Sunday, September 11, 2011

Ontario Court of Appeal: McNamee v McNamee, 2011 ONCA

McNamee v McNamee - an interesting analysis of "gifts" that may be excluded from calculation of net family property under s. 4(2) of the Family Law Act.

Facts

Clayton McNamee, appellant, and Connie McNamee, respondent, were married for 18.5 years with their marriage conducted as an equal partnership by all accounts. The parties separated on August 5, 2007.

Mr. McNamee Sr. owned a concrete trucking company. In 1988, he invited his two sons, Clayton and Trevor to join his company to establish a constructional division and sales divsion respectively. The company became very successful, with annual sales of more than 5 million. Mr. McNamee Sr. controlled the business side and made the major financial decisions.

In 2003, acting on the advice of his lawyers, Mr. McNamee Sr. implemented a corporate freeze in order to protect his business from creditors and limit his taxes upon death. This was achieved by folding the business into a holding company, "Holdco"and freezing the value of the business at 2 million. He subsequently transferred his only two common shares in his concrete company to Holdco in exchange for 20,000 voting shares valued at 2 million. Moreover, he subscribed for 1000 common shares for an amount of $1 and transferred 500 shares to each of his sons.

The key issue is whether this transfer of shares to his son Clayton McNamee constituted a gift.

Mr. McNamee Sr. was determined not to let anyone get a hold of the shares he transferred to his sons without his approval. He also took actions to guard against any of the shares becoming part of any joint property in the event that his sons experienced a breakdown in marriage. For instance, as part of the estate freeze, Mr. McNamee Sr. retained complete control by ensuring that his preference shares were voting shares.

Declaration of Gift

There were two conditions that Mr. McNamee attached to the declaration:

1.) In the event of a marital breakdown, neither the shares nor any increase in the shares would form part of donee's NFP in the event of a divorce

2.) The donee was to be in sole control of the shares without any interference from his spouse

The actual Declaration of Gift was as follows:

DECLARATION OF GIFT

I, John McNamee, of the Village of Jasper, in the Province of Ontario, am the owner of 1000 Common Shares in the capital of [Holdco] (the “Property”)

I desire to gift the property to my sons, Trevor McNamee and Clay McNamee, (the “Donees”) in equal proportion.

To carry out my intended purpose, I hereby deliver to each of the Donees a share certificate representing 500 Common Shares in the capital of [Holdco] registered in the name of the Donee.

I acknowledge that it is my intent to vest absolute ownership and title in the Property in the Donee from the date of this declaration.

I hereby direct that the whole of the Property gifted to each Donee, the income arising therefrom, any appreciation in the value thereof, and any property acquired in substitution therefor shall not fall into any community of property which may exist between the Donnee and his spouse, and shall not form part of the net family property of the Donee for any purpose or purposes under the Family Law Act, R.S.O. 1990, c. F.3 and any amendment thereto or any successor legislation thereto, and is given to the Donee on the condition that it shall remain his separate property, free from the control of his spouse. This direction shall apply not only to the Family Law Act, but also to the laws of any other jurisdiction dealing with the distribution of property in the event of death or marriage breakdown.


Proceeding to the estate freeze, the appellant along with his brother and father signed a unanimous shareholders agreement. The appellant stated that his father had told him the transferred shares were a gift.

Trial Judge's Findings

The trial judge held that the shares were not transferred by way of gift and Mrs. McNamee was entitled to half their value.

Main Issue Subject to Appeal

1.) Whether Mr. McNamee's 500 common shares in his father's (Mr. McNamee Sr.) company had been received by way of a gift and thus excluded from the appellant's Net Family Property ("NFP"). If the shares were deemed to be gifted then they would not form part of the appellant's NFP.

Application of Law & Analysis of Issue on Appeal:

Shares transferred by way of Gift:
Section 4(2) of the Family Law Act, R.S.O. 1990, c. F.3, excludes gifts received during the marriage from a spouse’s net family property:

4(2) The value of the following property that a spouse owns on the valuation date does not form part of the spouse’s net family property:

1. Property, other than a matrimonial home, that was acquired by gift or inheritance from a third person after the date of the marriage.

The onus of proving exclusion under s. 4(2) is on the person claiming it: s. 4(3).
Elements of a Gift:
In order to constitute a valid legal gift, there must be:
1.) An intention to make a gift on the part of the donor, without expectation of consideration
2.) An acceptance of the gift by the donee
3.) A sufficient act to transfer the property to complete the transaction
The trial judge concluded that the transfer of shares to the appellant was not a gift based on four circumstances:
1.) The transfer was not a gratuitous transfer but a transfer for consideration
2.) Mr. McNamee Sr. did not intend to gift the shares
3.) Mr. McNamee Sr. did not divest himself of power or control over the shares; and
4.) The appellant did not accept the gift

Consideration Factor:

Consideration is the value that flows from a promissee to a promisor as a result of a bargain. The Court of Appeal stated that the appellant did not bargain for the shares he received. Also, the Court determined that the shares were not transferred by Mr. McNamee Sr. to his sons to ensure their continued involvement with the company. Rather, they were transferred in order that the estate freeze could be implemented.

Intention of Donor/Transferor:

The trial judge held that Mr. McNamee Sr. only intended to transfer the shares to his sons in order the complete the the estate freeze and not for the purposes of gifting. In particular the trial judge asserted:

Clearly on the evidence the intention of John in authorizing and directing the estate freeze was not for the purpose of making a gift to his boys. It was to creditor proof his business and thus better protect the future of his business.

The transfer of the shares was but one step that was necessary for the primary objective to be accomplished.

So long as the main objective was achieved with the requirements he demanded John was less concerned about how the shares were transferred to his sons. This is evident from his testimony when asked why he didn’t sell the shares to the boys. He answered that it was because they didn’t have any money.

The Court stated that the fact that the Mr. McNamee Sr. transferred shares to the appellant in conjunction with the estate freeze did not disregard the main purpose of the transfer of shares, which was the intention to transfer by way of gift. Moreover, the Court held that since the father did not sell his shares to the appellant, this reinforced the notion that a valid gift was made.

Delivery:

There is no issue concerning the delivery of the shares.

Acceptance of Shares and Divesting Power of Control:

The Court held it was of no consequence that the appellant was unaware about the Declaration of Gift until after the divorce . The appellant was aware that his father had previously indicated to him that the transfer of shares was intended to be a gift and that he paid no consideration for the shares.

The respondent contended that the appellant must understand the nature of the transaction and willingly accept title to the property is that transferred (see Ziff, supra, at p. 157). The trial judge held:

These authorities indicate that the question of whether or not the husband in the case at bar is found to have accepted his father’s gift would require that he know of the transfer of shares, at the time it was made. Indeed, at the very minimum, he would be required, under the rule in Wilson v. Hicks which is still good law in Ontario, to have understood the nature of the transaction and to have willingly accepted title to the shares. This understanding presumes an element of knowledge that he was the donee to the transfer of the shares at the time the transfer was made and of the terms and conditions attached to the shares.

Professor Ziff qualifies this concept:
Acceptance of a gift involves an understanding of the transaction and a desire to assume title. This is a requirement that is treated with little rigour: in the ordinary case, acceptance is presumed to exist.

The Court asserted that there was no evidence to suggest the respondent's inference that if the appellant had been aware of the Declaration of Gift at the time it was created he would not have accepted the transfer of shares from his father.

The Court declared that the trial judge erred in ordering half the value of the shares be included in the equalization payment to the respondent. Referencing s. 4(2) Family Law Act, the Court was satisfied that the shares were transferred by way of gift and thus should not form part of the appellant's NFP and be subject to an equalization payment.

Disposition:

The Court allowed the appeal and set aside the order of the trial judge requiring the appellant to pay the respondent the amount of $209,100 in addition to prejudgment interest on that amount.

- Alim Ramji, Toronto
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