What’s the value of an interest in a trust?
If you own a unit in a publicly-traded trust such as a mutual fund trust, it’s easy to determine the value of your unit, since it trades on the market.
But what if you’re one of three beneficiaries of a family trust worth $3 million? And the trustees have full discretion over whether to pay you, or the other beneficiaries, any monies from the trust? Does your “trust interest” have a value that can be determined?
This issue comes up in family disputes, when couples separate and their assets have to be valued for purposes of equalization. It also comes up for tax purposes, such as when a person emigrates from Canada or dies, and their assets have to be valued for tax purposes so that their accrued capital gains can be taxed.
In the example above, the CRA is likely to say that your interest is worth $1 million because you’re one of three “equal” beneficiaries. This may not be correct, however.
S.A. v. Metro Vancouver Housing was a 2019 decision of the Supreme Court of Canada. The question in the case was the value of an interest in a “Henson trust”. This is a trust set up for a person X with disabilities, deliberately structured so that X cannot legally force the trustees to make any payments to X. The idea is not to disentitle X to other support they can get from public sources.
In this case, a Henson trust was set up for Ms. A, who had disabilities, from her late father’s estate. She and her sister were the sole trustees, and they could allocate any amount of the trust’s income or capital to Ms. A’s “care, maintenance, education or benefit”.
Ms. A lived in a rent-subsidized Vancouver rental housing complex. To qualify for rental assistance she had to show each year that she had less than $25,000 in assets. She said that, since she couldn’t force the trustees to pay her anything, her interest in the trust had no value.
The Supreme Court ruled that Ms. A had only “a mere hope that the trustees will exercise their discretion in a manner favourable to her”. As a result, her interest was valued at nil, and she qualified for the rent subsidy.
This was not a tax case, but it could have significant implications for tax purposes. In the example above, CRA’s view — that your interest in the trust is worth $1 million — might not be correct. In light of the Supreme Court of Canada’s decision, it can be argued that your interest is worth less than $1 million — or even nothing.