Punjab & Haryana High Court, Chandigarh, India NCA Qualified Lawyer Licensing Process, Law Society of Ontario, Canada
LinkedIn | Email | Mobile | WhatsApp
Articles: Estate Planning in Canada
By: Rajesh K. Sharma, Advocate (LinkedIn)
A Power of Attorney is a legal document that lets someone make decisions about a person’s behalf. In Canada, attorney does not usually mean lawyer.
Powers of attorney is governed by the common law of agency, which establishes an agency relationship when a principal authorizes an agent to act on their behalf. Agency relationship would terminate upon the principal's mental incapacity.
To overcome this situation of automatic termination of POA upon the principal's mental incapacity and for continuous care of the property of the person, Power of Attorney Act (POAA) introduced statutory changes in Ontario to allow power of attorney to continue despite the principal's incapacity, provided this intention is declared in the document.
The Substitute Decisions Act, 1992 (SDA) was created in Ontario as a comprehensive statutory framework for substitute decision making with respect to property and personal care of the person. Under the Substitute Decisions Act, 1992 (SDA), an attorney appointed through a power of attorney acts as a fiduciary. This means they must account for their actions, act with reasonable care, avoid conflicts of interest, and not make secret profits.
There are two types of SDA powers of attorney:
Continuing Power of Attorney for Property
A Continuing Power of Attorney for Property is a legal document in which one person gives someone else the authority to make decisions about their finances. The person who is named as the attorney does not have to be a lawyer. The power of attorney is called “continuing” because it can be used after the person who gave it is no longer mentally capable to make the financial decisions themselves. Some people use the word “durable” which means the same as "continuing".
Important aspects of Continuing Power of Attorney for Property
Scope of authority of Attorney
The Substitute Decisions Act, 1992, refers to decisions about property management and powers of attorney for property. “Property” means finances, which include any type of financial decision or transaction that a person would make in the course of managing their income, spending, assets, and debts. An attorney can do anything regarding property that the grantor could do, except making a will. The authority can be limited by specific provisions. Unless the authority of attorney is limited, the attorney can do almost anything with the property that the grantor can.
For example, the attorney can:
But the attorney can never
Capacity
Under the Substitute Decisions Act, 1992, incapacity refers to mental incapacity. It means that the person is unable to understand information that is relevant to making a decision or is unable to appreciate the reasonably foreseeable consequences of a decision or lack of decision. The grantor must have the capacity to manage property and understand the nature and effects of the power of attorney at the time of signing. The grantor must be at least 18 years old and mentally capable.
Who is mentally capable of making a power of attorney?
Any person is mentally capable of making a POA, who:
As well, to be mentally capable, the grantor must understand that:
Form
No specific form is necessary, but it must be referred to as a Continuing Power of Attorney for Property OR express the intention. To make a Continuing Power of Attorney for Property, the document must be called a Continuing Power of Attorney. Or, the grantor must write in the document that it gives his attorney power to continue acting for him if he becomes incapable.
Execution
Requires execution in the presence of two witnesses. Alternative witnessing methods (like remote witnessing) have been allowed due to COVID-19.
Excluded witnesses:
BUT a court may under section 10(4) of Substitute Decisions Act, 1992 still approve without formal requirements being met “if satisfied in grantor’s interests”
A power of attorney executed on or before October 3, 1995 otherwise valid under the POAA and that contained a provision expressly stating it may be exercised during any subsequent legal incapacity of the grantor is deemed to be a continuing power of attorney for property under the SDA.
Foreign Law Issues
It cannot be assumed that a CPOA for property will be sufficient authority to deal with the grantor’s assets in other jurisdictions. A continuing power of attorney may not be recognized in other jurisdictions, and local advice should be sought.
Attorney Resident in U.S.
Appointing a U.S. resident attorney can complicate the management of Canadian assets. Same concern as for U.S. resident estate trustees, there’s a potential need for liquidation due to U.S. Securities & Exchange Commission warnings against taking trading instructions respecting Canadian assets from a U.S. resident client.
Termination of Continuing Power of Attorney for Property
The power of attorney terminates in the following instances:-
Note:- The grantor should be cautioned about the risk of inadvertent revocation of COPA if he subsequently executed CPOA with a financial institution without declaring his intention to keep the previously appointed attorneys (502R)
Revocation of Continuing Power of Attorney for Property
Appointment can be revoked if the grantor retains capacity. Capacity test for revocation is same as that for making one under section 8(2) SDA, 1992. Revocation must be in writing, AND the same formalities as making a power of attorney under section 12(2) SDA, 1992.
Protection is given to third parties who honour the attorney’s authority in good faith and without notice of the revocation under section 13 SDA, 1992.
Duties
The document can specify whether the attorney’s authority begins immediately or only upon the grantor’s mental incapacity. This flexibility allows the grantor to tailor the power to their specific needs and circumstances. A CPOA grants the attorney broad authority over the grantor’s property and financial matters, which can include paying bills, managing bank accounts, and making investment decisions. The attorney is required to act in the grantor’s best interest, manage property prudently, and keeping detailed records of all transactions.
Authorized Expenditures, Gifts, and Loans
Attorneys must act in the grantor’s interest, though specific rules govern expenditures and loans. The attorney must keep accounts of all transactions involving the grantor’s property.
Standard of Care & Attorney Compensation
An uncompensated attorney must exercise the degree of care, diligence and skill that a person of ordinary prudence would exercise in conduct of the person’s own affairs.
A compensated attorney is subject to the higher standard of a person in the business of managing others’ property.
If the document is silent, SDA section 40 SDA, 1992 allows for annual compensation on a prescribed fee scale.
Power of Attorney for Personal Care
An entirely new framework that permitted a person to appoint an attorney to make decisions regarding the appointor’s personal care was created under Substitute Decisions Act, 1992 (SDA).
A Power of Attorney for Personal Care is a legal document in which one person gives another person the authority to make personal care decisions on their behalf if they become mentally incapable. Personal care includes health care, nutrition, shelter, clothing, hygiene, and safety.
Important aspects of Power of Attorney for Personal Care
Scope of authority of Attorney
The Health Care Consent Act (HCCA) is a law in Ontario that outlines who can make health care decisions for someone if they are unable to make those decisions themselves. This law establishes a list of substitute decision-makers who can give or withhold consent for medical treatments.
Role of Attorney for Personal Care
If a gantor appoints someone as his attorney for personal care (through a power of attorney document), this person gets priority over grantor’s relatives for making health care decisions on his behalf. This means they will be the first in line to give or refuse consent for any medical treatment the grantor needs, as long as there are no specific conditions or limitations in the document that appointed them.
When Powers of Attorney for Personal Care Take Effect
Capacity
General view that grantor should be at least 16 years old when the power of attorney document is signed. However, s.43 SDA does not specifically exclude a grantor younger than 16 years old from signing a POA for personal care document. The grantor must
Attorney must be at least 16 years old to act. Persons providing health care or certain other services to the grantor for compensation cannot act as attorney for personal care UNLESS spouse, partner, or relative of grantor.
A person may be incapable of personal care AND yet be capable of giving a power of attorney for personal care. (Section 47(2); Substitute Decisions Act, 1992)
Form
No specific form is necessary, but it must be referred to as a power of attorney for personal care OR express the intention.
Execution
Requires execution in the presence of two witnesses. Alternative witnessing methods (like remote witnessing) have been allowed due to COVID-19.
Excluded witnesses:
BUT a court may under section 10(4) of Substitute Decisions Act, 1992 still approve without formal requirements being met “if satisfied in grantor’s interests”
Foreign Law Issues
A power of attorney for personal care may not be recognized in other jurisdictions, and local advice should be sought.
Termination
The power of attorney terminates in the following instances:-
Revocation of POA for Personal Care
Appointment can be revoked if the grantor retains capacity. Capacity test for revocation’s same as that for making one under section 8(2) SDA, 1992. Revocation must be in writing, AND the same formalities as making a power of attorney under section 12(2) SDA, 1992.
Disputes Between Co-Attorneys
Disputes regarding healthcare decisions may be resolved by the Public Guardian and Trustee (PGT).
Standard of Care & Attorney Compensation
An attorney for personal care must act diligently and in good faith, and must explain the attorney’s powers and duties.
Where decisions are not governed by the HCCA :
If document silent, attorney may claim compensation as prescribed by legislation, but none exists currently
Imposing conditions and/ or restrictions on attorney’s authority
It is advisable not to impose an effective date based on the onset of incapacity within the document itself, unless grantor wishes to control the mechanism used for the capacity test.
If the POA for personal care authorizes the attorney or others to use necessary or reasonable force to undertake the capacity assessment, the authorization requires the grantor to:-
at execution of the POA or within 30 days afterwards
Important Points/ Key Takeaway
Avoid Combined Powers of Attorney Forms
Although not prohibited, it is not advisable to combine powers of attorney for property and personal care due to different tests for incapacity.
Practice Issues
Lawyers must ensure the grantor’s capacity and free consent, and verify that witnesses do not fall within prohibited classes. Proper execution and safekeeping of documents are essential.
By: Rajesh K. Sharma, Advocate (LinkedIn)
A will is a legal document that outlines how a person’s estate will be managed and distributed after death. It allows the individual, known as the testator, to specify their wishes regarding the distribution of his assets, appoint an executor to administer the estate, and designate guardians for any minor children. Without a will, the estate is distributed according to Ontario's intestacy laws, which may not align with the testator's wishes.
Individuals may create multiple wills to handle different types of assets, such as corporate and personal assets, to avoid probate fees on certain parts of the estate. Wills can be updated or revoked as circumstances change, ensuring the testator's wishes are always reflected. Having a well-drafted will ensures a smooth transition of assets and minimizes potential disputes among beneficiaries.
Lawyer Responsibilities
When drafting or preparing a will, lawyers in Ontario have several important responsibilities to ensure the document is valid, reflects the testator's wishes, and complies with legal requirements. Key responsibilities include:
Understanding the Testator's Intentions and Communication: Lawyers must thoroughly understand the testator's wishes regarding the distribution of their estate, appointment of executors, guardians for minors, and any special bequests or instructions. The lawyer must ultimately meet with the testator in person prior to the will’s being signed.
Providing Legal Advice: Lawyers advise clients on the legal implications of their decisions, including tax considerations, potential challenges, and the role of executors. They ensure that the testator understands the consequences of their instructions and suggest ways to avoid disputes or complications.
Ensuring Capacity and Voluntariness: Lawyers must assess whether the testator has the mental capacity to make a will and is acting of their own free will, without undue influence. This is crucial to ensure the will’s validity.
Drafting a Legally Compliant Will: The lawyer ensures the will meets all formal requirements under Ontario law, such as being in writing, properly signed by the testator, and witnessed by two independent witnesses. They also ensure the language is clear and unambiguous.
Managing Complexities: In cases involving complex estates (e.g., multiple properties, business interests, or blended families), lawyers may advise on the use of trusts, multiple wills, or specific bequests to handle unique circumstances.
Reviewing and Updating: Lawyers may periodically review the will with the client to ensure it remains current and reflects any changes in the client’s circumstances, such as marriage, divorce, or the birth of children.
Statutory Constraints on the Will
In Ontario, wills are subject to certain statutory constraints designed to ensure fairness, legal compliance, and protection of beneficiaries' rights. The Dependent Support Claim and the Family Law Act provide statutory protection to dependents and surviving spouses, ensuring that a will cannot completely disregard the needs of those who were financially dependent on the deceased. Some of the key statutory constraints include:
1. Dependent Support Claim (Succession Law Reform Act - SLRA)
Under the Succession Law Reform Act (SLRA) in Ontario, a dependent can make a claim for financial support from the estate if the deceased did not provide adequate support in the will. Dependents include spouses (married or common-law), children (including adult children), grandchildren, parents, and any other individuals whom the deceased was supporting or had a legal obligation to support before their death.
Adequate Provision: The testator must make “adequate provision” for dependents. If they fail to do so, the dependent can apply to the court for financial support.
Court’s Consideration: When determining support, the court considers factors such as the dependent’s financial needs, the size of the estate, the dependent’s relationship with the deceased, and the deceased’s obligations at the time of death.
Override of Will: A dependent support claim can override the deceased’s testamentary wishes, leading to a redistribution of assets to ensure dependents are properly cared for. This ensures that no dependent is left without necessary resources, even if they are excluded from the will.
2. Family Law Act (FLA) - Equalization of Net Family Property
The Family Law Act (FLA) provides significant rights to married spouses after the death of one spouse. Specifically, under the FLA, the surviving spouse can choose to either:
Take under the will, receiving whatever is left to them in the deceased’s estate, or
Elect for an equalization payment, which is similar to what they would be entitled to if the marriage had ended by divorce rather than death.
Equalization Payment: This entitles the surviving spouse to an equal division of the net family property, which is the difference between the increase in the value of each spouse’s property from the date of marriage to the date of death. If the deceased spouse’s estate is less than the surviving spouse’s equalization entitlement, the estate must make up the difference.
Election Process: The spouse must file an election with the court within 6 months of the deceased’s death. Choosing the equalization payment may result in them forfeiting what was left to them under the will.
Impact on Estate Distribution: An election under the FLA can significantly alter the distribution of the estate, especially if the equalization claim is larger than what was provided under the will. This statutory right ensures that the surviving spouse is financially protected.
Will Drafting
When drafting a will, the lawyer begins by gathering all relevant information about the client’s objectives and instructions. During the drafting stage, it is important to include certain administrative provisions that facilitate the proper administration of the estate, such as powers to sell assets, pay debts, manage minors’ shares, and make tax elections. One key provision is the authority for estate trustees to purchase estate assets for personal benefit, provided beneficiaries or the court approve.
Additionally, the lawyer may incorporate a memorandum by reference to detail specific personal effects. If the memorandum is intended to be legally binding, it must be prepared before the will is signed.
Lawyers must also avoid inadvertent distributions and address contingencies like beneficiaries predeceasing the testator (lapse). The anti-lapse provision in Ontario allows gifts to pass to a beneficiary’s descendants in certain cases unless the will specifies otherwise.
In drafting wills for couples or addressing complex family situations, the lawyer must account for simultaneous deaths, ultimate distribution scenarios, and provide for trusts when necessary. Consideration must also be given to investment authority, the rule against perpetuities, and trust accumulation limits to ensure proper management of trust assets.
Lawyers must navigate these complexities carefully to ensure the will accurately reflects the client’s intentions and complies with Ontario’s legal requirements.
Execution of will/ Signing of Will
In Ontario, the formal signing of a will requires the testator to sign at the physical end of the document in the presence of two witnesses, who must also sign. Witnesses should not be beneficiaries or married to beneficiaries, as this could void any bequest made to them unless proven that no undue influence was exerted. To avoid future complications, obtaining an affidavit of execution from one of the witnesses is recommended.
Due to the COVID-19 pandemic, alternative methods for witnessing wills were introduced, including remote witnessing via technology and the use of counterparts (separate but identical copies). The use of counterparts has become a permanent option, provided one witness is a licensee under the Law Society Act.
International wills, recognized under a global convention, offer added flexibility for clients with assets in foreign jurisdictions. Holograph wills, entirely handwritten by the testator, are also valid in Ontario and do not require witnesses, though they are generally used in emergencies. However, any handwritten portions of DIY will kits must independently reflect testamentary intent.
As of January 2022, Ontario’s courts can validate improperly executed wills if they clearly express the testator's intentions, introducing a "substantial compliance" standard to ensure a testator’s wishes are upheld despite formalities not being fully met
Will Storage
When a client keeps the original will, they should be warned of the potential issue that if the original will cannot be found at the time of death, the law may presume that the client destroyed it, leading to an assumption of intestacy. To mitigate this risk, lawyers should keep copies of the will, such as “true” or notarial copies, in their files.
If the client requests the lawyer to retain the original will, the lawyer should ensure they have appropriate secure storage, like a safe deposit box or a fire- and water-resistant filing cabinet. Additionally, the lawyer should obtain a written directive from the client allowing the lawyer to deposit the will with the local Superior Court of Justice registrar if contact with the client is lost, or if the lawyer intends to retire. Rule 74.02 of the Ontario Rules of Civil Procedure allows for such deposit by a lawyer who has custody of the will, ensuring its safekeeping in the absence of the lawyer or client
Important Points/ Key Takeaways
By: Rajesh K. Sharma, Advocate (LinkedIn)
Supreme Court of India Expands Definition of 'Owner' Under Motor Vehicles Act for Tortious Liability
The Supreme Court's observation in the Vaibhav Jain v. Hindustan Motors Pvt. Ltd. case expands the interpretation of "owner" under Section 2(30) of the Motor Vehicles Act, 1988 (MV Act) in the context of fixing tortious liability for motor vehicle accidents.
Section 2(30) of the MV Act defines "owner" as a person in whose name the vehicle is registered, or in cases where the registered owner has transferred possession, the person who has possession or control of the vehicle. The court, in this judgment, clarified that the definition is not restricted solely to these categories, and in certain situations, the term "owner" can be applied more broadly to include a person who has command or control over the vehicle at the time of an accident. This expanded interpretation is significant in cases where determining tortious liability for compensation is at issue.
In the case at hand, the Supreme Court was reviewing a civil appeal arising from a judgment of the Chhattisgarh High Court, which had enhanced the compensation awarded to the claimant and dismissed the dealer's appeal. The two-Judge Bench, comprising Justice J.B. Pardiwala and Justice Manoj Misra, emphasized that tortious liability may be attributed to a person who is effectively in control of the vehicle, even if they are not technically the registered owner.
This ruling is notable because it broadens the scope of who can be held liable for motor vehicle accidents, potentially holding dealers or other individuals in control of a vehicle responsible for compensating victims. The court analyzed whether, at the time of the accident, the vehicle was under the control of the dealer (the appellant), thus implying that the dealer could be considered the "owner" for the purposes of liability.
In essence, the decision underscores that the statutory definition of "owner" in the MV Act is flexible and can be expanded depending on the facts of the case, with the focus being on who had command and control of the vehicle at the time of the accident. This broader interpretation ensures that individuals who exercise effective control over a vehicle cannot evade responsibility simply because they are not the registered owner, which is crucial for victims seeking compensation.
By: Rajesh K. Sharma, Advocate (LinkedIn)
Introduction to Cultural Competence in Legal Practice
Cultural competence is an essential skill for legal practitioners, enabling them to provide effective, respectful, and inclusive legal services within a diverse society. Given the significant role that lawyers play in the administration of justice, cultural competence is critical in bridging the gap between the dominant legal culture and the diverse backgrounds of clients. This skill is crucial for maintaining public confidence in the fairness and integrity of the legal system.
Understanding Cultural Competence
Cultural competence refers to the ability to communicate and interact effectively with individuals from different cultural backgrounds. It requires an understanding of how cultural differences influence communication, behavior, and perspectives. For lawyers, this means recognizing how their own cultural background and the dominant culture in the legal system might affect their interactions with clients, witnesses, and colleagues.
Key Aspects of Cultural Competence:
1. Cultural Awareness:
Understanding that culture shapes how individuals and groups think, act, and interact. This includes recognizing how societal structures privilege the dominant culture while marginalizing others.
2. Self-Awareness:
Being aware of one's own cultural position and the relative privilege or disadvantage it might bring within a social context.
3. Recognition of Differences:
Identifying and respecting the differences between oneself and others, particularly in terms of cultural backgrounds, and how these differences can impact legal practice.
4. Understanding Clients’ Cultural Context:
Recognizing the cultural position of clients within their communities and how it affects their experiences, decisions, and interactions with the legal system.
5. Power and Privilege:
Understanding how power and privilege operate within society and the legal system, and how they can affect client interactions and access to justice.
6. Respect for Human Rights:
Ensuring that legal practices respect and promote human rights, particularly in relation to cultural diversity.
7. Adaptation of Practices:
Modifying legal practices to be more accessible and inclusive, ensuring that clients from diverse backgrounds receive equitable treatment and services.
Impact of Cultural Competence on the Lawyer-Client Relationship
A culturally competent lawyer is better equipped to build trust and maintain effective communication with clients from diverse backgrounds. This competence is critical because:
1. Miscommunication Risks:
Lawyers might misinterpret or negatively judge a client's actions based on their own cultural norms, leading to misunderstandings and impaired legal representation.
2. Client Trust:
A lawyer's ability to understand and respect a client's cultural background fosters a stronger fiduciary relationship, which is built on trust and respect.
3. Effective Advocacy:
Understanding cultural contexts enables lawyers to advocate more effectively on behalf of their clients, ensuring that their legal needs are fully met.
Skills for Developing Cultural Competence
To practice cultural competence, lawyers need to develop specific skills:
1. Cultural Awareness:
Recognizing how cultural differences shape social interactions and legal outcomes.
2. Self-Reflection:
Continuously reflecting on one's own biases and assumptions to ensure they do not negatively affect client interactions.
3. Effective Communication:
Adjusting communication styles to be inclusive and respectful of cultural differences.
4. Understanding Power Dynamics:
Recognizing the influence of power and privilege in the lawyer-client relationship and working to mitigate its impact.
5. Adapting Legal Practices:
Making necessary adjustments to legal services and office environments to accommodate the cultural needs of clients (e.g., avoiding scheduling meetings on religious holidays).
Cultural Barriers in Legal Practice
Lawyers must be aware of potential cultural barriers that can impact the lawyer-client relationship, such as:
1. Unconscious Bias:
Rapid judgments made without conscious awareness, often based on stereotypes or learned preferences.
2. Microaggressions:
Everyday behaviors or comments that subtly convey negative or derogatory messages to individuals from marginalized groups.
3. Cultural Homophily:
The tendency to associate with those who are similar, which can create barriers to inclusivity in legal practice.
To counteract these barriers, lawyers can:
1. Promote Microaffirmations:
Engage in small, positive behaviors that reinforce respect and inclusivity, such as learning the correct pronunciation of clients' names or recognizing cultural holidays.
2. Seek Guidance:
When uncertain about cultural protocols, lawyers should proactively seek advice from knowledgeable sources or directly ask the client how they can ensure respectful and appropriate treatment.
Cultural Competence in Legal Practice: Broader Implications
Cultural competence is not only about individual client interactions; it also has broader implications for the legal system:
1. Systemic Level:
Lawyers must recognize how systemic discrimination within the legal system affects clients' trust and engagement with legal processes. For example, understanding the impact of systemic racism in practices like police street checks is essential for effective advocacy.
2. Legal Culture:
Lawyers need to be aware that legal culture itself is a product of historical and societal norms, which may not align with the experiences of clients from diverse backgrounds. This awareness helps in bridging the gap between the legal system and the clients it serves.
The Importance of Cultural Competence
Cultural competence is a fundamental skill for lawyers, crucial for ensuring that legal services are delivered fairly and inclusively. By developing cultural competence, lawyers enhance their ability to serve clients effectively, uphold the integrity of the legal profession, and contribute to a more just and equitable legal system. Practicing cultural competence helps maintain public confidence in the administration of justice and reinforces the lawyer's role as a protector of human dignity and rights in a diverse society.
By: Rajesh K. Sharma, Advocate (LinkedIn)
Discrimination and Ontario Human Rights Code: Key Insights for Legal Professionals
As legal professionals, our role in the administration of justice places a special responsibility on us to uphold and protect the rights and dignity of every individual we serve. The Ontario Human Rights Code is a vital piece of legislation that ensures everyone in Ontario is treated equally, without discrimination, across various aspects of life—including employment, housing, and the provision of services, including legal services.
What Does the Code Cover?
The Code prohibits discrimination based on grounds such as race, gender, sexual orientation, age, disability, and more. Discrimination can occur directly, indirectly, or systemically, and it’s the impact of behavior—not just the intent—that determines whether an action is discriminatory.
Lawyers' Responsibilities
Employer Requirements:
For Employers with One or More Workers:
For Employers with Six or More Workers:
Why Is This Important?
Discrimination and harassment, unfortunately, still exist within the legal profession. Studies have shown that racialized licensees and other equity-seeking groups face significant challenges, highlighting the need for continuous improvement and adherence to human rights standards.
By committing to these principles and fulfilling our responsibilities as employers, we not only meet our ethical and legal obligations but also create safer, more inclusive workplaces that contribute to a more just and equitable society.
#HumanRights #LegalEthics #OntarioLaw #DiversityAndInclusion #Discrimination #LegalProfession #Lawyers #Professionalism #OntarioHumanRightsCode #WorkplaceSafety
By: Rajesh K. Sharma, Advocate (LinkedIn)
What is a Rollover?
In the context of Canadian tax law, a "rollover" refers to a provision in the Income Tax Act (ITA) that allows a taxpayer to defer the immediate recognition of income, gains, or losses when transferring property or reorganizing corporate structures. The essence of a rollover is that the taxpayer can move assets without triggering a taxable event, provided that certain conditions are met. The tax on the transaction is deferred until a later date, usually when the asset is eventually sold or disposed of under non-rollover conditions.
Fact Pattern Scenario
John's Corporation Reorganization
John owns 100% of the shares of a private Canadian corporation, ABC Ltd., which he has been running successfully for 20 years. John is considering retirement and wants to reorganize his company's share structure to allow his daughter, Sarah, to gradually take over the business.
Step 1: Initial Setup
John holds 1,000 common shares of ABC Ltd., each with an adjusted cost base (ACB) of $50 and a current fair market value (FMV) of $500 per share.
Step 2: Reorganization under Section 86
John decides to reorganize the share structure by exchanging his 1,000 common shares for 500 new preferred shares and 1,000 new common shares in ABC Ltd. under Section 86 of the ITA. The preferred shares are issued to John with a redemption value equal to the FMV of his old common shares ($500,000), and the new common shares are issued with no immediate value.
Application of the Rollover:
Under Section 86, John can elect to apply a rollover, which means that the exchange of his old shares for the new preferred and common shares will not trigger any immediate capital gains tax. The ACB of the old common shares ($50,000) is transferred to the new shares on a proportionate basis.
Step 3: Future Sale
Several years later, Sarah decides to redeem the preferred shares from John. At that time, the preferred shares are worth $600,000. Because the preferred shares were issued in exchange for the original common shares under a rollover, John's cost base remains at $25,000 for the preferred shares. He will now realize a capital gain of $575,000 ($600,000 - $25,000) when the preferred shares are redeemed.
Outcome:
By utilizing the rollover under Section 86, John was able to reorganize the share structure of ABC Ltd. without triggering an immediate taxable event, thus deferring the capital gains tax until the preferred shares were redeemed.
Key Points from the Scenario:
This scenario demonstrates how rollovers can be used strategically in corporate and personal tax planning to achieve specific financial and succession goals while managing tax liabilities effectively.
Rollovers under Income Tax Act (ITA)
Here is a comparative chart of the different rollovers available under Sections 51, 73, 85(1), 85(2), 86, 87, and 88(1) of the Income Tax Act (ITA):
Section | Rollover Type | Description | Assets Covered | Key Conditions |
51 | Convertible Property | Allows tax-deferred conversion of securities into shares in the same corporation | Convertible securities (options, warrants, etc.) | Conversion must be according to terms of the convertible property; only shares must be received. |
73 | Spousal and Family Rollovers | Allows tax-deferred transfer of property between spouses or to a trust for minors | Capital property, RRSPs, RRIFs | Transfer must be to a spouse or a trust for minor children; assets must be held as capital property. |
85(1) | Transfer of Property to a Corporation | Allows tax-deferred transfer of property to a Canadian corporation | Capital property, Canadian and foreign resource properties, inventory | Joint election required; the transferor must receive shares in exchange. |
85(2) | Partnership Transfer to a Corporation | Allows tax-deferred transfer of partnership property to a corporation | Capital property, resource properties, inventory | The partnership must receive shares in the transferee corporation in exchange for the property. |
86 | Corporate Reorganization | Allows tax-deferred exchange of shares in a corporation during reorganization | Old shares in a corporation | Exchange must be for new shares in the same corporation; no other consideration should be received. |
87 | Amalgamations | Permits tax-deferred merger of two or more Canadian corporations | All assets and liabilities of predecessor corporations | All shareholders must receive shares in the amalgamated corporation; no property is disposed of. |
88(1) | Wind-Up of Subsidiary into Parent | Allows tax-deferred transfer of assets from a subsidiary to a parent corporation | All assets of the subsidiary | The parent must own at least 90% of the subsidiary; the subsidiary must be wound up. |
This chart provides an overview of the key features, assets covered, and conditions for each type of rollover under the specified sections of the ITA, which are essential for tax planning and corporate reorganization.
By: Rajesh K. Sharma, Advocate (LinkedIn)
A capital dividend is a dividend that can be paid out of a corporation's Capital Dividend Account (CDA) to shareholders. The key feature of a capital dividend is that it is received tax-free by the shareholders, unlike regular dividends, which are subject to personal income tax.
Explanation with a Fact Pattern
Fact Pattern:
John is the sole shareholder and director of a private Canadian corporation, XYZ Ltd. XYZ Ltd. has been in operation for several years and has accumulated significant assets. Recently, the company sold an investment property, realizing a capital gain of $200,000. Additionally, XYZ Ltd. received $100,000 as a death benefit from a life insurance policy after the passing of a key executive. The policy's adjusted cost basis (ACB) was $20,000. John is considering paying himself a dividend and is exploring the option of declaring a capital dividend.
Understanding Capital Dividend:
A capital dividend is a dividend that can be paid out of a corporation's Capital Dividend Account (CDA) to shareholders. The key feature of a capital dividend is that it is received tax-free by the shareholders, unlike regular dividends, which are subject to personal income tax.
Components of the Capital Dividend Account (CDA):
1. Untaxed Portion of Realized Capital Gains:
2. Life Insurance Proceeds:
3. Eligible Capital Property (ECP) / Class 14.1 Property:
4. Capital Dividends Received:
Calculation of the CDA:
Total in the Capital Dividend Account (CDA): $215,000
Declaration of a Capital Dividend:
John, as the sole director, decides to pay himself a capital dividend. The amount of the capital dividend is deducted from the CDA. Suppose John decides to declare a capital dividend of $200,000.
Steps to Declare a Capital Dividend:
1. Directors' Resolution:
2. Election Form T2054:
3. Tax-Free Dividend to Shareholders:
Conclusion:
Capital dividends are a powerful tool for private corporations to distribute tax-free income to shareholders. However, strict compliance with the filing requirements is essential. If XYZ Ltd. fails to file the election (Form T2054) before paying the capital dividend, the corporation could face significant penalties. In John’s case, by correctly declaring and filing the capital dividend, he effectively receives $200,000 without any personal tax liability, utilizing the corporation’s CDA.
By: Rajesh K. Sharma, Advocate (LinkedIn)
Commercial Leases can be classified on the basis of Subject Matter and Financial Structure.
Commercial Leases on the basis of Subject Matter
On the basis of Subject Matter, Commercial Leases can be further divided into three types:-
1. Industrial Leases:
Used for manufacturing, warehousing, and distribution. Generally simpler, with tenants often responsible for maintenance and repair. Environmental provisions are crucial due to the nature of industrial operations.
2. Office Leases:
Pertaining to spaces used for professional services. More detailed, with tenants relying on landlords for various services like HVAC and elevator maintenance. Restoration obligations are often a focus.
3. Retail Leases:
For businesses that sell goods or services directly to consumers. Highly integrated, with landlords exerting control over use, signage, and tenant mix to maintain the retail center's viability. Exclusive-use rights and continuous operation clauses are common.
The following chart outlines the key differences and characteristics of industrial, office, and retail leases.
Aspect | Industrial Leases | Office Leases | Retail Leases |
Typical Provisions | Basic, with fewer additional provisions | Moderate complexity, more service dependencies | High complexity, many additional provisions |
Maintenance & Repairs | More responsibilities on the tenant | Landlord provides many services, tenant depends on landlord | High integration, responsibilities vary |
Environmental Issues | Significant, detailed environmental provisions | Less focus on environmental issues | Variable, depending on the type of retail space |
Use Restrictions | Often fewer restrictions | Moderate restrictions | Strict restrictions to maintain tenant mix and use |
Signage Rights | Usually fewer signage rights | Moderate signage rights | Critical, includes pylon sign rights |
Occupancy Obligation | Typically not required | Not necessarily required | Often required to continuously occupy the premises |
Relocation Rights | Rarely included | Sometimes included | Often included |
Measurement of Area | To exterior face of all exterior walls | To inside face of glass or exterior walls, center line of interior walls | To exterior face of exterior walls, center line of interior walls |
Common Area Inclusion | Usually no inclusion of common areas | Includes a pro-rata share of common areas | Generally no gross-up for common areas |
End-of-Term Restoration | Less focus, depends on tenant's use | Often more focus, can be costly | Variable, but often includes obligations to refresh or restore |
Landlord-Tenant Relationship | Less integrated, more self-sufficient | Moderately integrated | Highly integrated, akin to a partnership |
Commercial Leases on the basis of Financial Structure
Commercial leases can be categorized based on their financial structure, determining how rent and additional costs are allocated between the landlord and tenant. The three main types are net leases, gross leases, and percentage leases.
1. Net Leases
Net leases require tenants to pay a base rent plus additional expenses associated with the property. There are several variations:
Example: A tenant leasing a retail space under a triple net lease would pay the base rent and also cover property taxes, insurance premiums, and maintenance costs for the building.
2. Gross Leases
Gross leases involve a single, all-inclusive rent payment that covers all property-related expenses. The landlord is responsible for paying property taxes, insurance, and maintenance costs from the rent collected.
Full-Service Gross Lease: The landlord provides a range of services, such as utilities, janitorial services, and building maintenance, included in the rent.
Example: In an office lease with a full-service gross lease, the tenant pays one monthly rent amount, and the landlord covers all other costs associated with operating and maintaining the property.
3. Percentage Leases
Percentage leases are commonly used in retail properties, where the tenant pays a base rent plus a percentage of their gross sales. This structure aligns the landlord’s income with the tenant’s business success.
Standard Percentage Lease: The tenant pays a lower base rent and a percentage of gross sales over a specified breakpoint.
Modified Percentage Lease: Similar to the standard, but the percentage rent is calculated differently or includes other specific conditions.
Example: A tenant in a shopping mall might pay a base rent plus 5% of gross sales exceeding a certain amount each month, providing the landlord with additional income if the tenant’s business performs well.
4. Mixed Financial Structures
Some leases combine elements of the above structures, creating semi-gross leases or escalating leases. These arrangements might fix certain costs for the initial period and include provisions for increases over time, often tied to inflation or other indices.
Example: A semi-gross lease might include base rent with fixed utility costs for the first year, with adjustments for inflation in subsequent years.
By: Rajesh K. Sharma, Advocate (LinkedIn)
Difference Between a Lease and a Licence
Leases and licences are two different legal arrangements for occupying property, each with distinct characteristics and implications. The primary difference between a lease and a licence lies in the nature of the interest in the property and the level of legal protection afforded to the occupier. Leases grant an interest in land with exclusive possession and greater legal security, while licences provide a personal permission to use the property without exclusive possession and with fewer protections.
The following chart highlights the fundamental distinctions between leases and licences:-
Aspect | Lease | Licence |
Nature of Interest | A lease grants the tenant an interest in the property, creating an estate in land. | A licence grants permission to use the property without transferring any interest in the land. |
Possession | The tenant typically has exclusive possession of the premises, meaning they have the right to exclude others, including the landlord, from the property. | The licensee does not have exclusive possession and cannot exclude the licensor from the property. |
Legal Protection | Tenants have statutory protections and rights under tenancy laws, including protection against unjust eviction. | Licensees have fewer legal protections and can be more easily evicted. |
Binding on Third Parties | Lease rights are typically binding on third parties, meaning they remain in effect even if the property is sold. | Licence rights are personal to the licensee and do not bind third parties or future property owners. |
Formality | Leases usually require more formality, often needing to be in writing, especially for long-term arrangements. | Licences can be more informal and may be granted verbally or in writing. |
Duration | Leases are for a fixed term, providing certainty regarding the duration of the tenancy. | Licences are often more flexible regarding duration and can be terminated at short notice. |
Termination | Leases can only be terminated in accordance with the terms of the lease agreement or through legal processes. | Licences are generally revocable at the will of the licensor, subject to any terms of the agreement. |
Security of Tenure | Tenants have security of tenure, meaning they have the right to stay for the lease term unless they breach the lease terms. | Licensees have less security and can be asked to leave more easily. |
Examples of Use | Commercial Spaces: Offices, retail stores, warehouses.
Residential Property: Apartments, houses. | Temporary Access: Hotel rooms, event spaces.
Limited Use: Kiosks in malls, storage areas, parking spaces. |
Maintenance Responsibility | Often shared between landlord and tenant | Typically remains with the licensor |
Exclusive Possession | Yes, tenant can exclude others, including landlord | No, licensee cannot exclude the licensor |
Creation of Estate in Land | Yes | No |
Statutory Rights | Tenant has rights under tenancy laws | Licensee has no statutory tenancy rights |
Transferability | Can be assigned or sublet subject to lease terms | Generally not transferable |
Dispute Resolution | Governed by tenancy laws and courts | Governed by contract law |
Example Scenario
Lease:
Licence:
By: Rajesh K. Sharma, Advocate (LinkedIn)
Introduction
Statutory Constraints
Other Considerations
- Estate trustees.
- Guardians for minor children.
- Funeral and burial wishes.
- Property distribution.
- Family home and cottage arrangements.
Will Drafting
Signing
Storage
Key Takeaways
Introduction
Substitute Decisions Act, 1992 (SDA) was enacted by the Ontario government after a lengthy and detailed review of the law governing powers of attorney and substitutute decision making in Ontario. A comprehensive statutory framework was created governing substitute decision making with respect to both property and personal care.
It also included the concept of a “statutory guardian of property” and established the complete procedure for court-appointed guardians of (i) property, and (ii) the person.
Difference between Guardian and Attorney
A guardian is different from an attorney. An attorney is chosen by a person, before becoming incapable, to act on their behalf. A guardian is appointed through a legal process after a person’s incapacity.
A guardian of property is someone who is appointed by statute (the Substitute Decisions Act, 1992) or the court to look after an incapable person’s property. Both the guardian and the incapable person must be at least 18 years old. A court may appoint a guardian of the person to make decisions on behalf of an incapable person in some or all areas of personal care, usually because there is no power of attorney for personal care. The guardian must be at least 16 years old.
Procedure of appointment of Guardian
“Standard procedure” and the “summary disposition procedure” are two ways for the appointment of court-appointed guardian of property or personal care.
One major difference between the two “Standard procedure” and the “summary disposition procedure” is that standard procedure requires a hearing, and the summary procedure is “over the counter,” meaning the application is read by a judge in chambers without a hearing. Instead, two assessments (at least one by an official “assessor”) are required in the summary disposition procedure.
Requirements and procedure for the appointment of guardian of property under both “Standard procedure” and the “summary disposition procedure” is detailed below:-
Guardian of Property | Standard Procedure | Summary Procedure |
Hearing | Hearing is required | No hearing is required. Over-the-counter application is read by judge in chamber, but the application must contain statements from at least two medical assessors, OR one assessor and another person who saw the person within one year before issuance of notice of application. |
Documents required | 1. Proceeding commenced by notice of application (SDA s. 22(1)), seeking a finding that the person is incapable of managing property, and, consequently, it is necessary to appoint a guardian of property.
2. Personal service of notice of application on respondents (SDA s. 69(1), (6), (8), (9):
● the alleged incapable person;
● the person’s guardian;
● attorney under continuing POA;
● attorney for personal care;
● Public Guardian and Trustee; AND
● the proposed guardian of property, if not the applicant
3. Some relatives must be served by ordinary mail (SDA s. 69(6)), but they are not automatically respondents, including spouse/ partner, adult children; parents; AND adult siblings.
4. Applicant’s affidavit is required unless the applicant intends to call viva voce evidence.
Affidavit evidence is not to be on “information and belief”, except for uncontentious facts.
5. Separate management plans must be filed for guardianship of property, and guardianship of the person.
6. Medical affidavits are generally required as a practical matter, but not necessary in SDA: EITHER a capacity assessment by a duly-qualified assessor, OR at least two affidavits from physicians (Re Avery). | Notice of application, and applicant’s affidavit with exhibits as the core of the application record.
Additional capacity assessment is required.
● The person must meet with the alleged incapable person and provide statement in a prescribed form. The assessors use Capacity Assessment, s.7, Form A, and the non-assessors use General, Form 8.
● Assessor must be a member of a college listed in Capacity Assessment regulation.
● Assessment must have been made during the six months before the notice of application was issued.
● Prescribed form of statement for the assessor includes a statement that indicates they are of the opinion that it is necessary to appoint a guardian of property to make decisions on the allegedly incapable person’s behalf. The basis of this opinion must be set out. |
Service of Application Record | Personal service is required upon respondents.
Ordinary mail is required upon specified relatives. | Notice of application issued after assessment.
Procedure same as standard. |
Response to Service of Application Record | Respondent who wish to participate in the proceeding must deliver a notice of appearance.
Specified Relatives can become parties at any stage. | Procedure same as standard. |
Court Hearing and Judgment | Finding is required that the person is incapable, and, consequently, it is necessary for decisions to be made on person’s behalf (SDA s. 25(1)). Judgment should include specific statement appointing guardian (SDA s. 22(1)). Joint or multiple guardians of different property are possible.
Judgment must detail any security to be posted.
Guardian of property must adhere to management plan (SDA s. 32(10)), but guardian can apply to court for directions (SDA s. 39(1)).
Judgment should also address costs. | Judges are reluctant to declare incapacity without a hearing.
After time for delivery of notices of appearance has expired, applicant can require that the registrar submit the documents directly to a judge, and the judge may make a judgment without a hearing (SDA, s.77(1)).
The registrar must do so IF the applicant certifies that (SDA, s.77(2)):
● no notice of appearance has been delivered;
● appropriate documents have been submitted; AND
● at least one statement indicates that its maker is of the opinion that it is necessary for decisions to be made on the person’s behalf by a person who is authorized to do so.
NOTE that notice of appearance must be filed “forthwith”, so hard to know when to certify that it has not been filed.
Draft judgment is not necessary in application.
● But if applicant is seeking costs payable out of the property, it must be set out in a draft judgment.
Three possible dispositions: (i) judgment without a hearing; (ii) additional evidence or hearing required; OR (iii) order a trial. |
Requirements and procedure for the appointment of guardian for personal care under both “Standard procedure” and the “summary disposition procedure” is detailed below:-
Guardian of the Person | Standard Procedure | Summary Procedure
Standard procedure + two assessments by assessors |
Documents required | 1. Notice of application, seeking a finding that the person is incapable of some/all personal care functions set out in SDA s.45, AND a finding that the person needs decisions made on her behalf by an authorized person.
2. Applicant’s affidavit explaining application for full or partial guardianship of the person.
Section 45 lists the categories of decision-making.
3. A capacity assessment/ medical affidavits (no statutory requirement, but generally required by the court to record a finding of incapacity).
4. Proposed guardian’s consent to act.
5. Section 70(2)(c) statement.
6. Guardianship plan using General, Form 3 (s.70(2)(b)).
7. Consents from relatives are helpful, but not necessary.
8. Optional third-party statements from persons knowing the alleged incapable person (SDA s.71(1)), and in contact with the alleged incapable person during the preceding 12 months.
Preferably sworn as affidavits. | Standard procedure + two assessors must meet the alleged incapable person, perform an assessment of the person’s capacity during the six months before the notice of application is issued, AND provide statements in the prescribed form.
At least one statement must specify that the assessor believes that the person needs decisions made on her behalf by an authorized person.
Medical affidavits may be necessary, but it isn’t clear.
Preparing application record is the same as the standard procedure for guardianship of person. |
Service | Same as guardianship of property. | Same as standard procedure for guardianship of person. |
Response | Same as guardianship of property. | Same as standard procedure for guardianship of person. |
Court hearing and judgment | Considers criteria in SDA ss 55(2)(a)-(b) and 57(3)(a)-(c).
Judgment must specify full or partial guardianship (SDA s. 58(3)).
● Full only if person incapable of all functions in SDA s. 45).
● If partial, judgment must specify the functions.
Judgment may appoint joint guardians or multiple guardians to act for mutually exclusive time periods (513R).
Judgment may specify limited time period (SDA s. 58(2)(a)) or conditions (SDA s. 58(2)(b)).
Guardians may have authority to apprehend the person with police assistance (SDA s. 59(3)), to change the person’s custody or access arrangements, or to consent to adoption (SDA s. 59(4)(b)).
Guardian must act in accordance with guardianship plan (SDA s. 66(15). Good practice to get judgement direction that states this specifically. | Same as summary disposition procedure for guardianship of property.
At least one of the two assessors’ statements must indicate assessor is of opinion that the person needs someone authorized to make decisions on the person’s behalf (Capacity Assessment s.7, Form B).
Three possible disposition since same as summary disposition procedure for guardianship of property. |
Health Care Consent Act, 1996 (HCCA) and Substitute Decision-makers
Consent can be given or refused on behalf of incapable person based on a ranked list of priority
(s. 20 of the HCCA), from most priority to least:
HCCA, s.20(2) – person can only consent or refuse to consent to treatment on behalf of an incapable person IF :-
If the incapable person is at least 16 years old and objects to admission to a hospital or psychiatric facility, then consent can only be given by
(i). a guardian of the person with the authority to consent to the admission, OR
(ii). an attorney for personal care with authorizing provision. (s. 24, HCCA)
Lease Priority:
A lease is an interest in land and must be registered to provide notice to third parties and to protect the tenant's rights.
If a lease is registered before a mortgage, it generally takes priority over the mortgage. Conversely, if the mortgage is registered before the lease, the mortgage typically has priority.
Mortgage Priority:
A mortgage is a security interest in the property, and its priority is determined by the date of registration. The first registered mortgage generally has priority over later registered interests, including leases.
Common-Law Position
The common-law position on the interplay between leases and mortgages was notably addressed in two key cases:
- Goodyear Canada Inc. v. Burnhamthorpe Square Inc.:
- 1420111 Ontario Ltd. v. Paramount Pictures (Canada) Inc.:
This case affirmed the principle that a tenant under a lease that has priority over a mortgage is bound by the lease if the mortgagee enters into possession. The mortgagee must honor the lease and cannot oust the tenant.
Conversely, if the mortgage has priority over the lease, the mortgagee is not bound by the lease and can terminate the tenant's occupation upon default.
This case reinforced the principles established in Goodyear, emphasizing that tenants must be aware of the registration dates of leases and mortgages to understand their rights and obligations.
Non-Disturbance Agreements
To mitigate the risks associated with the priority of mortgages over leases, tenants often seek non-disturbance agreements from mortgagees.
These agreements provide that if the landlord defaults on the mortgage and the mortgagee takes possession, the mortgagee will not terminate the lease or disturb the tenant's occupancy.
In exchange, the tenant agrees to "attorn" to the mortgagee, recognizing the mortgagee as their new landlord under the same lease terms.
Practical Implications and Steps for Protection
(a). Title Search and Registration:
Tenants should conduct a thorough title search before signing a lease to identify any existing mortgages and their priority.
Registering the lease or a notice of lease can protect the tenant's interest and establish priority over subsequent mortgages.
(b). Negotiating Non-Disturbance Agreements:
Tenants should negotiate non-disturbance agreements with existing and future mortgagees to ensure their lease rights are protected if the landlord defaults.
Including a clause in the lease that requires the landlord to obtain non-disturbance agreements from mortgagees can provide additional security.
(c). Subordination, Non-Disturbance, and Attornment (SNDA) Agreements:
SNDA agreements are comprehensive documents that combine subordination, non-disturbance, and attornment provisions. They outline the relationship between the tenant, landlord, and mortgagee, ensuring clarity and protection for all parties.
(d). Mortgagee Rights:
Mortgagees may require tenants to acknowledge the priority of the mortgage and agree to subordination clauses, making the lease subordinate to the mortgage. This ensures that the mortgagee’s interests are protected in case of landlord default.
Fact Pattern:
John, the landlord, takes out a mortgage from Bank A and later leases part of the property to Sarah. Sarah registers her lease after the mortgage is registered. John defaults on the mortgage, and Bank A takes possession.
Analysis:
Priority: Since the mortgage was registered before the lease, Bank A’s interest takes priority. Bank A is not bound by Sarah's lease and may choose to terminate it.
Non-Disturbance Agreement: If Sarah had obtained a non-disturbance agreement, Bank A would be obligated to honor her lease, allowing her to remain in the property despite the foreclosure.
5. Registration of Commercial Lease Deed in Ontario
The registration of a commercial lease deed in Ontario is a vital process that secures the legal standing of the lease, establishes priority, and provides notice to third parties. By registering a lease or notice of lease, tenants and landlords protect their interests and ensure that the lease terms are recognized and enforceable in the event of property transactions or disputes.
The registration of a commercial lease deed in Ontario is a crucial step to protect the interests of both landlords and tenants. It ensures that the lease is legally recognized and provides public notice of the tenant’s rights under the lease.
Here’s an overview of the registration process and its significance:
Importance of Registration
Legal Recognition:
Registration provides formal recognition of the lease, making it legally binding and enforceable against third parties.
It ensures that the lease is documented in public records, providing transparency and clarity.
Priority and Protection:
Registering a lease establishes the priority of the tenant’s interest in the property. This is particularly important if there are multiple interests or claims on the property.
It protects the tenant’s rights in the event of a sale or transfer of the property, ensuring that the new owner is aware of and bound by the existing lease.
Notice to Third Parties:
Registration serves as notice to potential buyers, lenders, and other interested parties about the existence and terms of the lease.
This prevents disputes and ensures that all parties are aware of the tenant’s occupancy and rights.
Registration Process
(1). Preparation of Lease or Notice of Lease:
The lease or a notice of lease must be prepared, detailing essential terms such as the parties involved, the property description, the lease term, and any significant provisions.
A notice of lease is a summarized version that omits sensitive information like rent amounts but includes enough details to inform third parties of the lease's existence and key terms.
(2). Execution and Attestation:
The lease or notice of lease must be signed by the landlord and the tenant. In some cases, it may also need to be witnessed or notarized.
Proper execution ensures the document is legally valid and ready for registration.
(3). Submission to the Land Registry Office:
The executed lease or notice of lease is submitted to the Land Registry Office in the jurisdiction where the property is located.
The document is reviewed for completeness and accuracy before being accepted for registration.
(4). Payment of Fees:
Applicable registration fees must be paid at the time of submission. These fees vary based on the type of document and the jurisdiction.
(5). Issuance of Registration Number:
Once registered, the lease or notice of lease is assigned a registration number, and an official record is created in the land registry.
The registration number serves as a reference for future searches and legal proceedings.
Legal Framework
Registry Act (Section 70(2)):
Under the Registry Act, a lease of property does not need to be registered to bind third parties if the lease term does not exceed seven years and there is actual possession under the lease.
Land Titles Act (Section 44(1)(4)):
In the land titles system, a property is deemed encumbered by an unregistered lease if the lease has a period yet to run that does not exceed three years and if there is actual occupation under the lease.
Practical Considerations
A. Standard Lease Terms:
Most commercial leases prohibit tenants from registering the lease itself but permit the registration of a notice of lease to protect confidentiality and sensitive information.
Landlords typically reserve the right to approve the content of the notice of lease before registration.
B. Estoppel Certificates:
Tenants may also use estoppel certificates to provide evidence of the lease terms and their rights without disclosing sensitive details in the public registry.
Estoppel certificates confirm the status of the lease and are often requested by lenders or prospective purchasers.
6. Landlord Security
In commercial lease agreements, landlords often seek various forms of security to ensure that tenants fulfill their financial and contractual obligations. This security is crucial for mitigating risks associated with tenant defaults, such as non-payment of rent or failure to maintain the property. Here is a detailed overview of the types of security landlords may require and the legal considerations involved in commercial lease deeds in Ontario.
Types of Landlord Security
(a). Security Deposits
Purpose: Security deposits provide a financial buffer for landlords against potential losses due to tenant defaults, property damage, or unpaid rent.
Amount: Typically, security deposits amount to one to three months' rent, but the specific amount can vary based on negotiations.
Usage: Landlords can use security deposits to cover unpaid rent, repair damages beyond normal wear and tear, and address other breaches of the lease agreement.
Return Conditions: The conditions for returning the security deposit at the end of the lease term should be clearly outlined in the lease agreement.
(b). Prepaid Rent
Purpose: Prepaid rent serves as a guarantee for future rental payments, often covering the first and last months of the lease term.
Usage: It is applied to the rent due at the beginning and end of the lease term, reducing the risk of non-payment during these periods.
Legal Considerations: Landlords must ensure that the lease clearly specifies the application of prepaid rent and conditions for its return if applicable.
(c). Guarantees and Indemnities
Purpose: Guarantees and indemnities provide additional security by holding a third party responsible for the tenant’s obligations under the lease.
Guarantors: Common guarantors include corporate affiliates, business partners, or individual principals of the tenant.
Indemnity vs. Guarantee: An indemnity obliges the indemnifier to cover losses directly, while a guarantee requires the guarantor to fulfill the tenant's obligations if the tenant fails to do so.
Legal Standing: Guarantees and indemnities must be in writing and clearly outline the scope of the guarantor’s or indemnifier’s responsibilities.
(d). Letters of Credit
Purpose: A letter of credit is a financial instrument issued by a bank that guarantees the tenant’s payment obligations up to a specified amount.
Usage: Landlords can draw on the letter of credit if the tenant defaults, providing immediate funds to cover losses.
Renewability: The lease should specify the terms for renewing the letter of credit to ensure continuous coverage throughout the lease term.
(e). Personal Property Security Interest (PPSA)
Purpose: A personal property security interest allows landlords to claim a security interest in the tenant's personal property located on the leased premises.
Registration: Landlords must register the security interest under the Personal Property Security Act (PPSA) to perfect the interest and ensure priority over other creditors.
Scope: The security interest can cover various assets, including inventory, equipment, and fixtures, providing the landlord with collateral to recover losses in case of default.
7. Reporting to the Client
Effective reporting to the client is a critical aspect of managing commercial lease transactions. It ensures that the client is fully informed about the lease terms, their obligations, and any potential issues that might arise. This process involves providing clear, concise, and comprehensive information to the client, tailored to their level of sophistication and involvement in commercial leasing.
PART 5 - Remedies to the Landlord and Tenant under the Commercial Tenancies Act
In the context of commercial lease agreements, both landlords and tenants have various remedies available to address breaches or defaults by the other party. These remedies are designed to enforce the terms of the lease, ensure compliance, and provide recourse in the event of disputes.
Remedies Available to Landlords
1. Remedies for Tenant Defaults
Monetary Defaults
Notice and Cure Period: Most leases provide a specific period for the tenant to cure monetary defaults, such as unpaid rent. The landlord must provide written notice of the default, specifying the amount due and the time frame to rectify the default.
Termination and Re-Entry: If the tenant fails to cure the default within the specified period, the landlord may terminate the lease and re-enter the premises. The landlord may change the locks or physically take possession of the property.
Distress (Distraint): This self-help remedy allows the landlord to seize and sell the tenant's goods on the premises to recover unpaid rent. It is a drastic measure and must be executed with care to avoid legal complications.
Non-Monetary Defaults
Notice and Cure Period: Similar to monetary defaults, non-monetary defaults (e.g., failure to maintain the premises) require the landlord to provide written notice and a reasonable cure period.
Specific Performance: The landlord can seek a court order compelling the tenant to perform their obligations under the lease, such as making necessary repairs.
Injunctive Relief: The landlord can seek an injunction to prevent the tenant from engaging in prohibited activities or to enforce specific terms of the lease.
2. Other Remedies
Claim for Damages
Legal Action: The landlord can sue the tenant for damages resulting from the breach, including lost rent, repair costs, and other expenses incurred due to the tenant’s default.
Mitigation of Damages: After terminating the lease, the landlord must make reasonable efforts to re-let the premises to mitigate losses. The landlord can claim damages for the difference between the original rent and the rent received from a new tenant.
Security Enforcement
Security Deposits: The landlord can apply the tenant’s security deposit to cover unpaid rent or repair costs resulting from the tenant’s breach.
Guarantees and Letters of Credit: The landlord can enforce guarantees or draw on letters of credit provided by the tenant to recover losses.
3. Relief from Forfeiture
Court Application: The tenant can apply to the court for relief from forfeiture, seeking to nullify the lease termination. The court has discretion to grant relief if it deems it just and equitable, considering factors such as the tenant's efforts to remedy the default and the hardship faced by both parties.
Remedies Available to Tenants
1. Remedies for Landlord Defaults
Failure to Provide Possession
Specific Performance: The tenant can seek a court order compelling the landlord to provide possession of the premises as agreed in the lease.
Damages: The tenant can claim damages for any losses incurred due to the landlord's failure to provide possession, such as relocation costs or lost business opportunities.
Breach of Quiet Enjoyment
Injunctive Relief: The tenant can seek an injunction to stop the landlord or third parties from interfering with their quiet enjoyment of the premises.
Damages: The tenant can claim damages for any losses resulting from the breach of quiet enjoyment, such as lost profits or business disruption.
2. Other Remedies
Repair and Deduct
Self-Help Remedy: If the landlord fails to perform necessary repairs, the tenant may carry out the repairs and deduct the cost from future rent payments. This remedy must be explicitly allowed in the lease agreement.
Rent Abatement
Partial Reduction: If the premises become partially unusable due to the landlord's actions or inaction, the tenant may be entitled to a rent reduction proportionate to the unusable portion of the premises.
Termination of Lease
Fundamental Breach: If the landlord's breach is so severe that it fundamentally undermines the lease, the tenant may terminate the lease and vacate the premises. This is typically a last resort and requires clear evidence of a fundamental breach.
Court Application: Similar to the landlord, the tenant can apply for relief from forfeiture if they believe the lease termination was unjust. The court will consider the tenant's conduct, the nature of the default, and the potential impact on both parties.
PART 6 - Common Lease Issues in Commercial Lease Deeds
Commercial lease agreements in Ontario often involve various complex issues that can impact both landlords and tenants. Addressing these issues effectively in the lease deed is crucial to ensure a smooth leasing relationship and to prevent disputes. Here is a detailed overview of some of the most common lease issues encountered in commercial lease deeds in Ontario.
1. Operating Costs
Definition and Allocation: Operating costs, also known as additional rent, typically include expenses related to the maintenance, repair, and operation of the property, such as utilities, property taxes, insurance, and common area maintenance (CAM).
Gross-Up Clauses: Many leases include gross-up clauses that allow the landlord to adjust the operating costs to reflect what they would be if the property were fully occupied. This ensures that the landlord recovers a fair share of expenses from all tenants.
Exclusions: Tenants often negotiate exclusions from operating costs, such as capital expenditures, costs of correcting structural defects, and expenses covered by the landlord’s insurance or warranties.
2. Repairs, Maintenance, and Restoration
Responsibilities: Leases should clearly delineate the responsibilities for repairs and maintenance between the landlord and tenant. Typically, the tenant is responsible for interior maintenance, while the landlord handles exterior and structural repairs.
Restoration Obligations: At the end of the lease term, tenants may be required to restore the premises to their original condition. This can include removing leasehold improvements and repairing any damage beyond normal wear and tear.
Disputes: Ambiguities in the lease regarding repair obligations can lead to disputes. It is essential to clearly define what constitutes ordinary maintenance versus capital repairs.
3. Insurance
Coverage Requirements: Leases usually stipulate the types of insurance coverage required for both the landlord and tenant. This includes property insurance, liability insurance, and business interruption insurance.
Allocation of Risk: Leases often include provisions that allocate risk between the parties through indemnities and releases. Landlords typically seek to shift as much risk as possible onto tenants.
Mutual Waivers: Some leases include mutual waiver clauses, where each party waives their right to claim against the other for certain types of losses covered by insurance.
4. Assignment and Subletting
Landlord’s Consent: Most leases require the tenant to obtain the landlord’s consent before assigning the lease or subletting the premises. The consent should not be unreasonably withheld, delayed, or conditioned.
Conditions and Restrictions: The lease may specify conditions under which assignment or subletting is permitted, such as the assignee’s financial stability and the proposed use of the premises.
Recapture Rights: Some leases grant the landlord the right to terminate the lease and recapture the premises if the tenant seeks to assign or sublet, effectively allowing the landlord to re-lease the space at potentially higher rates.
5. Use of Premises
Permitted Use: The lease should specify the permitted use of the premises. This is crucial in retail leases where the landlord may want to control the tenant mix and prevent competition.
Prohibited Uses: Leases often list prohibited uses to maintain the character of the property and prevent activities that could harm other tenants or the property’s reputation.
Continuous Operation: Retail leases often include clauses requiring tenants to continuously operate their business during specified hours to maintain the vitality of the shopping center.
6. Options to Renew or Extend
Renewal Terms: The lease should specify whether the tenant has an option to renew or extend the lease term and the conditions for exercising this option.
Market Rent: Renewal terms often include provisions for determining the rent during the renewal period, commonly based on the current market rate.
Notice Periods: The lease should clearly define the notice period required for the tenant to exercise their renewal or extension option to avoid disputes over timing.
7. Good Faith and Fair Dealing
Implied Duty: In Canadian contract law, including Ontario, there is an implied duty of good faith and fair dealing, as established by the Supreme Court of Canada in Bhasin v. Hrynew. This duty requires parties to act honestly and not mislead each other about their contractual performance.
Lease Clauses: While good faith is implied, some leases explicitly include clauses requiring both parties to act in good faith in fulfilling their obligations, providing additional clarity and reducing the risk of disputes.