MATERIALS
2012 NATIONAL CHARITY LAW SYMPOSIUM
CORPORATE AND OPERATIONAL CONSIDERATIONS
The Abakhan Decision, Fraudulent Conveyances
and Inter-Charity Gifts
Margaret Mason
Bull Houser & Tupper LLP
(Vancouver)
May 4, 2012
Metro Toronto Convention Center
Presented by the CBA and OBA Charity and Not-for-Profit Law Sections and
the Professional Development Committee of the Canadian Bar Association
The Abakhan Decision: Fraudulent Conveyances
and Inter-Charity Gifts
Margaret H. Mason &
Michael Blatchford *
Bull, Housser & Tupper LLP
*The writers gratefully acknowledge the contribution of E. Jane Milton, QC and Emily Chan,
articled student, in preparing portions of this paper.
2
Introduction
Except for a recent amendment, the Fraudulent Conveyance Act (the “FCA”)1 was enacted in its
current form in British Columbia in 1987. One of the clearest examples of “creditor protection”
legislation, the FCA was developed to provide creditors and others with a remedy where debtors
transferred assets to place them out of reach of creditors. Similar legislation exists in every
province.
Although applicable to any transfer, regardless of the nature of the transferor and transferee, it
is perhaps safe to say that the FCA has not traditionally been considered to be of particular
significance to registered charities. Little attention has been afforded the application of the FCA
in the charitable sector, perhaps because the title of the statute suggests that its objective is to
protect against transfers and conveyances which are dishonest, deceptive or fraudulent. The
vast majority of registered charities, it was presumed (and correctly so), would not be involved in
a fraudulent transfer of property. An additional reason is that registered charities may, in
general, be less likely to have creditors that would attempt to apply the FCA.
Despite the lack of jurisprudential consideration, it is clear that registered charities have no
special exemption from creditor protection legislation and that a transfer by a registered charity
may be set aside if it meets the test set out in the FCA as interpreted by the courts. Recent
decisions have made the possibility of a transfer by a charity being challenged under the FCA
more likely by clarifying that fraudulent intent is not required to impugn a transfer.
In 2009, the decision of the British Columbia Court of Appeal in Abakhan & Associates Inc. v.
Braydon Investments Ltd. (“Abakhan”)2 raised eyebrows and blood pressure throughout the
legal and accounting communities in British Columbia. Since the date of its release, the
Abakhan decision has been referenced, considered, dissected, and followed in a number of
cases. In particular, Abakhan has been subsequently considered in several cases in the estate
planning context, culminating in the recent decision of the B.C. Court of Appeal in Mawdsley v.
Meshen et al. (“Mawdsley”)3 A central question that arises in these subsequent cases is
whether the provisions of the FCA can be used in conjunction with the provisions of the Wills
Variation Act (the “WVA”)4 to apply to inter vivos dispositions which may have the effect of
defeating or hindering claims that may be made against a person’s estate. In certain
circumstances, it appears that the answer to that question is “yes.”
1
R.S.B.C. 1996, c. 163
2009 BCCA 521, (“Abakhan”)
3
2012 BCCA 91, (“Mawdsley”)
4
R.S.B.C. 1996, c. 490
2
3
The purpose of this paper is to provide an overview of the principles of fraudulent conveyances,
to highlight the decision in Abakhan and subsequent cases and to provide a perspective and
practical considerations regarding how these doctrines might be used to adversely affect
transfers by (and between) registered charities. The paper will also discuss the rules included
in the Income Tax Act (the “ITA”) by the 2010 federal budget that regulate transfers between
charities.
A.
Basic Principles of the Fraudulent Conveyance Act
Any transaction which affects a transfer of property may be declared void by the court if it
contravenes the FCA. Until March 29, 2012, the FCA in its entirety provided as follows:5
1. If made to delay, hinder or defraud creditors and others of their just and lawful
remedies
(a) a disposition of property, by writing or otherwise,
(b) a bond,
(c ) a proceeding, or
(d) an order
is void and of no effect against a person or the person’s assignee or personal
representative whose rights and obligations by collusion, guile, malice or fraud are or
might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to
the contrary.
2. This Act does not apply to a disposition of property for good consideration and in good
faith lawfully transferred to a person who, at the time of the transfer, has no notice or
knowledge of collusion or fraud.
Although perhaps one of the shortest pieces of legislation ever introduced in British Columbia,
the FCA is not entirely straightforward, as its provisions include several nuanced terms that are
open to multiple interpretations. In part as a result of these ambiguities, the FCA has been the
subject of a tremendous amount of jurisprudence and judicial commentary.
1.
Who has standing to bring an action?
Standing to challenge a conveyance under the FCA is limited to “creditors and others.” Neither
of these terms is defined in the FCA and so the issue of standing has been left to the courts to
clarify. The definition of “creditors and others” has been given a broad interpretation to include
creditors with a entitlement arising out of a legal, equitable, or statutory obligation to share in the
general assets of the debtor. Two points, in particular, must be made:
5 An amendment to s. 1 of the FCA was brought in force by Royal Assent on March 29, 2012, removing the words
“by collusion, guile, malice or fraud”.
4
(a)
“creditors and others” encompasses future creditors. It is clear that a plaintiff does not
need to be a creditor or to have commenced an action at the time of the impugned
transfer to challenge the transfer.6 What is unclear is what limitations, if any, will be
placed on this general principle;
(b)
the key to establishing status as an “other” under the FCA appears to be the existence of
a claim that arises during the lifetime of the debtor, as opposed to one that arises only
on the death of the debtor. This principle was established first in the Hossay v. Newman
decision7 and was recently confirmed in the Mawdsley decision in the B.C. Court of
Appeal.
2.
Attacking a conveyance: what must be proven?
Once standing under the FCA is established, the following components must be established by
the plaintiff:
(a)
Disposition of property
The definition of “property” is very broad and covers any type of property and every interest in it,
including a beneficial interest. However, the definition does not extend to property to which the
debtor has no legal rights (for example, property held as a bare trustee), property received by
mistake, and property that is exempt from execution. Property that is subject to an express,
constructive, or resulting trust will not fall into the scope of the FCA unless it is shown that the
transfer into a trust was to avoid creditors.
Likewise, the definition of “disposition” is very broad and covers virtually any transaction,
including transfers, assignments, re-designations of beneficiaries under life insurance policies,
allowing property to be sold in a tax sale, and granting of an option to purchase property.
However, as s. 2 of the FCA sets out, if property is transferred by operation of law, such as to a
surviving joint tenant by right of survivorship, the transfer is not a fraudulent conveyance.
(b)
Intent to delay, hinder or defraud
Intent is the key element in any fraudulent conveyance action. If a creditor is unable to prove
that the transferor made the conveyance with an intent to delay or hinder or defraud a creditor,
the action should fail no matter how prejudicial the transfer.8
Where no consideration is given for the transfer, the court only requires the plaintiff creditor to
prove fraudulent intent on the part of the transferor alone. However, where valuable
consideration has been given for the transfer, the plaintiff creditor has to prove fraudulent intent
on the part of both the transferor and transferee.9
6
Jaston & Co. Ltd. v. McCarthy (1996) 41 C.B.R. (3d) 212, 1996 CanLII 2982 (B.C.S.C.)
5 C.B.R. (4th) 198, 1998 CanLII 15139 (B.C.S.C.) (“Hossay”). See also Antrobus v. Antrobus, 2009 BCSC 1341
8
See, for example, Devlin v. Hean, 41 B.C.L.R. 206, 1982 CanLII 665 (B.C.S.C.)
9
Meeker Cedar Products Ltd. v. Edge, (1968), 68 D.L.R. (2d) 294 (B.C.C.A.), aff'd at (1968), 1 D.L.R. (3d) 240
(S.C.C.)
7
5
Since direct evidence of an intent to defraud creditors is rarely available, the court generally
relies on circumstantial evidence, often referred to as the “badges of fraud.” Circumstantial
evidence may include the adequacy of consideration, whether the transaction renders the
transferor insolvent, and whether the transferor retains possession of the property. 10
(c)
Deprivation of just and lawful remedies
The plaintiff creditor must show that it was deprived of its just and lawful remedies as a result of
the transfer. Typically, deprivation will be shown if the plaintiff was deprived of the opportunity
to satisfy its pecuniary judgment or anticipated judgment against the property.
B.
The Abakhan Case
1.
The Facts
Mr. Botham (“Botham”) was the principal of Botham Holdings Ltd. (“BHL”), a real estate
company wholly owned by Botham and his family trust. BHL had been incorporated many years
earlier and had a substantial value. In 2004, BHL sold some of its real estate for a significant
profit, incurring a large amount of capital gains tax.
In 2005, BHL became a general partner in a new auto leasing business called “JW Auto Group.”
The new investment had the potential for a significant tax benefit, enabling BHL to obtain
refunds of the capital gains tax which it had previously paid. However, if BHL became the
general partner, its assets would be available to the claims of the creditors of JW Auto Group.
In order to protect BHL’s assets and to place BHL in a position to qualify for the tax benefits,
Botham transferred BHL’s assets to Braydon Investments Ltd. (“Braydon”) through a complex
rollover transaction which effectively stripped the exigible assets from BHL.
By May 2007, both the partnership and BHL were assigned into bankruptcy, with creditors’
claims exceeding $20 million as of the date of trial. Abakhan & Associates Inc., the trustee in
bankruptcy for BHL (the “Trustee”), sought an order declaring that the rollover transaction was
void as a fraudulent conveyance. Abakhan was successful at trial, and the matter was
appealed by Braydon to the B.C. Court of Appeal.
On appeal, the Defendants argued that:
10
(a)
in order to trigger the provisions of the FCA, a fraudulent intention needed to be
shown, as the language of the FCA states that a disposition is void if made to
defeat creditors by “collusion, guile, malice or fraud.” Here Botham had no mala
fides – his intent was an honest and prudent one, in that he wanted to take
advantage of the tax benefits of the rollover without unduly risking assets;
(b)
Botham could have incorporated a new company as general partner of JW Auto
Group without incurring any liability under the FCA. Consequently, what Botham
Twyne’s Case, (1601), 76 E.R. 809 (Eng K.B.)
6
did was no more “fraudulent” than what is routinely done by persons seeking to
limit personal liability by incorporation;
(c)
the rollover was for valuable consideration, and while the nature of BHL’s assets
changed as a result of the transfer, its net financial position did not; and
(d)
no creditor relied on the asset holdings of BHL in deciding to advance credit and
none were prejudiced by the asset transfer.
The Trustee’s position in the appeal was as follows:
(a)
the intent to delay, hinder and defraud creditors was evident. Not only were
there documents in which BHL’s solicitors referred to “creditor proofing,” but
Botham had conceded in his examination for discovery that the objectives of the
transfer were essentially twofold: to ensure that the assets of BHL would not be
exposed to the risks of the new leasing venture and to take advantage of the tax
benefits;
(b)
the only intent necessary to contravene the FCA is an intent to put assets out of
the reach of one’s creditors. No mala fides need be shown;
(c)
the transfer had not been for good or valuable consideration. The rollover placed
all of BHL’s real estate assets in Braydon’s hands and left BHL with only
preferred shares. The effect of the transfer was to put the real assets of BHL out
of the reach of creditors, as it is far more difficult to execute against preferred
shares than against real estate. Accordingly, creditors were prejudiced by the
transfer; and
(d)
it would have been lawful for BHL to limit liability by incorporating a new
company, but it chose not to proceed in that manner.
2.
The Decision
The court’s decision can be summarized as follows:
(a)
a dishonest intent, or mala fides, is not necessary to void a transaction under the
FCA. The only intent necessary is the intent to “put one’s assets out of the reach
of one’s creditors.” No further dishonest or morally blameworthy intent is
required;
(b)
intent is a state of mind and question of fact. There is usually no direct evidence
of intent, so inferences generally need to be drawn from the grantor’s conduct,
the effect of the transfer and other circumstances. However, in this case,
Botham had given direct evidence as to his intent;
(c)
while BHL may have had other legitimate business objectives, it had engaged in
a fraudulent conveyance by choosing not to incorporate a new company and
instead, transferring its assets to Braydon;
(d)
no decision needed to be made on whether good consideration for the transfer
had been given, since Braydon could not establish that the transfer was made in
7
good faith to a person who had no notice or knowledge of the fraud. Since
Botham controlled both BHL and Braydon, his knowledge and intent to delay and
hinder creditors was imparted to both corporations.
The immediate reaction to the Abakhan case was that the decision changed the law with
respect to fraudulent conveyances in British Columbia. There is however little that is new in the
decision. There have been numerous cases interpreting the FCA which have stipulated that the
only intent necessary to engage the FCA is the intent to put assets out of the reach of creditors.
It is well established that it is sufficient to fix transferors with liability under the FCA if they
foresee potential creditors who might be defeated by the conveyance. The FCA is couched in
general terms and will be interpreted liberally. At best, it might be said that the Court clarified
that there is no need for a dishonest intent to be shown although that conclusion has been
previously canvassed and established in prior case authorities.
Following the decision in Abakhan, the language of s. 1 of the FCA was amended to delete the
words “by collusion, guile, malice or fraud” which had effectively been judicially read out of the
statute. This amendment received Royal Assent on March 29, 2012.
Abakhan has raised awareness in the legal and accounting professions of the potential
problems that may arise from the application of this diminutive statute. The decision should also
raise concerns for registered charities, specifically those that have, in the past, made transfers
of assets to parallel foundations for the purpose of “asset protection”.
These issues and the associated risks are discussed in greater detail in Part F of this paper.
C.
Utilizing the FCA with Other Statutes
The FCA may apply to inter vivos dispositions that have the effect of defeating or hindering
claims made against the transferor’s estate pursuant to the B.C. Family Relations Act (the
“FRA”)11 and the Wills Variation Act (the “WVA”). A number of cases need to be considered in
this context as the case law in this area continues to evolve.
(a)
The Hossay v. Newman Line of Cases
In the 1998 decision of Hossay v. Newman, the plaintiff was the adult son of a testator who,
shortly before his death, placed his most significant assets into joint tenancy with one of the
defendants. The plaintiff asserted that he had a claim against the estate under the WVA and
that by virtue of that claim, he came within the definition of “creditors and others’’ under the
FCA. This, he claimed, provided him with a foundation to attack his father’s transfers as
fraudulent conveyances, and claw the assets back into the estate.
Mr. Justice Mackenzie held that the plaintiff did not fall under the s. 1 definition of “creditors and
others” because his interest in the testator’s estate arose subsequent to the testator’s death.
Since he had no legal or equitable claim that arose during the testator’s lifetime, he could not
successfully bring an FCA claim.
11
R.S.B.C. 1996, c. 128
8
Hossay was affirmed in Chowdhury v. Argenti Estate.12 In Chowdhury, the plaintiff had a secret
relationship with the deceased. The plaintiff sought to impeach the testator’s transfer of propery
to his daughter on the basis of the FCA. Allan J. cited Hossay and held that since there was no
constructive trust during the lifetime of the testator and therefore no claim during the lifetime of
the testator, the plaintiff had no basis for a claim under the FCA.
In Mordo v. Nitting et al., the plaintiff’s son sought reapportionment of dispositions to his sister
on the death of their mother.13 The mother wished to transfer all her assets to her daughter.
The plaintiff sought reapportionment on moral grounds. Wedge J. affirmed the holding in
Hossay, but as authority preventing reapportionment on moral grounds:
The issue of arranging one’s affairs to avoid possible claims under the WVA in
circumstances such as these was decided many years ago by this court in Hossay v.
Newman… Mr. Justice MacKenzie (as he then was) held that the claim of an
independent adult child under the WVA on moral grounds is not a claim by “creditors or
others” under the Fraudulent Conveyances Act… Despite the passage of eighteen years
since Hossay, the legislature has not seen it fit to pass legislation or amend existing
legislation to prevent the avoidance of claims under the WVA.
(b)
The Stone v. Stone Line of Cases
The Hossay case must be contrasted with the Ontario decision in Stone v. Stone.14
Mrs. and Mrs. Stone were married for 24 years and each had children from previous marriages.
When Mr. Stone was diagnosed with lung cancer, he anticipated that on his death, half of his
assets would pass to his wife under the provisions of Ontario’s Family Law Act. Because his
wife was also in poor health, he feared that his assets would then pass to his stepchildren.
Prior to his death, Mr. Stone transferred virtually all of his assets to his children. After Mr.
Stone’s death, Mrs. Stone brought an application to set aside the transfer. Mrs. Stone claimed
that she fell within the meaning of the words “creditors and others” and thus, had standing to
bring an action under the Ontario FCA.
At trial, the court found in favour of Mrs. Stone. On appeal to the Ontario Court of Appeal, the
Court upheld the trial judgment. In particular, the Appellate Court found that:
12
(a)
to qualify as a “creditor or other,” Mrs. Stone had to have an existing claim
against her husband at the time of the impugned conveyances;
(b)
section 5(3) of the Ontario Family Law Act states that when spouses are
cohabiting and there is a serious danger that one spouse may improvidently
deplete his or her net family property, the other spouse may make application to
have the family property divided as if on separation. If Mrs. Stone had exercised
2007 BCSC 1207
2006 BCSC 1761 (“Mordo”)
14
(2001), 55 O.R. (3d) 491, 2001 CanLII 24110 (C.A.) (“Stone”)
13
9
that remedy she would have been a “creditor or other” within the meaning of the
fraudulent conveyance legislation.
(c)
Mr. Stone could not, by the deliberate non-disclosure of his actions, deprive Mrs.
Stone of her ability to establish the legal status of “creditor or other”. Mr. Stone
could not be allowed to do through non-disclosure that which he could not have
done if disclosure had been made.
Stone was considered by the Ontario Superior court in Robins v. Robins Estate.15 In this case,
the plaintiff alleged that a share sale undertaken by her husband during his life was a fraudulent
conveyance. The couple had married in 1991, when he was 72 and she was 48. Two days
before their marriage, Mr. Robins sold $1.6 million of shares he owned in a shopping plaza to
his son. The consideration for this sale was annual instalment payments of $100,000 payable
by the son to this father. Any balance owing on Mr. Robin’s death was to be forgiven under
both the terms of the agreement with his son and by the will.
Mrs. Robins did not bring an action seeking an equalization of property. Instead, she argued
that she was a creditor within the meaning of the Ontario FCA because of her husband’s
obligation to provide spousal support under the Family Law Act.
Mrs. Robins’ claim was dismissed and Stone was distinguished on the basis that Mrs. Robins
was not seeking an equalization of property. The share sale involved an asset which had been
owned by her husband well before their marriage and the income from the conveyance of the
shares supported Mr. and Mrs. Robins. Additionally, if Mrs. Robins had brought an action to set
aside the share sale and obtain support, she would have been entitled to minimal support and
the action to set aside the sale would not have succeeded. Unlike the facts in Stone, this
transaction was a carefully considered plan initiated by Mr. Robins, his accountant and his
lawyer to provide him with stable income through the balance of his life. The only similarity in
the estate plans of Stone and Robins was the desire to keep the assets in the family, and this, in
itself, did not render the transaction void. Finally, although not determinative, the Court found
that the transaction was not a fraudulent conveyance in any event.
Several points arise out of the these decisions:
(a)
15
Stone is not at odds with Hossay. Mrs. Stone’s claim against her husband
existed during her husband’s lifetime, due to the Ontario Family Law Act. In
contrast, the plaintiff’s claim in Hossay only arose upon the death of the testator,
due to the WVA. The plaintiff in Stone also contrasts with the Plaintiff in Robins,
whose ability to claim under the Family Law Act in Ontario was found to be too
tenuous in the circumstances to allow her to be a “creditor or other.”;
2003 CanLII 2225, 2003 CarswellOnt 1272 (Ont. S.C.J.) (“Robins”). For other Ontario cases that follow Stone, also
see Jonas v. Jonas, 2002 CarswellOnt 2590 (Ont. S.C.J.), Campeau v. Campeau, [2005] W.D.F.L. 2396, 16 R.F.L.
(6th) 10 (Ont. S.C.J.), and Changoo v. Changoo Estate, [2009] W.D.F.L. 992, 2008 CarswellOnt 3839 (Ont. S.C.J.).
10
D.
(b)
the B.C. Family Relations Act does not have an equivalent provision to section
5(3) of the Ontario Family Law Act;
(c)
the establishment of a claim that existed during the lifetime of the testator is not
sufficient, in and of itself, to successfully attack an inter vivos transfer. The
claimant must still show the necessary intent to delay creditors in order to
succeed in setting aside the transfers;
(d)
the Stone decision does not provide any basis for an adult child to qualify as a
“creditor or other” unless the child is unable to withdraw from the charge of the
testator due to illness, disability, or other cause, and falls under the protective
provisions of s. 87 of the FRA.
Subsequent Court Decisions
Courts in both B.C. and Ontario have analyzed and commented on the decision in Abakhan,
adding to the jurisprudence.
1.
Mawdsley v. Meshen et al.
Joan Meshen was a woman of considerable wealth. She had been married twice and had three
children from her two former marriages. She inherited a number of companies after the death of
her second husband. Her three children worked in the family businesses.
Shortly before her death, she set into motion a series of transactions by which she transferred
certain assets into joint tenancy and divested herself of her remaining assets by way of outright
gifts and an inter vivos trust, the implementation of which effectively impoverished her estate.
By those dispositions, as well as a fresh Will made at the same time, Joan left nothing to the
plaintiff Dennis Mawdsley, her common law husband of 18 years.
During her lifetime, Joan had a number of financial advisors with whom she met to discuss
estate planning issues. Dennis was involved in a number of these meetings. The
establishment of an inter vivos trust was discussed openly before Dennis. The benefits of the
trust were to defer and control distributions of Joan’s assets to her children and protect against
claims made by the children’s spouses. There was also a savings of probate fees.
After Joan’s death, Dennis alleged that her pre-death movement of assets was carried out as
part of a deliberate scheme to deprive him of his lawful remedies contrary to the FCA. The relief
that he sought was two-fold. First, he sought orders aimed at unravelling the impugned
transactions primarily on the basis that they amounted to fraudulent conveyances, resulting in
the return of those assets to Joan’s estate. Next, he sought a variation of Joan’s will pursuant to
the WVA. He also asserted claims founded on unjust enrichment and constructive trust,
express trust and resulting trust.
11
At trial16, Joan’s financial advisors testified that the impetus behind Joan’s use of a trust was not
to protect her assets from a WVA claim by Dennis, that Joan was always adamant that her
assets were separate from those of Dennis, and that they had an agreement that their assets
were their own and would be kept separate. Additionally, the advisors testified that Dennis had
never raised an issue at any of the meetings that he attended with respect to the planning that
was taking place.
Madam Justice Ballance found that the financial advisors were credible witnesses and she
accepted their testimony. She found Dennis to be less than credible and did not accept his
testimony where it conflicted with other evidence. She found that Dennis knew that Joan did not
intend to give him any of her assets on her death. Her decision on the fraudulent conveyance
argument posed by Dennis was, in summary:
(a)
in order to set aside any of the challenged dispositions as a fraudulent
conveyance, Dennis was required to establish: (1) his standing as a “creditor or
other”; (2) Joan made the disposition in question with the intent to delay, hinder
or defraud him; and (3) he had been deprived of his just and lawful remedies;
(b)
the Hossay and Mordo cases indicated that the existence of a legal or equitable
claim against Joan during her lifetime was an essential threshold to Dennis’
establishing standing as a “creditor or other” under the FCA. She concluded that
the issue of whether Dennis had standing to invoke the FCA was “nuanced and
complex”;
(c)
Ballance J. avoided the complex and nuanced issue of standing by concluding
that Joan did not possess the fraudulent intent of the kind required under the
FCA when she carried out the impugned dispositions. She found that Joan and
Dennis did have an agreement that their assets would be kept separate from
each other, and noted that Joan was not named as a beneficiary in Dennis’ will,
nor did she share in the proceeds of the sale of his condo. Additionally, she
found that the threat of a WVA or other claim by Dennis did not inform or in any
way influence Joan’s decision to implement the Joan Meshen Trust or her
treatment of the remaining assets. Since Joan did not possess the intention
required under the FCA to void any one or more of the dispositions condemned
by Dennis, his claim under the FCA was dismissed.
Ballance J.’s decision in Mawdsley was appealed to the B.C. Court of Appeal. The Appellate
decision of the Mawdsley case was handed down February 28, 2012. The appeal was brought
by Dennis on several grounds, all of which were all dismissed. The decision highlights two
critical points, which are:
(a)
A fraudulent conveyance requires intent
Dennis argued that it is no longer necessary to prove an intention to hinder, delay or defraud
creditors, so long as that is the effect of the transaction. He asserted that that Abakhan had
16
2010 BCSC 1099
12
removed the requirement of intention completely. The Court of Appeal did not accept this
argument.
The Court held that intention to hinder, delay or defeat creditors is always required in a
fraudulent conveyance scenario. In some cases, that intention may be inferred from the effect
of the transaction and a presumption may arise in some circumstances to that effect. There is
no rule of law, however, that an intention to defeat creditors must be inferred from the effect of
an impugned transaction – that would depend on the circumstances and the evidence. The
Court did not explicitly state in what circumstances such an inference would arise, but
presumably this would occur when a number of “badges of fraud” are present.
(b)
A claimant whose interest in property vests after death is not a “creditor or other”
under the FCA
The second main point is a reconsideration of the Hossay principle: whether a claimant who
had no claim against a person in that person’s lifetime may claim to be a “creditor or other”
within the meaning of the FCA.
The Court of Appeal noted that no case has gone so far as to suggest that the phrase “creditors
and others” in the FCA included a person who has no claim during the transferor’s lifetime. The
implications of interpreting the phrase in this way would be significant, as spouses or children
would be entitled to challenge every disposition of property made by their spouse or parent
during his or her lifetime. The Court concluded that the decision in Hossay should not be
disturbed.
2.
Duca Financial Services Credit Union Ltd. v. Bozzo.17
The Abakhan decision was recently considered by the Ontario Superior Court. In Duca, the
defendant Bozzo and his wife incorporated Abbas Group Inc. At the time of incorporation,
Bozzo owned 51 common shares and his wife 49 shares. In 1988, Mr. Bozzo executed a trust
declaration that declared that he held his 51 shares in the corporation in trust for his wife.
Bozzo thereafter embarked on a number of real estate ventures and obtained a loan from a
credit union for an associated corporation, Joco Investment Inc. The loan went into default and
in 1994, the credit union petitioned Bozzo into bankruptcy. The credit union then attacked the
defendant’s trust declaration on the basis that it was invalid and unenforceable and a fraudulent
conveyance under s. 2 of the Ontario FCA.
At trial, the court found that despite suspicious circumstances surrounding the creation of the
trust, there was a true intent on the part of Mr. Bozzo to establish the trust, and ruled that the
1988 trust declaration was not a fraudulent conveyance. Referring specifically to Abakhan, the
court then commented in para. 65:
“There is also [law] to suggest that an honest intent to remove assets from the reach of
future creditors through a conveyance of property may be void under s. 2 of the FCA.
17
2010 ONSC 3104, reversed 2011 ONCA 455 (“Duca”).
13
However, as I have stated above, in my view, the law allows a person to rearrange his
affairs to isolate his personal assets from future creditors, as opposed to present
creditors.” [emphasis added]
On appeal, the decision of the lower court was reversed on the basis that Bozzo had never
intended to create a valid trust: it was a sham. The Abakhan decision was not considered in the
appeal.
While some practitioners may try to take some comfort from the words of the trial judge in Duca,
there is currently no doubt that in British Columbia, if it can be shown that a transferor had an
intent to move property out of the reach of potential creditors, the provisions of the FCA will be
triggered.
E.
Application of Abakhan to transfers by Registered Charities
The decision in Abakhan raises a number of concerns for transfers by registered charities,
particularly those charities that utilize a parallel foundation to shelter assets against the potential
liabilities of the operating entity.
By directing that the language requiring fraudulent or dishonest intent no longer be given effect,
the court reaffirmed existing case law and unmistakably emphasized that despite the language
of the FCA (which has since been modified), fraudulent intent need not be established in order
to set aside a transfer. Additionally, Abakhan stands for the proposition that it is irrelevant
whether there were other valid and prudent reasons for the transfer of assets. If an intention to
protect assets against creditors or future liabilities was one of the intentions behind the transfer,
it is subject to challenge under the FCA.
Accordingly, a transfer of assets by a registered charity to a parallel foundation (or to another
qualified donee) could potentially be set aside if there was an intention on the part of the
transferring charity to put assets out of reach of creditors or others. Such an intention will
trigger the FCA even where it was only one motivation in a constellation of reasons for making
the transfer. Put simply, if asset protection was among the reasons for a transfer, the transfer is
at risk of being set aside if challenged.
Although the subsequent decision of the B.C. Court of Appeal in Mawdsley highlighted the point
made in Abakhan that a positive intention is still required to trigger the provisions of the FCA (as
opposed to inferring intent from mere effect), the decision in Abakhan leaves the issue of future
creditors and others and foreseeability uncertain.
The case law interpreting the FCA holds that the phrase “creditors and others” includes future
creditors. Unfortunately the Abakhan decision does not address the issue of where a line can
be drawn with respect to future creditors (if anywhere). It is clear that if a creditor or class of
creditors are foreseeable at the time of a transfer, such creditors or claimants will have standing
to challenge that transfer. But what if the future creditors are not “foreseeable” at the time of the
transfer? Can any future creditor or other claimant attach a transaction not matter how distant
in the past it occurred?
14
The decision in Abakhan says nothing which limits the use of the FCA to future creditors on the
basis of foreseeability. This is not surprising - given the facts in Abakhan this issue did not need
to be specifically addressed. Prior case law does suggest that some element of foreseeability
should be present18. The Duca trial decision also demonstrates that courts will be much more
reluctant to apply the Fraudulent Conveyance statutes in circumstances where the complaining
creditors were not on the transferor’s radar at the time of the transaction. That being said, the
broad policy statements made in Abakhan leave open the possibility that a creditor or claimant
which, at the time of a transaction is so distant as to be unforeseeable may use the FCA to
challenge and try to set aside the transaction. It might be possible for an aggrieved party to
challenge and attempt to have set aside a transfer of assets to a parallel foundation even
though at the time of the transfer the claimant had suffered no loss and had no basis for a claim
against the operating charity.
The case law which has been canvassed and clarified in Abakhan may cause particular concern
for those operating charities that have parallel foundations, particularly where assets have been
transferred from the operating charity to the parallel foundation in the past. In many cases, a
foundation is created in parallel to an operating charity for the primary reason of protecting key
assets against the future potential liabilities of the operating charity. This intention is very likely
sufficient to allow the application of the FCA by future creditors and others of the operating
charity to “claw back” assets transferred to the parallel foundation.
It should be noted that it is unlikely that many transfers between charities would be able to rely
on the protection afforded by section 2 of the FCA which provides an exemption where a
transfer is made for good consideration, in good faith and where the receiving party has no
knowledge or collusion of the transferor’s intent to defeat, delay or hinder creditors or others.
There are two reasons for this. The first is that the governance of parallel foundations typically
overlaps to some extent with that of the operating charity. With the same persons involved on
both sides of the transaction, it would be relatively easy for a court to find collusion between the
two entities and correspondingly difficult for the foundation to effective argue a lack of
knowledge of the operating charity’s intent. Furthermore, since inter-charity gifts and other
transfers between charities are typically without consideration, it would be unlikely for this
exemption to apply in the charitable context.
Lastly, it must be noted that the creditors of an operating charity will only be able to attack a
transfer to a parallel foundation under the FCA if a transfer between the two entities has actually
taken place. If all the assets in the parallel foundation were acquired directly (through purchase
or donation) there is no “transfer” of property for the creditor to attack.
Put another way, creditors and others of the operating charity will have standing to invoke the
provisions of the FCA as a means of obtaining access to assets of the parallel foundations only
if two criteria are met:
18
See Newlands Sawmills Ltd. v. Bateman, 31 B.C.R. 351, [1922] 3 W.W.R. 649, 70 D.L.R. 165 (C.A.), appl’d
Canadian Imperial Bank of Commerce v. Boukalis, (1987), 11 B.C.L.R. (2d) 190 (C.A.), at p. 196; Bank of Montreal v.
Kelliher (1980), 36 C.B.R. ) (N.S.) 205 (B.C.S.C.) at p. 210.
15
1.
assets are transferred from the operating charity to the parallel foundation in whole
or in part for the purpose of protecting them against claims by present or future
creditors; and
2.
the operating charity subsequently has creditors or claimants who cannot satisfy their
claims against the operating charity by the assets remaining in the operating charity.
Where some assets are transferred from the operating charity and others are acquired directly,
those that were transferred would certainly be open to creditors of the operating charity using
the provisions of the FCA. However, where the transferred assets have been dissipated,
leaving the directly acquired assets untouched, it is possible that the court may allow the
creditor to attach the directly acquired assets in place of those that were dissipated.
Lastly, Abakhan and subsequent cases highlight that an intention to defeat, hinder or delay
creditors or others may be inferred from the fact that a transfer had the effect of putting assets
out of reach of creditors. If a transfer has the effect of hindering or delaying legitimate creditors,
then the court may presume an intent to do so, which presumption is rebuttable by the evidence
of the transferor charity. However, mere effect alone is insufficient, as the decision in Mawdsley
demonstrates. It is likely, in light of Mawdsley, that courts will be reluctant to jump to a
conclusion regarding intent based only on the effect of a transfer, preferring instead to look at
the totality of the facts and circumstances surrounding a transfer in an effort to determine the
transferor’s actual intent.
F.
Practical Considerations for Registered Charities
Due to the issues discussed above, it may be prudent for any operating charity with the potential
for future liabilities that is considering the purchase (or donation) of a significant asset to create
a separate parallel foundation as a vehicle to directly acquire (or receive) the asset. This
eliminates the transfer which is the trigger for the application of the FCA.
The distinction between transferring assets from the operating charity to the parallel foundation
and directly acquiring the same assets in the parallel foundation is significant. While many
operating charities have the potential for significant liability (in tort, in negligence, under
contracts and under various applicable statutes), parallel foundations rarely operate in a manner
that creates a high risk of organizational liability. Although a person may have a claim against
the operating charity, it is unlikely that he or she will have a direct claim against the parallel
foundation.
If an operating charity already has a parallel foundation, then most, if not all, donations and
acquisitions should be directly made to the foundation. If an operating charity is considering the
acquisition of a significant asset, it may be prudent to create a parallel foundation first to acquire
that asset directly, eliminating the need for a transfer which could later be attacked using the
FCA.
Furthermore, registered charities and their advisors should be very careful, in light of the
Abakhan decision, about using the term “asset protection” in connection with a transfer of
assets, whether to a parallel foundation or as an inter-charity gift. Abakhan stands for the
proposition that any intention to remove assets from the reach of present or future creditors will
16
be grounds for setting aside the transfer, even where asset protection was a secondary
motivation. Charities should carefully consider how they document these decisions, as well as
their conversations with advisors.
Another way to minimize risk of having a transfer set aside under the FCA is to demonstrate that
there was no intent in making the transaction to defeat, hinder or delay the rights of creditors.
An effective way to accomplish this is to provide evidence that the transferor has made
adequate provision for future potential liabilities. If a charity can demonstrate that it consciously
and thoughtfully calculated its potential liabilities and retained sufficient assets to provide for
them, this provides strong evidence of a lack of intent to defeat, hinder or delay creditors. A
charity in such a situation can, if challenged under the FCA, point out that, on the contrary, it
has made reasonable efforts to consider its unknown creditors and liabilities and to provide for
them. The effective use of insurance to provide for potential liabilities may also be effective
evidence of a lack of intent to hinder creditors.
For registered charities incorporated in British Columbia, and perhaps also those operating in
British Columbia, the provisions of the Charitable Purposes Preservation Act19 (the “CPPA”)
should be considered. The CPPA was introduced in British Columbia in 2004 primarily in
reaction to the uncertainty created by the various decisions in the Christian Brothers litigation
related to the Mount Cashel orphanage in Newfoundland20. This case and the CCPA which was
enacted in response to it, suggest that property which is:
(a)
gifted to a charity to be used exclusively for a specific charitable purpose; and
(b)
which must be kept and administered by the charity separate from its other
property
cannot be seized or attached for a debt of the charity except a debt or liability that relates to the
specified purpose. This principle may be useful for registered charities seeking to minimize risk
under the FCA and deeds of gift in British Columbia should always be prepared with the
provisions of the CPPA in mind.
19
20
S.B.C. 2004, c. 59.
see Christian Brothers of Ireland in Canada (Re), (2000), 47 O.R. (3d) 674 (C.A.).
17
G.
Inter-Charity Transfer Rules
In the federal budget of 2010 (the “Budget”), the Minister of Finance introduced provisions that
apply to gifts between charities, expanding the existing anti-avoidance rule and adding a new
non-arm’s-length expenditure rule.
1.
Revised anti-avoidance rule
The anti-avoidance rule relating to inter-charity transfers is found in section 149.1(4.1) of the
Income Tax Act (Canada) (the “ITA”). It allows the Minister of Finance to revoke registration in
certain circumstances described therein. Prior to the Budget, sub-section 149.1(4.1)(a) read as
follows:
“4.1 Revocation of registration of registered charity
The Minister may, in the manner described in section 168, revoke the registration:
(a) of a registered charity, if the registered charity has made a gift to another
registered charity, and it can reasonably be considered that one of the main
purposes of making the gift was to unduly the expenditure of amounts on
charitable activities;
(emphasis added)
Sub-section (b) allowed the ministry to revoke the registration of the charity receiving the gift if it
could be considered that the recipient was acting in concert with the transferring charity.
As a result of the Budget, sub-sections (a) and (b) were revised to read
(a) of a registered charity, if it has entered into a transaction (including a gift to another
registered charity) and it may reasonably be considered that a purpose of the transaction
was to avoid or unduly delay the expenditure of amounts on charitable activities;
(b) of a registered charity, if it may reasonably be considered that a purpose of entering
into a transaction (including the acceptance of a gift) with another registered charity to
which paragraph (a) applies was to assist the other registered charity in avoiding or
unduly delaying the expenditure of amounts on charitable activities;
(emphasis added)
These revisions expanded the anti-avoidance rules in several ways. The rule could now be
applied to any transaction (not just gifts or transfers). The term “transaction” is very broad,
including almost any dealing or instrument into which a charity could enter. Furthermore, the
rule was no longer limited to transactions between two charities; sub-section (a) could be read
in such a way as to apply to any transaction in which a charity was a participant, including,
potentially, a transaction between a charity and a donor.
18
The rule was also effectively broadened by substituting “a purpose” in place of the previous “one
of the main purposes”. It was now sufficient to revoke registration if an intent to delay
expenditure on charitable activities was even a minor or ancillary purpose.
One of the most immediate concerns raised by registered charities was that the expanded rule
would, on its face, appear to apply to donations of funds subject to a restriction on the
expenditure of capital (for example, an endowment). This action, by definition, has the effect of
delaying (if not prohibiting in perpetuity) the expenditure of the capital on charitable activities.
Although the Charities Directorate has commented that the expanded provision is not intended
to be applied to revoke charities for receiving endowed gifts, the statutory language remains
unchanged and charities remain concerned that, the present administrative position
notwithstanding, the expanded rule is overly broad and has the potential to be applied in a wide
variety of circumstances.
2.
Non-arm’s-length expenditure rule
In addition to expanding the anti-avoidance rule, the Budget added a new rule which applied to
transfers between registered charities that are not at “arm’s-length” with each other. A new
paragraph (d) was added to section 149.1(4.1) which reads as follows:
(d) of a registered charity, if it has in a taxation year received a gift of property (other than
a designated gift) from another registered charity with which it does not deal at arm's
length and it has expended, before the end of the next taxation year, in addition to its
disbursement quota for each of those taxation years, an amount that is less than the fair
market value of the property, on charitable activities carried on by it or by way of gifts
made to qualified donees with which it deals at arm's length;
The effect of this new rule was to require charities which had received an inter-charity transfer
from a non-arm’s-length charity (including, presumably, a parallel foundation or related charity)
to expend, in addition to its normal disbursement quota, an amount equal to the gift within the
immediate or the subsequent tax year. The additional amount is required to be spent on the
recipient charity’s charitable activities or on gifts to arm’s-length qualified donees. Failure to do
expend the transferred funds as required could result in revocation.
To determine which charities are not arm’s-length with one another, one should have reference
to sections 251 and 256 of the ITA, which describe a complex set of rules. Essentially, there
are two tests by which the ITA may deem two organizations (including two registered charities)
to be “not at arm’s-length” with one another. The first is if the two entities are controlled by the
same person or group of persons. If two registered charities have a significant overlap in their
directors or voting members, they will likely be deemed to be not at arm’s-length. The second
test is if the two organizations are in fact operating not at arm’s-length. This second test is
something of a catch-all which could be applied if two charities work closely with each other
over time, cooperate on major undertakings or otherwise are subject to circumstances that
suggests that they may be linked.
This new rule is again cause for concern for registered charities that operate with the help of a
parallel foundation. It is very likely that an operating charity and its parallel foundation will be
19
considered to be not at arm’s-length with each other, if not on the control test, then certainly by
the circumstances test. On the face of the rule, the operating charity would be required to
expend on its charitable activities 100% of all transfers from the parallel foundation within the
same or the subsequent tax year or risk revocation of its registration. While this requirement
may not adversely affect all operating charities, it seemingly limits the ability of the arrangement
to provide “patient capital”, or funds to be used over a number of years, to the operating charity.
It may be possible for a transferor charity to “designate” a gift which exempts the non arm’s
length recipient charity from the expenditure requirement. The practical reality is that the
transferor charity will need to be in a disbursement quota “excess” position to be able to so
designate a gift which may not be practical in many situations.
H.
Conclusion
Advisors should be aware of the issues raised by the case law concerning fraudulent
conveyances and the potential application to transfers between registered charities, both
“related” and otherwise. Care should be taken in discussing the reasons for such transfers and
for diligently creating a record for future substantiation in the event of a claim.