Can a Trustee Be Excused From Personal Liability in Ontario?

Being a trustee or estate trustee carries real responsibility. If something goes wrong with the trust property, you may worry that you could be personally on the hook for the loss, even if you were trying to do the right thing.

Ontario law does give courts some room to excuse an honest trustee, but that room has limits, and investment losses follow a different path. This article explains how the rules fit together, what trustees can do to protect themselves, and what beneficiaries should know about time limits.

When a court can excuse a trustee

Under section 35(1) of the Trustee Act, 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.

All parts of that test matter: honesty, reasonableness and whether it would be fair to excuse the trustee. The court looks at how the trustee behaved and whether it would be fair to excuse them. The relief can be complete or partial, so a trustee might be excused for some of a loss but not all of it.

It is a discretionary power. Nothing guarantees that a court will grant it, and the outcome turns on the facts. A lawyer can help you assess how a court is likely to view your own situation.

Investment losses are treated differently

The key exception is that the section 35 relief does not apply to losses from investing trust property. For those losses, the trustee relies instead on the protection in section 28.

Section 28 says 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. So the question is not whether the trustee seemed reasonable and honest in a general sense. It is whether the trustee followed a plan or strategy of that kind.

The prudent investor standard

Section 27(1) of the Trustee Act sets the standard: when investing trust property, a trustee must use the care, skill, diligence and judgment of a prudent investor.

• Consider the listed criteria when planning investments.
• Diversify to an appropriate extent.
• Obtain investment advice where it makes sense.
• Delegate investment functions to an agent if appropriate, as section 27.1 permits.

The trust terms come first. The Trustee Act's investment powers do not authorize or require a trustee to act inconsistently with the terms of the trust. If the will or trust document restricts or directs investments, read it carefully before relying on the general rules.

Practical steps that protect a trustee

• Ask the court for guidance. 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.
• Be careful with expenses. A trustee may pay a trust expense personally and recover the same amount from the trust property, but the court may later disallow the expense. Keep receipts and a clear reason for each one.
• Pass your accounts. A trustee who wants to pass the accounts of their dealings with the trust may file them in the office of the Superior Court of Justice.
• Keep a written investment plan and record any advice you obtained, since the investment protection depends on following a plan or strategy.

Passing accounts follows the Rules of Civil Procedure. The trustee files the accounts verified by affidavit, and the court issues a notice of application to pass accounts, which must then be served on everyone with an interest. A beneficiary who objects must serve and file a notice of objection at least 35 days before the hearing. Confirm current form numbers before you file.

Also remember that trustees are entitled to fair and reasonable compensation for their care, pains, trouble and time, fixed by a judge, unless the trust document sets the amount. Keeping good records helps with that too.

The beneficiary's view: time limits

If you are a beneficiary thinking about a claim, timing matters. The general limitation period in Ontario is two years from the day the claim was discovered. A claim is discovered when you knew, or reasonably ought to have known, of it.

There is also an outer limit: no proceeding may be started more than 15 years after the act or omission. That 15-year period does not run while the defendant wilfully conceals the loss, though the claimant must prove the concealment. The two-year period also does not run while a claimant is a minor, or is incapable of starting a proceeding and is not represented by a litigation guardian.

A beneficiary who has a financial interest in an estate and is worried may also bring a motion for an order requiring the estate trustee to pass accounts.

What to do next

• Trustees: gather the trust document, account records, receipts and any investment advice, and consider asking the court for directions before a risky decision.
• Beneficiaries: write down when you first learned of the problem and act promptly, because the two-year clock may already be running.
• Either side: speak with a lawyer early, since whether relief is available depends on the facts.

Frequently asked questions