(from the June 9, 1995 Sales Bulletin)
One of the most important issues surrounding your ability to make sales to a client who is investing on behalf of a trust is whether our mutual funds qualify as an eligible investment for the trust. In many cases mutual funds do not qualify as authorized investments for trusts. This bulletin will outline the rules governing investments for trusts.
A trust can be created by a trust agreement or under the terms of a will. A trust can also arise when a person is responsible for administering property for the benefit of another person, such as when an individual is appointed as "committee" of the affairs of a mentally incompetent person. The trustee is not assumed to have powers to invest the trust assets in any manner that the trustee may choose. Rather, the trustee only has the power to invest in the manner specified by the formal document that created the trust. For example: a trust document can specify that a trustee has power to invest in specific types of investments, or it may specify that a trustee has wide powers to invest in whatever investments he or she may wish to make on behalf of the trust. In some cases, the trust document may be silent on the issue of the trustee's investment powers. If the trust document does not deal with the trustee's investment powers, the trustee will only be able to invest in accordance with the provincial trust laws - each province has legislation which specifies that certain investments are eligible investments for trusts. This legislation also usually applies to individuals acting as committees, unless the court order appointing the committee provides additional investment powers to the committee.
The Trustee Acts of Manitoba, New Brunswick, Nova Scotia and Prince Edward Island provide that a trustee may make any investments that are "reasonable and prudent". The minimum standard to which a trustee should aspire is that of a reasonable and informed person. Trustees should generally not invest in investments that have a reasonable chance of decreasing in value. Investments in funds that are subject to regular or rapid price changes or are otherwise considered higher risk will possibly be viewed as unacceptable. Equities should not comprise a large portion of a trust, and it would be prudent to invest a fairly high percentage of trust money in investments which provide guaranteed returns and which are covered by deposit insurance. In this respect, it is worth mentioning that provinces which do specify investment restrictions for trustees generally provide that equities not exceed 30% to 35% of total trust assets as at the date of investment. As a result, Investors mutual funds can be purchased for trusts located in Manitoba, New Brunswick, Nova Scotia and Prince Edward Island, but trustees should make their choice of a particular fund with caution, keeping these guidelines in mind.
The Civil Code distinguishes between "simple administration" and "full administration" of trust property. Simple administration arises where the trustee basically acts as a caretaker of the property of another, and is more concerned with preservation of the trust funds. Such a trustee must invest only according to a list of "presumed sound investments" contained in the Civil Code. Although some types of mutual funds qualify in limited circumstances, none of the Investors mutual funds are deemed to be presumed sound investments under the Civil Code. In contrast, a trustee with full administration powers is not focused on simply the preservation of the property under administration, but has broader powers to manage the trust property to enhance its value. A trustee with full administration powers could choose an Investors mutual fund if satisfied that the investment is appropriate for the trust and in the best interests of the beneficiaries of the trust. The Civil Code also specifies that the trustee should work towards a diversified portfolio. The comments made with respect to the reasonableness of investments for trustees in Manitoba, New Brunswick and Nova Scotia would be applicable.
The Trustee Acts of Saskatchewan and Newfoundland do not permit trust monies to be invested in any mutual fund.
The Trustee Act of Ontario provides a list of qualified investments. Unit trust mutual funds definitely do not qualify. Incorporated mutual funds arguably would qualify under the Trustee Act if they met certain earnings criteria but, given that since January 1, 1995 all our mutual funds are now unit trust mutual funds, no Investors mutual funds now qualify under the Ontario Trustee Act.
Representatives sometimes inquire whether mutual funds purchased prior to the conversion of our incorporated mutual funds to unit trusts can continue to be held by trusts in Ontario. Investors Dividend Fund Ltd. was the only Investors mutual fund which qualified in the last few years (prior to being converted to a unit trust as at December 31, 1995). However, on April 7, 1994, in the case of Haslam vs Haslam, an Ontario court ruled that mutual funds are not a permissible investment under the Ontario Trustee Act, even if they achieved the earnings criteria. Our Legal Department suggests that Ontario clients who are holding mutual funds purchased prior to the Haslam decision should consult with their legal advisors for advice on whether the mutual fund should be redeemed.
The legislation in Alberta is similar to that in Ontario. Unit trust mutual funds definitely do not qualify, so that no Investors mutual funds now qualify under the Trustee Acts of Alberta . The Haslam decision is not directly applicable to Alberta . Our Legal Department advises that there is no indication that trustees in this province need to divest themselves of their Investors mutual funds if they were purchased prior to December 31, 1994.
The Trustee Act of British Columbia provides a list of qualified investments similar to those in Ontario, Alberta and Prince Edward Island. In addition, it requires that shares of companies be listed on a stock exchange in order to qualify for trust investments. Investors Dividend Fund Ltd. and Investors North American Growth Fund Ltd. were listed on the Winnipeg Stock Exchange specifically for this purpose and arguably would have qualified under the Trustee Act of British Columbia, until their conversion to unit trusts at the end of 1994. However, The Public Trustee in British Columbia has advised that is considers the principles of the Haslam decision from Ontario to be applicable in British Columbia, and that therefore it will not accept any mutual fund as a qualified investment. We understand that the Public Trustee in British Columbia has also sent letters to committees advising that they must divest themselves of mutual fund holdings within the next year, even if they were purchased prior to the Haslam decision. Our Legal Department has written to the Public Trustee of British Columbia to argue that it should permit committees to retain investments that, when purchased, were considered to be qualified investments. This would apply to investments in Investors Dividend Fund Ltd. and Investors North American Growth Fund Ltd. in B.C. prior to December 31, 1994. The Public Trustee has replied that it will not require trustee to divest their existing mutual fund investments, but that trustees may be required to justify any mutual fund investments when they are applying to have their accounts reviewed by the court. Our Legal Department advises that committees should consult with their own legal consel as to whether they should divest their existing mutual fund investments.
So, if your client is a trustee under a trust that does not give broad investment powers or specific authority to invest in a mutual fund, the Trustee will be limited by the foregoing rules and might not be able to invest in any Investors mutual fund, depending on the province in which the trust is located. If you have a client who is establishing a trust and wishes to invest in mutual funds, advise the client to instruct their lawyer to insert sufficiently broad investment powers in the trust document to ensure that the trustee is able to invest the trust assets in mutual funds.
It is important to note that the Investors Declaration for Trust Accounts form CL2073 is not intended to be a formal trust document. It does not contain any terms of trust and by itself is insufficient to constitute an irrevocable trust for income splitting purposes, as discussed in Appendix 3 in Chapter 10 of the Tax library. The purpose of the Declaration for Trust Accounts form is to confirm for our records that the trustee has been formally appointed in a trust document and has the authority to give Investors instructions on the accounts registered in the name of the trust.
This information is intended as a general guide only and is not to be relied upon by individuals who are attempting to determine whether or not a particular investment is appropriate for trust investment. The client and his or her legal advisor are responsible for the final selection of investments and the determination of their eligibility under the relevant provincial legislation.