Court File and Parties

Peterborough Court File No.: CV-15-0071 Date: 20181221 Ontario Superior Court of Justice

In the Matter of the Estate of DAVID RONALD BARRY COTNAM, deceased, late of the City of Peterborough, County of Peterborough.

Between: Faye Marlene Cotnam, personally and as Litigation Guardian for Shelly Ann Marie Cotnam, Applicants – and – Mabel Ann Rousseau, Respondent

Counsel: Jeffrey D. Ayotte, for the Applicants John E. McGarrity, for the Respondent

Heard: In Writing

Endorsement

DE SA J.:

[1] The Applicant seeks a variation of my initial order in Cotnam v. Rousseau, 2018 ONSC 216. Paragraph 60 of my decision requires that one half of the preretirement death benefit be assigned to Shelly Ann Marie Cotnam (“Shelly” or the “Applicant”). I anticipated that this transfer would be possible on a tax-free basis, the amounts to be drawn gradually by Shelly in accordance with the normal income tax rules.

[2] While the rollover appears possible, the assignment of the Registered Retirement Savings Plan (“RRSP”) raises significant issues for Shelly’s benefits, namely:

(a) Shelly is in receipt of disability benefits from the federal government. A rollover of $185,000 into an RRSP would cause Shelly to become ineligible for disability benefits. (b) There is a $200,000 lifetime Registered Disability Savings Plan (“RDSP”) contribution limit. Shelly currently has about $45,000 in the RDSP, so if Mabel Ann Rousseau (the “Respondent”) were to transfer the funds, Shelly will exceed her lifetime contribution limit. (c) In addition, the government has a grant program associated with the RDSP plan which provides that Shelly can receive up to $3,500 per year in grants from the federal government based upon annual contributions to her RDSP. If Shelly’s lifetime contribution limit is met or exceeded by the transfer of $185,000 into the RRSP Shelly will forego the future benefit of $3,500 per year in annual grants.

[3] Shelly points to paragraph 59 of my judgment which states that even if the pre-retirement death benefit was not subject to section 72(1)(g), I would have still have allocated $185,000 to Shelly from the residual assets of the Respondent. On the basis of this paragraph, Shelly proposes that I order that the sum of $185,000 be paid back into the estate for the benefit of Shelly. This proposal allows the estate to take advantage of the Henson Trust created in the Will of the deceased and will allow Shelly to maintain her disability benefits and the annual federal grant associated with contributions to her RDSP. Shelly and her brother Robert Cotnam (“Robert”) are the residual beneficiaries of the estate and Robert is prepared to forego his entitlement by way of a release of his interest in the residuary which will leave Shelly as the sole residual beneficiary.

[4] However, for the Respondent to pay the Applicant a gross sum of $185,000 would require her to withdraw approximately $260,000 from registered funds. This is obviously contrary to the intention of my decision which contemplated an equal division of the monies from the pre-retirement death benefit.

[5] In the circumstances, I am not prepared to impose the tax burden on the Respondent. The variation of my original order is sought by Shelly with a view to increasing her ultimate benefits. I see no basis to impose the costs of this request on the Respondent.

[6] However, I agree that the amounts should not be assigned to Shelly in the manner contemplated in my original order. This will unfairly interfere with Shelly’s benefits.

[7] In Ontario (Ministry of Community and Social Services, Income Maintenance Branch) v. Henson, [1987] O.J. No. 1121 (Ont. Div. Ct.), affd. Henson v. Ontario (Ministry of Community and Social Services, Income Maintenance Branch), [1989] O.J. No. 2093 (OCA) (“Henson”), a beneficiary of a trust was a “mentally handicapped” woman living in a specialized residence. She subsisted on an Ontario government allowance under the Family Benefits Act. The relevant government ministry attempted to claw back Ms. Henson’s benefit payments because her father had set up a trust for her in his will, worth $82,000.

[8] Ms. Henson’s father directed his estate trustees to “…exercise…their absolute and unfettered discretion…” to spend the funds in the trust he had set up for the benefit of his daughter. Any funds remaining after the death of the beneficiary were to be paid to a specified charity.

[9] The Divisional Court was called upon to decide whether Ms. Henson’s interest in the trust established by her father entitled the government to claw back her disability allowance. The court decided the issue in the negative. As Associate Chief Justice Frank W. Callahan, writing for the court, stated:

In our view the provision of the will, set out above, gives the trustees absolute and unfettered discretion; [Ms. Henson] could not compel the trustees to make payments to her if there were not funds available to her under the Family Benefits Act, sufficient to meet her needs. Therefore, in our view, Ms. Henson does not have a beneficial interest, as that term is used in the definition of liquid assets [in the applicable regulation under the Family Benefits Act].

[10] The Henson decision confirmed the propriety and status of Henson trusts. They have now become an established part of estates law. Their use was summarized by Justice Susan G. Himel of the Superior Court of Justice in Stoor v. Stoor Estate, 2014 ONSC 5684 as follows:

A Henson trust is an absolute discretionary trust. The trust instrument leaves the distribution of the income and capital of the trust in the absolute discretion of the trustee. The trust funds are beyond the reach of the beneficiary, who has no ability to compel the trustee to make payments to him or her: Elliott (Litigation guardian of) v. Elliott Estate (2008), 45 E.T.R. (3d) 84 (S.C.), at para. 35. The Henson trust, properly constituted, allows the beneficiary to retain entitlement to government benefits, while simultaneously deriving funds from the trust, at the trustee's discretion. The trust funds do not interfere with beneficiary's qualification for government benefits because no interest in the trust funds vests in the beneficiary. In order to prevent any such vesting, a Henson trust will include a gift over of any remainder of the trust fund capital, upon the death of the beneficiary of the life estate.

[11] There has been some judicial discussion of the purpose of a Henson trust being “…to remove the assets of the trust from the control of the beneficiary”, so that the assets cannot form part of the "income" or "assets" of the person for the purposes of qualifying for benefits under the Ontario Disability Support Program Act, 1997, S.O. 1997, c. C-25, Sched. B.; Soullière (Litigation guardian of) v. Robitaille Estate, 2014 ONSC 851, [2014] O.J. No. 639 (SCJ) at par 18 and Dillon v. Dillon, [2014] O.J. No. 1992 at para. 286. See also Borges v. Santos, 2017 ONCJ 651.

[12] I would be prepared to change the assignment to a designated trustee to manage the funds on Shelly’s behalf. If there is a way for Shelly to purchase an annuity or have a trustee otherwise manage the RRSP to avoid the impact on her benefits, and at the same time arrange for a gradual taxation of the funds as they are withdrawn, I would be prepared to make the appropriate order to facilitate this.

[13] However, if this is not possible, the monies, net of any taxes, are to be directed to the existing Henson Trust for the benefit of Shelly. Alternatively, the funds can be rolled into her RDSP to the extent there is available space.

[14] I leave it to Shelly and her family to obtain the necessary tax advice to make the decision that makes the most sense given her circumstances.

Justice C.F. de Sa Released: December 21, 2018