Are trustees entitled to take interim compensation?

Under Ontario law, all fiduciaries, including estate trustees, have a right to compensation for their time and efforts. This right is derived from the common law, statute,¹and the instrument creating or governing the relationship, such as a will or continuing power of attorney (as the case may be). However, the question of when a fiduciary is entitled to compensation depends on several factors. In examining this question, this blog will examine the statutory framework for compensation of attorneys and trustees, the common law rule against “pre-taking” compensation and its exceptions, and the consequences that may arise from breach of the rule.

Compensation for Attorneys

There is a statutory entitlement for interim compensation (sometimes referred to as “pre-taking”) for guardians or attorneys for property.

Subject to any provisions respecting compensation contained in a continuing power of attorney,² pursuant to the Substitute Decisions Act, 1992,³ (the “SDA”) a guardian or attorney for property may take annual compensation from the property according to a prescribed fee scale on a monthly, quarterly, or annual basis.⁴ The fee scale provides for compensation of 3 percent on capital and income receipts and disbursements, as well and three-fifths of 1 percent on the annual average value of the assets as a care and management fee.⁵ There is no statutory entitlement to interim compensation or compensation in general for guardians or attorneys of the person.

Compensation for Trustees

Conversely, while the Trustee Act provides that trustees are entitled to “such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge”,⁶there is no statutory provision for interim compensation for trustees.

General Exceptions to the Rule Against “Pre-taking” Compensation

In general, absent a statutory entitlement to do so fiduciaries are entitled to take interim compensation where:

1. the will or other instrument stipulates that the fiduciary may take interim compensation; or
2. the beneficiaries provide their consent to interim compensation.⁷

The Common Law Rule Against Pre-Taking

If the fiduciary has no statutory entitlement to interim compensation, no basis under the will or instrument to pre-take compensation, and has not received consent from the beneficiaries to pre-take, the courts have generally held that the fiduciary may not receive interim compensation and must instead wait until the court makes an order fixing the amount of compensation on a passing of accounts.⁸

The reason for the courts’ aversion to interim compensation is that it may be contrary to public policy and a breach of trust on the grounds that it places the trustee’s personal interests in conflict with his or her duties to the beneficiaries.⁹ The core of the problem is that the trustee is in effect appropriating the trust property for his or her own use by taking compensation without prior permission from the court. In addition, courts have voiced concerns that the trust or estate will ultimately lose out in situations where the trustee pre-takes excessively and becomes insolvent.¹⁰

While it has also been held that pre-taking compensation may be less costly (as it avoids incurring the costs of a passing of accounts) and may therefore be preferred where the compensation is for work already completed, the amount of compensation is reasonable, and the administration of the trust or estate is ongoing,¹¹ the rule against pre-taking has been more frequently regarded as the better view of the law.¹²

Consequences for Pre-Taking Compensation

In light of the fact that the courts will usually take a dim view of the taking of interim compensation by a fiduciary, what then are the consequences when this has occurred?

If the fiduciary pre-takes compensation without consent of the beneficiaries or authority to do so under the applicable instrument, he or she is liable to be charged with breach of trust. On a passing of accounts, the estate trustee risks court approval of a reduced amount of compensation and an order requiring repayment of the difference to the estate.¹³ In the severest cases of breach of trust, the court may require repayment of the entire pre-taken amount plus interest.¹⁴  The court may also order that the trustee be removed.¹⁵ However, the common approach by courts in cases that do not involve particularly egregious conduct on the part of the fiduciary is to deduct the interest that would have been earned on the pre-taken amount from the final order of compensation.¹⁶

The foregoing illustrates why it may make sense for corporate trustees to ensure that the order or instrument appointing them provides that they are entitled to interim compensation.¹⁷ Indeed, all fiduciaries would be well-served by informing themselves on the law in respect of pre-taking and treading carefully when taking compensation prior to passing their accounts.