Abstract As in all civil law jurisdictions, usufruct is a recognized institution of Quebec law. However, unlike most European civil jurisdictions where usufruct is a popular estate planning technique, its use for estate planning has been eclipsed in Quebec by the trust. The principal features of the Quebec usufruct are canvassed in this article, along with the main reasons for the decline in popularity of the usufruct, such as the awkward tax treatment accorded to usufruct as a deemed trust and the mismatch between the deemed tax trust and the civil law trust. As illustrated by examples in the article, serious tax consequences can arise when foreign usufructs are imported into Canada. Quebec: a mixed law jurisdiction By way of prefatory comments, it should be noted that Quebec is not a pure civil law jurisdiction. It is a mixed law jurisdiction with its private law drawn from the civilian tradition and its public law drawn from the common law tradition. Unlike most civil law jurisdictions, Quebec opted for the common law principle of freedom of willing over a forced heirship regime prevalent in most civil law jurisdictions. Quebec, like the rest of the Canadian provinces but unlike the civilian countries in Europe, has no estate tax or gift tax. Law of property Quebec property law is firmly rooted in the French civil law tradition, deriving from Roman law. Anglo-American common law has had little influence on its property institutions (except for the mechanism of the trust and a number of security devices). Quebec law, like French law, has historically attached the greatest importance to land and rights in land as objects of wealth. Indeed, feudal landholding (the seigneurial system) was only abolished in Quebec in 1854. In Quebec civil law, rights in things (technically ‘real rights’) can be divided into three broad categories. Individuals may have a right of ownership, that is a right in their own property; a right in the property belonging to another, that is, a right less than ownership but nonetheless composed of some of the prerogatives associated with ownership; or a right in the form of a claim by a creditor to seize and sell a debtor’s property to satisfy an unpaid debt. Ownership, the most complete real right, is the right of using, enjoying, and disposing of things in the most absolute manner, provided no use is made of it contrary to law or public order. Ownership is an exclusive or individual right and, as a concept, is unitary. The civil law does not admit the distinction, known to the common law, between legal and equitable ownership. Given that ownership is viewed as exclusive and individual, the general policy of the law is that rights less than ownership vested in other persons are normally limited in time, so that the full integrity of the prerogatives attaching to ownership itself is preserved. The rights in the second category—rights in property of which someone else is the owner—carry some of the prerogatives of ownership but are less complete than the right of ownership because they are limited not only by modalities but also by dismemberments, which are combinations resulting from an actual splitting of the bundle of ownership rights. Articles 947(2) and 1119 of the Civil Code of Quebec (CCQ) identify and regulate the most common dismemberments, namely, usufruct, use, servitude and emphyteusis. The principal focus of this article will be on the right of usufruct. Usufruct Usufruct is an old institution of Quebec civil law. Its use was traditionally confined to immovables and a rural economy. The last vestiges of the medieval order—the legal usufruct of the surviving spouse which surfaced upon intestate death under the matrimonial regime of community of movables and acquests as well as customary dower—were swept away in 1970 when major reforms were introduced in the fields of persons, family, and matrimonial law. With the reform of the CCQ in 1994, the legislator modified the rigidity attaching to the exercise of the right salva rerum substantia to render the use and effects of usufruct less paralytic for today’s society. Nonetheless, while the institution of usufruct is valued as an estate planning tool in some civil law jurisdictions, it is not at all widely used in Quebec. Nature of usufruct Usufruct is defined in Article 1120 CCQ as the right of use and enjoyment, for a certain time, of property owned by another as one’s own, subject to the obligation of preserving its substance. A usufruct may be granted over movable or immovable property. It is essential that two persons are, at the same time, holders of distinct rights. The usufruct severs the right of ownership comprised of its three attributes (usus, fructus, abusus), by conferring two of them upon the usufructuary, that is the right of use (jus utendi) and the right of enjoyment (jus fruendi) while the third attribute, namely, the right of disposal (jus abutendi) is conferred upon the bare owner. The hallmark and distinguishing feature of usufruct is that both the usufructuary and the bare owner receive their benefits simultaneously. There is no hiatus in time in the acquisition of their respective rights; these are not successive benefits, as in the case of a substitution or a trust. Modalities of establishing usufruct Usufruct is established by contract, by will or by law; it may also be established by judgment in the cases prescribed by law (Article 1121 CCQ). It is more often seen in the context of a gift or a will and hence the focus of this article will be on usufruct created by gratuitous title. An arrangement using usufruct and bare ownership may be created by a testator in his will, for example, the usufruct to his spouse for her lifetime and the bare ownership to his children. There are three possible variants for the creation of a usufruct by means of an inter vivos gift, that is: the donor may give the usufruct of the property to one person and the bare ownership to another; the donor may give the usufruct of the property to another and keep the bare ownership for himself;1 the donor may give the bare ownership of the property to another and keep the usufruct for himself. Upon the death of the usufructuary, the usufruct ends and the bare owner, by operation of law, becomes full owner of the property. This method for the acquisition of property is, essentially, another means of transferring property at death otherwise than by succession. It has been identified by one authority as a succession substitute.2 Types of usufruct Usufruct may be established for the benefit of one or several usufructuaries jointly or successively (Article 1122 CCQ). The usufructuary must be in existence when his right arises. Each co-usufructuary in a joint usufruct holds an individual right of common use and enjoyment. Successive usufruct strongly resembles substitution and can give rise to problems of interpretation. Duration of usufruct The nature of usufruct is temporary and its maximum duration cannot exceed 100 years, even if it is a successive usufruct (Article 1123 CCQ). Usufruct granted to a physical person without a stipulated term is granted for life while usufruct without a term to a legal person is limited to 30 years. Rights of the usufructuary Whether the property given in usufruct be movable or immovable, corporeal or incorporeal, it only gives the usufructuary the right to benefit from its use and to collect all of its fruits and revenues. The usufruct of consumable property, also known as ‘quasi-usufruct’, allows the usufructuary to alienate the property provided he returns the same quantity, quality, and value at the expiry of the term, except in certain cases. The modernization of the usufruct concept in the CCQ relies in part on the distinction between capital, and fruits and revenues which were introduced into the law of property in the CCQ from which the following rules at Articles 1130–1134 CCQ derive: the usufructuary has an acquired right only to dividends declared during the term of the usufruct; the usufruct also extends to unexpected gains, subject to the usufructuary rendering account to the owner at term; the usufruct of a debt gives the usufructuary the right to collect it, to give acquittance for it and to profit from the capital received, subject to rendering an account at term; the usufruct extends to any increase of the capital which is the object of the right, such as the right to subscribe for securities of a legal person, limited partnership or trust; the usufruct of a share or other security on any property, of an undivided right or of a fraction of co-ownership, gives the usufructuary the voting rights, except regarding decisions aimed at modifying the substance of the property subject to the usufruct, changing its destination or the winding-up of a legal person, business or group holding the share, security or property that is subject to the usufruct. There are also rules for disbursements or payments for labour or materials expended in order to preserve the property (necessary disbursements), to increase its objective added-value (useful disbursements) or its subjective added-value (optional disbursements). Obligations of the usufructuary All the obligations of the usufructuary arise from the temporary nature of the dismemberment: to make an inventory; to provide security; to insure the property. The division of responsibility for repairs between usufructuary and bare owner has remained unchanged in the CCQ. The usufructuary is usually responsible only for minor repairs in the nature of maintenance of the property. Major repairs are the responsibility of the bare owner. A comparison is often made with the landlord–tenant division of responsibility for repairs. The terms of the instrument establishing the usufruct may modify these rules and the burden of responsibility for the various repairs. Responsibility for repairs is often a bone of contention between the usufructuary and the bare owner, so it is important that the constituting document be drafted with great precision in this regard. Alienation and seizability The bare owner is entitled to alienate his right but such alienation does not affect the right of the usufructuary (Article 1125(2) CCQ). With respect to the usufructuary, Article 1135 CCQ provides that he may transfer his right or lease a property included in the usufruct. A creditor of the usufructuary may cause the rights of the usufructuary to be seized and sold, subject to the rights of the bare owner. Similarly, a creditor of the bare owner may also cause the rights of the bare owner to be seized and sold, subject to the rights of the usufructuary (Article 1136 CCQ). Extinction of usufruct Usufruct is extinguished pursuant to Article 1162 CCQ: by the expiry of the term; by the death of the usufructuary or the dissolution of the legal person; by the union of the qualities of usufructuary and bare owner in the same person, subject to the rights of third parties; by the forfeiture or renunciation of the right or its conversion into an annuity; by non-user for 10 years. When the right of usufruct terminates with respect to immovable property, it is necessary to publish an acquittance or discharge in notarial form in the land register (Article 2938 CCQ). Use Use is a specific dismemberment of ownership, often referred to as a ‘mini-usufruct’, which carves off from another’s property the right of use and the right to collect a variable amount of fruits and revenues in order to live. This amount used to be determined as a function of the user’s needs, but these now include those of persons living with him or dependent on him. In reality, the right of use is mainly used with regard to a dwelling. Although undoubtedly a dismemberment of ownership and a real right, the right of use has, nevertheless, always retained the characteristics of a right intuitu personae which served as the basis for the enjoyment of fruits and revenues in relation to household needs. The rationale for this was because use and habitation were customarily granted in the context of an agrarian society and in the narrower context of the family group, where the identity and character of the user were the main factors in obtaining the right in the first place. Tax treatment of usufruct Prior to 1991, the tax consequences for a Quebec usufruct were far from clear.3 Since then changes to both the federal and Quebec tax legislation clarified the tax treatment of usufruct,4 not entirely but substantially. Subsection 248(3) ITA was amended to provide that a Quebec usufruct is deemed to be a trust for tax purposes. What emerges from subsection 248(3) ITA is the following: the property subject to the usufruct is deemed to have been transferred to this deemed trust and is held in trust and not otherwise; if the usufruct has been established by a will, the property is deemed to have been transferred as a consequence of death and would qualify for certain, now highly circumscribed, tax benefits; the usufructuary and bare owner are deemed to be beneficiaries of the deemed trust: given paragraph 108(1) ITA, this presumption has the effect of giving the usufructuary an income interest while the bare owner has a capital interest. Basically, when a property is transferred subject to a usufruct, which for tax purposes is transferred to a deemed trust, this transfer constitutes a disposition. There is an exception to this rule when there is no change in beneficial ownership. The difficulties are compounded because the concept of beneficial ownership does not exist in Quebec civil law.5 This is one of the myriad anomalies that exist when ITA is applied in the context of Quebec civil law institutions or concepts. Therefore, it seems that a disposition does occur when a usufruct is created because there has been a change in ownership rights triggered by the transfer to the ‘tax trust’ and there is no relieving provision available6 (except for certain provisions concerning a transfer to a spouse or of agricultural property to children). By way of comparison, it should be noted that in common law Canada, it appears that only real property can be subject to successive interests, such as a life interest (or estate) and a remainder interest (or estate). Thus, it is possible to give a remainder interest in real property, while retaining a life interest in it so that the property can continue to be used by the donor during his lifetime. Paragraph 43.1(1) ITA makes it possible in such a case to avoid a taxable deemed disposition of the life interest retained by the donor, in particular, in the context of a charitable gift or a transfer of agricultural property to children. Accordingly, the donor will be taxed only on the fraction of the value of the property that corresponds to his gift of the remainder interest. If the remainder interest is given to a registered charity, the gift could benefit from the charitable donation credit. However, generally, there will be no taxable disposition of the life interest. Since the concepts of life interest and remainder interest do not exist in the civil law of property of Quebec, paragraph 43.1(1) ITA could not be applied in the case of usufruct. The effect of subsection 248(3) ITA as originally enacted was to provide for the deemed disposition not just of the value of what is given, but of what is retained as well, since the creation of a usufruct, (or even a substitution) involves the deemed disposition of the entire property that is its object. There are several provisions in ITA that deal with a tax-deferred transfer (commonly called a rollover), in particular, to a trust for the exclusive use of the spouse (commonly called a spousal trust). To qualify as a spousal trust, the trust must be established in favour of the spouse for his lifetime and the spouse must be exclusively entitled to receive the income and may receive some capital, but no other person could have the use of the capital during his life. If the terms of the trust have limited the use and enjoyment to certain income or if the right can be revoked, the spousal rollover criteria in subsection 70(6) ITA would not be fulfilled. Furthermore, in the case of a testamentary spousal trust, the property must vest indefeasibly within 36 months of death. The common law concept of indefeasible vesting is another example of the difficulties encountered by a civil law practitioner dealing with terminology in ITA dictated by a common law environment.7 In addition, the trust must have its residence in Canada. The test for the residence of a trust used to be determined in accordance with the residence of the trustee, but now it is the mind and management test that prevails.8 These tests may prove to be difficult to apply in the context of a usufruct which is a deemed trust for tax purposes given that there is no trustee in a usufruct. Arguably, even if there is no trustee per se, the usufructuary has the possession and administration of the property during the existence of the deemed trust. Nonetheless, the question persists that even if the spouse who is the usufructuary is a Canadian resident, could the rollover even apply? It should be noted that there are divergent views on whether a usufruct in favour of the creator’s spouse can qualify as a spousal trust under the terms of ITA. The principal reason for disqualification of the usufruct to a spouse as a spousal trust under ITA is the fact that the bare owner has an immediate right to the capital upon creation of the usufruct, thereby denying the exclusivity the spouse must have with respect to the capital. However, since the bare owner does not have the use of that capital until the death of the usufructuary, it is possible to argue that the requirements in subsection 70(6) ITA (which speaks of use of the capital) for a spousal trust are fulfilled.9 Given that the usufruct is deemed to be a trust for tax purposes, the income derived from the property held by the trust must be included in the calculation of the income of the deemed trust. The trust is deemed to be an individual and thus constitutes a taxable entity distinct from the usufructuary and bare owner. Depending on whether the deemed trust is resident or not in Canada, it is taxable on its worldwide income or only on certain income earned in Canada. The costs of the inventory at the opening of the usufruct are a one-time expense and hence of a capital nature and, therefore, they are not deductible. However, the costs of insurance and surety are generally deductible expenses if they are of a repetitive nature. Since the usufructuary is entitled to all the income, this income is taxable in the hands of the usufructuary. However, if the usufruct is a deemed testamentary or inter vivos trust, it could claim a deduction for any income earned by the trust that is payable to a trust beneficiary. Prior to 2016, a trust had the ability to elect to tax income in the trust even if it was paid or payable to a beneficiary. Now, this election is only available to reduce the trust’s taxable income to nil. When the donor has granted a usufruct over property but has retained the bare ownership, this may give rise to application of the attribution rule at subsection 75(2) ITA which attributes any income from the property and any gain or loss from the disposition of the property, such as shares, to the bare owner while resident in Canada. Other attribution rules could attribute income and capital gains to the testator or donor if the usufructuary is his spouse. In the case where the usufructuary is a minor child, income is attributed to the testator or donor; however, there is no attribution of capital gains so ‘growth’ shares such as mutual fund units can be given to children without attracting the attribution rules. The usufruct, being a deemed trust for tax purposes, is also susceptible to the application of the 21-year deemed disposition rule. With respect to a disposition (actual or deemed), of property, such as shares, the proceeds of disposition are capital for civil law purposes within the meaning of Articles 909 and 910 CCQ. On the other hand, any capital gain realized by the deemed trust is income for tax purposes. If the property in question is a principal residence and has been so designated and is held in a deemed trust, that could qualify as a spousal trust, then the principal residence exemption may be claimed. In short, given that the deemed trust has no real existence under civil law, it is important to determine which of the usufructuary or the bare owner should assume payment of tax. In the absence of any clear indication, Article 1154 CCQ provides guidance: it states that the usufructuary is liable ‘for charges that are ordinarily paid with the revenues’. It does appear that this provision envisages the tax of a deemed trust and, therefore, it generally would be the usufructuary who pays the tax. This is also equitable since the usufructuary generally enjoys the benefits of the revenues of the deemed trust. Therefore, only the portion of tax with respect to the taxable income attributable to the bare owner (such as the tax attributed to a capital gain realized by the deemed trust) would be assumed by the bare owner. It should further be noted that there can be no accumulation or capitalization of income. All income is subject to the usufruct and belongs to the usufructuary. Earlier in this article, the events that cause the extinction of the usufruct were referenced. This entails the end of the deemed trust for tax purposes. What are generally the tax consequences for the deemed trust, the bare owner and the usufructuary? The deemed trust is deemed to dispose of its property at its cost amount and the bare owner is deemed to acquire it at the same amount. Thus, for the deemed trust created by gratuitous title, no income or loss will result. The bare owner is also deemed to dispose of his capital interest at its cost amount and no gain or loss will result. Normally, the extinction of the usufructuary’s right entails the disposition of his income interest without proceeds of disposition being received, such that this will result in no inclusion in the calculation of his income. If the usufruct constitutes a spousal trust (as some would maintain as noted above) and it terminates on the death of the spouse, a deemed disposition of its property at fair market value (FMV) may result in triggering a taxable capital gain payable by the trust and the bare owner acquires the property at its FMV, with the result that no negative tax consequences are suffered by the usufructuary spouse and the bare owner. A major problem arises from the assimilation of a Quebec usufruct to a trust for the purposes of ITA while not being a trust for civil law purposes. The most striking anomaly is that no deemed trustee has a role to play with respect to the practical aspects of the taxation of trusts, as for example, the exercise of elections, estimating the amount of tax payable by the trust, filing the trust tax returns as well as paying tax instalments, any tax balances owing within stipulated delays, interest and penalties, making objections to tax assessments and obtaining a clearance certificate before distributing property in the trustee’s possession or control, failing which, the trustee becomes personally liable for any unpaid tax plus interest. Under Quebec trust law, neither the usufructuary nor the bare owner is a trustee. This brings into the forefront the question of who is responsible for fulfilling these obligations. This lapsus is a major complicating factor in applying the tax rules not only to usufruct, but also to quasi-usufruct.10 More complications and conundrums can arise in multi-jurisdictional situations where usufruct is involved as illustrated in the examples that follow. Example 1 This example involves a Canadian citizen, formerly of Montreal but living in Italy, who is the beneficiary of a gift by an Italian relative of a usufruct on immovables situated in Italy. Title is held by the bare owner who is an Italian national and resident. The usufructuary earns rental income from these immovables. The deeming provision at section 248(3) ITA would not apply in these circumstances because the usufruct was not created under Quebec law. If the usufructuary returns to Quebec, she will pay income tax on the rental income. How would the usufruct be treated upon repatriation into Canada and how would the usufruct be viewed in terms of a deemed disposition if the Montrealer should subsequently decide to leave Canada (expatriate) again? When the usufructuary becomes a Canadian resident again, she must declare her worldwide income and the rental income will be included in her income for tax purposes. If she is also paying tax in Italy where the immovables are situated, she will be entitled to claim a foreign tax credit. If she leaves Canada again, and establishes residency elsewhere, no capital gains tax would be triggered because these are not immovables that she owned. She merely has a right of usufruct which does not appreciate in value. In fact, the right of use depreciates in value because the usufructuary is aging and the local law of the situs of the immovables provides for that. For example, if a 20-year old is a usufructuary his right of usufruct is worth more than that of a 90-year old, the logic being that the 90-year old will likely not gain as much from the usufruct since the latter will likely die much earlier than the 20-year old. While there are no capital gains for the usufructuary in Canada either on acquisition or disposition of the right of usufruct, there would have been gift tax upon creation in Italy where the immovables are situated. If the usufructuary renounced to her right of usufruct while residing in Canada, it would not be a tax event for Canadian capital gain tax purposes, but had she renounced it while residing in Italy, it is a gift tax event for Italian tax purposes. Example 2 Another example is provided in a tax interpretation provided by the Canada Revenue Agency (CRA). CRA took the position that a disposition is triggered under ITA when a Canadian taxpayer makes a gift inter vivos of an immovable located in France to Canadian non-arm’s length recipients, retaining the usufruct for herself, which gift is governed by the Civil Code of France11. The taxpayer is deemed to have disposed of the property at its FMV and the recipients are deemed to have acquired it at its FMV. Since the usufruct arrangement is governed by French civil law and not the law of Quebec, no deemed trust within the meaning of subsection 248(3) ITA was created, but a deemed trust was created pursuant to article 7.9 of the Taxation Act (Québec). Furthermore, in the event of double taxation with respect to the gift and the creation of the usufruct, it is possible that no foreign tax credit could be claimed with respect to the gift and the creation of the usufruct under the Canada–France Tax Treaty (the Treaty) or under the Entente fiscale entre la France et le Québec (the ‘Entente’)12. However, the taxpayer may apply to the competent authority of CRA under article 25 of the Treaty or of QRA under article 24 of the Entente for relief from double taxation. Example 3 This example involves a very efficient tax-planning strategy for French tax purposes, where a mother transfers the bare ownership of her personal residence in France to her son and retains the usufruct for herself.13 The son then moves to Quebec and a few years later, his mother dies. The son is deemed to have re-acquired the entire property at nominal value with no bump in the cost. The son’s acquisition cost is not determined as at the mother’s date of death but at the date of creation of the usufruct when he acquired this right. While there would be no succession taxes in France upon the death of the mother, there will be tax consequences in Canada, when, at a later date, the son disposes of the property by sale or gift or upon his death, there will be a disposition (or deemed disposition) for Canadian tax purposes with exposure to capital gains tax if the property has increased in value over time. Given that the usufruct was created in France, subsection 248(3) ITA will not apply because this provision only applies to a Quebec usufruct.14 Furthermore, there will be a deemed disposition of the bare owner’s right on the increase in value of the foreign property from the date of acquisition to the date of arrival in Canada. Upon departure from France, there may also be consequences under French tax law. Example 4 In another case, Spanish parents created a usufruct in 1973 over their immovables in Spain, retaining the usufruct for themselves and giving the bare ownership to their daughter who subsequently moved to Quebec and became a Quebec resident and domiciliary and a Canadian citizen. While there would be no inheritance taxes in Spain on the death of the last parent, it gave rise to a significant capital gain tax problem in Canada on the death of the bare owner. Since the usufruct was created in Spain, subsection 248(3) ITA cannot apply. The daughter’s estate therefore took the position that the usufruct right was acquired on the death of the last parent as a gift, bequest or inheritance and that its cost was therefore the FMV of the right at that time, which was determined to be equal to the FMV of the underlying property. The concern is that the tax authorities may take the position that the usufruct right was acquired prior to the death of the last parent and that its cost would be $1.00 or the discounted FMV of the property at the time the bare ownership right was acquired, based on the expected lifetime of the last-to-die of the parents. Examples 3 and 4 are emblematic of a growing phenomenon for tax practitioners in Quebec, and even elsewhere in Canada. When Europeans immigrate to Canada from jurisdictions where usufruct is a popular estate planning device to avoid inheritance tax, it may lead to unattractive tax results for them if they hold the bare ownership due to the fact that the deeming provision at subsection 248(3) ITA is not available for non-Quebec usufructs. Therefore, no bump is allowed in the cost base of the entire property when the usufruct terminates and capital gains tax will be incurred in all likelihood because of the increase in value of the property over a long period of time by the owner in Canada when the owner dies. While usufruct may constitute an interesting estate planning technique for several civil law countries, when imported into Quebec, this technique may produce adverse tax consequences. Anomalies Although the provisions on usufruct in the CCQ have been modernized, the usufruct still conserves some anachronistic elements that impede its effectiveness as a functional estate planning device. Moreover, certain anomalies persist with usufruct that cast shadows over its use in certain environments. Financial institutions and, in particular, portfolio managers, from time to time, are faced with the situation of managing an investment portfolio that is subject to a usufruct. They have been plagued by a plethora of problems for which clear answers are not readily available in the CCQ, doctrine or jurisprudence and, consequently, they have struggled to devise guidelines for day-to-day operations. It appears that the counsel of prudence dictates that both the usufructuary and the bare owner should sign the service contract and investment policy and should together make amendments to them. Both should also give trading orders for a non-discretionary investment management account. There may also be unintended consequences of its use as a succession substitute by Quebec residents owning property in certain jurisdictions. By way of example, if property situated in Morocco is acquired by parents who retain the usufruct of the property and give their daughters the bare ownership, this is a method of circumventing the law of inheritance. On the death of the parents, the rights of the daughters are consolidated. However, it is not without its inconveniences if one of the daughters is married and dies before the parents; in that case, the succession of the daughter would devolve to her husband.15 The question also arises as to what law or laws would be applied in resolving conflicts arising from the use of a usufruct in a multi-jurisdictional situation. In the Book on Private International Law in the CCQ, there is no specific conflict rule governing usufruct and bare ownership and no general conflict rule governing succession substitutes. One author has ventured to state that the law applicable to this device should be the cumulative application of the law governing the juridical act that establishes the usufruct, and the law governing the situation of the property.16 Substitution Recent years have seen a slight revival of the use of substitution as an estate planning tool.17 It is not a widespread phenomenon but, for the purposes of this article, it is worth inquiring into the reasons for this revival and the relative ascendancy of substitution over usufruct in estate planning in circumscribed circumstances. Substitution began to be promoted a few years ago as an alternative to the trust in certain circumstances and for certain persons, but does not seem to have gained significant traction and almost none, to this author’s knowledge, for estate planning for high net worth individuals. Substitution enjoys limited utility in estate planning for individuals of modest means. The principal reasons for opting for a substitution in preference to a trust in these circumstances are the following; to avoid Article 1275 CCQ which requires that there be an independent trustee, that is, one who is neither a settlor (in the case of an inter vivos trust) nor a beneficiary; and to avoid administrative costs and fees, especially for non-income producing assets and personal use property. Substitution is accorded the same tax treatment as usufruct pursuant to subsection 248(3) ITA and is plagued by the same problems of being a deemed trust as outlined above for usufruct. Defective characterizations There is a whole body of jurisprudence on the interpretation of clauses in wills or gifts where the language of usufruct is used but, upon judicial scrutiny, the institution created is held to be a substitution or even a trust. As noted earlier, usufruct is a dismemberment of ownership while substitution is not. Usufruct entails two concurrent liberalities while substitution and trust involve successive liberalities. Conclusions The popularity of the usufruct and substitution has been greatly diminished. Their use as estate planning devices has been effectively eclipsed by the advent in 1994 of a coherent law of trust or fiducie in Quebec. From a practical and operational point of view, the supplemental regime which constitutes a code of governance or standards in Book Four of the CCQ for administrators of the property of others and complements the law of trust, renders the trust more responsive to the expectations of individuals with respect to their estate plans. The major reform and modernization of the law of trust in the CCQ in 1994 has been the nemesis of usufruct and substitution. Usufruct and substitution are ill-suited to meet the needs of high net worth individuals whose property holdings are complex and often comprise investment portfolios. That factor, together with the awkward tax treatment accorded to usufruct and substitution in ITA, have conspired to relegate the use of usufruct and substitution to estates of individuals of modest means or of those who find the ‘independent trustee’ rule vexing and intrusive. In the case of usufruct, its utility has been pared down to the right of use of residences, and even then, it is fraught with potential difficulties, notably, disputes over responsibility for repairs. The classical staging area for such disputes is in the second marriage scenario where the second spouse is given a right of use in the family residence; it is ripe for tensions developing with the deceased spouse’s children from the first marriage over the care and maintenance of the residence of which they are the bare owners but are deprived of its use and enjoyment because of the surviving spouse’s rights therein.18 By offering efficient operation to those among the public who use it, the trust has earned an enhanced and prominent position in Quebec and, by contrast, usufruct and substitution, beset as they are by inefficiencies and anomalies, as well as the mismatch between tax and civil law concepts, remain the poor cousins in the Quebec estate planning landscape. Marilyn Piccini Roy is a Partner at Robinson Sheppard Shapiro and focuses her practice on wealth management, estates, trusts, regimes of protective supervision and elder law. She serves as counsel to private clients, trust companies and philanthropists, as well as individual and institutional trustees. E-mail: firstname.lastname@example.org. Website: www.rsslex.com. Presented at the International Academy of Estate and Trust Law meeting in Chicago, 23 May 2017. Footnotes 1. The masculine gender includes the feminine and vice versa (whenever required by the context). 2. Jeffrey TALPIS, ‘Succession Substitutes’, Hague Academy of International Law, Offprint from the Recueil des cours, Vol. 356 (2011), at 147 to 148. 3. Paul J Setlakwe, ‘La fiducie, l’usufruit et la substitution : analyse de certaines incidences fiscales’ (1985) 26 Les Cahiers du Droit, 739, at 747. 4. For ease of reading, references are only to the federal Income Tax Act (ITA), unless otherwise indicated; generally speaking, the Taxation Act (Québec) has comparable provisions as in ITA; however, in the case of the tax treatment of usufruct, art 7.9 of the Taxation Act (Québec) deems a usufruct, without qualifying it as a Québec usufruct, to be a deemed trust, whereas the federal tax legislation only treats a Quebec usufruct as a deemed trust. 5. Diane Bruneau, ‘Symposium: Problems in the Application of Tax Law to Civil Law Trusts’ (2003) 51 Canadian Tax Journal 252, at 262 where the author suggests that an interim solution is to give a liberal interpretation to paragraph 248(3)(e) which attempts to harmonize the common law concept of beneficial ownership with the civil law. 6. Mark D Brender, ‘Symposium: Propriété effective dans la législation fiscale canadienne: Réforme nécessaire et incidences sur l’harmonisation de la législation fédérale avec le droit civil du Québec’ (2003) 51 Canadian Tax Journal 355. 7. See n 5 above, at 273–82. 8. Fundy Settlement v Canada, 2012 SCC 14. 9. There are three tax interpretations that consider the eligibility of a usufruct qualifying as a spousal trust: CRA T.I. 2004-0069681 E5 (F), 31 May 2004 and CRA T.I. 2004-0089661 E5 (F), 18 March 2005 are in favour, while CRA T.I. 2005-0111911 E5 (F), 2 February 2006 is not; Luc Massé, ‘L’usufruit et l’impôt sur le revenu’ (1992) 14 Revue de planification fiscale et successorale (1992) 1, at 13–14 and at 31–32 favours its eligibility, as does Marc Cuerrier, ‘Impacts et consequences du Bill technique du 13 juillet 1990 sur les fiducies et l’usufruit’, in Colloque Fiducies 42, Montreal: Association de planification fiscale et financière, 1990, at 8: 19; contra, see Caroline Marion, ‘Coffre d’outils en planification successorale: Partie C - le droit d’usage de la résidence familiale de la famille reconstituée’ in Congrès 2009, Association de planification fiscale et financière, Montreal 2010, at 23:61–23:62. 10. See generally on the taxation of usufruct the detailed study by Massé (n 9) above, and especially on this issue, at 7–8; his paper is one of the few on the subject, but must be read in light of current tax legislation. 11. T.I. 2012-0466081I7 (F), 23 April 2013 applied subsection 43.1(1) and para 69(1) b) (ii) ITA. 12. Revenue Quebec Roundtable 2016, QT19. 13. Jean-Marc Tirard, ‘Trouble at the Border’ (2016) 14 Trust Quarterly Review 7, at 9. 14. See n 4 above on the different tax treatment under art 7.9 of the Taxation Act (Québec). 15. See n 2 above, at 147, footnote 315. 16. ibid at 148. 17. See Marie-Hélène Turcotte, ‘La Substitution : un véhicule utile à la planification’ (2013) 33 Revue de la planification fiscale et financière 125; Caroline Marion, ‘Et si parfois la fiducie n’était pas la solution’ in Les fiducies entre vifs (La Collection Blais 2010 75; Caroline Marion et Marilyn Piccini Roy, ‘Coffre d’outils en planification successorale: Partie A-tableau comparatif : usufruit, substitution, fiducie’ in Congrès 2009, Montreal, Association de planification fiscale et financière, 2010, at 23:5–25; Caroline Marion, ‘Démystifier la substitution: une option à la fiducie testamentaire’ (2005) 26 Revue de la planification fiscale et financière 775; Martin Lord, ‘Coffre d’outils en planification successorale: Partie B – La substitution : une fiducie fiscale sans fiduciaire indépendant’, in Congrès 2009, Association planification fiscale et financière, Montreal 2010, at 23 : 2652. 18. To avoid or mitigate these problems, see n 17 above, at 23:60–23:61, where Marion suggests limiting the term of the right of use to less than five years. © The Author (2017). Published by Oxford University Press. All rights reserved.
Trusts & Trustees – Oxford University Press
Published: Feb 1, 2018
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