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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.

 

Footnotes
  1.   See Trustee Act, R.S.O. 1990, c. T.23, s. 61; Substitute Decisions Act, 1992, S.O. 1992, c. 30, s. 40.
     
  2.   Substitute Decisions Act, 1992, S.O. 1992, c. 30, s. 40(4).
     
  3.   S.O. 1992, c. 30.
     
  4.   Ibid., at s. 40(2).
     
  5.   The fee scale is set out in O. Reg. 26/95, as amended, s. 1. Pursuant to section 40(3) of the SDA, the compensation can be increased if the Public Guardian and Trustee (the “PGT”) and the guardian or attorney of the person consent in writing. The PGT can also seek court approval for increased compensation if the PGT itself is the guardian. If an attorney or guardian or property wishes to claim additional compensation than provided for in the fee scale, he may do so on a passing of accounts. The court has discretion pursuant to section 42(1) of the SDA to adjust the attorney or guardian’s compensation in accordance with the value of the services performed – see Osmulski Estate v. Osmulski Estate, 2014 ONSC 6370 at para. 20.
     
  6.   Trustee Act, R.S.O. 1990, c. T.23, s. 61(1).
     
  7.   So long as they are adults and have the capacity to consent.
     
  8.   See Trustee Act, supra at s. 23(2), which states: “Where the compensation payable to a trustee has not been fixed by the instrument creating the trust or otherwise, the judge upon the passing of the accounts of the trustee has power to fix the amount of compensation payable to the trustee and the trustee is thereupon entitled to retain out of any money held the amount so determined.”
     
  9.   Knoch, Re, 1982 CarswellOnt 622 (Ont. Surr. Ct.) at paras. 28-29.
     
  10.   Zimmerman v. McMichael Estate, 2010 ONSC 2947 at para. 75.
     
  11.   See William George King Trust (Re), 1994 CanLii 7497 (Ont. S.C.J.) at para. 12.
     
  12.   Zimmerman v. McMichael Estate, 2010 ONSC 2947 at paras. 74-75.
     
  13.   Wall v. Shaw, 2018 ONCA 929 at para. 44.
     
  14.   See Zimmerman v. McMichael Estate, 2010 ONSC 2947 at para. 115.
     
  15.   Zucker et al. v. Moore et al., 2011 ONSC 7165 (CanLII).
     
  16.   Freeman Estate, Re, 2007 CarswellOnt 5654 at paras. 43-45.
     
  17.   See Albert H. Oosterhoof, Compensation and Passing of Accounts (Paper prepared for LSUC, 2017) p. 13, s. 2.2.4.
     

Peter Askew

Peter is an associate at Wagner Sidlofsky LLP and a member of the firm’s Estate and Commercial Litigation Groups.

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This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
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