The Prudent Investor Rule for Trustees Under Ontario Law

If you are a trustee in Ontario and you hold investments for others, you may worry about what happens if the market falls. The law does not expect a trustee to guarantee returns, but it does expect a careful process.

This article explains the main investment rules in Ontario's Trustee Act and the protections that can apply if something goes wrong.

The standard: a prudent investor

Under the Trustee Act, in investing trust property, a trustee must use the care, skill, diligence and judgment of a prudent investor. In plain words, the standard asks what a careful, sensible investor would do when managing money that belongs to other people.

What a careful process includes

When planning investments, a trustee must consider the criteria listed in the Act and must diversify to an appropriate extent. A trustee may also obtain investment advice. A trustee may delegate investment functions to an agent.

• Settle on an investment plan or strategy that a prudent investor could adopt, since that is what the loss protection looks at.
• Spread the investments out rather than concentrating them in one asset.
• Consider getting advice if you do not have the skill yourself.
• If you use an agent, you are delegating a function under the Act. Ask a lawyer how to supervise and document that arrangement.
• How often to revisit your approach, and what records to keep, depends on your situation, so it is worth confirming with a lawyer.

The trust document comes first

The Act's investment powers do not authorize or require a trustee to act inconsistently with the terms of the trust. A will or trust deed might limit the kinds of investments you may hold, or it might require you to keep a particular asset. Read the document before you rely on the general rules.

When a trustee is blamed for a loss

A trustee is not liable for an investment loss if the conduct that led to the loss followed an investment plan or strategy that a prudent investor could adopt. Whether a particular plan meets that description depends on the facts, so it is worth confirming with a lawyer.

Separately, a court may relieve a trustee wholly or partly from personal liability for a breach of trust if the trustee acted honestly and reasonably and ought fairly to be excused. This relief does not apply to losses from investing trust property. For those losses, the trustee relies on the plan-or-strategy protection.

What a beneficiary can do if they are unhappy with a trustee's investment decisions depends on the facts, so it is worth confirming with a lawyer. For estate trustees, the Superior Court of Justice may remove them on any ground on which it could remove any other trustee, and appoint someone else in their place. The general limitation period is two years from the day a claim was discovered, with exceptions, so timing matters.

What to do next

If you are unsure how to proceed, a trustee may apply to the Superior Court of Justice, without starting an action, for the court's opinion, advice or direction on managing trust property. A trustee may also pay a trust expense personally and recover it from the trust property, although the court may later disallow it.

• Get a copy of the will or trust document and note any investment limits.
• List the trust's assets and the needs of each beneficiary.
• Choose an investment plan or strategy a prudent investor could adopt, and diversify to an appropriate extent.
• Consider getting investment advice.
• Gather the trust's account statements and other documents in one place so you can find them easily.
• Speak to a lawyer before making large or unusual investments, or if a beneficiary complains.

Frequently asked questions