trustee Act does not directly confer upon trustees the ability
to exercise the rights and powers attendant upon the ownership of shares of
a corporation. It may be argued that as trustees are vested with the legal title
to shares and are registered as owners of the shares, they should, by virtue
of applicable company legislation, be entitled to exercise the powers of a
shareholder. However, it is not clear whether this is the case in the absence
of an express provision in the trust instrument or statute to that effect.

In the opinion of the Commission, trustees should be able to exercise all
the rights and powers attendant upon shareholding; trustees should not be in
a position where they cannot vote on matters that vitally affect the trust. The
New Zealand,335 Western Australia,336 and Queensland337 trustee legislation,
as well as the American Uniform Act,338 confer upon trustees the necessary
powers to administer corporate securities properly. We agree with this ap-
proach and, accordingly, recommend that the revised Act should contain a
provision to the effect that trustees may exercise all rights and powers and
satisfy all liabilities incidental to the ownership of shares or obligations of a
corporation, including power to sell or exercise subscription rights, to ex-
change the shares or obligations for other shares or obligations, to join in
plans for reconstruction, reorganization or amalgamation, to enter into pool-
ing or other agreements, and to authorize the sale of the assets or undertaking
of the corporation. 3-

(39

(ix) Surrender of Property

Although, pursuant to their duty to hold an even hand between benefici-
aries, trustees are obliged to sell a wasting or hazardous asset, it is question-
able whether this duty enables trustees to surrender trust property, even where
the property is of such a nature that its retention would not be in the interests
of the beneficiaries, for example, insurance policies for which there is insuf-
ficient money available for the payment of premiums, or leasehold property
that is subject to onerous covenants. Certainly, no express power of surrender
is to be found in the Ontario Trustee Act. We are of the view that an
appropriately drafted power of surrender should find its place in our proposed
list of specific statutory powers. We find support for this view in the fact that

334 Draft Bill, s. 35(/?).

335 Trustee Act 1956, supra, note 227, ss. 12 and 13.

336 Trustees Act, 1962, supra, note 95, ss. 25(3), (4) and 26.

337 Trusts Act 1973, supra, note 229, ss. 30(3), (4) and 33(1 )(c).

338 American Uniform Act, supra, note 233, § 3(c)(13), (14) and (15).

339 Draft Bill, s. 35(/).

245

such a power is contained in the trustee legislation of other jurisdictions.
Accordingly, we recommend that the revised Act should provide that trustees
may surrender insurance policies, leases or other property subject to onerous
obligations of such a nature that it would not be in the interests of the
beneficiaries to retain the trust property.341

(x) Acquisition of Dwelling Home

At present, the Ontario Trustee Act does not permit trustees to rent,
purchase, or build a house for the use of a beneficiary, and we are also
informed that this power is not commonly found in trust instruments. The
trustee legislation of New Zealand,342 Queensland,343 and Western Australia344
permits trustees to purchase a dwelling house for the use of a beneficiary,
and the New Zealand Act further allows trustees to erect a dwelling house or
to lease accommodation for this purpose.

It may be contended that, in light of the power of investment that we
have earlier recommended, it is unnecessary to include in our proposed list
of statutory powers the power to acquire a dwelling house for a beneficiary.
However, English case law has held that a power to invest in land does not
authorize the purchase of land for use as a beneficiary's home, as the land
would not produce income.345 While this may be a correct interpretation of
the investment power, we consider that circumstances may arise where trust-
ees may reasonably desire to acquire property as a dwelling for a beneficiary.
Indeed, the English Law Reform Committee has recently recommended that
the case law position should be reversed and that a new statutory power
should be introduced enabling trustees to purchase a residence for occupation
by the person entitled to the income used for the purchase.

346

We would confer upon trustees considerable latitude in this regard, and,
as in the case of the New Zealand provision, we would authorize trustees not
only to purchase land, but also to rent or erect accommodation for this
purpose. However, we consider that before so acting trustees should obtain
the consent of the income beneficiary. Accordingly, we recommend that the
revised Act should provide that trustees may purchase or rent living accom-
modation, or construct a house on land held by them, for the purpose of

340 See, for example, the Western Australia Trustees Act, 1962, supra, note 95, ss. 30( 1 )(i)
and (j), and 35; the New Zealand Trustee Act 1956, supra, note 227, ss. 15(l)(i) and (j)
and 20(f); the Queensland Trusts Act 1973, supra, note 229, ss. 33(1 )(k) and 38; and
the American Uniform Act, supra, note 233, § 3(c)(7).

341 Draft Bill, s. 35(j).

342 Trustee Act 1956, supra, note 227, s. 14(2)(b), (2A), and (2B).

343 Trusts Act 1973, supra, note 229, s. 22.

344 Trustees Act, 1962, supra, note 95, s. 17.

345 In re Power, [1947] 1 Ch. 572. In that case it was held that the investment power could
not be used to purchase a home for the testator's widow and children, on the basis that,
as the house did not produce income, it was not an investment. This reasoning is
surprising since the rental of the property would otherwise have been payable to the
widow as life tenant.

34f' English Law Reform Committee Report, supra, note SO, at 63.

246

providing a home for the person entitled to the income of the money expended
in respect of the purchase, or to the income to be expended in respect of the
rent, or to the income of either the land or the money expended in respect of
the purchase or construction, if the person for whom the living accommoda-
tion is provided consents thereto.347

(xi) Power to Borrow Money

There is no provision, at present, in the Ontario Trustee Act that author-
izes trustees, in a general manner, to borrow money in relation to the man-
agement and operation of the trust. Section 44 of the Act does provide a
limited power in this regard, and deals with the position where a testator
devises to his executors or trustees land that he charges with the payment of
his debts or with the payment of a legacy, without any express provision for
the raising of such money to pay debts or a legacy. In such a case, the section
empowers the executors or trustees to raise money to pay such debts or legacy
by sale or by mortgage of the land.

Unlike the position under the Ontario Trustee Act, the legislation of New
Zealand,348 Western Australia,349 and Queensland,350 and the American Uni-
form Act351 do contain a borrowing provision of general scope. We appreciate
that it may be argued that trustees' borrowing powers should be limited by
specifying the purpose for which borrowing is permissible, since it is a power
that should not be exercised lightly by trustees. However, it seems to the
Commission that, as there are numerous purposes for which trustees should
be entitled to borrow funds, any attempt to list them all might well result in
the omission of one or more. We are of the view that the revised Act should
contain a borrowing power, and that the power should be in general terms,
with the trustee's duty of care acting as a discipline in the employment of the
power. Accordingly, we recommend that the revised Act should provide that
trustees may borrow money and, as security, may mortgage, pledge, or
otherwise charge any of the trust property.352

(xii) Settlement and Contestation of Claims

Section 48 of the Ontario Trustee Act, a provision that deals with the
administration of estates, empowers a personal representative to pay debts
and to compromise, compound, abandon, submit to arbitration or otherwise
settle any debt. We are of the view that this is a useful provision and that it
should be available to trustees. However, we would expand the provision in
a manner similar to the American Uniform Act353 and permit trustees to contest

347 Draft Bill, s. 35(A).

348 Trustee Act 1956, supra, note 227, s. 21.

349 Trustees Act, J 962, supra, note 95, s. 43.

350 Trusts Act 1973, supra, note 229, s. 45.

351 American Uniform Act, supra, note 233. § 3(c)(18).

352 Draft Bill, s. 35(/).

353 American Uniform Act, supra, note 233, § 3(c)(19).

247

any claim, as well as to settle any claim. Accordingly, we recommend that
the revised Act should provide that trustees may pay or assert or contest any
claim, and compromise, compound, abandon, submit to arbitration or oth-
erwise settle any debt, account, claim or thing relating to the trust or the trust
property.354

(xiii) Power to Give a Receipt

The Ontario Trustee Act provides in section 24 that trustees may give
receipts for the payment of money, thereby effectually discharging the person
paying the money. The section provides as follows:

24. The payment of any money to and the receipt thereof by any person to
whom the same is payable upon any trust, or for any limited purpose, and such
payment to and receipt by the survivor or survivors of two or more mortgagees
or holders or the executors or administrators of such survivor or their or his
assigns, effectually discharges the person paying the same from seeing to the
application or being answerable for the misapplication thereof.

We are of the view that this provision should be carried over to the revised
Act, but we prefer a less complex formulation. Accordingly, we recommend
that the revised Act should provide that trustees may give a receipt in writing
for any money or other property received.355 We further recommend that a
receipt in writing for any money or other property received by trustees should
be a sufficient discharge to the person paying or transferring the money or
other property and should exonerate him from seeing to its application or
being answerable for its misapplication.

356

(xiv) Power to Pay Outgoings

Although we have earlier recommended that trustees should be able to
pay any debt outstanding against the trust,357 it is doubtful whether such a
provision would comprehend the payment of taxes, premiums, assessments
and other outgoings in relation to the trust property. We are of the view that,
like the legislation of New Zealand,358 Western Australia,359 and Queens-
land,360 and the American Uniform Act,361 the revised Act should expressly
provide this power for trustees. Accordingly, we recommend that the revised
Act should contain a provision to the effect that trustees may pay out of trust
money any taxes, assessments, charges, premiums or other outgoings in

354 Draft Bill, s. 35(w).

355 Ibid., s. 35(«).

356 Ibid.,s. 38.

7 Supra, this ch., sec. 3(d)(xii).

358 Trustee Act 1956, supra, note 227. s. 15( 1 )(f).

359 Trustees Act, 1962. supra, note 95. s. 30(1 )(g).

360 Trusts Act 1973, supra, note 229. s. 33( I )(d).

361 American Uniform Act, supra, note 233, § 3(c)(20).

248

respect of trust property.362 The secondary issue of which beneficial interest
should bear the burden of these expenses is discussed in greater detail in a
later part of this chapter.

563

(xv) Reimbursement of Expenses

Section 33 of the Ontario Trustee Act provides, in part,364 that a trustee
"may reimburse himself or pay or discharge out of the trust property all
expenses incurred in or about the execution of his trust or powers". The power
of reimbursement is, of course, a necessary administrative power that should
be included in our proposed statutory list. Generally speaking, trustees in
Ontario reimburse themselves for expenses before passing their accounts.365
As a result, if any expense is later held to be improper, and if the trustees are
unable to reimburse the trust, the trust will suffer a loss. However, if trustees
could not reimburse themselves at the time the expense is incurred, they
would have to have access to considerable sums of working capital in order
to pay the current expenses of the trust, a requirement that, in our opinion,
would be impracticable and, indeed, would impose a financial burden upon
some private trustees. We do not consider that such an approach is desirable,
and support the continuation of the present Ontario practice. Accordingly,
we recommend that the revised Act should contain a provision to the effect
that trustees may reimburse themselves or pay or discharge out of trust
property all expenses incurred in or about the administration of the trust.366
The issue of which beneficial interest should bear the cost of these reimburse-
ments is canvassed at a subsequent point in this chapter.

367

(xvi) Appropriation and Valuation of Property in Specie

As the law now stands in Ontario, trustees may only distribute property
in specie to beneficiaries if the trust instrument so permits, or if all the
beneficiaries are capacitated and agree to the appropriation and valuation.368
The trustee legislation of New Zealand,369 Western Australia,370 and
Queensland371 confers upon trustees a power to value and appropriate property
in specie in or towards satisfaction of the interest of a beneficiary. We consider

362 Draft Bill, s. 35(c).

363 See infra, this ch., sec. 4(b).

364 The remainder of section 33 excludes liability for certain acts or omissions unless they
occur through "wilful default", a subject that will be discussed in greater detail in ch. 6
of this Report.

365 The reimbursement of actual expenses incurred by the trustees must be distinguished
from the payment to trustees of general compensation. For a discussion of the latter
topic, see infra, this ch., sec. 3(f)-

366 Draft Bill, s. 35(p).

367 See infra, this ch., sec. 4(b).

368 See Waters, supra, note 8, at 694-700.

369 Trustee Act 1956, supra, note 227, s. 15(1 )(j).

370 Trustees Act, 1962, supra, note 95, s. 30(1 )(k).

371 Trusts Act 1973, supra, note 229, s. 33(1)(1) and (m).

249

that a provision of this kind is desirable for the efficient administration of a
trust and should be incorporated in the proposed list of statutory powers.

Unlike the position under the present law, we do not consider it necessary
for all beneficiaries to consent to an appropriation of trust property in specie.
We are, nonetheless, of the view that trustees should be able to exercise the
power only if the beneficiary in question consents to take the property in
specie. If such consent is not forthcoming, there should be no appropriation
of trust property to satisfy that beneficiary's share. If the beneficiary does
consent to take the property, we agree with the Commonwealth legislation to
which we have referred, which enables a beneficiary to apply to the court to
vary the appropriation or valuation. The Commission is of the view that these
qualifications provide a useful safeguard and strike a balance between pos-
sibly competing interests.

Accordingly, we recommend that the revised Act should provide that
trustees may appropriate property in specie in or towards satisfaction of the
share or interest of any beneficiary, with the consent of that beneficiary. For
the purpose of the appropriation, following consultation with a qualified
person where the trustees are not personally qualified, trustees should place
a valuation on the property. However, no specific gift made by the trust
instrument should be adversely affected by an appropriation of property in
specie. In addition, within one month of the valuation, or such longer time
as the court authorizes, the trustees, beneficiaries or any other interested
person should be able to apply to the court for a review of the appropriation
or the valuation, and, following such notice as the court may order, the court
should confirm or make such variation as it considers proper.372

(xvii) Execution of Administrative Powers

Although the Ontario Trustee Act is silent on the point, it would appear
that trustees are entitled to execute all acts or instruments that are necessary
to implement any of their powers. We consider that it would be desirable to
include expressly such a provision in our list of statutory powers, and we
note that this approach has been followed in New Zealand,373 Western Aus-
tralia,374 and Queensland,375 and in the American Uniform Act.376 Accord-
ingly, we recommend that the revised Act should provide that trustees may
do all supplementary or ancillary acts or things and execute all instruments
necessary or desirable to enable them to carry out effectively the intent and
purpose of the powers vested in them.

377

We would emphasize, however, that such a power is not designed to
permit trustees to exercise additional substantive administrative powers that

372 Draft Bill, s. 35(g)-

373 Trustee Act 1956, supra, note 227, s. 15(1)(1).

374 Trustees Act, 1962, supra, note 95, s. 30(1 )(m).

375 Trusts Act 1973, supra, note 229, s. 33(1 )(n).

376 American Uniform Act, supra, note 233, § 3(c)(26).

377 Draft Bill, s. 35(r).

250

are not contained in their trust instrument or in the revised Act. Rather, only
procedural or administrative acts ancillary to the exercise of powers otherwise
conferred should be performed under this proposed provision. If trustees wish
to enlarge their administrative powers beyond those expressly provided by
statute or the trust instrument, the assistance of the court should be sought, a
topic that we turn to consider next.

(e) Enlargement of Administrative Powers

The scheme that we have so far proposed envisages that the revised Act
will contain a list of specific administrative powers, which the creator of the
trust will be free to exclude, modify, or add to as he wishes. However, we
do recognize that situations may arise where the interests of the trust would
be served if trustees could exercise a power not authorized by the trust
instrument or contained in our proposed statutory list. In such circumstance,
we are of the view that there should be a mechanism available to permit an
enlargement of trustee powers.

In selecting this mechanism the Commission has examined two possible
approaches. The first is that contained in section 3(a) of the American Uniform
Trustees' Powers Act,378 which provides as follows:

3. (a) From time of creation of the trust until final distribution of the assets of
the trust, a trustee has the power to perform, without court authorization, every
act which a prudent man would perform for the purposes of the trust including
but not limited to the powers specified in subsection (c).

The Uniform Act not only enables trustees to exercise specifically enumerated
administrative powers, but also empowers trustees to perform any other act
that a prudent man would perform for the proper administration of the trust.
In this fashion, trustees who wish to act in a particular manner need not be
concerned whether, at the crucial moment, they possess the necessary power.
We appreciate that the purpose of this provision in the Uniform Act is to
encourage efficient and resourceful trusteeship. However, we have concluded
that the revised Act should not adopt this approach.

In arriving at this conclusion, we have derived support from the fact that
the trustee legislation of the Commonwealth, including the recent Acts of
New Zealand, Western Australia, and Queensland, place in statutory form
only specific administrative powers. The apprehension seems to be that a
general authorization to trustees to carry out any act that a prudent man would
perform might well encourage trustees to exercise powers that the creator of
the trust did not desire should be exercised by his trustees. We are persuaded
that it should remain primarily the domain of the testator or settlor to confer
expressly upon trustees the powers that he wishes to be exercised in relation
to the trust.

8 American Uniform Act. supra, note 233.

251

In the selection of an appropriate mechanism for the enlargement of
administrative powers, the second approach that the Commission has exam-
ined is the judicial power that is contained in section 57 of the English Trustee
Act, 1925. 379 This section states, in part,380 as follows:

57. — (1) Where in the management or administration of any property vested
in trustees, any sale, lease, mortgage, surrender, release, or other disposition,
or any purchase, investment, acquisition, expenditure, or other transaction, is in
the opinion of the court expedient, but the same cannot be effected by reason of
the absence of any power for that purpose vested in the trustees by the trust
instrument, if any, or by law, the court may by order confer upon the trustees,
either generally or in any particular instance, the necessary power for the purpose,
on such terms, and subject to such provisions and conditions, if any, as the court
may think fit . . .

(2) The court may, from time to time, rescind or vary any order made under
this section, or may make any new or further order.

(3) An application to the court under this section may be made by the trustees,
or by any of them, or by any person beneficially interested under the trust.

(4) This section does not apply to trustees of a settlement for the purposes of
the Settled Land Act, 1925.

Unlike the position under the inherent jurisdiction of the court, this authority
is not limited to emergency situations, where it must be demonstrated that
the lack of a particular power will place the trust in danger of severe prejudice.
Rather, this provision, which finds its place in the trustee legislation of
Alberta,381 Manitoba,382 New Brunswick,383 Nova Scotia,384 and the Ordi-
nances of the two territories,385 enables the court to enlarge a trustee's admin-
istrative powers where, in the management of the trust, the transaction in
question is "in the opinion of the court" expedient.

We are of the opinion that a power modelled upon section 57 of the
English Trustee Act, 1925 should be included in the revised Act. Such a
power would complement our proposed statutory list of powers, and would
also provide a necessary measure of control over the granting of powers to
trustees that are beyond those usually contained in trust instruments. Further,
should such a provision be included, trustees would no longer be required to

379

380

381

382
383
384

385

Supra, note 31, s. 57.

It should be noted that section 57 also empowers the court to "direct in what manner any
money authorized to be expended, and the costs of any transaction, are to be paid or
borne as between capital and income", an aspect that will be discussed in greater detail
infra, this ch., sec. 4(b).

Trustee Act, supra, note 225, s. 21.

The Trustee Act, supra, note 175, s. 60.

Trustees Act, supra, note 58, s. 25.

Trustee Act, supra, note 225. s. 50.

Trustee Ordinance (N.W.T.), supra, note 59, s. 20, and Trustee Ordinance (Yukon),
supra, note 60, s. 23.

252

seek an enlargement of their powers under the Variation of Trusts Act,3*6 a
use for which that Act was not primarily designed. Accordingly, we recom-
mend that, where in the administration of trust property any sale, lease,
mortgage, surrender, release, or other disposition, or any purchase, invest-
ment, acquisition, expenditure, or other transaction is in the opinion of the
court expedient, but it cannot be effected because of the absence of a power
for that purpose vested in the trustees by the trust instrument or by law, the
court should be able by order to confer upon the trustees, either generally or
in any particular instance, the necessary power for the purpose on such terms
and subject to such provisions and conditions as the court thinks fit.387 We
further recommend that the court should be able to rescind, vary, or replace
any such order, but that such a rescission, variation, or replacement should
not affect any act or thing done in reliance upon the order before the person
doing the act or thing became aware of the application to the court to rescind,
vary, or replace the order.

388

(f) Passing of Accounts and Compensation of Trustees

In the previous sections of this chapter, we have discussed the various
powers that trustees should possess in order to carry out effectively the
administration of the trust. The time and care that a trustee expends on trust
affairs may be considerable, and trustees usually anticipate that they will be
compensated for their efforts. In return, the trust, in the form of the benefi-
ciaries, expect that the trustees will give a full account of their activities
concerning the administration of the trust. We shall turn to examine first the
passing of the accounts of the trust by the trustees and, secondly, the general
compensation of trustees.

(i) Passing of Accounts

Trustees have a duty to keep ongoing records concerning their activities
with respect to the trust property,389 and may from time to time, either
voluntarily or as required by law, render a "true and just account" of the trust
administration to the court.190 This latter process is called "passing the ac-
counts" of the trust. The trust instrument may contain an express provision
that relates to the frequency and manner of passing of accounts. In the absence
of such a direction, section 23(1) of the Ontario Trustee Act sets forth the
procedure for trustees who wish to file their accounts with the court, and
provides as follows:

386
387
388
389

390

Supra, note 217.

Draft Bill, s. 63(1).

Ibid., s. 63(2).

See Sanford v. Porter (1889), 16 O.A.R. 565, at 571, where, in this leading Canadian
case, MacLennan J. A. stated that "[t]he duty of a trustee ... is to have his accounts
always ready, to afford all reasonable facilities for inspection and examination, and to
give full information whenever required".

See, generally. Waters, supra, note 8, at 729-34, and Baker (ed.), Widdifield on Exec-
utors' Accounts (5th ed., 1967), ch. 14.

253

23. — (1) A trustee desiring to pass the accounts of his dealings with the trust
estate may file his accounts in the office of the surrogate court of a county or
district in which he or a co-trustee is resident or in which any part of the trust
estate is situate, and the proceedings and practice upon the passing of such
accounts shall be the same and have the like effect as the passing of executors'
or administrators' accounts in the surrogate court; but in the case of trustees
under a will the accounts shall be filed and passed in the office of the surrogate
court by which probate of the will was granted.

Pursuant to section 23(1), the procedure applicable to trustees for the
passing of the accounts of a trust is the same as that for the passing of
executors' or administrators' accounts in the surrogate court.391 The procedure
for the passing of executors' and administrators' accounts is prescribed by
the Surrogate Courts Act 392 and Rules.393 Briefly stated, the Rules provide
that the accounts shall "contain a true and perfect inventory of the whole
property",394 and shall include the following: (a) an account snowing of what
the original estate consisted; (b) an account of all money received; (c) an
account of all money disbursed; (d) an account of all property remaining on
hand; (e) a statement of compensation claimed by the executor or administra-
tor; and (f) such other accounts as the judge requires.395

It is not our intention to review here the present practice, or to make
recommendations for reform, concerning the passing of accounts generally.
This topic is being considered in detail in our Project dealing with the Ad-
ministration of Estates of Deceased Persons,396 and we anticipate that reform
proposals made with respect to the passing of accounts for executors and
administrators will apply equally, as under the present law, to ordinary
trustees. Accordingly, pending a review of this area of the law at a later date
by the Commission, we recommend that section 23(1) of the present Trustee
Act should be carried over to the revised Trustee Act. The revised Act should
provide that trustees desiring to pass the accounts of their dealings with the
trust property may file their accounts in the office of any court having juris-
diction, and that the proceedings and practice upon the passing of such
accounts shall be the same and have the like effect as the passing of the
accounts of executors or administrators, except that, in the case of trustees
under a will, the accounts shall be filed and passed in the office of the court
by which probate of the will was granted.397

J91

392
393
394
395
396

397

For an explanation of the procedure involved in the passing of accounts by executors
and administrators, see Hull and Cullity, Macdonell, Sheard and Hull on Probate
Practice (3d ed., 1981), ch. 23, and Widdifield on Executors' Accounts, supra, note
390, ch. 14.

Surrogate Courts Act, R.S.O. 1980, c. 491, ss. 64, 73, 74, and 75.

Surrogate Court Rules, R.R.O. 1980, Reg. 925, rr. 59-63.

Ibid.,r. 61(1).

Ibid.

The objective of the Commission's current Project on the Administration of Estates of
Deceased Persons is a new Administration of Estates Act. The new Act would bring
together in revised form relevant portions of the Trustee Act, the Estates Administration
Act, R.S.O. 1980, c. 143, the Surrogate Courts Act, supra, note 392, and Rules, supra,
note 393, as well as a number of the common law doctrines that now govern estate
administration.

Draft Bill. s. 36(2).

254

There is one matter, however, that we wish to address at this juncture,
which concerns the passing of accounts by a trustee of an inter vivos trust.
At present, trustees of a testamentary trust may pass their accounts voluntarily
or, by rule 59 of the Surrogate Court Rules, they "may be called upon by
citation to do so on the application of any person interested therein".398
Trustees of an inter vivos trust, however, cannot be compelled under the
present law to pass their accounts, unless, of course, the trust instrument so
provides; they need only do so voluntarily pursuant to the power to pass
accounts conferred by section 23(1) of the Trustee Act.

We are concerned about the trustee of an inter vivos trust who declines
to exercise his statutory (or express) power to pass his accounts. At present,
a beneficiary who wishes to have an accounting of the trustee's activities
must allege breach of trust by the trustee in connection with the trust's
accounts in order to have the accounts brought before the court.399 The
beneficiary who is confronted by a recalcitrant trustee will usually wish to
have the trustee demonstrate to the court that all is in order with respect to
the trust, either because he suspects a breach of trust but has insufficient or
no evidence upon which to base an action for breach, or because a limited
interest, or indeed the trust itself, is about to terminate and the capital is about
to be distributed.

We are of the view that a beneficiary should not have to commence an
action for breach of trust in order to compel an accounting, especially in the
circumstances where an interest or the trust itself is about to terminate. Like
trustees of a testamentary trust, trustees of an inter vivos trust should be
required to pass their accounts if required to do so; we can see no reason to
distinguish the practice for testamentary trusts from that of inter vivos trusts
in this regard. We would note that both Manitoba400 and British Columbia40'
provide that trustees of testamentary and inter vivos trusts may be compelled
to pass their accounts.

Accordingly, we recommend that Rule 59 of the Surrogate Court Rules
should be amended and incorporated in the revised Trustee Act to provide
that trustees, whether of an inter vivos or testamentary trust, may pass their
accounts voluntarily or may be called upon by citation to do so on the
application of any person interested therein.402

398 Supra, note 393, r. 59.

399 Rule 607 of the Supreme Court of Ontario Rules of Practice, R.R.O. 1980, Reg. 540,
provides that a cestui que trust may apply by originating notice for the determination
without an administration of the trust of a number of enumerated questions or matters,
including k'[t]he furnishing of any particular accounts by the executors or administrators
or trustees and the vouching (where necessary) of such accounts". However, Re Smith,
[1952] O.W.N. 170 (H.C.J. ), has held that this rule does not enable the court to make
an order directing the trustee to make available to the beneficiary the accounts or other
documents of the trust. Moreover, rule 607 does not address directly the situation where
the beneficiary seeks to compel an accounting generally by the trustees, in the form of
passing the accounts of the trust in court.

400 Manitoba Trustee Act, supra, note 175, s. 87(2).

401 British Columbia Trustee Act, supra, note 223, s. 101(2).

402 Draft Bill, s. 36(1).

255

(ii) Compensation of Trustees

In a previous section of this chapter, we discussed the power that trustees
should possess to reimburse themselves out of the trust property for all
expenses incurred in or about the administration of the trust.403 The reim-
bursement of all actual expenses incurred by trustees during the course of
administering the trust is distinct from the payment of general compensation
to the trustees. General compensation is a sum that is paid to a trustee for his
time, efforts, and care expended on the activities of the trust.404 The issue
that the Commission has considered is whether the present provisions per-
mitting general compensation are adequate to meet the needs of the modern
trustee in administering a trust.

As we discussed in chapter 2 of this Report, equity requires that a trustee
must "do nothing to place his own interest above his duties or even put
himself in a position where he would be tempted to do so".405 Two manifes-
tations of this rule are that a trustee must not profit from the trust and that a
trustee must act gratuitously.406 Accordingly, while a trustee is clearly entitled
to out-of-pocket expenses, he is not entitled to compensation from the trust
fund, although several exceptions to this latter general rule have been rec-
ognized.

The first exception is where the settlor or testator expressly provides for
remuneration in the trust instrument. The court will give effect to the intention
of the trust creator to provide remuneration for the trustees, but only as to the
amount stipulated in the trust instrument.407 The second situation in which
trustees may be remunerated is where there is an agreement between all the
beneficiaries that the trustees shall be paid.408 In such a case, the court will
scrutinize the agreement carefully and will not enforce anything that appears
to be unconscionable. Thirdly, the court may award compensation pursuant
to its inherent jurisdiction where a solicitor, as trustee, has performed func-
tions apart from those of the ordinary trustee, and, more rarely, where the
work of the trust has taken up a great deal of the trustee's time.409 This, in

403
404

See supra, this ch., sec. 3(d)(xv), and Draft Bill, s. 35{p).

The court determines the amount of compensation based upon the size and complexity
of the trust, the care, ability, and skill required, and the time occupied in the adminis-
tration: see Re Anderson (1923), 55 O.R. 527 (H.C. Div.); French v. Toronto General
Trusts Co. (1923), 53 O.L.R. 336, [1924] 1 D.L.R. 288 (H.C. Div.); and Re Hughes
(1918), 43 O.L.R. 594 (H.C. Div.). See, also, Hull and Cullity, supra, note 391, at
590.

405
4()f.

See Waters, supra, note 8, at 804-05. See supra, ch. 2, sec. 4(a).
See Waters, supra, note 8, at 805.

407 See Heron v. Moffatt (1879), 7 P.R. 438 (Ont. H.C.J. ); Williams v. Roy (1885), 9 O.R.
534 (H.C.J. ); and Re Cooke (1975), 5 O.R. (2d) 388 (Surr. Ct.). In Re Taylor, [1967]
2 O.R. 557 (Surr. Ct.), the Court held that the only agreement that would be binding
would be the one located in the instrument creating the trust. See, also. Waters, supra.
note 8, at 623.

408 See French v. Toronto General Trusts Co., supra, note 404. See. also. Dart v. Drury
(1915), 8 W.W.R. 173, 23 D.L.R. 399 (Man. C.A.). See. also. Waters, supra, note 8.
at 806.

409

See Cradock v. Piper ( 1850). 1 Mac. & G. 664, and Lewin on Trusts, supra, note 25,
at 195-205.

256

brief, is the law, at present, in England and in the majority of states in
Australia.410

The trustee legislation in common law Canada, however, has adopted a
different approach to the compensation of trustees than has legislation in
England and the majority of the Australian states.4" Since 1858, Ontario
legislation has expressly authorized the court to allow a fair and reasonable
compensation to trustees for their care, pain and trouble in the administration
of a trust.412 Today, the statutory authority permitting the court to award
general compensation to trustees is contained in section 61 of the Trustee
Act, which provides as follows:

61 . — (1) A trustee, guardian or personal representative is entitled to such fair
and reasonable allowance for his care, pains and trouble, and his time expended
in and about the estate, as may be allowed by a judge of the Supreme Court or
by any master or referee to whom the matter may be referred.

(2) The amount of such compensation may be settled although the estate is
not before the court in an action.

(3) The judge of a surrogate court, in passing the accounts of a trustee or of a
personal representative or guardian, may from time to time allow to him a fair
and reasonable allowance for his care, pains and trouble, and his time expended
in or about the estate.

(4) Where a barrister or solicitor is a trustee, guardian or personal represent-
ative, and has rendered necessary professional services to the estate, regard may
be had in making the allowance to such circumstance, and the allowance shall
be increased by such amount as may be considered fair and reasonable in respect
of such services.

(5) Nothing in this section applies where the allowance is fixed by the instru-
ment creating the trust.

As is clear from section 61(5), if the settlor or testator wishes to make
provision for the remuneration of his trustees in the trust instrument, he may
do so, and this provision will govern.413 Where, however, no such provision
is made, the trustees may apply to the court under section 61(1) for a deter-
mination of a fair and reasonable allowance, or may, on a passing of the
accounts of the trust, have the allowance set by the court under section 61(3).
In this latter regard, section 23(2) of the Trustee Act is relevant, and provides
as follows:

23. — (2) Where the compensation payable to a trustee has not been fixed by
the instrument creating the trust or otherwise, the judge of the surrogate court

410 See Pettit, supra, note 65, at 317-21, and Meagher and Gummow, supra, note 93, at

335-37.

411 See, generally, Waters, supra, note 8, at 805-08.

412 The Surrogate Courts Act, 1858, 22 Vict., c. 93, s. 47.

413 Waters, supra, note 8, at 624, states that "when the trust or will itself provides for
remuneration, the trustee has no access to the courts for more. The statute expressly
withholds the statutory jurisdiction from the courts in those circumstances". See, also,
Re Edy (1983), 13 E.T.R. 44 (B.C.).

257

upon the passing of the accounts of the trustee has power to fix the amount of
compensation payable to the trustee and the trustee is thereupon entitled to retain
out of any moneys in his hands the amount so determined.

The seeming duplication of provision contained in sections 23(2) and 61(3)
of the Trustee Act may be explained by the fact that these sections were
introduced in the Act at different times.414 In any event, in the majority of
cases, especially in relation to testamentary trusts, trustees apply for compen-
sation, and the court fixes the relevant amount, on a passing of the accounts
of the trust, at which time all of the information relevant to the activities of
the trustees for the period during which compensation is claimed is before
the court.415 Nonetheless, if trustees wish to apply to the court for compen-
sation other than on a passing of accounts, and tender the necessary infor-
mation to enable the court to fix the compensation, they may do so pursuant
to section 61(1). 416

We agree with the present procedures, as reflected in section 61(1) and
(3) and section 23(2) of the Trustee Act, by which trustees, in the absence of
a provision dealing with compensation in the trust instrument, may apply to
the court for an award of a fair and reasonable compensation. We would,
however, consolidate these three provisions of the present Act in the revised
Trustee Act. Accordingly, we recommend that the revised Act should provide
that trustees are entitled to such fair and reasonable compensation for their
work and time spent on the trust as a court of competent jurisdiction on
application or on the passing of accounts may award.417 This provision would
be subject to the expression of a contrary intention concerning compensation
contained in the trust instrument.418

Section 61 of the Trustee Act also deals with the trustee who is a barrister
or solicitor and who renders professional services to the trust apart from his
duties as a trustee. Subsection (4) provides that a solicitor-trustee's general
allowance may be increased to reflect professional services rendered to the
trust. We agree with the principle contained in section 61(4), but are of the
view that it should be extended to all trustees who render professional or
special services to the trust apart from their functions as a trustee; they should
be compensated according to the additional services rendered. Therefore, we
recommend that section 61(4) of the present Act should be retained, but
expanded in the revised Act to provide that trustees who possess or who
because of their profession, business or calling have professional skills and
who have rendered necessary professional services to the trust, apart from
their duties and powers as trustees, are entitled to such additional compen-
sation for such services as a court of competent jurisdiction may award.

419

414 Section 61(3) of the Ontario Trustee Act was first enacted in The Surrogate Courts Act,
1858, supra, note 412. Section 23(2) of the Trustee Act was first introduced as s. 2 of
The Trustee Act, 1925 , S.O. 1925, c. 38. These sections first appeared together in The
Trustee Act, 1926, S.O. 1926, c. 40, ss. 24 and 61(3).

415 See Widdifield on Executors' Accounts, supra, note 390, ch. 14, and Hull and Cullity,
supra, note 391, ch. 23.

416 See Waters, supra, note 8, at 806-07.

417 Draft Bill, s. 71(1).
41S Ibid., s. 2(h).

419 lbid.,s. 71(2).

258

Having reviewed the present statutory provisions governing compensa-
tion for trustees, and having recommended that these provisions should be
carried over, in an amended form, to the revised Act, we also considered
whether the revised Act should do more in the area of trustee compensation.
As with the passing of accounts, the area of compensation is being reviewed
in detail in our Project on Administration of Estates of Deceased Persons.
We expect that recommendations made in that Project with respect to the
compensation of executors and administrators will be equally applicable to
the ordinary trustee. Accordingly, at the present time, we have chosen not to
propose extensive general reforms in the area of trustee compensation, pend-
ing completion of the Project on Administration of Estates of Deceased
Persons. We are of the opinion, however, that there is one aspect of this area
of the law that should be addressed at this juncture, namely, the practice
whereby trustees pay to themselves, from time to time and without court
approval, sums from the trust fund as compensation, for which judicial
approval is sought after the fact on a passing of acounts. This practice has
been described as the "pre-taking" of compensation by trustees.

The pre-taking of compensation by trustees has been the subject of recent
litigation. The central issue is whether statutory authority exists for trustees
to take sums by way of compensation from the trust without the prior approval
of the court and in the absence of an express provision in the trust instrument
or an agreement between all the beneficiaries and the trustees authorizing
such a method of taking compensation. Widdifield on Executors' Accounts
contains the following statement, which predates the recent litigation, con-
cerning the pre-taking of compensation by trustees:420

It is a practice accepted in most jurisdictions for the executor to estimate and
take some compensation as the receipts and disbursements occur rather than wait
for a passing of accounts.

In support of this statement, two early Ontario cases, Re Davis421 and Heron
v. Moffatt,422 are cited.

These two cases, however, have been criticized recently on the basis that
they are not a strong and unambiguous authority for the pre-taking of com-
pensation.423 And, since 1979, courts in three cases - two in Western Canada,
Re Welbourn424 and Re Prelutsky,425 and one in Ontario, Re Knoch426 - have
denied the authority of trustees to withdraw funds from the trust as compen-
sation prior to court approval in the absence of an express authorization to
this effect in the trust instrument. Each of the cases did, however, endorse

420 Widdifield on Executors' Accounts, supra, note 390, at 339.

421 [1936] O.W.N. 146 (H.C.J. ).

422 Heron v. Moffatt, supra, note 407.

423

424
425
426

See, for example, Youdan, "Pre-taking of Remuneration by Trustee or Personal Repre-
sentative" (1983), 13 E.T.R. 59, at 62-63.

(1979), 96 D.L.R. (3d) 76, 4 E.T.R. 122 (Alta. Surr. Ct.).

[1982] 4 W.W.R. 309. 1 1 E.T.R. 233 (B.C.S.C).

(1982), 12 E.T.R. 162 (Ont. Surr. Ct.).

259

the authority of trustees to reserve a portion of the trust assets in a separate
fund to be used ultimately for the payment of court approved compensation.

Because of the unsettled state of the present position, the Commission
has decided that the revised Act should deal with the question whether trustees
should be able to take sums by way of compensation from the trust without
the prior approval of the court where there is no express provision in the trust
instrument or no agreement with the beneficiaries authorizing this method of
compensation.

In favour of pre-taking, it is argued that, if trustees are not permitted to
pre-take compensation, they may have to wait a substantial period of time
before receiving judicially approved compensation on a passing of accounts.
As we noted previously, the usual method by which trustees obtain compen-
sation is pursuant to sections 23(2) or 61(3) of the Trustee Act on a passing
of accounts.427 On a passing of accounts, all relevant information concerning
the trust administration is before the court, and on the basis of this information
the court can determine a fair and reasonable compensation for the trustees.
The accounts of a trust, however, are not usually passed on a regular or
frequent basis, due largely to the extensive procedure involved and the cost
to the trust that a passing of accounts entails. Generally speaking, accounts
are rendered every two or three years in routine cases and every three to four
years in the case of professional trustees.428

Accordingly, the notion of taking compensation prior to the passing of
accounts becomes important if trustees are not to remain unpaid for long
periods of time, which, in addition to personal inconvenience, may create
serious cash flow problems for a trustee that may affect his ability to admin-
ister the trust. Proponents of pre-taking argue that it is fairer to the trustee to
be paid as tasks are completed, rather than being required to wait for the
passing of accounts of the trust. In addition, if trustees must wait until a
passing of accounts to be remunerated, the compensation will be eroded by
the effect of inflation. Inability to draw compensation at periodic intervals
prior to court approval may also result in trustees being forced to pass the
accounts of the trust - a costly procedure - on a more frequent basis than is
necessary.

Opponents of the taking of compensation prior to judicial consent argue
that, until the court awards a fair and reasonable amount to the trustees, they
have no claim to trust funds. Accordingly, trustees should not be able to
withdraw funds from the trust prematurely, and thereby deny the trust the
benefit of these funds. While it is true that inflation will erode the true value
of the trustee's remuneration, there is no reason, it is argued, why the amount
of compensation ultimately allowed should not reflect this factor. It is also
argued that the inability to pre-take compensation will not, in most cases,
adversely affect the cash flow of trustees, especially professional trustees,
given the fact that trustees can recover all out-of-pocket expenses as they are
incurred. Lastly, and perhaps most important, arc the concerns expressed

427
428

See supra, note 415 and accompanying text.

See Widdifield on Executors' Accounts, supra, note 390. at 352.

260

about the trustee who takes an amount in excess of that to which he is entitled.
When the propriety o\' the sum taken by the trustee is reviewed by the court
and judged to be excessive, and if the trustee is insolvent or otherwise unable
to repay the excess sum taken, a loss to the trust occurs. Given that, under
the present law, the beneficiaries have a personal claim only against the
trustee, it is likely that the full amount owed to the trust would not be
recoverable. 4:';

We have considered these arguments carefully, and, on balance, have
concluded that, in the absence of a contrary intent expressed in the trust
instrument, trustees should be entitled to general compensation on a regular
basis during the administration of the trust. In our view, trustees should not
be forced to initiate costly accounting procedures before the court on a
frequent basis for the sole purpose of obtaining compensation. Rather, they
should be entitled to take sums periodically from the trust fund as compen-
sation, without the approval of the court. We believe that the concerns
expressed about the possible abuses that might result from such an authori-
zation can be met by the imposition of appropriate controls upon the pre-
taking of compensation and by the use of sanctions where the taking is judged
by the court to be improper.43

1-30

We are strengthened in our view by the fact that, until the case of Re
Knock, the ability of trustees in Ontario to take interim compensation prior
to a passing of accounts had not been in doubt and, we understand, occurred
frequently without major difficulties. We therefore recommend that, in the
absence of a contrary intent contained in the trust instrument431 and subject
to several specific controls that we shall propose, the revised Trustee Act
should provide that trustees may, from time to time during the administration
of the trust, pay to themselves or any of them from the assets of the trust such
sum as in their opinion is fair and reasonable compensation for their work
and time spent on the trust during the period of time to which the payment
relates.432

In order to ensure that the interim compensation taken by the trustees is
reasonable and proper, we are of the view that several requirements should
be imposed upon the trustees. First, the trustees should be obliged to inform
the beneficiaries, at the time they take the compensation, of the sum taken
and should provide to them an account of the services rendered for such
compensation. If the beneficiaries are of the view that the interim compen-
sation is inappropriate, they may, under the present law governing trustees
of a testamentary trust and under our proposals for trustees of a inter vivos

429
430

431
432

See Youdan, supra, note 423, at 68.

The Uniform Probate Code, Uniform Laws Ann., Estates, Probate and Related Laws
(1972), Vol. 8, § 3-721, at 453, and the New York Civil Practice Act, N.Y. Civ. Prac.
Law, § 8005 (McKinney), authorize trustees to pre-take compensation, and the trustees
must give notice to the beneficiaries of the sum taken and the basis upon which it was
taken. In the case of New York, the amount that trustees may pre-take is governed by a
detailed tariff.

Draft Bill, s. 2(b).

Ibid., s. 72(1).

261

trust, compel the trustees to pass the accounts of the trust.433 Upon the passing
of accounts, the court would be able to scrutinize the compensation taken by
the trustees. Accordingly, we recommend that the revised Act should provide
that, where trustees take interim compensation, they must, at the time of the
taking, give notice to the beneficiaries of the sum taken and an account of
the services rendered.434

Secondly, where the trustees have taken interim compensation, and they
have not been compelled to pass the accounts of the trust, they should be
required, on an application or when the accounts are eventually passed, to
satisfy the court that the sum taken was fair and reasonable, and we so
recommend.435 While we do not favour prescribing by statute specific sums
or percentages that may be taken by trustees as interim compensation, we are
of the view that guidelines respecting the sums payable as compensation, as
well as other matters respecting the taking of interim compensation, might
be usefully provided by regulation. Accordingly, we recommend that the
Lieutenant Governor in Council should be empowered to make such regula-
tions.436

Finally, we wish to address the situation where a trustee has taken
excessive interim compensation or otherwise wrongly appropriated funds
from the trust as compensation. We recommend that, where the court deter-
mines that the interim compensation was not fair and reasonable, it should
determine what is fair and reasonable, and should order the difference be-
tween the sum taken and the sum fixed by the court returned with interest to
the trust.437 In addition, we are of the view that, where the conduct of the
trustee constitutes fraud, the court should be empowered to order the return
to the trust of sums taken by the trustee in excess of a fair and reasonable
compensation, and to deny compensation entirely. Accordingly, we recom-
mend that the revised Act should provide that, where a court determines that
the sum taken as interim compensation was fraudulently taken, the court shall
order it to be returned to the trust, and may deny any compensation to the
trustees.438

4. ALLOCATION OF RECEIPTS AND OUTGOINGS BETWEEN
INCOME AND CAPITAL BENEFICIARIES

(a) Introduction

Unless required to retain a particular asset by directions, either express
or implied, in the trust instrument, trustees have a duty to invest. The object
of investment is to produce gain, which, although it can arise in many forms,

433 See supra, note 402 and accompanying text.

434 Draft Bill, s. 12(2)(a).

435 Ibid.,s. 12(2)(b).

436 Ibid., s. 73.

437 Ibid., s. 72(3)(fc).

438 Ibid., s. 72(3)(a).

262

may be viewed as falling into one or other of two categories. First, gain may
constitute income or revenue return, such as rentals on residential or com-
mercial buildings, interest on mortgages and bonds, or cash dividends on
preference shares or common shares. Secondly, gain may take the form of
capital growth or appreciation, as where the value of real estate or a business
inventory increases, or where stock or stock options are issued in lieu of cash
dividends.

The distinction between income and capital is not crucial where there is
only one trust beneficiary; for instance, it will be a matter of indifference,
tax implications aside, to a minor who will receive the property from trustees
upon the attainment of majority whether gain accrues as income or capital,
because he will take both. Similarly, if there is a class of beneficiaries, each
of whom is to share in both income and capital when given circumstances
occur, they will not be concerned with the form of the gain. Where the
distinction is important, however, is where the trust is in favour of two or
more persons with successive interests, one interest being to enjoy the trust
property for a period of time, and the other to have the property absolutely at
the conclusion of that period of time. Traditionally, a beneficiary with a
limited interest in the trust property is described as being entitled to income,
while a beneficiary with an interest in remainder is said to be entitled to
capital. The income beneficiary would like to see the highest return of income
that is compatible with non-hazardous investment, while the capital benefi-
ciary wishes to ensure the maximum possible capital appreciation.

The problem that faces trustees is how to balance fairly the potentially
conflicting interests of income and capital beneficiaries. In this regard, unless
instructed otherwise by the trust instrument, trustees must buy and sell in the
course of investment always having in mind these two interests. However,
from an investment point of view, high income return may often be achieved
at the expense of capital appreciation, and vice versa. Moreover, practically
speaking, the receipt of gain does not always arise in the conceptually distinct
forms of income and capital, and trustees may have to make difficult deter-
minations concerning how a particular receipt should be treated.

So far, we have been concerned with the distribution of benefits that
accrue either as income or as capital to the trust assets. However, the need to
strike a balance between income and capital beneficiaries also arises in the
context of expenses and losses. Most trust property, whether it is to be
retained or converted for investment purposes, involves expenses, from re-
pairing buildings to meeting calls on shares. So too, losses may be incurred
in the administration of a trust. The question for trustees is whether the
expenses or losses, which we shall refer to collectively as "outgoings", should
be a charge on the income or the capital. Although trustees are primarily
responsible to creditors, the interest of either the income or capital beneficiary
must ultimately bear the burden.

The short answer to the problem of allocating both receipts and outgoings
is that the trust instrument should specify the beneficiaries who are entitled
to the several receipts and who are to bear the several outgoings. Provided
that a testator or settlor creates interests or estates that are certain in quantum
and permitted by law, he may allocate all receipts between successive bene-
ficiaries as he wishes. Likewise, there are no restraints upon a creator of the

263

trust in the distribution of outgoings; he may provide that they all shall be
borne by the trust capital, be shared between income and capital, or be borne
exclusively by income. However, when the settlor or testator does not ex-
pressly state his intention on these matters, it must be determined whether
the instrument impliedly reveals his intention, an exercise that may result in
difficult problems of construction. If the intention of the creator of the trust
cannot be garnered from the trust instrument, the case law provides rules that
reflect what the reasonable man creating competing interests must have con-
templated. In other words, the law attempts to be fair and equitable as between
the competing claims, assuming that this is what the creator of the trust would
have desired. The case law is extensive in this area, and is fully examined in
the available texts.439

Our purpose in this section of the chapter is to ask whether the revised
Act could assist trustees, in the absence of express directions in the trust
instrument, in allocating receipts and outgoings between income and capital
beneficiaries. We first turn to consider the allocation of outgoings. Thereafter,
we shall discuss the allocation of receipts between income and capital bene-
ficiaries.

(b) Allocation of Outgoings

(i) Ontario

Section 21(1) of the Ontario Trustee Act440 authorizes trustees to insure
property against loss or damage. This section provides, in part,441 as follows:

A trustee may . . . pay the premiums for such insurance out of the income thereof
or out of the income of any other property subject to the same trusts, without
obtaining the consent of any person who may be entitled wholly or partly to such
income.

Aside from this provision, the Act is silent regarding the allocation of out-
goings by trustees.442 To determine which beneficial interest should bear the
burden of a particular outgoing, trustees must rely either upon directions
expressed or implied in the trust instrument, or upon the case law.

442

See. for example. Waters, supra, note 8, at 690-728; Widdifield on Executors' Accounts,
supra, note 390, ch. 7; Lewin on Trusts, supra, note 25, at 228-49; Hayton (ed.),
Underhill's Law relating to Trusts and Trustees (13th ed., 1979), chs. 1 1 and 12; and
Meagher and Gummow, supra, note 93, at 376-90.

Supra, note 6.

For a discussion of the power to insure trust property, see supra, this ch.. sec. 3(d)(vi).

It should be noted, however, that section 49( 1 ) of the Ontario Trustee Act abolishes the
rule in Allhusen v. Whittell ( 1867), L.R. 4 Eq. 295. This section, found in the admin-
istration of estates part of the Act, provides that, unless a contrary intent appears in the
will, the debts, funeral and testamentary expenses, estate, legacy, succession and inher-
itance taxes or duties, or other similar disbursements, are to be paid out of capital, unless
the capital is insufficient. This provision, among others, will be examined by the
Commission in the course of its current Project on the Administration of Estates of
Deceased Persons.

264

In allocating the burden of outgoings between income and capital bene-
ficiaries, the principle followed by the case law is that the nature of the burden
will determine upon whom it falls; that is, outgoings of an income nature are
borne by the income beneficiaries, while those of a capital nature are the
responsibility of the capital beneficiaries.443 For example, recurring annual
expenses such as property taxes, insurance premiums, and ongoing repairs
and maintenance are usually attributed to income,444 while major improve-
ments or expenditures, such as substantial repairs, are normally associated
with capital. Similarly, the costs of the administration of the trust, including
investment and solicitors' fees, as well as trustees' remuneration, have been
regarded by the courts as sufficiently basic to the trust that they should be
borne by capital. However, this is only a prima facie determination; if in any
particular case costs are incurred that relate exclusively to the administration
of the life tenant's interest, they will, in all probability, be assessed against
income.445

Sometimes courts have been prepared to attribute an expense to both
income and capital beneficiaries although, generally speaking, acts done for
the benefit of the trust as a whole are treated as a burden on the capital. This
result is based upon the premise that, if capital meets these costs, the life
tenant, who loses the income that would have been produced by the capital
expended, thereby indirectly shares the burden. In relation to losses occurring
from the sale of an investment, such as a mortgage security, the law is less
clear concerning how the loss should be borne: although the courts agree that
the loss must be apportioned, there is disagreement concerning the method
of apportionment.446 However, if a business is carried on by trustees, one
year's losses must be made good out of another year's profits. Should the
business be sold, losses that occur pending the sale will be apportioned
between income and capital.

(ii) Other Canadian Jurisdictions

For the most part, the trustee legislation of the common law jurisdictions
of Canada does not contain general provisions relating to the allocation of
outgoings. Rather, like Ontario, they contain one, or perhaps several, sections
that deal with the allocation of outgoings in particular instances.

All the provincial Trustee Acts, except the Prince Edward Island Act,
authorize trustees to insure the trust property and to pay the premiums out of

443
444
445
446

See, generally, Waters, supra, note 8, at 712-28.

SeeReCaulfield, [19331 O.W.N. 233 (H.CJ.).

See Re Vair (1923), 54 O.L.R. 497 (H.C.Div.).

See In re Plumb (1896). 27 O.R. 601 (H.C.J.), foll'g In re Foster (1890), 45 Ch. D.
629, where it was determined that income and capital beneficiaries should share the loss
in the proportion that each would have benefited had the loan been fully repaid with
interest. However, in In re Moore (1885), 54 L. J. Ch. 432, it was thought that the
division of the price received on the market should be on the basis of the relative amounts
owed when foreclosure took place; that is, arrears of interest and capital.

265

income.447 In addition, the Manitoba Trustee Act*4* contains a provision con-
cerning audits, and confers upon trustees a discretion to determine whether
the costs should be borne by capital or income. Both the Manitoba449 and
British Columbia450 Acts permit trustees to borrow money by way of mortgage
or charge upon all or any part of the trust property for the purpose of carrying
out repairs and improvements - a power similar to that which we have
previously recommended should be included in the revised Act451 - but the
Acts are silent regarding which trust interest should bear the burden of
repayment. Presumably, case law would attribute the interest payments on
such loans to income and capital repayments to capital.

As we noted earlier, the Trustee Acts of Alberta,452 Manitoba,453 New
Brunswick,454 Nova Scotia,455 and the Ordinances of the Yukon456 and North-
west Territories457 empower the court to confer additional administrative
powers upon trustees, and we have recommended that the revised Act should
contain a similar power.458 These Acts further enable the court to direct how
the costs involved in the exercise of the powers granted are to be borne as
between capital and income; that is, the court may direct the manner in which
any money authorized to be expended, and the costs of any transaction
authorized to be undertaken, are to be paid or borne as between capital and
income.

In one respect, the Prince Edward Island Trustee Act459 departs somewhat
from the typical Canadian approach by providing for the allocation of losses
through the establishment of a depreciation or obsolescence fund. Section
3(1) and (2) of the Act provides as follows:

3. — (1) Unless expressly forbidden by the instrument or order appointing him
or creating the trust, a trustee, who has power to hold real estate as an investment
or to invest the trust property under his control, or any part thereof, in real estate,
may and if ordered by a court of competent jurisdiction shall, from time to time,

447 British Columbia Trustee Act, supra, note 223, s. 8; Alberta Trustee Act, supra, note
225, s. 24; Saskatchewan Trustee Act, R.S.S. 1978, c. T-23, s. 45; Manitoba Trustee
Act, supra, note 175, s. 39; New Brunswick Trustees Act, supra, note 58, s. 5; Nova
Scotia Trustee Act, supra, note 225, s. 23; Newfoundland Trustee Act, R.S.N. 1970, c.
380, s. 19; Yukon Trustee Ordinance, supra, note 60, s. 26; and Northwest Territories
Trustee Ordinance, supra, note 59, s. 23.

448 Manitoba Trustee Act, supra, note 175, s. 85.

449 Ibid., s. 32(4).

450 British Columbia Trustee Act, supra, note 223, s. 1 1 .

451 See supra, this ch., sec. 3(d)(xi).

452 Alberta Trustee Act, supra, note 225, s. 21 .

453 Manitoba Trustee Act, supra, note 175, s. 60.

454 New Brunswick Trustees Act, supra, note 58, s. 25.

455 Nova Scotia Trustee Act , supra, note 225, s. 50.

456 Yukon Trustee Ordinance, supra, note 60, s. 23.

457 Northwest Territories Trustee Ordinance, supra, note 59, s. 20.

458 See supra, this ch., sec. 3(e).

459 Trustee Act, R.S.P.E.I. 1974, c. T-9, s. 3.

266

in respect of any such real estate, whether situated within or outside this province
held or acquired by him as such trustee, deduct from and set aside out of the
income whenever received from the real estate such fair and reasonable amounts
as he may deem proper, having regard to recognized accounting practice and
reasonable business prudence, to protect the capital of the trust from loss due to
depreciation in value or obsolescence of any improvements upon or of any
property used in connection with any such real estate, and any amounts so
deducted and set aside shall be added to the capital of the trust.

(2) Any exercise of discretion by the trustee pursuant to subsection (1) shall
be final and conclusive as to all other persons interested in the trust.

Accordingly, unless expressly forbidden by the trust instrument, where trust-
ees are authorized to hold or invest in real estate, they may make deductions
from income received from the real estate to protect the capital of the trust
from loss due to depreciation in value of, or obsolescence of any improve-
ments upon, any property used in connection with the real estate. The word
"improvements" is not defined in the Act, but would presumably include
buildings and essential facilities. Moreover, a trustee may be "ordered by a
court of competent jurisdiction,, to act in this fashion.

The section provides that all deductions from income are to be set aside
and added to capital, but the section is silent concerning the disposition of
money deducted from income that, as events turn out, is not required to meet
losses arising from depreciation or obsolescence. Probably, such money
would not be recoverable by income beneficiaries,460 although, if the income
deductions are to be added to capital, the fund so established should be
appropriately invested, and the income beneficiaries would be entitled to the
interest on that investment. However, trustees may only make "fair and
reasonable" deductions, and they are required to have regard to "recognized
accounting practice and reasonable business prudence".

Finally, it will be noted that by section 3(2) of the Prince Edward Island
Act, trustees' decisions are final and conclusive upon all the trust benefici-
aries; in the result, therefore, the decisions of trustees who prima facie comply
with the requirements of the section may only be challenged on the grounds
of bad faith.

(iii) Other Commonwealth Jurisdictions

The trustee legislation of Western Australia,461 Queensland,462 and New
Zealand463 contains various provisions regarding the allocation of outgoings

460 In Chartered Trust Co. v. Robertson Estate, [1953] 2 S.C.R. 1, trustees, pursuant to
their authority under a will to carry on a business, set up a reserve for depreciation with
respect to certain assets, a plant and a building, in which the business was conducted.
The Court held that the unused reserve was not an accumulation within the meaning of
the Ontario Accumulations Act (now R.S.O. 1980, c. 5), as, if depreciation deductions
from income were fair and reasonable when made, the reserve nevertheless became part
of capital.

461 Trustees Act, 1962, supra, note 95.

462 Trusts Act 1973, supra, note 229.

463 Trustee Act 1956, supra, note 227.

267

between income and capital beneficiaries. For present purposes, we consider
it sufficient to do no more than mention that, as with the Canadian position,
this legislation deals with the allocation of outgoings in particular instances.
For example, the Queensland Act464 authorizes trustees to attribute insurance
premiums to either capital or income, or both, as they think equitable in the
circumstances, subject to any direction to the contrary in the trust terms or of
the court. The Queensland Act,465 together with the Western Australia Act,466
provides that the costs of audits may be charged to capital or income, or in
an appropriate division to each, as the trustees shall in their discretion think
fit. However, the trustee legislation of these Commonwealth jurisdictions
contains two features that we consider merit more detailed comment.

The first feature of this legislation that we wish to discuss is the depre-
ciation or replacement fund authorized by the New Zealand467 and Western
Australia468 trustee legislation. This fund is not, in principle, unlike the
obsolescence fund contained in the Prince Edward Island Trustee Act. How-
ever, unlike the Prince Edward Island fund, which, it will be recalled, is only
authorized where trustees hold or invest in real estate, the Western Australia
and New Zealand fund may be set up in relation to "any property employed
in the production of income or from which income is derived,\ Moreover, it
is not obligatory for trustees to establish such a fund, but, if so established,
the income deducted may be used as trustees think fit for repair, maintenance,
or acquisition of property of a like or advantageous nature. Further, the fund,
presumably including any excess income that is not required to meet actual
depreciation or replacement costs, shall "follow the destination of the capital
of the property".

The second feature of the legislation that we find of interest is the
discretionary apportionment and recouping provision. This provision appears
in the statutes of Western Australia,469 New Zealand,470 and Queensland,471
although its scope is not the same in each Act. However, all three Acts
provide, in part, as follows:

. . . every trustee, in respect of any property, may . . . apportion [a payment or
expenditure] between capital and income or otherwise among the persons entitled
thereto in such manner as he considers equitable, with power, where the whole
or part of the payment or expenditure is made out of capital moneys, to recoup
capital from subsequent income, if that course would be equitable in all the
circumstances.

Accordingly, trustees are vested with a discretion to determine whether a
particular expenditure should be met by either income or capital, or appor-
tioned according to the circumstances of the case. Moreover, the provision

464 Trusts Act 1973, supra, note 229, s. 47(3).

465 Ibid., s. 52(2).

466 Trustees Act, 1962, supra, note 95, s. 51(2).

467 Trustee Act 1956, supra, note 227, s. 15(2).
46X Trustees Act, 1962, supra, note 95, s. 30(2).

469 Ibid., s. 30(l)(b).

470 Trustee Act 1956, supra, note 227, s. 15( 1 }(a).

471 Trusts Act 1973, supra, note 229. s. 33(l)(g).

268

permits trustees to make immediate necessary expenditures out of capital, but
to allocate a fair share of any such cost to income and recoup the capital from
subsequent income.

The provisions in each of the above-noted Commonwealth Acts differ,
however, in two respects. First, the New Zealand and Western Australia
provisions limit the discretionary power of apportionment and recoupment to
expenditures effected on repair, maintenance, upkeep or renovation of trust
property, while the Queensland Trusts Act 1973 extends the power to ex-
penditures made in respect of improvement or development costs, calls on
shares, property taxes, assessments and similar outgoings, subdivision pay-
ments, and costs associated with the construction and maintenance of roads,
streets, and other rights of way, of sewage, water, electricity, drainage, and
similar works.472 Secondly, the application of the Queensland section is
subject only to the Act and any direction of the court, but it is not subject to
a contrary intention expressed in the trust instrument.473 The New Zealand
and Western Australia provisions, on the other hand, are subject not only to
a contrary direction of the court and to a contrary intention contained in the
trust instrument, but also to "the rules of law applicable in such cases1'. This
latter exception appears to subordinate the trustee's discretion to discernible
common law rules.

(iv) Conclusions

From our review of relevant statutory provisions in other jurisdictions,
we find ourselves attracted to the principle contained in the provisions of the
Queensland, Western Australia, and New Zealand Acts: namely, the confer-
ring upon trustees of a power to determine, in their discretion, an equitable
allocation of outgoings between income and capital beneficiaries. Our reasons
for this view are several.

First, there appears to be uncertainty in the law concerning the allocation
of outgoings between successive beneficiaries. As a result, trustees may, in
the administration of their trust, be required to distribute the burden of
outgoings in situations where the law provides little guidance. Perhaps, for
this reason, it is the rule rather than the exception that extensive discretionary
powers of allocation are conferred upon trustees by the trust instrument.
However, even where discretionary powers are so conferred, the duty to hold
an even hand among beneficiaries requires trustees to select a mode of ap-
portionment that is reasonable and fair in the circumstances. Accordingly, it
may be said that the New Zealand, Western Australia, and Queensland Acts
more accurately reflect the practice in this area.

Secondly, where clear rules have been formulated, either by case law or
by statutory provisions, they are often inflexible and, therefore, not appro-
priate for all situations. There may be a number of instances in the conduct

2 See Queensland Law Reform Commission, A Report of the Law Reform Commission on
the Law Relating to Trusts, Trustees, Settled Land and Charities (1971), No. 8, at 34-
35 (hereinafter referred to as "Queensland Report"), for an explanation of s. 33(l)(g).

473 Trusts Act 1973, supra, note 229, s. 31.

269

of every trust where, although the case law would classify the expense or loss
as an income or a capital responsibility, nevertheless, it would seem to be
more equitable if it were apportioned between both classes of beneficiary.
For example, major renovations will increase rentals, although expenditures
of this kind are normally regarded as permanent and, therefore, as a capital
investment. Also, it is not entirely clear why the premiums on property
insurance should be solely the responsibility of the life tenant. If the property
is destroyed and the insured value of the property is recovered from the
insurer, the capital beneficiary will gain either through the investment by the
trustees of the sum so acquired, or by its expenditure on reinstatement.
Moreover, as the nature of outgoings is so diverse, the formulation of specific
rules of allocation in the revised Act might well result in a situation where
not all instances in which trustees might require guidance are addressed.

Accordingly, the Commission is of the opinion that a discretionary power
to allocate outgoings between income and capital as trustees see fit would
better equip trustees to make determinations that would be appropriate in
each individual case. Further, we would not limit this power of discretionary
allocation to particular expenditures, as have the Acts of New Zealand and
Western Australia, and as does, to a lesser extent, the Queensland statute.
Rather, we have concluded that this policy is equally applicable to all types
of expense and loss, and that a comprehensive discretionary power of allo-
cation should be conferred upon trustees. In so concluding, we place reliance
upon the trustee's duty of even-handedness to ensure the exercise of the
discretion in a manner that is equitable between all those concerned, and
upon the trustee's general duty of care, which we have recommended be
placed in the revised Act to govern the exercise of all administrative powers
by trustees.474

The Commission, therefore, recommends that the revised Act should
contain a provision to the effect that trustees may apportion any payment or
expenditure for any outgoing between the income and capital accounts, or
may charge the payment or expenditure exclusively to either income or capital
as they consider just and equitable in all the circumstances.475 Regarding the
scope of the term "outgoings", we recommend that the revised Act should
define this term to mean payments and expenditures, whether discharged by
the trustees or a beneficiary, resulting from and necessitated by the existence
of the trust property, and that the term should include expenses of adminis-
tration, repairs, maintenance, insurance, taxes, payments on account of mort-
gages and debts, calls on shares, annuities, and business and other losses.476
If the above recommendations are accepted, the Commission further recom-
mends that the portion of section 21 of the Ontario Trustee Act that deals
with the payment of insurance premiums out of income should not be carried
over to the revised Act.

Apart from the allocation of outgoings between the income and capital
account, trustees are often confronted with difficult decisions concerning the

474 See supra, ch. 2, sec. 2, and Draft Bill, s. 4.

475 Draft Bill. s. 40(1).

476

/hid., s. !(/).

270

actual payment of these burdens. At present, trustees would surely be in
breach of trust if they initially met costs, chargeable to income, out of capital,
or vice versa. Moreover, if payments were made out of capital, trustees
would be personally liable if loss to the capital account took place because
the money so expended was not later recoverable from the income beneficiary.
However, situations may arise where it would be more advantageous for the
trust to meet expenditures either wholly or partly out of a beneficial interest
that might not ultimately bear the entire cost. For example, it might be
financially more appropriate, having regard to sound business practice, for a
certain expense to be met initially out of income, although it be an expense
that would later require allocation either in whole or in part to capital. On the
other hand, although a particularly heavy burden might ultimately be allocated
to income, there might not be sufficient income to meet the burden, as well
as the financial requirements of the income beneficiary, in a given year. In
such a case, it might be desirable to pay the expenditure out of capital and to
allocate an appropriate portion of the burden to income over a number of
years.

To meet these situations, we have concluded that trustees should be
permitted to pay for any outgoing from either income or capital, in whole or
in part, in a manner that they determine to be in the best interests of the trust
beneficiaries. Moreover, for reasons that we have stated, this matter should
be expressly addressed in the revised Act.477 Accordingly, we recommend
that the revised Act should contain a provision to the effect that trustees may
pay for any outgoing from income or capital, or wholly or partly from each,
as appears to them to be in accord with sound business practice and in the
best interests of the trust beneficiaries as a whole.478

Further, to enable trustees, after payment has been rendered, to allocate
the burden to those beneficial interests that should bear it, we have concluded
that the revised Act should incorporate a provision akin to the recouping
provision that is contained in the New Zealand, Western Australia, and
Queensland trustee legislation. However, to complement the previous rec-
ommendation concerning payment of outgoings, we are of the view that the
provision should be expanded to allow not only the recouping of capital from
income, where the whole or part of the payment or expenditure has been
made out of or charged to capital, but also the recouping of income from
capital, where the whole or part of the payment has been made out of or
charged to income, if, in either case, trustees consider that course to be just
and equitable in all the circumstances, and we so recommend.479

We are also of the view that the establishment of a depreciation or
obsolescence fund, similar to the fund authorized by the Prince Edward

477 The power to recoup capital from subsequent income contained in the Western Australia,
Queensland, and New Zealand Acts presumes that an actual payment was made out of
capital that should ultimately be borne by income.

478 Draft Bills. 40(2).

479 Ibid.

271

Island, Western Australia, and New Zealand Acts would be useful. 4m We
have concluded that trustees should be empowered to deduct from the income
of property that is subject to depreciation or obsolescence such amounts as
they deem reasonable to protect the capital of the trust from loss, and that the
amounts so deducted should be set aside and added to capital. The fund would
be employed to finance such tasks as repair, maintenance, or renovation, and
would be particularly appropriate in those instances where the income bene-
ficiary is receiving the entire income of the trust, but is not maintaining the
trust property; for example, a house that will eventually fall into the posses-
sion of the capital beneficiary.

4SI

As in the case of the New Zealand and Western Australia provisions, we
believe that the fund should be authorized for any property that produces
income and is subject to depreciation or obsolescence. Also, we agree in
principle with the Prince Edward Island provision that compels trustees to set
up a fund if so ordered by a court. However, we would depart from the Prince
Edward Island provision that renders all such decisions final and conclusive,
as we prefer to leave the exercise of this discretion to the scrutiny of the
present law. Accordingly, we recommend that the revised Act should provide
that trustees may, and if ordered by the court upon application shall, deduct
from the income derived from trust property that is subject to depreciation or
obsolescence such amounts as are fair and reasonable having regard to sound
business practice in order to protect the capital of the trust from loss, and that
any sums so deducted should be set aside and added to the capital of the trust
so as to become capital for all purposes.

482

We would, however, make two exceptions to the above recommendations
concerning the powers of trustees to pay and to allocate outgoings, to recoup
payments made, and to establish a depreciation fund. First, in view of the
terms of the Income Tax Act (Canada),483 we are compelled to except spousal

480

We are aware that the Queensland Report, supra, note 472, at 76, did not recommend
the adoption of a depreciation or replacement fund. The Commission was of the view
that such a fund was inconsistent with subsequent provisions contained in both the
Western Australia Trustees Act, J 962, supra, note 95, s. 105, and the New Zealand
Trustee Act J 956, supra, note 227, s. 85. These sections provide that the whole of the
net income of property settled as a residuary gift shall, pending sale, be applied as
income, notwithstanding that the property may be of a wasting, speculative, or rever-
sionary nature. This recommendation was accepted by the Queensland Parliament, and,
accordingly, the Trusts Act 1973, supra, note 229, does not contain a provision author-
izing a depreciation or obsolescence fund. It should be noted that, as we do not recom-
mend the adoption of a provision similar to ss. 105 and 85 of the Western Australia and
New Zealand Acts, respectively, we are of the view that the inconsistency mentioned
by the Queensland Report will not arise in the revised Act: see infra, this ch., sec.
4(c)(ii).

We have considered the provisions of the American Uniform Principal and Income Act,
Uniform Laws Annotated (1978), Vol. 7A, at 429, §§ 9-11 (hereinafter referred to as
"American Uniform Principal and Income Act"), which deal with the depletion of capital
that occurs with the working of minerals and of timber lands, as well as with leaseholds,
patents, copyrights and royalty rights. However, we observe that these sections have
often been amended by states adopting the Act, and take note that clauses concerning
depletion reserves are evidently best drawn without particular circumstances in mind.

482 Draft Bill, s. 40(3).

483

Supra, note 281, ss. 70(6). 70(7). 73, 74, and I04(4)(a).

272

trusts from the above recommendations. Where there is a testamentary or
inter vivos transfer of capital property to a spouse, the advantageous rollover
provisions of the Act will only apply if the provisions of the trust satisfy
certain requirements, including the following: the spouse must be entitled to
receive the entire income of the trust that arises during his or her lifetime;
and no other person may receive or otherwise obtain the use of the income
or capital of the trust during that period. Our recommendations to allow
income deductions for depreciation to be added to capital and to permit
trustees to use, albeit on a temporary basis, income to pay for an expense
that will be met ultimately by capital would "taint" the spousal trust, thereby
disqualifying the assets from the preferential taxation treatment afforded by
the federal Act. We consider that this interplay between the recommended
provisions of the revised Act and the terms of the Income Tax Act (Canada)
should be a matter for decision by the creator of the trust. Accordingly, we
recommend that where a trust is a trust for the exclusive benefit of the spouse
of the testator or settlor within the meaning of the Income Tax Act (Canada),
the above recommendations should not apply to the trust unless the trust
instrument expressly provides that the provisions contemplated or a specified
part thereof should apply.484

Secondly, because these recommendations effect a significant change in
relation to the allocation of outgoings, we recommend that they should only
apply to trusts that take effect after the revised Act comes into force, and that
the revised Act should state expressly that they are subject to the duty to
maintain an even hand between income and capital beneficiaries.485

Finally, it will be recalled that we previously recommended that the court
should be authorized to confer upon trustees additional powers of administra-
tion if, in the opinion of the court, it is thought necessary and expedient to
do so.486 We have referred to the fact that other jurisdictions that have enacted
such a provision also confer upon the court the authority to determine how
the cost of the exercise of the power should be borne.487 We are of the view
that a provision of this kind would be of assistance to trustees, and, accord-
ingly, recommend that the revised Act should provide that, where the court
confers upon trustees an additional administrative power, the court should be
able to direct in what manner any money authorized to be expended and the
costs of any transaction are to be paid or borne as between capital and
income.488

An important function of trustees is to allocate gain received by the trust.
As we discussed briefly in the introduction to this section, where a trust is in
favour of two or more persons entitled in succession, potentially conflicting

484 Draft Bill, s. 40(4).

485 Ibid., s. 40(5). See, also, Draft Bill, s. 39(1), and infra, this ch., sec. 4(c)(ii).

486 See supra, this ch., sec. 3(e), and Draft Bill, s. 63.

487 See supra, this ch., sec. 4(b)(ii).

488

Draft Bill, s. 63(1).

273

interests arise regarding the enjoyment of the trust property. Primarily, it is
a matter of determining what the settlor or the testator intended in this regard,
as he is free to distribute his property among his beneficiaries as he desires.
However, if the intention of the creator of the trust has not been clearly
expressed, or is not implicit in the language of the instrument and the nature
of the disposition, the law infers what the reasonable man creating competing
interests must have contemplated. Although in the distribution of particular
receipts rules formulated by the case law are, for the most part, well settled,489
the following areas of the law, in our opinion, merit further comment: first,
where a change occurs in the ownership of, or the entitlement to, an author-
ized investment; secondly, where assets that are unauthorized as trustee
investments, either by the instrument or by statute, fall into a trust and income
must be allocated pending conversion of these assets; and thirdly, where
proceeds from an insurance policy are received by trustees.

(i) Competing Claims on Change of Ownership

Competing claims to the income of authorized trustee investments may
arise when a change occurs in the ownership of, or entitlement to, assets
during the time when interest, dividends, rent, or other periodic revenue is
accruing, and where, therefore, the accrued sum does not fall due until after
the change of ownership or entitlement has taken place. This situation may
arise at several points during the life of a trust: first, at the inception of the
trust, when the beneficial enjoyment of the assets passes from the creator of
the trust to the life beneficiary; secondly, at the termination of the life estate,
when the entitlement to the assets passes from a life beneficiary to a remain-
derman; and thirdly, when trustees buy or sell assets during the term of the
beneficial life interest. If, at any of these transitional points, an asset has
accrued or continues to accrue revenue, but the whole of the accrued amount
does not fall due and is not payable until after the change of ownership or
entitlement has occurred, trustees must determine, upon receipt of the pay-
ment, which beneficial interest is entitled to the amount that has so accrued.

a. Ontario

In Ontario, the Apportionment Act490 assists trustees with the allocation
of certain types of periodic payment. Sections 2 and 3 of the Act provide as
follows:

2. Dividends shall, for the purposes of this Act, be deemed to have accrued
by equal daily increment during and within the period for or in respect of which
the payment of the dividends is declared or expressed to be made.

3. All rents, annuities, dividends, and other periodical payments in the nature
of income, whether reserved or made payable under an instrument in writing or
otherwise, shall, like interest on money lent, be considered as accruing from day
to day, and are apportionable in respect of time accordingly.

489
490

See, generally, Widdifield on Executors' Accounts, supra, note 390, at 236-52.
Apportionment Act, R.S.O. 1980, c. 23.

274

As a result of the Apportionment Act, therefore, dividends, rent, interest, or
other periodic payments are considered "as accruing from day to day" and
are "apportionable in respect of time accordingly".491 For example, where a
testamentary trust is created, that portion of the receipts deemed to accrue
daily before the date of death is treated as property to which the testator was
entitled and, therefore, as part of his estate, while the balance that was deemed
to accrue on a daily basis after the testator's death is viewed as income for
the life beneficiary.

This apportionment formulation of the Act does not, however, apply to
all forms of accruing revenue. It has been held that the income payment must
be a periodic one and must have been declared or expressed for, or in respect
of, a stated period of time.492 Therefore, even if the income payment is
rendered on a regular basis, if it does not represent a particular time period,
such as a specific year or quarter, that payment is not apportionable under
the Act.493

Apart from revenue payments that are made in respect of a specific period
of time and that are, accordingly, apportionable under the provisions of the
Apportionment Act, the distribution of income receipts is governed by rules
formulated by the case law.494 Generally speaking, the "non-apportionment"
rule applies; that is, the case law imposes no duty to apportion receipts, even
where it might be said that a receipt represents a combination of beneficial
interests, unless the non-apportionment would produce a glaring injustice, in
which case the court may make an equitable apportionment.495 For example,
trustees may sell shares cum dividend, that is, after a dividend has been
declared, but before the record date,496 so that a portion of the proceeds of
sale received by trustees would represent a dividend or interest that would
have been paid to the income beneficiary had the trustees remained as share-
holders of record on the record date.497 Normally, the entire proceeds of such
a sale would be allocated to the capital account.498 Further, apportionment

492

493
494
495
496

497

498

Ibid., ss. 2 and 3.

Ibid. See, also, Re Thomson, [1947] O.R. 469, [1947] 3 D.L.R. 466 (H.C.J.), affd
[1947] O.W.N. 907, [1948] 1 D.L.R. 304 (C.A.).

ReCoulson, [1960] O.R. 1 (C.A.).

See Widdifield on Executors' Accounts, supra, note 390, at 236-52.

See Re Maclaren's Settlement Trusts, [1951] 2 All E.R. 414 (Ch. D.), at 420.

The "declaration date" is the date of the formal announcement or approval of the dividend
by the directors of the corporation. The "record date" is the date at which the sharehold-
ers' list is "frozen" for the purpose of identifying those shareholders who qualify for the
payment. The "payment date" is the date when the dividend cheques are actually mailed:
see Widdifield on Executors' Accounts, supra, note 390, at 242.

See Lewin on Trusts, supra, note 25, at 359-61 , for a detailed discussion of the common
law rules of allocation of accruing dividends.

The critical date for determining the allocation of dividends appears to be the record
date; that is, whoever was beneficially entitled to the shares on the record date will
receive the dividend. For example, if the life interest terminates after the declaration
date, but before the record date, the dividend subsequently paid would be allocated to
the capital account, as it would be the remainderman and not the life tenant who would
be beneficially entitled to the shares on the record date: see Widdifield on Executors'
Accounts, supra, note 390, at 242.

275

does not take place when a payment totally accrues, and is therefore due,
within the period of one person's beneficial interest, but is paid during his
successor's time.499

b. Other Jurisdictions

Legislation in terms similar to the Ontario Apportionment Act exists in
all the Australian states, except Tasmania. This legislation deals with the
allocation of periodic payments made with respect to a specific period of
time.500 Moreover, several of the Australian jurisdictions have introduced
statutory provisions to minimize the possibility of inequity caused by the
common law "non-apportionmenf rule. The trustee legislation of New South
Wales,501 Victoria,502 South Australia,503 and Western Australia504 contains a
statutory provision that permits trustees to make an apportionment between
capital and income where the payment is not declared in respect of a particular
period of time. In particular, these Acts provide that, where any payment
received or made by trustees includes payment for the right to receive any
interest accrued from securities at the time of the sale or purchase, as the case
may be, though the interest may not then be due, it shall be "deemed to have
been received by the trustee as interest in respect of the period during which
the interest so accrued".505 In all the states, except Victoria, whose legislation

500
50!

505

499 For example, assume that A is entitled to a life interest in trust assets and that B is
entitled to the assets on A's death. Assume also that the trust assets include a leasehold
property and that the rent reserved by the lease is due and payable in advance. Assume
further that rent to the value of $500.00 becomes due and payable during A's life, but
is actually paid after A's death. In this situation, the $500.00 would be allocated
exclusively to A's interest.

See, generally, Meagher and Gummow. supra, note 93, at 390-95.

Trustee Act, 1925, Stat. N.S.W. 1824-1957, Vol 11, No. 14, s. 24.

502 Trustee Act 1958, Vict. Stat. 1958, No. 6401, s. 25 (3) and (4).

503 Trustee Act, 1936-1974, S. Austl. Stat. 1837-1975, s. 13.

504 Trustees Act, 1962, supra, note 95, s. 103.

Ibid., s. 103(1) and (2). Section 103 effectively reverses the common law rule expressed
in Re Maclaren's Settlement Trusts, supra, note 495, and provides, in full, as follows:

103. — (1) Whenever any payment received by a trustee in respect of a sale of
trust property, being securities bearing interest at a fixed rate, is, or includes,
payment for the right to receive any interest accrued from those securities at the
time of the sale, though that interest may not then be due, the amount of that
accrued interest shall for the purposes of the trust be deemed to have been received
by the trustee as interest in respect of the period during which the interest so
accrued.

(2) Whenever any payment made by a trustee out of trust money in respect of a
purchase of any securities bearing interest at a fixed rate is, or includes, payment
for the right to receive any interest accrued from those securities at the time of the
purchase, though that interest may not then be due, the amount of that accrued
interest when received on account of the trust shall, for the purposes of the trust,
be deemed to have been so received as purchase money repaid.

(3) Anything done by a trustee before the passing of this Act that would have
been authorised by this section, if this section had then been in force, shall be
deemed to have been authorised by this section.

(4) The provisions of this section apply if and so far only as a contrary intention
is not expressed in the instrument (if any) creating the trust, and have effect subject
to the terms of that instrument.

276

is silent, the section may be ousted by a contrary intent expressed in the trust
instrument.

In the United States, the Uniform Principal and Income Act506 sets forth
provisions that deal with the manner in which trustees should handle receipts
and expenditures in a variety of circumstances. Regarding the apportionment
of income, section 4 of the Act contains directions not unlike, in effect, the
rules, both statutory and common law, in force in Ontario and referred to
previously.507 For example, receipts due, but not paid at a point when the

506

507

American Uniform Principal and Income Act, supra, note 481, at 429. The original
Uniform Principal and Income Act was approved by the Conference of Commissioners
on Uniform State Laws and the American Bar Association in 1931 and is in force, in
some cases with modifications, in thirteen states: namely, Alabama (1939); Arizona
(1951); Colorado (1955); Connecticut (1939); Kentucky (1956); Montana (1959); Okla-
homa (1941); Pennsylvania (1972); Tennessee (1955); Texas (1943); Vermont (1957);
Virginia (1936); and West Virginia (1953). A revised version of the Act was approved
by the Commissioners and the Bar Association in 1962, and is in force, in some cases
in modified form, in twenty-three states: namely, Arkansas (1971); California (1968);
Florida (1975); Hawaii (1973); Idaho (1963); Illinois (1982); Indiana (1969); Kansas
(1965); Maryland (1965); Michigan (1966); Minnesota (1970); Mississippi (1967); Ne-
vada (1969); New Mexico (1969); New York (1967); North Carolina (1974); North
Dakota (1969); Oregon (1975); South Carolina (1963); Utah (1980); Washington (1972);
Wisconsin (1957); and Wyoming (1963).

Section 4 of the American Uniform Principal and Income Act, supra, note 481 , provides
as follows:

4. [When Right to Income Arises; Apportionment of Income]

(a) An income beneficiary is entitled to income from the date specified in the
trust instrument, or, if none is specified, from the date an asset becomes subject to
the trust. In the case of an asset becoming subject to a trust by reason of a will, it
becomes subject to the trust as of the date of the death of the testator even though
there is an intervening period of administration of the testator's estate.

(b) In the administration of a decedent's estate or an asset becoming subject to a
trust by reason of a will

(1) receipts due but not paid at the date of death of the testator are principal;

(2) receipts in the form of periodic payments (other than corporate distri-
butions to stockholders), including rent, interest, or annuities, not due at the
date of the death of the testator shall be treated as accruing from day to day.
That portion of the receipt accruing before the date of death is principal, and
the balance is income.

(c) In all other cases, any receipt from an income producing asset is income even
though the receipt was earned or accrued in whole or in part before the date when
the asset became subject to the trust.

(d) On termination of an income interest, the income beneficiary whose interest
is terminated, or his estate, is entitled to

(1) income undistributed on the date of termination;

(2) income due but not paid to the trustee on the date of termination;

(3) income in the form of periodic payments (other than corporate distri-
butions to stockholders), including rent, interest, or annuities, not due on the
date of termination, accrued from day to day.

(e) Corporate distributions to stockholders shall be treated as due on the day
fixed by the corporation for determination of stockholders of record entitled to
distribution or, if no date is fixed, on the date of declaration of the distribution by
the corporation.

277

entitlement to an asset changes, are payable to the person who was entitled
to the enjoyment of the asset when the payment became due.508 Corporate
distributions to stockholders are treated as due on the "day fixed by the
corporation for determination of stockholders of record entitled to distribu-
tion",509 and, accordingly, whoever was the beneficial owner on the record
date is entitled to the dividend payment. Moreover, other than corporate
distributions, the Uniform Act, like the aforementioned Ontario apportion-
ment legislation, treats receipts in the form of periodic payments that are not
due at a particular transitional point as accruing from day to day and appor-
tionable among the relevant interests accordingly.510

c. Conclusions

We have considered whether a case can be made for amending the Ontario
Apportionment Act or altering, by statutory provision, aspects of the case law
rules that govern the apportionment of income when a change of ownership
or entitlement occurs. However, on balance we are of the opinion that no
change should be made to this area of the law.

We appreciate that the specific time period stipulated in the Apportion-
ment Act may produce arbitrary results, but we are also convinced that it
would be equally arbitrary if, for example, the Act were to require apportion-
ment of a dividend where there is no evidence of the date when the profit was
made. Accordingly, we have concluded that the common law "non-appor-
tionment" rule should continue to apply to income receipts that are not made
in respect of a specific period of time. Indeed, in relation to such payments,
it seems to us that when trustees buy and sell assets over a period of time a
working equity is done between the parties. Further, whenever a change
occurs in the ownership of, or entitlement to, assets, the court, as mentioned,
may always order apportionment when the non-apportionment rule would
produce a glaring injustice. Therefore, we do not think it desirable to intro-
duce provisions akin to those in force in the Australian States. We are
strengthened in our opinion by the fact that the provisions of the American
Uniform Act closely parallel the statutory and common law rules followed in
this Province. Accordingly, we recommend the continuation of the Ontario
Apportionment Act, without modification. Further, we recommend that in-
come receipts not apportionable under the Act should continue to be allocated
by the common law rules that are well established in this Province.

(ii) Duty to Convert Assets and Allocation of Income Pending
Conversion

The second situation where difficulties appear to have arisen in connec-
tion with allocation of receipts occurs where trust assets comprise investments
that are unauthorized by the trust instrument or by statute. Trustees are

5(,x Ibid., § 4(b)(1) and (d)(2).

509 Ibid., 8 4(e).

5,0 Ibid., § 4(b)(2) and (d)(3).

278

required to convert these assets into authorized investments, and difficulties
occur concerning the allocation of gain from the unauthorized investments
pending the conversion. This issue is addressed by what may be compen-
diously described as the rule in Howe v. Lord Dartmouth.

a. Ontario

At present, in Ontario, there are no statutory provisions that govern the
conversion of trust assets or the allocation of income pending their conver-
sion. Rather, trustees must look either to the trust instrument or to the common
law512 for guidance in these matters.

A duty to convert trust assets may arise in several ways. First, a settlor
or testator may expressly provide in the trust instrument that the assets are to
be sold and that the proceeds of sale are to be invested. Alternatively, the
terms of the trust instrument and the nature of the dispositions may require
this intention to be implied. In the absence of any such express or implied
direction, the common law presumes a duty to convert trust assets in certain
circumstances. This duty, known as the first branch of the rule in Howe v.
Lord Dartmouth, provides that, where a testator bequeaths his residuary
personal estate in trust for persons in succession, and the estate comprises
assets that are wasting or unauthorized as investments, they must be sold and
the proceeds of sale invested in authorized investments. The same rule applies
where in such circumstances trust assets comprise reversionary interests.

The basis for this rule is that the law presumes that the testator intended
to treat the income and capital beneficiaries equitably, and as wasting or
hazardous513 assets or reversionary interests cannot, by their nature, do so,
the duty to convert into authorized investments arises.514 Accordingly, it
seems that the duty is not imposed where the assets are authorized as trustee
investments.515 The duty to convert may also be ousted where it can be
demonstrated that the testator intended assets to be enjoyed in specie.516
Moreover, the law implies in specie enjoyment with respect to certain types
of asset, and, for this reason, the common law duty to convert does not apply

511
512

513

514

515
516

Supra, note 17.

See, generally, Waters, supra, note 8, at 690-712; Pettit, supra, note 65, at 290-302;
Lewin on Trusts, supra, note 25, at 228-42; and Meagher and Gummow, supra, note
93, at 376-90.

In Re Lloyd, [1949] O.R. 473, at 475, [1949] 4 D.L.R. 99, at 102 (H.C.J. ), Wells J.
stated that "all residuary personalty is deemed to be hazardous if it is not a trustee
investment authorized by law or by the terms of the will".

For example, some assets may be shares in a mining company whose mines will soon
be exhausted, others may be shares in companies that compensate for their high risk by
the payment of exceptionally high dividends, while others, like reversionary interests,
have yet to fall into possession. The first two unfairly favour the income beneficiary,
the last favours the remainderman.

Re Bentham (1906), 94 L.T. 307.

See Waters, supra, note 8, at 694-97.

279

to any asset settled by deed,517 to any bequest of a specific asset,518 or to any
devise of land.5|i;

Where a duty to convert trust assets arises, whether by express or implied
intent, or as a result of the operation of the first branch of the rule in Howe
v. Lord Dartmouth, the assets will, in all likelihood, not be sold immediately.
Pending the conversion of the assets, trustees must ascertain the amount of
income to which the life beneficiary is entitled. Ideally, where the assets are
subject to an express duty to convert, the creator of the trust should stipulate
whether, pending conversion, the life beneficiary is to receive the whole or
any part of the income from the trust assets. The trust instrument might
provide that the life beneficiary is entitled to the income that actually arises
or to only a fair portion thereof, with any surplus to be capitalized.

If, however, the instrument is silent on this matter, or in cases where the
duty to convert has been implied or imposed by law, the common law will
infer, in the absence of a contrary intent, that pending conversion the income
beneficiary is only entitled to a fair and reasonable income, even though the
assets are actually producing a greater return:520 this is known as the second
branch of the rule in Howe v. Lord Dartmouth.521 Any part of the actual
income that remains after a fair and reasonable income has been paid to the
income beneficiary is added to capital.522 Alternatively, if there is a shortfall
of income, the life beneficiary is entitled to have his fair and reasonable
income recouped out of the proceeds of sale.523 So too, with reversionary
interests that produce no income, the law, as stated in Re Earl of Chesterfield's
Trusts,524 infers what a fair and reasonable income would have been, retro-
active to the testator's death.

517 In re Van Straubenzee, [1901] 2 Ch. 779.

518 Hubbard v. Young (1847). 10 Beav. 203, 50 E.R. 560.

519 Lottman v.Stanford A 1980] 1 S.C.R. 1065, 107 D.L.R. (3d) 28, rev'g (1978), 2 E.T.R.
1 (Ont. C.A.). This case reverses a contrary line of cases in Ontario. See, for example.
Re Rutherford, [1933] 4 D.L.R. 222 (Ont. C.A.). See, also, Waters, supra, note 8, at
700.

520 Traditionally, since Victorian times in England, the rate has been 3% or 4%. In Re
Wood, [1961] O.R. 573 (H.C.J. ), the figure was put at 4%, but in Re Smith, supra, note
9, at 588, between 8% and 9 1/2% was being mentioned by the trial court as the return
on "good quality bonds". In Re Lauer and Stekl, [1974] 6 W.VV.R. 490, at 497. 47
D.L.R. (3d) 286, at 292 (B.C.C.A.), the Court directed a reference to hear evidence
and recommend a percentage rate that would give a fair return to a life tenant, a decision
that was affirmed: see 54 D.L.R. (3d) 159 (S.C.C.).

521 The amount of fair income is calculated on the value of the assets as of one year after
the testator's death, unless the assets are sold prior to that time, in which case the interest
is based on the actual amount received by the trustees. If there is a power to postpone
sale, the assets are valued at the date of the testator's death. The interest, whenever
calculated, commences from the testator's death to the date on which the assets are sold:
see Waters, supra, note 8, at 700-05.

522 In re Woods, [1904] 2 Ch. 4.

523 In re Fawcett, [1940] Ch. 402.

524 (1883), 24 Ch.D. 643. The courts ascertain "the sum which, put out at interest at a
certain rate per annum on the day of the testator's death, and accumulating at compound
interest at that rate, with yearly rests would, together with such interest and accumula-
tions, after deducting income tax, amount on the day when the reversion falls in or is

280

With respect to the duty to convert, there is an issue concerning whether
the duty applies (because of the even hand principle) in circumstances other
than the narrow circumstances associated with Howe v. Lord Dartmouth, or
whether the even hand principle will require conversion in other circum-
stances as well. Over time, and as a result of multiple applications of these
rules, the principle of maintaining an even hand among successive benefici-
aries has frequently been associated exclusively with Howe v. Lord Dart-
mouth and its corollaries.525 In England, for example, the development of the
even hand rule beyond the nineteenth century jurisprudence has been almost
non-existent.526 This has not, however, been the experience in Ontario, where
the even hand rule has received more attention.527 In particular, the decision
of the Ontario Supreme Court in Re Smith52* marked a change in the courts'
attitude to the impartiality doctrine.529

In Re Smith, the corporate trustee refused the request of the life benefi-
ciary to sell low yielding investments. The investments had been settled in
an inter vivos trust. In response to the intransigence of the trustee, the life
beneficiary instituted an action to remove the trustee. Although the trustee
was empowered by the trust document to retain the low yielding investments
and it was uncertain if it even had the power to sell them, the Court ordered
the trustee removed, stating that, "[u]nless there is some provision in the trust
agreement which prevents the trustee from [maintaining an even hand], it
seems . . . inescapable that the trustee is in breach of his well-recognized
duty. . . ."53° The trustee was removed because it was "impossible to restore
confidence in the trustee with respect to the future administration of [the]
trust".531 Specifically, the trustee had been unduly influenced by a consultation
it made with the settlor subsequent to the life beneficiary's request.

The general view is that Re Smith articulated the even hand rule and
applied it in a novel fashion.532 The doctrine of impartiality was elevated to
a dominant position in the court's analysis, and the discretion of the trustee
was successfully challenged on this broad principle. Moreover, the duty to
convert was extended well beyond the constraints of Howe v. Lord Dart-
mouth. Nonetheless, the current status of Re Smith is debatable.

525

realised to the sum actually received; the sum so ascertained is treated as representing
the corpus, and the difference between that sum and the sum actually received, the
income": see Lewin on Trusts, supra, note 25, at 240-41 .

Cullity, "Trustees' Duties, Powers and Discretions - Exercise of Discretionary Powers",
in Law Society of Upper Canada - Special Lectures 1980 ( 1 980) 1 3, at 27. The corollaries
referred to involve apportioning or otherwise adjusting receipts between capital and
income beneficiaries.

526 Ibid., at 29.

527 Scane, "Comment on Re Katz" (1981), 5 Estates 277, at 294.

Re Smith, supra, note 9.

Hogg, "Comment on Lottman v. Stanford" (1981), 5 Estates 181, at 187. See, also,
Oosterhoff, "The Application of the Rule in Howe v. Earl of Dartmouth to Residuary
Real Property" (1981), 5 Estates 127.

Supra, note 9, at 589 ([1971] 1 O.R.).

Ibid.

528
529

530
531
532

Hogg, supra, note 529; Cullity, supra, note 525, at 29; and Smith, "Does the Trustee's
"Duty of Impartiality' Extend to Real Property?" (1981), 59 Can. B. Rev. 687, at 700.

281

In Lottman v. Stanford,532 the Supreme Court of Canada reversed a
decision of the Ontario Court of Appeal, which had asserted that Howe v.
Lord Dartmouth was applicable to underproductive realty on the basis of the
general principle of impartiality. On the one hand, the Court of Appeal was
of the view that, as the social and economic environment that spawned the
restrictions of Howe v. Lord Dartmouth no longer existed, the fair treatment
of beneficiaries could only be achieved by a more dynamic judicial attitude.534
The Supreme Court of Canada, on the other hand, was of the opinion that
the lower Court's decision was tantamount to judicial legislation. While the
unwillingness of the Supreme Court of Canada to follow and apply the
reasoning of Re Smith has indicated to some that it has been overruled,535 Re
Smith continues to be cited as authority for a broader principle of impartiality
than that enunciated in Howe v. Lord Dartmouth.5™

b. Other Commonwealth Jurisdictions

For the most part, other Commonwealth jurisdictions, like Ontario, ad-
here to the above-stated common law rules. However, the trustee legislation
of New Zealand537 and Western Australia538 contains a provision that modifies
the second branch of the rule in Howe v. Lord Dartmouth, which rule is to
the effect that a life beneficiary is entitled only to a fair and reasonable income
pending conversion of a trust asset. Section 105 of the Western Australia
Act, which is in terms similar to the New Zealand provision, provides as
follows:

105. — (1) Where, under the will of any person any real or personal property,
included (either by specific or general description) in a residuary gift is settled
by way of succession, then, notwithstanding that the property may be of a
wasting, speculative or reversionary nature, -

(a) pending any sale, calling in, or conversion of the settled property, the
whole of the net income of the property actually producing income

533 Supra, note 519. In Lottman v. Stanford, an income beneficiary who was dissatisfied
with her income applied to the court seeking the conversion of underproductive realty.
At the trial level, the question of the application of Howe v. Lord Dartmouth to realty
was left open. The Ontario Court of Appeal held that Howe v. Lord Dartmouth was
applicable to underproductive realty, but was reversed on this point by the Supreme
Court of Canada.

534 Lottman v. Stanford, supra, note 519, at 14 (2 E.T.R.). See, also, Scane, supra, note
527, at 284, and Smith, supra, note 532, at 693.

See Hogg, supra, note 529, at 194.

See, for example, ReHopkins{ 1982), 132D.L.R. (3d)671 (Ont. H.C.J. ), aff'd (1982),
17 A.C.W.S. (2d) 299 (Ont. C.A.). Rutherford J., at 682, while acknowledging that
the decision of the Supreme Court of Canada in Lottman v. Stanford put beyond doubt
that the rule in Howe v. Lord Dartmouth does not apply to real property, stated that "that
does not settle the issue before me", and cited Re Smith with approval for the general
proposition that the duty upon trustees to maintain an even hand must still be considered.

537 Trustee Act 1956, supra, note 227, s. 85.

538 Trustees Act, 1962, supra, note 95, s. 105.

535
536

282

shall be applied as income and no part thereof shall be apportioned to
capital; and

(b) on any sale, calling in, or conversion of the settled property, or on the
falling in of any reversionary property, no part of the proceeds of the
sale, calling in, conversion or falling in shall be applied as past income.

(2) This section applies only in respect of the wills of persons who die after
the commencement of this Act.

(3) The provisions of this section apply if and so far only as a contrary intention
is not expressed in the will of the deceased, and have effect subject to the terms
of that will.

In effect, this provision prescribes that, unless a contrary intention is ex-
pressed in the will, pending conversion of any asset, whether of a wasting,
speculative, or reversionary nature, the life beneficiary shall receive the actual
income thereof and no part shall be apportioned to capital. Further, upon
conversion no part of the proceeds shall be applied as past income by way of
adjustment.

c. Conclusions

As we have stated, the duty to convert unauthorized assets may arise by
the express or implied direction of the creator of the trust, or be imposed by
law under the first part of the rule in Howe v. Lord Dartmouth. Where a duty
to convert does arise, the income beneficiary, pending conversion, is entitled
to a fair and reasonable income, a result that follows from the second branch
of the rule in Howe v. Lord Dartmouth and, where the trust assets comprise
a reversionary interest, the rule in Re Earl of Chesterfield's Trusts.

After much debate, we have concluded that we are in basic agreement
with the second branch of the rule in Howe v. Lord Dartmouth, that is, with
the present approach for determining the mode of apportionment of the
income of assets pending conversion, including the time of notional conver-
sion. We are of the view, however, that the first part of the rule in Howe v.
Lord Dartmouth, dealing with the circumstances in which a duty to convert
arises, is too restrictive in its application. We prefer a broader statement than
that expressed by the present case law of the duty to convert trust assets in
order to maintain an even hand among beneficiaries.

In arriving at our conclusion concerning the second branch of the rule,
we considered, but rejected, the approach of vesting trustees with a general
discretion to make such apportionments as seem to them to be fit in all the
circumstances. In this respect, we share the view of the Queensland Law
Reform Commission, which also rejected this approach on the basis that "it
is hard to see how a trustee could ever justify exercising such a discretion in
a manner substantially different from the manner settled in Howe v. Lord
Dartmouth".5*9

539

Queensland Report, supra, note 472, at 77.

283

We prefer that, pending conversion of unauthorized assets, the income
beneficiary should be entitled to a fair and reasonable income, rather than the
actual income as is provided in the New Zealand and Western Australia
provisions cited previously.540 In this regard, we again concur with the re-
marks made by the Queensland Law Reform Commission that "it is difficult
to accept that the tenant for life should be allowed to take the entire income
of wasting assets".541 Since, as that Commission pointed out, the provisions
of the New Zealand and Western Australia Acts do not abrogate or abridge
the general duty of the trustee to maintain an even hand between life tenants
and remaindermen, "the effect of [these] provisions would appear to be that
a greater compulsion to sell wasting assets is placed on the trustees than
formerly".542 Further, in our opinion, the "fair income" for the life beneficiary
should be commensurate with the current rate of interest being paid on court
funds. Accordingly, we recommend that there should be no change in the
law relating to rules associated with the second branch of the rule in Howe v.
Lord Dartmouth, that is, the law with respect to the mode of apportionment,
including, in those circumstances where the issue arises, the time of notional
conversion of assets, and the allocation of a fair and reasonable income
pending conversion of assets to the income beneficiaries.

Turning to the role of intention as it affects both branches of the rule in
Howe v. Lord Dartmouth, there is no doubt that the common law rules in this
area of the law have not been popular with Canadian practitioners. Indeed,
the response of most draftsmen today is to exclude their operation in the trust
instrument, on the basis that the average testator creating a testamentary trust
intends to favour his life beneficiary, and that in many instances the amount
of income involved does not justify the application of the rules. Nonetheless,
the difficulty that practitioners seem to have experienced does not, for the
most part, concern the mode of apportionment established by the rules in
Howe v. Lord Dartmouth and Re Earl of Chesterfield's Trusts, but rather
relates to the ascertainment of intention. In this respect, it will be recalled
that both the duty to convert and the entitlement of the life beneficiary to a
fair and reasonable income will only arise in the absence of a contrary
intention.

When a testator has not expressly directed a sale of his residuary estate,
the question arises whether he has intimated, so far as evidence is adducible,
that he does indeed intend the assets to be enjoyed in specie, or the income
beneficiary to have the actual income produced by assets that are wasting or
hazardous and to assume the risk that reversionary interests may never fall
into possession. The testator may have intended in specie enjoyment, for
example, in a case where he had an attachment to the assets in question and
intended them to be retained as trust property, or where he intended to prefer
his widow as income beneficiary. However, the task of adducing satisfactory
evidence may be formidable. The language of the entire will must be con-
strued, each clause read independently and as part of the whole, and it has
more than once been the case that courts of appeal have been divided on the

540 See supra, this ch., sec. 4(c)(ii)b.

541 Queensland Report, supra, note 472, at 76.

542 Ibid., at 76-77.

284

issue of proper construction.543 Moreover, even in those cases where a power
to retain the original assets is contained in the trust instrument, this power
may not necessarily enable trustees to retain these assets indefinitely and to
pay to the income beneficiary the actual income that arises: the courts have
interpreted the power, not as one of retention, but merely as a device to assist
in the process of investment.544

Alternatively, the testator or settlor may have directed a sale of the assets
transferred to trustees. Although the issue of in specie enjoyment is settled,
the question that remains is whether evidence can be adduced to persuade a
court that the income beneficiary was intended to have the actual income
generated by the assets prior to conversion, or whether, in the absence of
such evidence, a notional conversion to authorized investments was intended
from the inception of the trust.545

The testator or settlor, while having directed a sale of trust assets, may
also have authorized trustees to postpone the conversion at their discretion.
Does such a postponement power reveal an intention that the income benefi-
ciary is to have the actual benefit of wasting and hazardous assets, or merely
that trustees should be free to choose the best market timing for sale, without
fear of incurring liability for breach of trust for not having sold at an earlier
date? This latter interpretation appears favoured by at least those Common-
wealth jurisdictions that have conferred statutory powers of postponement
upon trustees for sale.546 It has also been held that a power to postpone
conversion, accompanying a direction to convert, does not demonstrate an
intention that the income beneficiary is to have the entire income that arises
prior to sale, whereas a power to retain existing investments does carry this
implication, whether or not there is a direction to convert.547 Yet the Supreme
Court of Canada has held that a direction to convert, accompanied by a power
to postpone and a power to retain existing investments, establishes only an
intention that trustees should be free to choose the best market moment for
sale. Such a clause says nothing about beneficial entitlement to income prior
to sale.548

This discussion highlights the difficulties that trustees face in determining
the intention of the creator of a trust regarding the conversion and the allo-
cation of income of unauthorized investments. It may be contended that the

543

544

545

546
547

548

See, for example, Royal Trust Co. and McMurray v. Crawford, [1955] S.C.R. 184,
[1955] 2 D.L.R. 225. See, also, Waters, supra, note 8, at 695-97.

See Fales, Wohlleben v. Canada Permanent Trust Co., supra, note 1, and Re Wright
(1977), 14 O.R. (2d) 698, 74 D.L.R. (3d) 504 (H.C.J. ).

The same issue arises with respect to reversionary interests; when they eventually fall
into the trust, was it the intention of the creator of the trust that the income beneficiary
should be entitled to a portion of the capital as accumulated past income, or merely to
the interest arising from the investment of the capital?

See Meagher and Gummow, supra, note 93, at 378.

See Royal Trust Company and McMurray v. Crawford, supra, note 543, and In re
Nicholson, [1909] 2 Ch. 111.

See Fales, Wohlleben v. Canada Permanent Trust Co., supra, note 1, and Re Wright,
supra, note 544. See, also, Re Billes (1983), 42 O.R. (2d) 110, 148 D.L.R. (3d) 512.

285

construction of an instrument that leaves these matters open or ambiguous
should be continued to be determined by the common law. However, after
much thought we have concluded that legislative intervention in this area of
the law would be advantageous. At the very least, a statutory provision could
alleviate the present unsatisfactory situation by clearly stipulating that, unless
the instrument expressly provides to the contrary, if a trust for successive
beneficiaries contains unauthorized investments, whether or not a direction
to convert is contained in the instrument, trustees are required to convert the
unauthorized into authorized investments at the first advantageous moment,
and pending the conversion pay to the income beneficiary a fair income out
of any greater actual income arising. Such a provision would remove doubts
concerning the testator's or settlor's intention that are attendant upon the
construction of particular directions in the instrument; testators or settlors
would have to state expressly whether the original assets are to be enjoyed in
specie and whether it is intended to favour the life beneficiary. In this regard,
we are of the view that the nature of the asset should not in itself dictate
whether it is to be held in specie; that is, unless the instrument expressly
provides otherwise, land, as with personalty, should be subject to conversion.
Similarly, a direction in the trust instrument to retain or postpone or otherwise
delay the sale of an asset should not of itself constitute an express provision
to the contrary.

However, while this approach to reform of the rule in Howe v. Lord
Dartmouth would clarify the position of trustees with respect to the retention
of unauthorized investments, we are of the view that, with respect to the first
branch of the rule, it does not go far enough. It is a basic principle of trust
law that beneficiaries of the trust are to be treated equally by trustees, unless
the settlor or testator has indicated to the contrary.549 Today, the impartial
treatment of successive beneficiaries poses difficulties for many trustees,
because individual investments tend to favour either an income beneficiary
or a capital beneficiary, aside from whether the investment is authorized or
unauthorized. As recent cases have indicated, trustees have had to grapple
with this dilemma and, while courts in Ontario have been willing to apply a
general duty of impartiality, subject, of course, to the wishes of the settlor or
testator, to assist trustees in their task of maintaining an even hand among
beneficiaries (even where the assets consist of otherwise authorized invest-
ments),550 other courts continue to adhere to the nineteenth century jurispru-
dence of Howe v. Lord Dartmouth.551 We are of the view that the approach
adopted by the Ontario courts, and, in particular, the general principle enun-
ciated in Re Smith,552 should be the primary focus of trustees when deciding
whether successive beneficiaries are being treated equitably; the test should
not be whether the particular asset is realty or personalty, specific bequest or

549 Waters, supra, note 8, at 690-91 .

550 See Re Smith, supra, note 9, and discussion supra, this ch., sec. 4(a).

551 See Lottman v. Stanford, supra, note 519 and accompanying text.

552 Supra, note 9. Arnup J. A., at 542 ([1971] 2 O.R.) speaking for the Court, stated that
"the trustee under this document was obliged to follow the well-recognized principle
applicable to a trust fund where there are interests for life and interests in remainder,
namely, that he must maintain an even hand between the respective interests of both
classes of beneficiaries".

286

residuary, unless the creator of the trust has expressly indicated that one
beneficiary is to be favoured over another.

Releasing the general principle of impartiality from the confines of the
rule in Howe v. Lord Dartmouth has both judicial and academic support,553
and we are of the opinion that a concise statement of the expanded principle
would be welcomed. In effect, Howe v. Lord Dartmouth applied the even
hand rule in respect of a limited type of property - unauthorized residuary
personalty that was an original trust asset - and for limited circumstances -
testamentary dispositions. The contemporary view is that the even hand
principle should be applicable to all types of property - personalty and realty
and whether it be an original or subsequently acquired trust asset - and to all
types of disposition - testamentary and inter vivos - and should apply whether
the property is authorized or unauthorized as a trustee investment, unless, of
course, the creator of the trust expressly states to the contrary.

Accordingly, we recommend that the revised Act should provide that
trustees shall act impartially as between income and capital beneficiaries,
having regard to each item of trust property, whatever the nature of the
property, and whether it is an original asset or an asset that is acquired
subsequently, further to an authorization in the trust instrument or conferred
by statute.554 In addition, we recommend that this recommendation should
apply to all trusts, unless the trust instrument expressly provides otherwise

555

(iii) Disposition of Insurance Proceeds

We have recommended previously that trustees should be able to insure
trust property against loss or damage and any other risk or liability.556 We
also have discussed the payment of insurance premiums, and recommended
that trustees should be able to pay for any outgoing, which would include
insurance premiums, from income or capital, or wholly or partly from each,
as appears to them to be in accordance with sound business practice and in
the best interests of the trust beneficiaries.557 In addition, we recommended
that trustees should be given a discretion to apportion any payment or ex-
penditure for any outgoing, such as insurance premiums, between the income
and capital accounts, as they consider just and equitable in all the circum-
stances and having in mind the need to maintain an even hand among the

553

554
555
556
557

See, for example, Re Welsh; Re Thompson and Morrisson (1980), 6 E.T.R. 257 (Ont.
H.C.J.), at 274 where Holland J. stated that Re Smith represented "a forward advance
... in which the intention of the testator and the obligation of the trustees to treat fairly
between successive interests are the paramount considerations". See, also, Re Hopkins,
supra, note 536. See, further, Smith, supra, note 532, at 700-11; Scane, supra, note
527, at 291; and Hogg, supra, note 529, at 187-90.

Draft Bill, s. 39(1).

Ibid.,s. 39(2).

See supra, this ch., sec. 3(d)(vi), and Draft Bill, s. 35(g).

See supra, this ch., sec. 4(b)(iv), and Draft Bill, ss. 40(2) and 1(/).

287

beneficiaries.558 We now turn to consider the matter of the allocation of the
proceeds received by trustees under a policy of insurance.

At present, the Ontario Trustee Act does not address the issue of the
disposition of proceeds received from insurance policies. Rather, the alloca-
tion of insurance proceeds to either the income or capital accounts, or to
reinstate, rebuild or repair the lost or damaged trust property will be governed
by specific provisions in the trust instrument or, in the absence of such
provisions, by the common law.

Generally speaking, unless it is clear from the language of the trust
instrument that the creator of the trust intended the insurance proceeds to be
applied to the reinstatement or repair of the lost or damaged trust property,
or to any other purpose, the proceeds are treated in the same manner as the
asset on behalf of which they are payable, that is, as capital of the trust to be
invested by the trustees in order to earn income for the income beneficiary.559
There is a suggestion in early case law that insurance proceeds may be paid
to the life tenant,560 but this position has been the subject of criticism.

561

The trustee legislation of England,562 the Australian states,563 and New
Zealand564 contains provisions that deal with the disposition of proceeds
received from insurance policies. Although there are differences in legislative
expression, these jurisdictions provide that money received under a policy of
insurance is capital for the purposes of the trust.565 In addition, subject to
obtaining the consents of any person whose consent is required by the trust
instrument for the investment of money, the trustees may apply the insurance
proceeds to rebuild, reinstate, replace, or repair the lost or damaged trust
property.566 If the insurance money has been paid into court, the Acts provide
that any application of the money for rebuilding, etc., shall be under the
direction of the court.567

We agree with the position taken by the legislation in these Common-
wealth jurisdictions that insurance proceeds should be treated as capital for
the purposes of the trust. In effect, the insurance moneys are intended to

558 See supra, this ch., sec. 4(b)(iv), and Draft Bill, ss. 40(1) and \{j).

559 Widdifield on Executors' Accounts, supra, note 390, at 134-35.

560 In re Quicke's Trusts, [1908] 1 Ch. 887.

561 Widdifield on Executors' Accounts, supra, note 390, at 135.

562 Trustee Act, 1925, supra, note 31, s. 20.

3 See Meagher and Gummow, supra, note 93, at 450-54, for a summary of the legislative
provisions in the various states of Australia.

564 Trustee Act 1956, supra, note 227, s. 25.

565 See, for example, English Trustee Act, 1925, supra, note 31 . s. 20( 1 ); Western Australia
Trustees Act, 1962, supra, note 95, s. 47(1); Queensland Trusts Act 1973, supra, note
229, s. 48(1); and New Zealand Trustee Act 1956, supra, note 227, s. 25(1).

566 See, for example, English Trustee Act, 1925, supra, note 31 , s. 20(4); Western Australia
Trustees Act, 1962, supra, note 95, s. 47(4); Queensland Trusts Act 1973, supra, note
229, s. 48(3); and New Zealand Trustee Act 1956, supra, note 227, s. 25(4).

567 Ibid.

288

replace, as far as possible, a lost or damaged capital asset of the trust. Subject
to the terms of the trust and, in particular, the power of investment, trustees
should utilize the insurance proceeds in the same manner as they would any
capital asset, namely, to generate income. In this way, the capital beneficiary
will receive, in time, the insurance proceeds, while the income beneficiary
will have the benefit of the income produced from the proceeds. We cannot
contemplate any general situation where insurance proceeds should be treated
as income of the trust, but it is always open for a testator or settlor to make
such a provision in the trust instrument. Accordingly, we recommend that
the revised Trustee Act should provide that, where a contract of insurance
has been entered into and any premiums have been paid by the trustees, the
money receivable by the trustees under the policy shall be held by them as
capital money of the trust, subject to the terms of the trust, including the
power of investment.

568

We are also of the view that, like the position under the legislation of
England, Australia, and New Zealand, trustees should be able to apply the
insurance proceeds to rebuild, reinstate, replace, or repair the lost or damaged
trust property. However, unlike the Commonwealth legislation, we have
concluded that the consent of the court should be obtained before insurance
proceeds are so applied, except in the case of minor repairs to the trust
property. The rebuilding, reinstating, replacing or major repair of trust prop-
erty will, in most cases, involve the application of substantial sums of money.
In the interest of harmony among the successive beneficiaries, the consent of
the court should be obtained to ensure that the insurance proceeds are applied
in the most appropriate manner. Accordingly, we recommend that the revised
Act should provide that all or part of the money held by the trustees as capital
money of the trust, and representing insurance proceeds, may be applied by
them, with the consent of the court, for rebuilding, reinstating, replacing or
the major repair of trust property that has been lost or damaged.

569

One matter that is not addressed specifically by the legislation of other
Commonwealth jurisdictions is what is to happen when, for whatever reason,
a life tenant or remainderman takes out his own policy of insurance on trust
property and asserts that moneys payable under the policy belong to him and
not to the trust. Under the case law, if a life tenant does insure a trust asset,
he does so voluntarily, and therefore for his own benefit.570 However, section
127 of the Insurance Act51x makes it clear that, if there is more than one
contract of insurance covering the same interest, each of the insurers is liable
to the insured for its rateable proportion of the loss, unless otherwise expressly
agreed in writing between the insurers. Therefore, if both the trustees and the
beneficiary insure the same trust asset, the trustees, upon the occurrence of
any loss or damage to the asset, would only be entitled to collect a pro rata
proportion of the proceeds under their policy. If the beneficiary asserted that
the pro rata share of proceeds that he received from his insurer belonged to

568 Draft Bill, s. 37(1).

569 Ibid., s.37(2).

570 Gaussen v. Whatman ( 1905-06), 93 L.T. 101 (Ch. D.), at 103.

571 R.S.O. 1980, c. 218.

289

him, the trust would be inadequately eompensated for the loss or damage
occurring to the trust asset.

We are of the opinion that all insurance policies covering risks attaching
to the trust property should be the sole concern of the trustees. Moreover, if
loss or damage does occur to the property, the trust should receive the full
benefit of available insurance proceeds. If a beneficiary takes out his own
insurance, the advantage of all insurance on trust property should accrue to
the trust. Accordingly, we recommend that the revised Act should provide
that, where a beneficiary of a trust enters into a contract of insurance against
loss of, or damage to, any trust property, or any other risk or liability to
which the trustees are or might be exposed, whether or not the beneficiary is
required by the trust instrument or by a third party so to do, the money
received under the policy should be held as capital money and assigned by
the insured to the trustees.572

We recognize, however, that, had the trustees, rather than the benefici-
ary, been the insured they would, under our previous recommendations, have
charged the premiums proportionately to the income or capital accounts as
they saw fit. Therefore, when the proceeds of insurance on trust property
received by a beneficiary are assigned to the trustees, the trustees should
ensure that the beneficiary is put in the same position he would have occupied,
vis-a-vis the allocation of insurance premiums, had the trustees been insured.
Accordingly, we recommend that, in the event that money is received under
a contract of insurance entered into by a beneficiary, the insured beneficiary
should be reimbursed by the trustees for the amount of such premium payment
or payments as the trustees in their discretion consider reflects the interests
of beneficiaries other than the insured in the trust property.

573

Finally, we wish to mention two other matters that should be addressed
in relation to the disposition of insurance proceeds. First, in the event that
the insured trust property is subject to a mortgage or a lease or other charge
or obligation, special rights of a mortgagee, lessor, or lessee in relation to
the application of insurance moneys received on the property may be in-
volved. The Commonwealth provisions referred to previously provide that
any such special rights should govern,574 and we agree with this position.
Accordingly, we recommend that nothing in our previous recommendations
concerning the disposition of insurance proceeds should affect the rights of a
mortgagee, lessor, lessee or other person in money received from an insurer
of trust property.575 Secondly, as under the Commonwealth provisions re-
ferred to previously,576 we are of the view, and recommend, that our proposals

572 Draft Bill, s. 37(3)(a).

573 Ibid., s. 37(3)(fr).

574 See, for example, English Trustee Act, 1925, supra, note 31 . s. 20(5); Western Australia
Trustees Act, 1962, supra, note 95, s. 47(5); Queensland Trusts Act 1973, supra, note
229, s. 48(6); and New Zealand Trustee Act 1956, supra, note 227, s. 25(5).

Draft Bill, s. 37(4).

See, for example, English Trustee Act, 1925, supra, note 3 1 . s. 20(6); Western Australia
Trustees Act, 1962, supra, note 95, s. 47(6); Queensland Trusts Act 1973, supra, note
229, s. 48(8); and New Zealand Trustee Act 1956, supra, note 227, s. 25(6).

575
576

290

concerning the disposition of insurance proceeds should only apply to money
received by the trustees after the revised Act comes into force, so as not to
affect the allocation of insurance proceeds received before that date that might
not be in conformity with the revised Act.577

(d) Separation of Investment and Allocation Decisions

So far in this chapter, we have considered the administrative powers of
trustees, including the investment power, and the power of allocation of
receipts and outgoings between income and capital beneficiaries. It will be
apparent from this discussion that, in making investment decisions, and in
allocating receipts and outgoings, trustees must, in the absence of directions
to the contrary, endeavour to hold the balance between successive benefici-
aries. At present, in order for trustees to make prudent investment choices
that will ensure the maintenance of an even hand, certainty concerning the
extent and nature of income and capital return on investments is essential.
When a trustee invests in such assets as rental buildings, mortgages, bonds,
or preferred shares, indeed, in any debt or fixed-interest security, few diffi-
culties arise concerning whether a particular receipt represents an income or
a capital payment. Moreover, should the trust fund be so invested, trustees
will know the level of income that can be expected, and, except in relation
to land and buildings that will probably appreciate, the amount of the capital
return. However, this is not the case with all investments, and, while other
sources of revenue may present problems of classification, corporate distri-
butions merit, in our opinion, particular attention. It is to this topic that we
now turn.

(i) Corporate Distributions

A corporation can distribute profits in a variety of forms that take no
account of the fact that a particular shareholder may be a trustee for both
income and capital beneficiaries. Trustees must not only be concerned with
the level of risk and the profitability of an investment, but, in order to assess
whether the investment in question treats the income and capital beneficiaries
fairly, they must also determine whether a particular distribution is to be
classified as "income" or as "capital". As a result, when trustees choose an
investment they must be guided not only by the objective quality of the
investment in the prevailing market conditions, but also by whether the
investment will enable them to fulfill their duty to maintain an even hand.578
Accordingly, the classification of corporate distributions is a matter of im-
portance, and we wish to consider whether the revised Act could assist trustees
with these determinations, and, more fundamentally, could minimize the
impact of even hand considerations upon the investment decisions of trustees.

577
578

Draft Bill, s. 37(5).

This point is well illustrated by the case of Re Smith, supra, note 9. Although the oil
company shares were an excellent investment, the gain was coming in the form of capital
appreciation, rather than cash dividends. The income beneficiary was demanding the
sale of these shares in order that the proceeds might be reinvested in some other
authorized investment that would bring a fair income return. The Court agreed, and held
that the trustee was in breach of the duty to act impartially by retaining the oil shares.

291

a. Ontario

Trustees in Ontario, as in other Commonwealth jurisdictions, must rely
upon common law rules to classify distributions that are received from
corporations.

When trustees invest in common shares, they are entitled as shareholders
to nothing more than the right to participate in any trading profits that the
corporation may make in the future. All that a shareholder can demand, if
profits are made, and if a distribution takes place, is that he receive, propor-
tionate to his shareholding, the same amount and type of distribution as any
other shareholder of the class of shares in question.

It is a fundamental principle of company law in Canada that, unless a
corporation is in liquidation or engaged in the reduction of capital, it may not
return capital to its shareholders; if it chooses to make a distribution, it must
be from profits.579 However, a corporation has the power to utilize and
distribute profits in various ways. Generally, a corporation will make regular
distributions of profits to shareholders in the form of cash dividends, or, if it
chooses to distribute extra profit, a "cash bonus" or "bonus" may be given to
shareholders. The receipt of dividends in this fashion is normally treated as
income by trustees, for the benefit of the life beneficiaries.

However, there is no obligation on a corporation to distribute its profits
to shareholders. Moreover, even if there is a distribution of corporate profits,
it need not take the form of cash dividends. Rather, a corporation may choose
to retain and capitalize profits; as a result, although a shareholder does not
receive cash-in-hand, the value of his shares on the market will increase
commensurately. In recognition of the increase in value of the shares, a
corporation may distribute to shareholders rights in the new capital increment.
These rights may take the form of an issue of additional shares or preferential
options to purchase new shares. The corporation may also issue new shares
with the proviso that shareholders may allow a bonus dividend to be applied
as payment, in whole or in part, for the new shares. It is at this juncture that
the common law distinguishes between profits distributed directly as a cash
dividend, and profits that have been capitalized and distributed as a capital
entitlement; the former, as mentioned, accrue to the benefit of the life bene-
ficiary, while the latter are treated as capital to which the remainderman is
entitled.

Initially, in 1887, the English courts adopted the test of intention to
classify corporate distributions.580 The critical question was whether the cor-
poration paid, and intended to pay, a cash dividend, or appropriated, and
intended to appropriate, the profits to an increase in the capital stock of the
corporation. Thereafter, it was widely accepted that the decisive element of
the test was whether the corporation intended to distribute a money payment
or to capitalize profit. However, in 1930, the Privy Council, in Hill v.

579 See, for example. Re Keating Estate. 1 1934] S.C.R. 698, [1934] 3 D.L.R. 745.

580 Bouch v. Sproule(mi), 12 A.C. 385 (H.L.).

292

Permanent Trustee Co. ofN.S.W. Ltd.,5** held that it was not a matter of the
intention of the corporation, but rather what the corporation actually did that
decided the matter.582 If a corporation capitalized profit, the receipt was capital
in the hands of trustees; if it "gave away" profit by distributing cash, the
receipt was to be treated as income.

In England, therefore, the test is expressed in terms of the real character
and substance of the corporate action; that is, the "form" of the distribution.
In Canada, the "form" test, without embellishment, is also the governing
rule. This was put beyond doubt by two celebrated cases in the Supreme
Court of Canada in 1956, namely, Re Waters5™ and Re Hardy.5*4 As a result
of these decisions and their subsequent interpretation, it can now be said that,
however the corporation describes its actions, if cash is distributed it is to be
classified as income,585 but if profit is retained and capitalized, even if the
new shares are redeemable, the distribution must be treated as capital in the
hands of the trustees. Accordingly, today, normal cash dividends are alone
classified as income. Redeemable preferred stock, bonus shares, rights to
purchase stock, and the proceeds of compulsory sales and expropriations are
all classified as capital.

It should be noted, however, that trust instruments often authorize trust-
ees to allocate receipts, including corporate receipts, between income and
capital beneficiaries at the trustee's discretion, subject, of course, to the duties
of care and of impartiality. It is only where the trust instrument is silent that
the corporate action determines the issue.

b. United States

In the United States over the years, a number of approaches have been
taken in different jurisdictions to the appropriate method of classifying cor-
porate distributions.586

One of the earliest approaches was the Pennsylvania, or American, rule,
first formulated in 1857.587 This rule, which sought to relate corporate distri-
butions to income and capital beneficiaries in a manner that would achieve
an equitable apportionment, considered both the source of distribution and
the period of time during which a corporate profit had been earned. If the
source was profit, and if the profit was earned during the subsistance of the
interest of the income beneficiary, the distribution was treated as income,
while any distribution of earnings accumulated prior to the creation of the
life interest belonged to and formed part of the capital.

581 [1930] A.C. 720 (P.C.) (Aust.).

582 Ibid., at 734.

583 [1956] S.C.R. 889, 4 D.L.R. (2d) 673.

584 [1956] S.C.R. 906, 4 D.L.R. (2d) 721.

5 An extraordinary cash dividend could still be ambiguous, one would have thought.
586 See, generally, Scott, supra, note 140, §§ 236-236.16, at 1967-2023.

587

Earp's Appeal, 28 Pa. 368 (1857).

293

For much of the nineteenth century this rule was popular, particularly
among the theorists, but in practice it became unworkable. The real difficulty
was not the complex accounting that the rule involved, but the fact that, since
a corporation normally pays its distributions from accumulated surplus, it
was impossible to determine the source of the profit or the period during
which the profit was earned by the corporation. A method of determining the
time of acquisition of surplus was devised that involved valuing all the
corporation's assets at the commencement of the income beneficiary's inter-
est, and determining the proportionate share interest in these assets that was
originally acquired by the trust. However, this process required examination
of corporate records over many years and often raised difficult questions
concerning valuation and accounting procedures.588 The complexities of the
rule, the unpredictability of outcome, and the increasing sophistication of
corporate issues have resulted in the diminished use of the rule.589

A further approach was the so-called Kentucky rule, adopted toward the
end of the nineteenth century. This rule was a court-made rule based upon
the source of corporate funds.590 It stated that, if a corporation declared any
dividend out of profits, whatever be the nature of the declaration, this was
income. Equally, if a dividend was based upon revenue received from the
sale of corporate assets, this was capital. Although, in contrast to the Penn-
sylvania rule, this rule was relatively simple to apply, it nonetheless often
resulted in arbitrary allocations. As a result, Kentucky statutorily abandoned
the rule in 1954.591

Contemporaneously with the pronouncements of the Pennsylvania and
Kentucky rules, Massachusetts, in 1868, enunciated the so-called Massachu-
setts rule,592 which was eventually to become the rule adopted by the majority
of jurisdictions in the United States. The rule, not unlike the "form" test
espoused by Commonwealth jurisdictions, directed that cash dividends on
corporate stocks were to be viewed as income, while stock dividends, that is
profits distributed in the form of further capital entitlement, were to be
considered capital. In 1931 , in response to the wide variety of allocation rules
that existed among the states, the National Conference of Commissioners on

588 The method of apportionment was predicated on the theory of "intact value"; that is, it
was based on the concept that the capital of the trust owns an interest in all the
corporation's accounts equal to the proportionate share interest originally acquired by
the trust, known as the "intact value" of the trust. Any distribution of earnings was, in
the first instance, presumed to be income, but if the intact value of the original shares
would be impaired by such an allocation, an apportionment was made to capital in order
to preserve the intact value. Valuation of the corporation's accounts posed a significant
problem. At first market value was taken, but, as that proved unsatisfactory, book value
was adopted. This demanded a resort to corporate balance sheets, and in turn to a list of
arbitrary asset values. Hawaii and New Jersey also attempted other accounting devices
to meet the problems of the arbitrary elements. For a full account, see Flickinger, "A
Trustee's Nightmare: Allocation of Stock Dividends between Income and Principal"
(1963), 43 B.U. L. Rev. 199. See, also, Robinson, "Trust Allocation Doctrine and
Corporate Stock: The Law Must Respond to Economics" ( 1972), 50 Tex. L. Rev. 747.

589 See Scott, supra, note 140, § 236.3, at 1975-88.

590 Hite's Devisees v. Hite's Executors, 93 Ky. 257, 20 S.W. 778 (Ky. Ct. App. 1892).

591 Ky. Rev. Stat., § 386.020(4).

592 Minot v. Paine, 99 Mass. 101 (1868).

294

Uniform State Laws adopted the Massachusetts rule for the allocation of
corporate distributions. The rule, which first appeared in the Uniform Prin-
cipal and Income Act of 1931 , was retained in substance in the 1962 revision
o( that Act, which is now in force in thirty-six jurisdictions of the United
States.593 The central aim of the Commissioners in adopting the Massachusetts
"form" test was to make administration simple and convenient for trustees.
Therefore, they sought workable rules that they considered to be in line with
the usual wishes of settlors and testators, and that they regarded as considerate
to all beneficiaries, present and future.594

A concept that the National Conference of Commissioners on Uniform
State Laws rejected in 1962, when the Uniform Principal and Income Act
was revised, was the so-called "six percent" rule. This rule is applied in

593 See supra, notes 481 and 506. While the 1962 revision of the American Uniform
Principal and Income Act retains the principle of the Massachusetts rule, it has also
provided specifically for problems that have arisen since the original Act was adopted,
such as the treatment of distributions of a regulated investment company or real estate
investment trust. Section 6 of the Uniform Principal and Income Act, 1962, provides as
follows:

6. [Corporate Distributions]

(a) Corporate distributions of shares of the distributing corporation, including
distributions in the form of a stock split or stock dividend, are principal. A right to
subscribe to shares or other securities issued by the distributing corporation accruing
to stockholders on account of their stock ownership and the proceeds of any sale
of the right are principal.

(b) Except to the extent that the corporation indicates that some part of a corporate
distribution is a settlement of preferred or guaranteed dividends accrued since the
trustee became a stockholder or is in lieu of an ordinary cash dividend, a corporate
distribution is principal if the distribution is pursuant to

(1) a call of shares;

(2) a merger, consolidation, reorganization, or other plan by which assets
of the corporation are required by another corporation; or

(3) a total or partial liquidation of the corporation, including any distribution
which the corporation indicates is a distribution in total or partial liquidation
or any distribution of assets, other than cash, pursuant to a court decree or
final administrative order by a government agency ordering distribution of the
particular assets.

(c) Distributions made from ordinary income by a regulated investment company
or by a trust qualifying and electing to be taxed under federal law as a real estate
investment trust are income. All other distributions made by the company or trust,
including distributions from capital gains, depreciation, or depletion, whether in
the form of cash or an option to take new stock or cash or an option to purchase
additional shares, are principal.

(d) Except as provided in subsections (a), (b), and (c), all corporate distributions
are income, including cash dividends, distributions of or rights to subscribe to
shares or securities or obligations of corporations other than the distributing cor-
poration, and the proceeds of the rights or property distributions. Except as provided
in subsections (b) and (c), if the distributing corporation gives a stockholder an
option to receive a distribution either in cash or in its own shares, the distribution
chosen is income.

(e) The trustee may rely upon any statement of the distributing corporation as to
any fact relevant under any provision of this Act concerning the source or character
of dividends or distributions of corporate assets.

American Uniform Principal and Income Act, supra, note 481 , at 430-31 .

594

295

Pennsylvania,595 New York,596 and New Jersey597 to remove some of the
unfairness that can result from the application of the Massachusetts or "form"
rule to the classification of corporate distributions. Under this rule all divi-
dends, whether in stock or in cash, ordinary or extraordinary, are allocated
to the income account if they constitute six percent or less of the value of the
corporation's outstanding shares before the distribution is made. The rule is
based on the assumption, which was demonstrated to be correct in a study
conducted in 1965,598 that small distributions of six percent or less have their
origin in earned, rather than in unearned, surplus.

Before concluding our review of American jurisdictions, we would note
two other approaches to the allocation of corporate distributions, one, the
"prudent man" rule, in force, at present, in Delaware, and the other, the
"unitrust" or "percentage trust" proposed by American judicial literature.
Regarding the first approach, Delaware, not having adopted either the original
Uniform Act of 1931 or the revised 1962 Act, continued to adhere to the
Kentucky rule until 1962. At that time Delaware abandoned its judicial
version of the Kentucky rule, and became the only state then, or since, to
adopt statutorily what has become known as the "prudent man" rule. Under
this rule, trustees are required to assess, as would a prudent man, whether
the distribution in question should be regarded as income from an investment,
or whether it should be viewed as a diminution of an income-producing
property.599 In making this assessment, trustees must ask whether the distri-
bution is likely to reduce substantially the future earning capacity of the
corporation. Trustees must also consider whether the distribution is likely to
reduce materially the future income of the shares held by the trust. Further,
trustees must take into account any other relevant and significant factors.600
Accordingly, in classifying corporate distributions, the rule requires trustees
to do more than merely assess the source of each receipt.

The final approach that we wish to note is the "unitrust" or "percentage
trust",601 a concept first suggested by American judicial writing.602 Under the

595

596

597

598

599

The Supreme Court of Pennsylvania first suggested the idea in Catherwood Trust, 405
Pa. 61, 173 A. 2d 86 (1961), and it was adopted statutorily in 1963: see Pa. Stat. Ann.,
tit. 20, § 8105 (Purdon). See, also, Devine, "Principal and Income Allocation of Stock
Distributions - The Six Per Cent Rule" (1966), 64 Mich. L. Rev. 856, and Scott, supra,
note 140, § 236.7, at 1996-99.

N.Y. Pers. Prop. Law, § 27-e (McKinney).

N.J. Stat. Ann., § 3A: 14A-4 (West), as am. by N.J. Laws 1964, c. 123. In New Jersey,
the relevant figure is four percent.

The study was conducted by the Trust Department of the Chase Manhattan Bank, and
involved 227 stock distributions. See Shapleigh, "How fair is the Six Percent Rule on
stock distributions?" (1965), 104 Trusts & Es. 908.

See further. Devine, supra, note 595, at 865-69.

,>0" Del. Code Ann., Rev. 1974, § 3526(a).

6(l|

6(12

The American description is "unitrust". We have employed the term, "percentage trust",
because of the possible confusion with the investment "unit trust". See, also, Gibson.
"Trusts and Estates" (1971), Can. Tax Fdn. Conf. 354, at 363-64.

The percentage trust, or unitrust. was first discussed, and its mode of operation exam-
ined, by Lovell. "The Unitrust: A new concept to meet an old problem" (1966). 105
Trusts & Es. 215. We have also considered for this purpose the Model Charitable

296

percentage trust, trustees invest and manage a single fund and keep a single
set of accounts for that fund, rather than maintain separate 'income" and
"capital" accounts. All receipts of whatever nature are paid into the fund, and
all disbursements of whatever nature are paid out of the fund. Periodically
the fund is valued, although not necessarily on an annual basis. The income
beneficiary receives a prescribed percentage annually of the periodic valua-
tions, and this payment is treated by trustees in the same way as any other
proper disbursement from the fund. The prescribed percentage payable to the
life beneficiary may be fixed at a certain figure, which by an appropriate
process is periodically reviewed in order to ensure that it is in accord with a
current fair economic return. Alternatively, it may be determined by the
current return on a familiar type of trust investment.603 The capital beneficiary,
or remainderman, receives the balance of the fund at the close of the interest
of the income beneficiary.604 Depreciation of any assets of the trust will be
reflected in the periodic valuations, and depletion will be ascertained in the
same way. As the percentage return is calculated on the value of the trust's
assets, it follows that the life tenant shares in the depreciation and depletion.

(ii) Conclusions

As we have mentioned, in Ontario, the "form" test governs the classifi-
cation of corporate distributions. However, the manner in which a corporation
handles its profits does not have regard to the obligations of trustees towards
income and capital beneficiaries. For this reason the "form" test, directing
that the characterization of distributions by a corporation is binding upon
trustees, has been frequently criticized. In defence of the "form" test, it may
be argued that this test is simple, clear in the result, and definitive; it is,
therefore, convenient for trust administration, and, accordingly, saves money,
time, and trouble. Nonetheless, it cannot be overlooked that the test is arbi-
trary. A testator or settlor presumably creates a successive interest trust
because he wishes a steady income percentage paid to A, the income bene-
ficiary, and the capital to be taken by B, the remainderman, on A's death. It
follows that, if the decisions of a third party who has no connection with and
no interest in the trust determine whether receipts accrue either to A or B, it
is merely fortuitous if the expectations of the testator or settlor are fulfilled.

In considering the various alternatives for reform of the "form" test, we
note that none of the Commonwealth jurisdictions has found any commend-
able judicial alternative to Hill v. Permanent Trustee Co. of N.S.W. Ltd.605
Further, the trustee legislation of England, the Australian States, and New
Zealand is silent on this matter.

Remainder Unitrust contained in the Report of the A.B.A. Committee on Charitable
Giving, Trusts and Foundations (1975). 10 Real Prop. Prob. & Tr. J. 535. See, also,
Comus, 'The Unitrust in Estate Planning: A Partial Panacea" (1967-68), 21 Vand. L.
Rev. 1023.

603

In Ontario, we understand that the return on prime residential mortgages in Toronto has
been adopted for this purpose.

604 Translated into the language of income and capital, the life tenant will be entitled to his
payment first out of income, and any deficiency out of capital. Excess income is
accumulated, and is added to capital.

Supra, note 581.

605

297

Turning to the statutory approach adopted by the majority of American
jurisdictions, we have considered closely the provisions of the Uniform Prin-
cipal and Income Act, but have concluded that their adoption in Ontario is
not desirable. Our main reason is that, as the basis for the Uniform Act's
provisions on the classification of corporate distributions is the "form" test,
they vary only slightly from the common law rules followed in Ontario.
Consequently, adoption of these provisions would not be justifiable or achieve
anything.

We have also weighed the advantages and disadvantages of the "six
percent" rule. In favour of this rule it may be asserted, first, that a more
regular pattern of allocations to the trust's income account can usually be
obtained, and, secondly, that trustees are able, without lowering the income
beneficiary's expectations, to invest in those corporations that reinvest an
abnormally high percentage of their earnings, but pay stock dividends. This
rule, to some degree, separates the investment task of trustees from their task
vis-a-vis the beneficiaries of allocating receipts. The rule permits trustees to
invest so as to produce the greatest gain commensurate with the security of
the capital invested, while going some way to prevent an attack from an
income beneficiary that they have favoured the capital beneficiary. Moreover,
it obviates the necessity for trustees to distinguish between the various kinds
of dividend declaration, namely, ordinary, extraordinary, stock, and stock
split.

Nevertheless, on balance, the Commission has no hesitation in rejecting
the "six percent" rule. Although perhaps fairer than its counterpart, the
Massachusetts or "form" rule, the "six percent" rule does suffer shortcomings.
From a definitional point of view, if "income" means profits that are realized,
then, strictly speaking, a stock dividend of six percent or less cannot be such
a distribution, because the profit is not realized until the stock is sold. A sale
of the same proportionate share of the corporation's holdings would, presum-
ably, realize the same money receipt, and, if such a sale took place, the
proceeds, not being by way of dividend, would go, even under the "six
percent" rule, to the trust's capital account exclusively. Accordingly, the
rule, in deeming a stock dividend of six percent or less to be income, is to
some degree arbitrary. Of a more substantive nature, it is argued that the "six
percent" rule presents administrative difficulties, particularly as the volume
of small distributions increases with a growing number of corporations at-
tempting to make low-yield stock more attractive.

The major objection to the "six percent" rule, however, is that it assumes
that a corporation, although pursuing a heavy reinvestment policy, will at
least issue dividends, whether cash or stock. Clearly, if a corporation issues
no dividends, or dividends that do not constitute a fair yield, there is nothing
that the "six percent" rule can do to alleviate the situation. The value of such
an investment will be reflected, so far as the trust is concerned, in its sale
value that must go to capital. Finally, while the allocation of a fixed six
percent of corporate distributions to the income account may have been a
suitable return during periods of low inflation, a greater flexibility is required
by trustees to meet today's volatile market conditions.

298

Having expressed our reasons for not adopting, as an alternative to the
"form" test, either the provisions of the American Uniform Principal and
Income Act or the "six percent" rule, we now wish to discuss two approaches
that we consider could usefully be included in the revised Act. These two
approaches are the discretionary allocation trust and the percentage trust.

a. Discretionary Allocation Trust

The discretionary allocation trust embraces, in general, an approach that
we understand is not unfamiliar to current Canadian practice. As we have
stated, in Ontario trust instruments often authorize trustees to allocate re-
ceipts, including corporate receipts, between income and capital beneficiaries
at the trustee's discretion, subject, of course, to the duties of care and of
impartiality. A0A So far as we are aware, this approach, which we call the
"prudent man" approach, has not been statutorily adopted in any Common-
wealth jurisdiction. Further, it is considerably broader in scope than the
Delaware rule, which, although based upon the element of prudence, restricts
its exercise to allocation decisions concerning the character of individual
receipts.

The prudent man approach, unlike the other rules we have previously
reviewed, enables the trust portfolio to be treated as a whole; it is not
concerned with the character of each particular trust receipt. It permits trustees
the flexibility and discretion to manage a portfolio so as to achieve growth
value, while at the same time to balance the treatment of the income and
capital beneficiaries. In this sense, the prudent man rule is unique in that it
minimizes the impact of even hand considerations upon investment decisions
for trustees.

Nonetheless, this approach requires that trustees possess a significant
degree of financial analytical skills, or at least the ability to understand the
recommendations that financial advisers render. It may also be said that the
prudent man rule exposes trustees to attack by beneficiaries who may allege
that the trustees' conduct, in the circumstances, was not prudent. An attack
of this nature would require the court to determine the issue of prudence, an
issue that may be both difficult to assess and to predict. Moreover, where
small amounts of money are involved, the time and expense involved with
prudent man considerations may be said to be unjustified. And, of course, it
may generally be alleged that this approach, where decisions turn upon the
conduct of the prudent man,607 does not permit uniform objective standards
to develop. Indeed, it may be argued that, so far as common stock investment

606

607

This power is not inconsistent with Re Bronson, [1958] O.R. 367, 14 D.L.R. (2d) 51
(H.C.J. ). In that case, it was established that, as a matter of public policy, a settlor or
testator may not validly confer a power upon trustees to determine whether any particular
receipt is income or is capital. The power discussed does not relate to this issue. Rather,
it authorizes trustees to distribute receipts among income and capital beneficiaries,
regardless of whether the receipts be classified as income or as capital.

The problems involved in allocation between the income and capital accounts is well
illustrated in Maryland National Bank v. Merson, 239 A. 2d 905 (Md. Ct. App. 1968),
discussed in Hoak, "Range of Returns: A New Approach to the Allocation of Trust
Gains and Losses" (1969), 21 Stan. L. Rev. 420.

299

is concerned, the prudent man rule places beneficiaries in the position where
they no longer possess definitive interests of the classic income and capital
kind.

We have sought to express the major objections to the prudent man rule
because we have concluded that, on balance, this approach comes closest to
achieving equity among the trust beneficiaries and to facilitating the adoption
of sound investment practices. The prudent man rule also allows trustees to
take into account tax considerations. It is, no doubt, for these reasons that a
clause conferring upon trustees a discretion to allocate receipts among bene-
ficiaries is often found in well-drawn trust instruments. We are of the opinion
that the revised Act should contain a facultative provision, which a settlor or
testator would be free to adopt or ignore, permitting the discretionary allo-
cation of receipts between income and capital. In this regard, trustees would
be governed, of course, by the duty to maintain an even hand among succes-
sive beneficiaries.608 However, two matters remain for comment.

First, we do not consider that the prudent man rule should be mandatory
for testators or settlors. Considerable experience has been acquired by the
legal profession in handling the case law "form" test. Further, accepted
practices concerning the classification of corporate distributions have been
established, and there may be many settlors and testators who will prefer the
certainty produced by the "form" test, or who may regard the "form" test as
more compatible with the nature and size of the particular trust contemplated,
or with the knowledge and experience of those whom they wish to act as
trustees. For these reasons, we are of the view that the discretionary allocation
power should only apply where the creator of the trust so provides in the trust
instrument by the use of the words "on discretionary allocation trust".

Secondly, it will be recalled that, to this stage, our discussion has been
limited to the classification of corporate distributions. However, we are of
the view that the discretionary power should apply to all types of receipt and,
further, should be equally applicable to the allocation of disbursements be-
tween income and capital. We have earlier recommended that trustees should
be able, in their discretion, to pay and allocate outgoings between income
and capital beneficiaries.609 It may, therefore, be contended that it is unnec-
essary and duplicative to extend the discretionary allocation power to outgo-
ings. However, our intention is that the proposed discretionary allocation
power should be self-contained, so that a creator of a trust who expressly
invokes its application would thereby confer upon his trustees discretion to
allocate both receipts and outgoings. In addition, we are of the view that the
provisions recommended earlier in the context of the apportionment of out-
goings concerning deductions for depreciation and obsolesence and the actual
payment and recoupment of outgoings from either capital or income, as the
case may be, are equally applicable where a trust instrument authorizes assets
to be held on a discretionary allocation trust.

610

608 See supra, this ch., sec. 4(c)(ii)c, and Draft Bill, s. 39.

609 See supra, this ch., sec. 4(b)(iv).

610 See supra, this ch., sec. 4(b)(iv), and Draft Bill, s. 40(2) and (3).

300

Accordingly, we recommend that the revised Act should contain a pro-
vision to the effect that, where trustees are expressly directed by the trust
instrument to hold trust assets kkon discretionary allocation trusts", they shall
allocate receipts to, and charges for outgoings against, the income and capital
accounts as they consider just and equitable in all the circumstances. In so
doing, it should be their duty to maintain an even hand as between income
and capital beneficiaries/'" Moreover, where trustees are expressly directed
by the trust instrument to hold trust assets on discretionary allocation trusts,
the recommendations proposed previously concerning deductions for depre-
ciation and obsolescence and for the payment and recoupment of outgoings
in whole or in part from either income or capital should apply.612

We are also of the view that it would be useful to provide trustees with
guidance regarding the allocation of receipts as income or as capital. Such
guidance, while not intended to derogate from the general discretionary
allocation power, would assist trustees with initial determinations concerning
which receipts should be treated as income and which as capital. Accordingly,
we recommend that the revised Act should specify that, for the purpose of
determining the relative proportionate interests of beneficiaries of the trust,
income should generally be understood to be the return in money or property
derived from the use of capital; and capital should generally be understood
to be the property set aside to be delivered eventually to a remainderman,
while the return or use of the capital is, in the meantime, taken or received
by or held for accumulation for an income beneficiary.'

613

Finally, we wish to note two diverse points regarding the operation of
these proposed provisions. First, we are aware that, if a trustee, pursuant to
a discretionary allocation trust provision conferred by the trust instrument,
allocates income receipts to the capital account, accumulation of these re-
ceipts in the capital account may run the risk of offending the maximum
accumulation periods specified in the Ontario Accumulations Act.614 This
might deter trustees from making such an allocation decision, even though it
would be in the best interest of the trust to do so. Accordingly, in order to
remove this impediment, we recommend that the Accumulations Act should
not apply to the operation of the proposed statutory discretionary allocation
trust provisions.615 Secondly, although the discretionary allocation trust pro-
visions might be viewed as blurring the distinction between the income and
capital accounts, we are of the view that the employment of these provisions
should not preclude a testator or settlor from conferring upon the trustees a
power to encroach upon capital in favour of an income beneficiary, and we
so recommend.616

611
612
613

Draft Bill, s. 41(1).

Ibid., s. 41(2).

Ibid.,s. 41(3).
614 Supra, note 460.
6,5 Draft Bill, s. 43(1).
616 Ibid., s. 43(2).

b. Percentage Trust

One aim of our recommendations to this juncture has been to minimize
the impact of even hand considerations upon the investment decisions of
trustees. To this end, we have recommended that the creator of a trust should
be able to provide that his trustees are to hold trust assets "on discretionary
allocation trusts", a mechanism that would enable trustees to allocate receipts
and outgoings to the income and capital accounts as they in their sole discre-
tion think fit. In this manner, trustees would be able to assess the suitability
of investments based upon all relevant circumstances, confident in the knowl-
edge that, although a particular investment might not treat income and capital
equitably, this could be remedied by the discretionary power to adjust the
income and capital accounts.

Although we are of the view that our recommendations in this area go a
great distance to promote sound investment decisions and equitable allocation
of receipts and outgoings, they envisage that the property interests of succes-
sive beneficiaries will continue to be classified as income and capital. While
trustees under a discretionary allocation trust are not required to consider
whether a particular receipt is income or capital, they still must allocate
receipts to the income and capital accounts in a manner that will maintain an
even hand between the successive beneficiaries. In other words, we appreciate
that the conferment upon trustees of a broad discretion does not remove the
problem of allocation of receipts and outgoings between income and capital
beneficiaries; rather, it shifts the problem to be dealt with at the accounting
level.

We have considered, therefore, whether investment considerations could
be severed completely from the allocation decisions of trustees. We have also
considered whether there could be a departure from the commonly understood
notion of "income" and "capital" accounts. We are of the view that the
percentage trust concept would achieve these objectives.

Various arguments have been made in favour of the percentage trust. It
has been asserted that trustees can invest for gain, albeit prudently, and have
no regard to whether receipts should be allocated to, or outgoings should be
paid from, the income or capital account: that is, trustees have the freedom
to invest both in low yield equities and high yield debt securities without
producing rises and falls in the life tenant's income. The percentage trust also
enables the income beneficiary to share in the inflationary growth of capital
assets. Moreover, the percentage trust promotes better investment perform-
ance of the trust funds, while at the same time maintaining the life tenant's
income over a period of years at a constant level. In particular, so far as
corporate distributions are concerned, it has been contended that investment
decisions may be taken with a view solely to the factors that constitute or
affect gain. The only restraint upon the trustee under a percentage trust is that
he must pursue the prudent investment policies required of fiduciaries.

However, there are limitations to the percentage trust. Because of the
need of trustees to draw on capital in those years when the actual return on
the trust investments is below the percentage that is to be paid to the income
beneficiary, the assets of the percentage trust should be readily marketable.

302

Mortgages, income-producing real estate, and business interests are, there-
fore, best handled in the conventional manner of income and capital account-
ing. The problem is not insoluble for the average trustee, who is likely to
have a mix of assets in the portfolio, but there could be a liquidity problem.
In the main, a percentage trust is only worthwhile if the trust holds common
stock that has a growth potential. There could also be problems for percentage
trust accounting when the trust is yielding an invisible return: for example,
where, in the case of a testamentary trust, the life tenant is living in a house
owned by the trust. It is possible, of course, to charge the tenant an economic
rent, but this is not likely to have been the testator's wish, and, if the house
is removed as a source of receipts, the outgoings will still appear on the
disbursements side.617

Moreover, the valuation of the trust assets can be costly and, when shares
in a closely held corporation are involved, difficult. It is possible to have
valuations made less frequently than annually, but we understand from those
with experience that valuations should not be less frequent than every three
years. When the share market is going through times of erratic movement,
as has been the case during the recent past, the timing of valuations, where
common stock is concerned, can be crucial. A valuation in share values at a
temporary high point, or low point, could produce an unrealistic economic
return for the income beneficiary throughout the period when that valuation
determines the amount that is to be paid to the beneficiary. And there is
another difficulty with valuation. If it reflects inflation, the revenue received
by the income beneficiary will be based upon paper gains. Interest rates
themselves reflect the inflation factor, and these rates will normally have
much to do with the prescribed percentage that is fixed. It is possible to
contend, therefore, that the percentage trust markedly favours the income
beneficiary as the inflation factor increases.

The central difficulty for the percentage trust, however, stems from the
definition of "income" in the Income Tax Act (Canada).618 This Act defines
income not only to mean income as understood in the law of trusts, but also
to include taxable capital gains. It follows, therefore, that the position of the
income beneficiary under the percentage trust and under the federal Act will
only coincide in this context when the percentage payable in any year is the
same in amount as the actual income, plus the taxable capital gain. The
preferred beneficiary election619 would still be useful, but often difficult to
apply. Moreover, capital dispositions may be required, which may trigger
capital gains, in a year when the trustees have to draw on capital to pay the
income beneficiary's percentage. Further, because of the federal Act's defi-
nition of income, a spousal trust will be tainted if the actual income of the
percentage trust is greater in any year than the percentage to which the income
spouse beneficiary is entitled.

Although we understand that the percentage trust is employed by some
practitioners in the Province, we were initially of the view that there was

7 It is probably best to exclude such assets from the percentage trust, and continue to
handle them in the conventional manner.

618 Supra, note 281.

619 See Cullity and Forbes, Taxation and Estate Planning (1978), at 113-15.

303

little, it anything, that could be gained by including a provision of this nature
in the revised Act. Indeed, we were concerned that draftsmen might be
encouraged to employ this mode of trust accounting without, perhaps, fully
realizing the difficulties for trustees that can subsequently arise. However, as
we have previously stated, it is the lack of separation of investment policy
from the allocation of receipts and outgoings that, in our view, can create
difficulties for trustees in the administration of a trust. The percentage trust,
by ensuring that the income beneficiary receives a fair economic return on a
periodic basis, with the remaining value of the trust assets being regarded as
capital, effectively achieves this separation.

For this reason, we endorse the general concept of the percentage trust,
but we also appreciate, having particularly in mind the tax implications, that
not all settlors or testators may be attracted to its unique provisions. Accord-
ingly, we have concluded that the revised Act should include a facultative
provision, which a settlor or testator would be free to adopt or to ignore as
he chooses. Such a provision would set out a comprehensive percentage trust,
and it would enable draftsmen to adopt the statutory trust solely by expressly
employing the words, "on percentage trusts", in the trust instrument.

We therefore recommend that the revised Act should contain a provision
to the effect that, where trustees are expressly directed by the trust instrument
to hold trust assets "on percentage trusts", they shall value the assets period-
ically and, instead of any income arising from the assets, pay to the person
who would otherwise be the income beneficiary a percentage of that valuation
in each year of the valuation period. In so doing, trustees should be required
to maintain an even hand between income and capital beneficiaries.620 The
Act should further provide that, where there are two or more income benefi-
ciaries whose interests are vested in possession at the same time, the per-
centage should be divided equally among them, unless the trust instrument
divides the percentage in another proportion, or makes other provision, in-
cluding discretionary trusts, for the distribution of the percentage.621 In ad-
dition, we recommend that the percentage payment should be made from
income arising during the accounting year and, so far as income is insufficient,
from capital, and that any income of the trust arising during the accounting
year in excess of the amount of the percentage payment should be added to
capital.622

For clarity, we also recommend that the following words should be
defined in the revised Act: first, "assets" should be defined to mean the capital
of the trust property subject to the percentage trusts, plus the income arising
therefrom on hand, accumulated and accrued on valuation day; secondly,
"valuation" should be defined to mean the fair market value of the assets less
the liabilities outstanding at the moment of valuation; and finally, "valuation
period" should be defined to mean the period of time between one valuation
and the next.623

620 Draft Bill, s. 42(1).

621 !bid.,s. 42(2).

622 Ibid.,s. 42(3).

623 Ibid., s. 42(4).

304

We arc also of the view that the frequency of valuations for the statutory
percentage trust, and the percentage to be paid annually during any valuation
period, should be established and kept under review by a governmental review
agency. Decisions of this agency should be binding upon the trustees, unless
the creator of the trust has provided to the contrary. Accordingly, we rec-
ommend that where ihe trust instrument does not provide for the frequency
of valuations or for the percentage that is to be paid annually during a
valuation period, the Lieutenant Governor in Council should be empowered
to make regulations providing therefor and for such ancillary matters as he
considers proper/124

Lastly, as with the operation of the discretionary allocation trust provi-
sion, in order to prevent accumulations of income receipts in the proposed
single fund of the percentage trust from violating the maximum accumulation
periods of the Ontario Accumulations Act,625 we recommend that this Act
should not apply to the operation of the proposed statutory percentage trust
provision.626 Furthermore, as the percentage trust concept, even more so than
the discretionary allocation trust, eliminates the distinction between an in-
come and capital account, this should not preclude a testator or settlor from
conferring upon the trustees a power to encroach upon capital in favour of a
beneficiary. We so recommend.627

Recommendations

The Commission makes the following recommendations:

1 . Sections 26 and 27 of the Ontario Trustee Act should be repealed, and in
their place the revised Act should adopt a version of the prudent man rule
for trustee investment powers. Accordingly, the revised Trustee Act
should provide that the basic duty of care proposed for inclusion in the
revised Act - namely, that in the discharge of their duties and the exercise
of their powers, whether the duty or power is created by law or the trust
instrument, trustees shall exercise that degree of care, diligence, and skill
that a person of ordinary prudence would exercise in dealing with the
property of another person - should govern the power of investment.

2. Subject to the basic duty of care and the terms of the trust instrument,
trustees should be able to invest trust money in any kind of property.

3. The revised Act should provide that, in investing trust money under the
proposed statutory power of investment, among the matters that trustees
may appropriately consider are the following:

(a) the marketability of the investment;

624 Ibid.,*. 42(5).

625 Supra, note 460.

626 Draft Bill, s. 43(1).

627 Ibid., s. 43(2).

305

(b) the length of the term of the investment, including its maturity date,
callability and redeemability;

(d) the probable condition of the market with respect to the value of the
investment at the termination of the trust, especially if at the termi-
nation of the trust the investment must be converted into money for
the purpose of distribution;

(e) the probable condition of the market with respect to reinvestment at
the time when the investment matures;

(f) the aggregate value of the trust estate and the nature of the other
investments;

(g) the effect of the investment in increasing and diminishing liability
for taxes; and

(h) the likelihood of inflation.

4. The revised Act should stipulate expressly that trustees are not obliged
to consider each of the matters mentioned above before deciding upon
any investment.

5. The revised Act should contain a set of administrative powers that are
customary in well-drawn contemporary trust instruments. Further, the
testator or settlor should be able to exclude or modify any of the statutory
administrative powers conferred upon trustees.

6. The current arbitrary placement of administrative powers in the Ontario
Trustee Act should be replaced by a thematic list in the revised Act.

7. Where land is settled on trust for successive beneficiaries, the powers of
management and administration should not be conferred upon the life
tenant or other limited owner in possession. Rather, the revised Act
should confer such powers directly upon the trustees, in order that they
may exercise necessary administrative powers for all trust assets.

8. In order to implement the proposal contained in Recommendation 7, the
Ontario Settled Estates Act should be amended so as to exclude from its
operation settlements of land by way of trust. The Settled Estates Act,
insofar as it confers administrative powers in relation to common law
settlements of land, should remain in force, pending a review of the basic
principles of land law.

9. The revised Trustee Act should provide expressly that the exercise of the
listed statutory administrative powers set out in Recommendations 10,
1 1 , and 14 to 29 is subject to the basic duty of care proposed for inclusion
in the revised Act.

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10. The revised Act should provide that trustees may, pending investment,
or for the purpose of paying the ongoing expenses of the trust, deposit
trust money in a chartered bank, trust company, or any other depository
empowered by law to accept moneys for deposit.

1 1 . The revised Act should provide that trustees may sell trust property by
public auction or private contract for cash or credit on appropriate secu-
rity.

12. The revised Trustee Act should provide that, where land is held by trustees
for a charitable purpose and it appears that the land can no longer be
advantageously used for such charitable purpose or that for any other
reason the land ought to be sold, the court may authorize its sale and give
such directions in relation to the sale and for securing the due investment
and application of the money arising from the sale as are appropriate.

13. The revised Trustee Act should provide that no order shall be made by
the court under Recommendation 1 2 unless notice has been given to the
Public Trustee.

14. The revised Act should contain a provision to the effect that trustees may
dispose of trust property by way of exchange for other property, or where
the trust property consists of an undivided share, concur in the partition
of the property in which the share is held.

15. The revised Trustee Act should provide that trustees may, as lessees,
renew a lease held by the trust.

16. The revised Act should contain a provision to the effect that trustees
may, as lessors, grant or renew a lease or sublease of trust property for
a term not exceeding, in the case of residential property, three years, or,
in the case of any other type of property, seven years, or, with the consent
of the court, grant or renew a lease or sublease of trust property for longer
periods or grant an option to renew the lease or sublease or to purchase
the reversion.

17. The revised Act should provide that trustees may manage, maintain,
repair, renovate, improve, or develop trust property, including in the
case of land subdividing, erecting buildings, dedicating for any public
purpose, granting easements, profits a pendre, or licences, and entering
into agreements with respect to boundaries, party walls, fencing, or other
matters in connection with trust property.

18. The revised Act should provide that trustees may insure against loss or
damage to trust property and against any other risk of liability.

19. The revised Act should contain a provision to the effect that trustees may
carry on any business, whether as sole proprietor, partner, limited part-
ner, or otherwise, and may incorporate or otherwise change the form of
the business, and dispose of or wind up the business.

307

20. The revised Act should contain a provision to the effect that trustees may
exercise all rights and powers and satisfy all liabilities incidental to the
ownership of shares or obligations of a corporation, including power to
sell or exercise subscription rights, to exchange the shares or obligations
for other shares or obligations, to join in plans for reconstruction, reor-
ganization or amalgamation, to enter into pooling or other agreements,
and to authorize the sale of the assets or undertaking of the corporation.

21. The revised Act should provide that trustees may surrender insurance
policies, leases, or other property subject to onerous obligations of such
a nature that it would not be in the interests of the beneficiaries to retain
the trust property.

22. The revised Act should provide that trustees may purchase or rent living
accommodation or construct a house on land held by them for the purpose
of providing a home for the person entitled to the income of the money
expended in respect of the purchase, or to the income to be expended in
respect of the rent, or to the income of either the land or the money
expended in respect of the purchase or construction, if the person for
whom the living accommodation is provided consents thereto.

23. The revised Act should contain a provision to the effect that trustees may
borrow money and, as security, mortgage, pledge, or otherwise charge
any of the trust property.

24. The revised Act should provide that trustees may pay or assert or contest
any claim, and compromise, compound, abandon, submit to arbitration,
or otherwise settle any debt, account, claim or thing relating to the trust
or the trust property.

25. The revised Act should provide that trustees may give a receipt in writing
for any money or other property received. A receipt in writing for any
money or other property received by trustees should be a sufficient
discharge to the person paying or transferring the money or other property
and should exonerate him from seeing to its application or being answer-
able for its misapplication.

26. The revised Act should contain a provision to the effect that trustees may
pay out of trust money any taxes, assessments, charges, premiums, or
other outgoings in respect of trust property.

27. The revised Act should contain a provision to the effect that trustees may
reimburse themselves or pay or discharge out of trust property all ex-
penses incurred in or about the administration of the trust.

28. The revised Act should provide that trustees may appropriate property in
specie in or towards satisfaction of the share or interest of any beneficiary,
with the consent of that beneficiary. For the purpose of the appropriation,
following consultation with a qualified person where the trustees are not
personally qualified, trustees should place a valuation on the property.
However, no specific gift made by the trust instrument should be ad-
versely affected by an appropriation of property in specie. In addition,

308

within one month of the valuation or such further time as the court
authorizes, the trustees, beneficiaries or any other interested person should
be able to apply to the court for a review of the appropriation or the
valuation, and, following such notice as the court may order, the court
should confirm or make such variation as it considers proper.

29. The revised Act should provide that trustees may do all supplementary
or ancillary acts or things and may execute all instruments necessary or
desirable to enable them to carry out effectively the intent and purpose
of the powers vested in them.

30. The revised Act should contain a provision to the effect that, where in
the administration of trust property any sale, lease, mortgage, surrender,
release, or other disposition, or any purchase, investment, acquisition,
expenditure, or other transaction is in the opinion of the court expedient,
but it cannot be effected because of the absence of a power for that
purpose vested in the trustees by the trust instrument or by law, the court
may, by order, confer upon the trustees, either generally or in any
particular instance, the necessary power for the purpose on such terms
and subject to such provisions and conditions as the court thinks fit. The
revised Act should further provide that the court may rescind, vary, or
replace any such order, but that such a rescission, variation, or replace-
ment does not affect any act or thing done in reliance upon the order
before the person doing the act or thing became aware of the application
to the court to rescind, vary, or replace the order.

31. Section 23(1) of the present Trustee Act should be carried over to the
revised Trustee Act, pending a review of passing of accounts in the
Commission's Project on the Administration of Estates of Deceased
Persons. Accordingly, the revised Act should provide that trustees desir-
ing to pass the accounts of their dealings with the trust property may file
their accounts in the office of any court having jurisdiction, and that the
proceedings and practice upon the passing of such accounts shall be the
same and have the like effect as the passing of the accounts of executors
or administrators, except that, in the case of trustees under a will, the
accounts shall be filed and passed in the office of the court by which
probate of the will was granted.

32. Rule 59 of the Surrogate Court Rules should be amended and incorporated
in the revised Trustee Act to provide that trustees, whether of an inter
vivos or testamentary trust, may pass their accounts voluntarily or may
be called upon by citation to do so on the application of any person
interested therein.

33. Sections 61(1) and (3) and 23(2) of the present Trustee Act should be
consolidated in the revised Trustee Act. Accordingly, the revised Act
should provide that trustees are entitled to such fair and reasonable
compensation for their work and time spent on the trust as a court of
competent jurisdiction on application or on the passing of accounts may
award. This provision should be subject to the expression of a contrary
intention concerning compensation contained in the trust instrument.

309

34. Section 6 1 (4) of the present Trustee Act should be retained, but expanded
in the revised Act to provide that trustees who possess or who because
of their profession, business or calling have professional skills and who
have rendered necessary professional services to the trust, apart from
their duties and powers as trustees, are entitled to such additional com-
pensation for such services as a court of competent jurisdiction may
award.

35. In the absence of a contrary intent contained in the trust instrument, and
subject to several specific controls that we shall propose in Recommen-
dations 36 to 40, the revised Trustee Act should provide that trustees
may, from time to time during the administration of the trust, pay to
themselves or any of them from the assets of the trust such sum as in
their opinion is fair and reasonable compensation for their work and time
spent on the trust during the period of time to which the payment relates.

36. The revised Trustee Act should provide that, where trustees take interim
compensation, they must, at the time of the taking, give notice to the
beneficiaries of the sum taken under Recommendation 35 and an account
of the services rendered.

37. Where the trustees have taken interim compensation, and they have not
been compelled to pass the accounts of the trust, they should be required,
on an application or when the accounts are eventually passed, to satisfy
the court that the sum taken under Recommendation 35 was fair and
reasonable.

38. The revised Trustee Act should provide that the Lieutenant Governor in
Council may make regulations prescribing guidelines respecting the sums
payable as interim compensation to trustees, as well as other matters
concerning the taking of interim compensation under Recommendation

35.

39. The revised Trustee Act should provide that, where the court determines
that the interim compensation was not fair and reasonable, it shall deter-
mine what is fair and reasonable, and shall order the difference between
the sum taken and the sum fixed by the court returned with interest to the
trust.

40. The revised Trustee Act should provide that, where a court determines
that the sum taken as interim compensation was fraudulently taken, the
court shall order it to be returned to the trust, and may deny any com-
pensation to the trustees.

41 . The revised Act should contain a provision to the effect that trustees may
apportion any payment or expenditure for any outgoing between the
income and capital accounts, or may charge the payment or expenditure
exclusively to either income or capital, as they consider just and equitable
in all the circumstances.

42. Regarding the scope of the term "outgoing", the revised Act should define
this term to mean payments and expenditures, whether discharged by the

310

trustees or a beneficiary, resulting from and necessitated by the existence
of the trust property, including expenses of administration, repairs, main-
tenance, insurance, taxes, payments on account of mortgages and debts,
calls on shares, annuities, and business and other losses.

43. If Recommendations 41 and 42 are accepted, that portion of section 21
of the Ontario Trustee Act dealing with the payment of insurance pre-
miums out of income should not be carried over to the revised Act.

44. The revised Act should contain a provision to the effect that trustees may
pay for any outgoings from income or capital, or wholly or partly from
each, as appears to them to be in accord with sound business practice
and in the best interests of the trust beneficiaries as a whole.

45. The revised Act should contain a recouping provision whereby trustees
may recoup capital from income, where the whole or part of the payment
or expenditure has been made out of or charged to capital, or recoup
income from capital, where the whole or part of the payment has been
made out of or charged to income, if, in either case, trustees consider
that course of action to be just and equitable in all the circumstances.

46. The revised Act should provide that trustees may, and if ordered by the
court shall, deduct from the income derived from trust property that is
subject to depreciation or obsolescence such amounts as are fair and
reasonable having regard to sound business practice in order to protect
the capital of the trust from loss, and that any sums so deducted should
be set aside and added to the capital of the trust so as to become capital
for all purposes.

47. Recommendations 41, 42, and 44 to 46 should not apply where a trust
constitutes a trust for the exclusive benefit of the spouse of the testator
or settlor within the meaning of the Income Tax Act (Canada), unless the
trust instrument expressly provides that the provisions contemplated or a
specified part thereof should apply.

48. Because the proposals contained in Recommendations 41 to 46 effect a
significant change in relation to the allocation of outgoings, they should
only apply to trusts that take effect after the revised Act comes into force.
Moreover, the revised Act should state expressly that they are subject to
the duty to maintain an even hand between income and capital benefici-
aries (see infra, Recommendation 52).

49. The revised Act should provide that, where the court confers upon trust-
ees an additional administrative power, the court should be able to direct
in what manner any money authorized to be expended and the costs of
any transaction are to be paid or borne as between capital and income.

50. With respect to the apportionment of receipts upon a change in ownership
of or entitlement to trust assets, the Ontario Apportionment Act should
continue in force, without modification. Further, income receipts not
apportionable under that Act should continue to be allocated by the
common law rules that are well established in Ontario.

311

51. With respect to the allocation of income pending conversion of trust
assets, there should be no change in the law relating to rules associated
with the second branch of the rule in Howe v. Lord Dartmouth, that is,
the law with respect to the mode of apportionment, including, in those
circumstances where the issue arises, the time of notional conversion of
assets, and the allocation of a fair and reasonable income pending con-
version of assets to the income beneficiaries.

52. The first branch of the rule in Howe v. Lord Dartmouth, dealing with the
circumstances in which a duty to convert trust assets arises, should be
stated in broader terms. Accordingly, the revised Act should provide that
trustees must act impartially as between income and capital beneficiaries,
having regard to each item of trust property, whatever the nature of the
property, and whether it is an original asset or an asset that is acquired
subsequently, further to an authorization in the trust instrument or con-
ferred by statute.

53. The revised Act should provide that Recommendation 52 applies to all
trusts unless the trust instrument expressly provides otherwise.

54. The revised Act should provide that, where any contract of insurance has
been entered into and any premiums have been paid by the trustees, the
money receivable by the trustees under the policy shall be held by them
as capital money of the trust, subject to the terms of the trust, including
the power of investment.

55. The revised Act should contain a provision to the effect that all or part
of the money held by the trustees as capital money of the trust, and
representing insurance proceeds, may be applied by the trustees, with the
consent of the court, for rebuilding, reinstating, replacing or the major
repair of trust property that has been lost or damaged.

56. The revised Act should provide that, where a beneficiary of a trust enters
into a contract of insurance against loss of, or damage to, any trust
property, or any other risk or liability to which the trustees are or might
be exposed, whether or not the beneficiary is required by the trust instru-
ment or by a third party so to do, the money received under the policy
shall be held as capital money and assigned by the insured to the trustees.

57. The revised Act should provide that, in the event that money is received
under a contract of insurance entered into by a beneficiary, the insured
beneficiary shall be reimbursed by the trustees for the amount of such
premium payment or payments as the trustees in their discretion consider
reflects the interests of beneficiaries other than the insured in the trust
property.

58. The revised Act should contain a provision to the effect that nothing in
Recommendations 54 to 57 affects the rights of a mortgagee, lessor,
lessee or other person in money so received from an insurer.

59. The revised Act should provide that Recommendations 54 to 58 apply
only to money received by trustees after this Act comes into force.

312

60. The revised Act should contain a facultative discretionary allocation trust
provision. Accordingly, the Act should provide that, where trustees are
expressly directed by the trust instrument to hold trust assets "on discre-
tionary allocation trusts", they shall allocate receipts to and charges for
outgoings against the income and capital accounts as they consider just
and equitable in all the circumstances. In so doing, it should be their duty
to maintain an even hand as between income and capital beneficiaries.

61 . Where trustees are expressly directed by the trust instrument to hold trust
property on discretionary allocation trusts, Recommendations 44, 45,
and 46 should apply.

62. In order to assist trustees in allocating receipts under Recommendation
60, the revised Act should specify that, for the purpose of determining
the relative proportionate interests of beneficiaries of the trust, income
should generally be understood to be the return in money or property
derived from the use of capital; and capital should generally be under-
stood to be the property set aside by the trust instrument to be delivered
eventually to a remainderman, while the return or use of the capital is,
in the meantime, taken or received by or held for accumulation for an
income beneficiary.

63. The Ontario Accumulations Act should not apply to the operation of the
proposed statutory discretionary allocation trust provision recommended
above.

64. The employment of the proposed discretionary allocation trust provision
should not preclude a testator or settlor from conferring upon the trustees
a power to encroach upon capital in favour of an income beneficiary.

65. The revised Act should contain a facultative percentage trust provision.
Accordingly, the Act should provide that, where trustees are expressly
directed by the trust instrument to hold trust assets "on percentage trusts",
they shall value the assets periodically and, instead of any income arising
from the assets, pay to the person who would otherwise be the income
beneficiary a percentage of that valuation in each year of the valuation
period. In so doing, it should be their duty to maintain an even hand as
between income and capital beneficiaries.

66. Where there are two or more income beneficiaries whose interests are
vested in possession at the same time, the percentage should be divided
equally among them, unless the trust instrument divides the percentage
in another proportion, or makes other provision, including discretionary
trusts, for the distribution of the percentage.

67. The percentage payment should be made from income arising during the
accounting year and, so far as income is insufficient, from capital, and
any income of the trust arising during the accounting year in excess of
the amount of the percentage payment should be added to capital.

68. For clarity, the following words should be defined in the revised Act:
first, "assets" should be defined to mean the capital of the trust property

313

subject to the percentage trusts, plus the income arising therefrom on
hand, accumulated and accrued on valuation day; secondly, "valuation"
should be defined to mean the fair market value of the assets less the
liabilities outstanding at the moment of valuation; and finally, "valuation
period" should be defined to mean the period of time between one valuation
and the next.

69. Where the trust instrument does not provide for the frequency of valua-
tions or for the percentage that is to be paid annually during a valuation
period, the Lieutenant Governor in Council should be empowered to
make regulations providing therefor and for such ancillary matters as he
considers proper.

70. The Ontario Accumulations Act should not apply to the operation of the
proposed statutory percentage trust provision.

7 1 . The employment of the proposed statutory percentage trust provision
should not preclude a testator or settlor from conferring upon the trustees
a power to encroach upon capital in favour of a beneficiary.

Copies of this report may be purchased from the
Ontario Government Bookstore, 880 Bay Street,
Toronto, or by mail order from Publications Services
Section, 5th Floor, 880 Bay Street, Toronto, Ontario
17 A 1N8. Telephone 965-6015. Toll free long
stance 1-800-268-7540; in area code 807, 0-Zenith
67200.

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