CY PRES GRANTED TO ENABLE CHARITABLE TRUST TO MEET DISBURSEMENT
QUOTA
By Terrance S. Carter, B.A., LL.B., Trade-mark Agent
and Nancy E. Claridge, B.A., M.A., LL.B. Candidate
A. INTRODUCTION
In Toronto Aged Men's and Women's Homes v.
Loyal True Blue and Orange Home (2003), 68 O.R. (3d) 777,
[2003] O.J. No. 5381 (the "Toronto Aged Men's and Women's
Homes case"), the Ontario Superior Court of Justice exercised
its inherent jurisdiction to alter the terms of a charitable
trust (the "Trust") to address the Trust's inability
to meet its disbursement quota due to the rate of return on
its capital assets. Coincidentally, the difficulties of charities
meeting their disbursement quota was addressed in the March
23, 2004 Federal Budget (the "2004 Federal Budget"),1
which proposed several changes to the disbursement quota for
charities, including a reduction from 4.5 percent to 3.5 percent
per year on capital assets held by charitable foundations
(to be extended to all registered charities), in order to
more closely represent historical long-term real rates of
return on the typical investment portfolio held by charities.
This proposed change to the Income Tax Act ("ITA")
will apply to tax years that begin after March 22, 2004. Draft
legislation to implement the 2004 Federal Budget was introduced
by the Federal Government on September 16, 2004.
Notwithstanding the proposed reduction in the
disbursement quota, charities will likely continue to face
difficulties in meeting their disbursement quota from time
to time. This Charity Law Bulletin discusses the findings
of the Toronto Aged Men's and Women's Homes case and resulting
implications in relation to ensuring the terms of a charitable
trust are sufficiently broad in order to enable trustees to
operate effectively and in compliance with the disbursement
requirement of the ITA.
B. FACTS OF THE CASE
A Trust created by the Will of Mary Elsworth
Stillman (the "Testatrix" or "Stillman"),
amounting to $3,464.075 on death in 1961 and $19,306,466 on
June 30, 2001, contained terms requiring the capital to be
set aside and kept invested, with the net income paid out
to two charitable beneficiaries. The Trust was intended to
be a perpetual endowment, with Stillman expressing a preference
for investments in equities in order to protect the value
of the residue against the effects of inflation. This was
achieved to an extent by the investment policy adopted by
the trustee in accordance with Stillman's intentions, with
an approximate 10 percent loss of purchasing power by 2001,
and a further six percent loss between June 30, 2001 and June
30, 2002 due to the decline in share prices. The combined
effect of the investment strategy and the absence of any authority
to distribute capital resulted in the Trust's inability to
meet its 4.5 percent disbursement quota for the fiscal years
ended June 30, 1997 through June 30, 2002, instead only averaging
3.4 percent to 4.1 percent of the value of its investment
property for those years. The court indicated that the disbursement
quota was calculated as 4.5 percent of the average fair market
value of the investment property in the immediately preceding
24-month period, pursuant to the ITA. The cumulative shortfall
was $738,000, potentially exposing the Trust to having its
charitable registration revoked, and liability for a revocation
tax. Although the Minister's discretion under s. 149.1(5)
of the ITA to reduce a charity's disbursement quota is referred
to in the decision, no explanation of whether the Trust had
applied for such a reduction of the disbursement quota, which
would likely have been granted, was provided.
The trustee and charitable beneficiaries applied
to the court for approval of a scheme for the administration
of the Trust that would permit the trustee to diverge from
the directions in the Will and adopt a "total return"
investment and distribution policy. Under a total return investment
policy, the best returns of income and capital gains are sought
without distinguishing between them. While the respondent,
The Loyal True Blue and Orange Lodge, whose interest was contingent
on the termination of the trust for the charitable beneficiaries,
consented to the order requested, the Public Guardian and
Trustee (the "PGT") submitted that the court should
not grant its approval of the scheme as formulated, but took
the position that the PGT would not oppose more limited relief
that would alleviate the problem, justifying a departure from
the terms of the Will.
The central issues in the application were whether
the court had jurisdiction to give its approval, and whether
such jurisdiction should be exercised in the manner requested.
C. FINDINGS OF THE COURT
The applicants in the Toronto Aged Men's and
Women's Homes case proposed a scheme that would override the
Testatrix's intention that the capital be retained and kept
invested and only have the income distributed. The court had
difficulty accepting the proposition that the Testatrix's
directions be ignored on the ground that it is expedient or
desirable because the Trust would be more efficiently administered
without them. In so doing, the court distinguished the case
of In re J.W. Laing Trust, [1984] Ch. 143 (Ch.D.),
wherein the English Chancery Division approved a departure
from the terms of a trust, which did not create an endowment,
affecting the timing of distributions of capital. However,
the court noted that the terms of a charitable trust may be
varied when the conditions for an application of the cy
pres jurisdiction are satisfied, namely that the purposes
of the Trust have become impossible or impracticable to achieve
if it is to continue to be administered in accordance with
the provisions of the Will.
1. Cy Pres Jurisdiction Exercised
"Cy pres" is the equitable
doctrine under which a court changes a written instrument,
such as a trust, with a gift to charity "as closely to
the donor's intention as possible," so that the gift
does not fail. In this case, such a variation would involve
a departure from the intentions of the Testatrix and would
override her express directions in the Will. The court held
that its jurisdiction would permit the authorization of encroachments
on capital to the extent required to satisfy the Trust's disbursement
quota.
Accepting that the combined effect of the investment
strategy and the absence of any authority to distribute capital
resulted in the Trust's inability to meet its disbursement
quota in successive years, and the potential for serious consequences
should this continue, the court concluded that the administration
of the trust in accordance with Stillman's intentions was
no longer practicable and that a cy pres order was
appropriate to rectify the problem. According to the court,
the existence of the Minister's discretion, under s. 149.1(5)
of the ITA to reduce the disbursement quota was not sufficient
to make the purposes of the trust practicable in these circumstances.
Consequently, as the administration of the trust in accordance
with the terms of the Will jeopardized the Trust's status
as a charity, it was sufficient to constitute an impracticability
that justified the exercise of the court's cy pres jurisdiction.
The total return approach proposed by the applicants
was found to provide a degree of flexibility that should enable
an increase in the return from investments and thereby protect
the Trust's purchasing power or real value, notwithstanding
the fact that distributions of capital may be made. This was
likely to accommodate the overall intentions of the Testatrix
with respect to both investments and distributions to a greater
degree than an order authorizing encroachments on capital
from time to time. The scheme proposed by the applicants for
investments and distributions in accordance with the total
return model was approved, with some modifications including
fixing the distribution rate at 4.25 percent.
2. Disbursement Quota Alleviation Required
Despite the stated position of the Canada Revenue
Agency (the "CRA") to not revoke charities whose
failure to meet their disbursement quota was directly attributable
to the current low interest rates requiring affected charities
to request an alleviation pursuant to s. 149.1(5) of the ITA,
the court did not regard it as sufficient to justify inaction
on the part of the court as far as the future administration
of the Trust was concerned. However, in order to address the
accumulated shortfall, the court directed the trustee to make
such a request to the CRA.
3. PGT and Attorney General Authority
Addressing submissions made by the PGT, the
court refused to extend the authority of the Attorney General,
and by extension that of the PGT, to make it necessary to
obtain their consent before the court could exercise its jurisdiction
to approve a proposed variation of the terms of a charitable
trust saying, "the inherent jurisdiction is that of the
court and not that of the Attorney General or the Public Guardian
and Trustee." Instead, the Attorney General cannot act
except with the authority of the court.
D. IMPLICATIONS OF THIS CASE
In the current investment climate, it is inevitable
that many charities will be unable to achieve real rates of
return sufficient to satisfy the disbursement quota required
under the ITA. Without the legislation required to implement
changes proposed in the 2004 Federal Budget, charities will
continue to face potentially severe penalties for innocent
failures to comply with the ITA. Still, the proposed changes
announced in the 2004 Federal Budget will not resolve all
issues. Accordingly, charities, their boards of directors,
donors, and their advisers should note several points made
by the Toronto Aged Men's and Women's Homes case:
