Yared v Karam: Equality in Family Patrimony Triumphs

In Yared v Karam, 2019 SCC 62 (Yared), the Supreme Court of Canada (“SCC” or “Court”) grappled with conflicting rights and obligations at the intersection of trusts and family patrimony under the Civil Code of Quebec, CQLR c CCQ-1991 (CCQ). Family patrimony determines the joint assets in a marriage, which should be divided after its dissolution or breakdown. Family patrimony provisions under the CCQ are intended to protect vulnerable spouses from the sometimes-detrimental effects of economically unequal relationships. Trusts, on the other hand, are established to protect assets held by the trust for its beneficiaries. So, what happens when a family residence is held in trust? Does it matter whether the trust was established in good faith, rather than for the express purpose of avoiding its inclusion in the family patrimony? The majority held that a family residence held in trust, where one spouse is a trustee with extensive powers, should be included in the family patrimony. As the appellants’ counsel, Stewart Litvack, said following the decision’s release in December 2019, “courts are [increasingly] putting family patrimonial rules above trust rules, they’re widening their interpretation of family rules, and limiting their protection of trusts” (Canadian Lawyer Mag). This somewhat muddies the waters for families seeking to establish a trust for themselves or their children as trusts are no longer as protective of assets as they have been in the past.

The Facts

Ms. Yared and Mr. Karam had been married for 12 years when they found out Ms. Yared had incurable cancer (Yared, para 4). They decided to set up a trust to ensure their four children would be the beneficiaries of the family assets (Yared, para 4). Accordingly, the children and Ms. Yared were the beneficiaries of the trust, Mr. Karam and his mother were the trustees, and Mr. Karam was the electeur of the trust. As electeur, Mr. Karam had the power to name new beneficiaries, including himself; destitute any beneficiaries; and determine how the revenues and capital of the trust would be distributed (Yared, para 5). The couple used the trust to purchase a home for $2,350,000 in Montreal, intended for use as a family residence as well as an investment (Yared, para 6). Two years after this purchase, Ms. Yared filed for divorce, and changed her will to divide her estate into four trusts, one for each child. The divorce was not finalized by the time she passed several months later. Ms. Yared’s brothers were liquidators of Ms. Yared’s estate upon her passing, and they sought a declaration from the Superior Court of Quebec that the value of the family residence was included in the division of the family patrimony (Yared, para 8).

The Issue & Procedural History

Art 415 CCQ includes in the family patrimony property owned by one or the other of the spouses, including the residences of the family or the “rights which confer use” of them. That last phrase was introduced to prevent a spouse from using a corporation to purchase a home with the intention of avoiding the rules around family patrimony (Yared, para 33). In Yared, the spouses had used a trust to purchase their family home. Importantly civil trusts are defined as a patrimony by appropriation (art. 1261 CCQ). This means that the property in the trust is not owned by anyone, whereas property in a trust under common law is owned by the trustee. The main issue before the Court, then, was whether the husband’s extensive powers as trustee amounted to “rights which confer use” of the family home, which would therefore include the home in the family patrimony, requiring the husband to pay 50% of the property value into the wife’s estate.

The trial judge decided the full value of the family residence should be included in the family patrimony because Mr. Karam’s extensive powers as trustee and electeur gave him the “rights which [conferred] use” over the property (Yared, para 10). He also gave other reasons which were rejected by both the Court of Appeal and the Supreme Court. The Court of Appeal overturned his decision based primarily on their concern for spouses’ contractual freedom, concluding that no part of the family residence should be included in the family patrimony (Yared, para 15).

The Analyses and Decisions

The Court decided the appeal in a 5-2 split. Justice Rowe wrote the majority opinion, signed on by Chief Justice Wagner and Justices Abella, Brown, and Martin. The majority decision was chiefly concerned with the purpose of the family patrimony provisions—to protect the public order (Yared, paras 22-24). The dissenting judges, Justices Côté and Karakatsanis, were more concerned about spouses’ ability to contract freely regardless of the consequences to public order (Yared, paras 84-87).

 “Rights Which Confer Use”

Art. 415 CCQ reads: “The family patrimony is composed of the following property owned by one or the other of the spouses: the residences of the family or the rights which confer use of them…” Justice Rowe read the words “rights which confer use” as indicating the legislator’s intention to include in the family patrimony living arrangements where neither spouse has title to their family residence but they do have control over it (Yared, para 33). Indeed, the provision was created to prevent spouses from using corporations to purchase homes in order to shield themselves from family patrimony laws. Jurisprudence in Quebec already addressed the possibility of a property in trust creating rights which confer use of that property for one spouse. The case history showed that simply occupying a residence would not be enough to demonstrate a right which confers use; a requisite level of control over the residence is also required (Yared, paras 36-37). The trial judge found that Mr. Karam’s powers established that control over the residence, as Ms. Yared was not a trustee nor an electeur, and thus he did hold rights conferring use of the residence. Justice Rowe agreed.

Justice Côté, writing for the dissent, conceded that there may be situations where it is necessary to include a trust-owned property in a family patrimony because it would amount to rights which confer use, per art. 415 CCQ (Yared, para 88). However, she disagreed that this was such a case, highlighting the difference between power and rights. While she agreed that Mr. Karam had substantial power according to the trust deed, he also had significant duties and obligations that arose in conjunction with that power. He could not act in his own self-interest unless he was himself a beneficiary and, even then, he could not exercise his authority arbitrarily, according to art. 1283 CCQ (Yared, para 95). A right, by contrast, is exercised in one’s own interest (Yared, para 98). Therefore, his ability to control the residence only existed within the established parameters of the trust and he therefore did not have the right which conferred use.

The Parties’ Intentions

Again, the Court split on the significance of the parties’ intentions in establishing and administering the trust. The rules around family patrimony exist to protect vulnerable parties in the institution of marriage and, according to Justice Rowe the parties’ intentions are not relevant in pursuing this objective (Yared, para 47). If a spouse’s ability to access the protections offered by art. 415 CCQ to ensure equity in their marriage, they would be unduly burdened by the requirement to prove their spouse’s bad-faith intention to evade the rules (Yared, para 49).

Justices Côté and Karakatsanis, on the other hand, believed the intention of the parties was crucial in art. 415 CCQ. Firstly, a trust deed is a contract, which means its interpretation relies on consideration of the parties’ intentions in establishing the trust, among other things (Yared, para 100). Where a trust has no legitimate purpose beyond evading the family patrimony rules, this demonstrates a bad faith intention and the trustee may have a right which confers use (Yared, para 101). This was consistent with jurisprudence in which courts have included property held in trust in a family patrimony in the past, demonstrating the importance of intention in deciding these cases (Yared, paras 103-105).

Fairness

Justice Côté pointed out that if Mr. Karam is found to hold rights conferring use of the property as trustee and electeur, then the property will be both held by the trust and part of the family patrimony. In effect, Mr. Karam could end up owing his children 150 per cent of the value of the property (Yared, para 134). If he is required to pay have of the property value into Ms. Yared’s estate, that money is coming out of a trust that is operated for the benefit of his children. In other words, it is his children’s money that is being used to pay out their mother’s half of the family patrimony into her estate, which will eventually be paid to them. As beneficiaries of the trust, they could still be owed the full amount of the property value even after half has already been given to them through the liquidation of their mother’s estate. This clearly leaves Mr. Karam in a very vulnerable position (Yared, para 138).

The majority opinion did not believe this concern will come to fruition. Justice Rowe suggested that it is open to the courts to modify a trust deed under art. 1294 CCQ, and it should be expected that the courts would do this in a situation as patently unfair as the one suggested by the dissent (Yared, para 68). Justice Côté argues that this is not a satisfactory answer, since the Court is not in a position to predict how other courts should respond to this conundrum and trust deeds can only be amended insofar as the amendments promote the purpose of the trust more than if the trust remained unchanged (Yared, para 135).

Conclusion

In considering how the majority’s decision might impact the lives of the parties in this case, I am more inclined to agree with the dissent’s opinion. For instance, consider if the facts in this case were the same except that instead of Ms. Yared passing away, the couple did simply divorce. Based on the majority’s decision, the family residence, held by the trust, would still be included in the family patrimony. In effect, Mr. Karam would still have to pay Ms. Yared half of the property value, however I believe that money would go directly to her, while “his” half of the property value would remain in the trust for the benefit of the children. The concern that he may still owe the children 100% of the value of the property remains, meaning Mr. Karam loses a lot of money, which was not really his in the first place. The fact that Mr. Karam demonstrated no ill will or bad faith in the establishment nor in the administration of the trust, that Ms. Yared and Mr. Karam had established the trust together, and that Mr. Karam simply wanted to protect their collective assets for the benefit of their children would make such a situation unconscionable. While there are of course ways of mitigating this kind of situation, as Justice Rowe raised, this does seem to create the very situation the law is trying to avoid: a situation where one spouse is clearly economically disadvantaged.

In any case, the impact of this decision on the way families manage their assets is significant. It demonstrates the Court’s chief concern for equality in the institution and dissolution of marriage. In Yared, that concern was paramount over legal vehicles which simply could be used to protect property from inclusion in a patrimony, even if that was not the intention.