Is it Really a Gift? The Ontario Court of Appeal’s Decision In McNamee v. McNamee

In McNamee v. McNamee (2011 ONCA 533), the Ontario Court of Appeal considered whether common shares received pursuant to an estate freeze qualified as a gift and were thus exempt from a spouse’s net family property.

In 2003, Mr. McNamee, who was married, received common shares in a company pursuant to an estate freeze undertaken by his father. The estate freeze was implemented by the father to protect the assets of the company and to reduce income taxes on his death. The father transferred shares of the company to a holding company and then subscribed for common shares in the holding company. Those shares were then gifted equally to his two sons.

Under this estate freeze structure, the future growth of the company would accrue to the common shares held by the two sons. The father signed a declaration of gift providing that the gifted shares or any increase in their value or income would not form part of the son’s net family property in the event of a marital breakdown, and that the shares were to remain the separate property of the son, free from the control of the son’s spouse. Although the future growth would accrue to the common shareholders, the father retained control of the companies and the rights attached to his preference shares permitted him to take unlimited dividends at any time, thereby enabling him to strip the equity of the company.    

Approximately four years after the estate freeze, Mr. McNamee and his wife separated.  At that time, the shares were valued at approximately $418,200. The issue was whether Mr. McNamee’s common shares were received by gift and therefore excluded from his net family property pursuant to the Family Law Act.

It is recognized in Ontario law that the essential components of a valid gift are as follows:

1. the donor must intend to make a gift without consideration or expectation of remuneration;
2. the donee must accept the gift; and
3. there must be an act of delivery or transfer of the property to complete the transaction.

At trial, the judge held that the transfer of the shares to the son was not a gift, based on the following factors:

1. the transfer was not a gratuitous transfer but was a transfer for consideration;
2. the father did not intend to gift the shares;
3. the father did not divest himself of all power or control over the shares; and
4. the son did not accept the gift.

The critical factors in the McNamee case were the requirements that the donor must divest himself or herself of all power and control over the property, and the control must be transferred to the donee.

The trial judge stated that the intention of the donor must be inspired by affection, respect, charity or similar impulses, and not commercial purposes. In this case, the father’s intention was not to gift the shares to the sons but rather to effect an estate freeze and to protect the corporation from creditors. The father did not divest himself of all control over the shares since he could affect their value by payment of dividends on preference shares. As such, it was not an irrevocable transfer of the shares. Finally, the fact that the son was not aware of the conditions attached to the gift, as provided in the declaration of gift, invalidated his acceptance of the gift.  

The Court of Appeal disagreed with the trial judge, ruling that there was no consideration for the transfer.

Consideration involves bargaining, and in the present situation the transaction involving the transfer of the shares was completely unilateral. Since there was no bargaining, there could not be consideration at law. The fact that the donor receives some benefit from the transaction, such as freezing the value of shares, creditor proofing, and tax relief on death, does not constitute consideration. The fact that the underlying motivation was to effect an estate freeze does not mean that there was no intention to gift the shares. Further, the declaration of gift was clear evidence of the intention to gift the shares. The fact that the gift was motivated in part by commercial purposes did not invalidate the gift. 

The Court of Appeal stated that the fact that the donor could affect the value of the shares had no bearing on whether the shares were gifted or not. Further, the son clearly knew about the transfer of the shares and had accepted them. The fact that he did not fully understand the exact share structure or the terms and conditions attached to the gift does not mean that he did not accept the gift. 

Ultimately, the Court of Appeal held that the shares had been gifted to the son and were to be excluded from his net family property.

However, it is interesting to note that, at trial, Mr. McNamee’s spouse had also sought a declaration of beneficial ownership on the basis of unjust enrichment and constructive trust. The trial judge did not deal with this claim as he found that the shares were not a gift and were therefore subject to equalization. The Court of Appeal ordered a new trial on this issue, noting that the determination of beneficial ownership should have been decided before dealing with the question of equalization. A spouse cannot exclude property from net family property if such property is beneficially owned by the other spouse.

Overall, the Court of Appeal’s decision helped to clarify the impact of estate freeze procedures on net family property. But they can still be tricky structures. Contact your Collins Barrow advisor for more information.

Dominique Proulx, B.Sc., LL.B., is a Tax Lawyer in the Sudbury - Nipissing office of Collins Barrow.