In this Advisory, we present an overview of the principles of trustee investment under Ontario's governing legislation, the Trustee Act. As well, we provide a critical analysis of the main implications of the legislation for trustees, beneficiaries and advisors concerned with trust investment.
OVERVIEW OF TRUSTEE INVESTMENTS IN ONTARIO
Standard of Care
In July 1999, significant amendments to the Trustee Act regarding trustee investment came into force and those rules continue to govern today. By far the most sweeping change to the law governing trustee investment at the time was the introduction of a new standard of care incorporating the "prudent investor rule". Under prior legislation, if a trust agreement did not provide broad investment authority, a trustee was obligated to invest only in "trustee investments" set out under the Trustee Act, which were conservative and heavily fixed-income oriented. If a trust agreement provided broad investment authority, case law determined what were "prudent" investments for trustees, and focused on the nature of the individual investment, as opposed to the overall investment strategy.
Since July 1999, a trustee has been permitted to invest trust property in any form of property in which a prudent investor might invest, and must exercise the care, skill, diligence, and judgment any prudent investor would exercise in making investments. As a result, the types of investments trustees can currently invest in are considerably broader than under the former rules.
Authority to Invest in Mutual Funds and Common Funds
The legislation specifically authorizes trustees to invest in mutual funds, notwithstanding any rule of law in Ontario case law pre-dating July 1999 that prohibited a trustee from delegating his or her powers or duties.
Trustees also have express authority under the Act to invest in common trust funds if trust property is held by co-trustees and one of the co-trustees is a trust company. Common trust funds are pooled investment funds used by a trust company to consolidate the investment management of trusts and estates it administers as trustee.
Mandatory Investment Criteria
The Act sets out mandatory investment criteria which a trustee is obligated to consider in planning the investment of trust property, in addition to any others that are relevant to the circumstances. These criteria include:
- general economic conditions;
- the possible effect of inflation or deflation;
- the expected tax consequences of investment decisions or strategies;
- the role that each investment or course of action plays within the overall trust portfolio;
- the expected total return from income and the appreciation of capital;
- needs for liquidity, regularity of income and preservation or appreciation of capital; and
- an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
Diversification Requirement
The legislation also requires that trustees diversify the investments of a trust as appropriate having regard to the requirements of the trust and to general economic and investment market conditions.
Authority to Obtain Investment Advice
Trustees have express authority to obtain investment advice. The legislation specifically provides that it is not a breach of trust for a trustee to rely on advice he or she obtains if a prudent investor would rely on such advice under comparable circumstances.
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