



COURT OF APPEAL FOR ONTARIO

CITATION:
The
    Canada Trust Company v. Browne, 2012 ONCA 862

DATE: 20121207

DOCKET: C53262

Feldman, Simmons and Cronk JJ.A.

In the Matter
    of the Primo Poloniato Grandchildrens Trust

BETWEEN

The Canada Trust Company Trustee of the Primo Poloniato Grandchildren's
  Trust

Applicant (Respondent)

and

Russell Browne,
John Mori Jr.
, Andrea L. Mori-Mickus, Laura Lee,
Marla L. Ashmore
,
Teresa O'Neil
, Michael Poloniato,
  Kristen Wiley, Brandon Ashmore, and
The Children's Lawyer
on behalf of the minors, Rachel Browne, Hailey Browne, Michelle Wiley, Jessica Ashmore, Julia
  Mickus, Robert Mickus, Olivia Mickus, John Mickus, Marissa Lee, Erica Lee and
  on behalf of the unborn and unascertained beneficiaries of the Primo
  Poloniato Grandchildren's Trust

Respondents (
Appellant
/
Respondents
)

Earl A. Cherniak, Q.C. and Cynthia B. Kuehl, for the
    appellant

Archie J. Rabinowitz, David Lobl, and Jeremy C. Millard, for
    the respondent Canada Trust Company

Mark Abradjian, Christopher R. Durdan and Brad Wiseman, for
    the respondents John Mori Jr., Marla L. Ashmore and Teresa ONeil

Heard: April 11, 2012

On appeal from the order of Justice Laurence A. Pattillo
    of the Superior Court of Justice, dated October 5, 2011, with reasons reported
    at 2011 ONSC 731.

Feldman
    J.A.:

INTRODUCTION

[1]

The Childrens Lawyer brings this appeal on behalf of the minor, unborn
    and unascertained beneficiaries of the Primo Poloniato Grandchildrens Trust
    (the Trust). The Trust was settled in October 1980 by Primo Poloniato, the
    founder of Primo Foods Ltd., in favour of his grandchildren (the income
    beneficiaries) and their issue, his great-grandchildren (the capital
    beneficiaries). The Trusts principal asset is shares in 679312 Alberta Ltd.
    (the Holding Company), a private investment company controlled by the Trust.
    While the value of the Trust has fluctuated over the years, at its peak it was
    worth in excess of $130 million.

[2]

Since its inception, the Trust has been varied with court approval twice
    - in December 1988 and again by a deed of arrangement, dated December 1997, which
    was approved in March 1998. Both variations were made based on the agreement and
    consent of all parties, including the Childrens Lawyer (in 1988, the Official
    Guardian) on behalf of minor, unborn and unascertained beneficiaries.

[3]

The application that gives rise to this appeal was brought by Canada
    Trust, the Trusts current trustee, for the courts advice and direction to
    clarify the trustees obligations under the Trust agreement as varied by the 1997
    trust deed (the Trust Deed as Varied). That variation changed the nature of
    the Trust to a percentage trust or a unitrust. It allowed the trustee to
    have a freer hand to make investments within the Holding Company in order to
    maximize the value of the Trust for the benefit of all beneficiaries, without
    concern as to whether those investments were income-producing or growth-oriented.

[4]

The Trust Deed as Varied provides that the income beneficiaries receive
    a fixed percentage of the net fair market value of a defined percentage of the Trusts
    assets as their distribution each year. This provides the income beneficiaries
    with a guaranteed annual income, allowing them to be able to plan their
    spending priorities and obligations with confidence. As a percentage trust, if the
    income-producing investments chosen by the trustee do not produce sufficient
    income to make the distributions, the trustee may sell equities or other
    capital investments held by the Holding Company in order to generate sufficient
    funds to make the percentage payments to the income beneficiaries.

[5]

For the residuary capital beneficiaries, the benefit of the 1997
    variation is that the trustee may invest in equities and other appreciating assets,
    which will ultimately be available for the capital beneficiaries, rather than
    being constrained by the obligation to earn income and preserve capital.

[6]

The 1997 variation application was based on accounting projections of
    the future value of the Trust that were prepared by Ernst & Young based on
    past market performance. Those projections saw the value of the Trust continue
    to increase over time.

[7]

Unfortunately, because economic conditions since 2001 have resulted in
    lower than expected investment returns, the trustee has had to continue to sell
    a significant portion of the underlying assets owned by the Holding Company in
    order to make the annual percentage distributions to the income beneficiaries,
    resulting in an ongoing depletion of the value of the Trust as a whole.

[8]

The application judge interpreted the Trust Deed as Varied to require
    the trustee to make the percentage distributions to the income beneficiaries in
    spite of the downturn in the market and its effect on the capital value of the Trust.

[9]

The Childrens Lawyer appeals from the application judges decision,
    arguing that the application judge ignored trust principles and failed to take
    into account the proper factual matrix in interpreting the terms of the Trust Deed
    as Varied. Counsel submits that the effect of the decision is to erode the
    interests of the capital beneficiaries to the point of elimination, which could
    not have been what was intended when the 1997 variation received court
    approval.

[10]

For the
    reasons that follow, I would dismiss the appeal. In my view, the application judge
    interpreted the Trust Deed as Varied in accordance with proper trust principles
    and in the way it was understood and intended by all the consenting parties and
    by the approving court at the time.


FACTS

[11]

Mr. Poloniato,
    who died in 1984, had seven grandchildren. All are now of full age and
    capacity. At the time of the application there were 12 great-grandchildren, six
    of full age and capacity and six minors.

[12]

The Trust
    was settled as part of an estate freeze. Initially, the Trust held the growth
    shares of Primo Foods through an Ontario numbered company. Upon Mr. Poloniatos
    death, the shares were sold and the proceeds were invested in securities and
    near cash equivalents, which are now held by the Holding Company.

[13]

Under the
    original terms of the Trust, income from the Trust would be accumulated until
    the earlier of the expiration of 21 years from the settling of the Trust, or
    the death of the settlors first grandchild (the latter defined as the Time of
    Division). At the Time of Division, the Trust would be split equally into
    sub-trusts for each grandchild then living or who had issue living. Subsequent
    to the Time of Division, the income from each sub-trust would be paid to each
    grandchild during his or her lifetime and, on the death of the grandchild, the
    capital of each sub-trust would be payable to one or more of the grandchilds
    issue as designated by him or her pursuant to a power of appointment. The
    trustee was given no specific power to encroach on capital.

[14]

By the
    mid-1980s, the value of the Trust had grown significantly. The grandchildren,
    who were the income beneficiaries, sought earlier access to some of the income
    from the Trust to assist them in addressing their immediate financial needs and
    to prepare them for the anticipated receipt of a large sum of money beginning in
    October 2001 (the expiration of 21 years from the settlement of the Trust).

[15]

In
    December 1988, the court approved a trust variation that accelerated payment of
    income to the income beneficiaries beginning in 1988 and continuing to 2001.
    The variation sought by the trustee was consented to by all the adult
    beneficiaries and the Official Guardian.

[16]

The main
    elements of the 1988 variation (also referred to as the Settlement) were the  following:

·

The income beneficiaries
    became entitled to receive 1/7 of the gross annual income of the Trust in
    1988 and an increasing percentage each year up to 1/3 of the gross annual
    income for the years 1998, 1999 and 2000; the distributable income was to be
    paid to those grandchildren alive in each of those years, divided in equal
    shares
per capita
.

·

From January 1, 2001 onwards on an
    annual basis, all the net income from the Trust fund was to be divided in equal
    shares
per capita
among the grandchildren.

·

The trustee was permitted to
    encroach on capital to a maximum of $200,000 for each family unit for the
    benefit of the great-grandchildren.

·

The income beneficiaries released
    their power of appointment in respect of their capital interests under the
    Trust so that every one of their issue (all the great-grandchildren) would be
    equal capital beneficiaries.

[17]

Some
    problems arose following the 1988 variation, including uncertainty about the
    meaning of the term gross annual income. Also, the grandchildren (the income
    beneficiaries) wanted to receive a predictable annual amount of money so that
    they could plan and live knowing what amount would be available each year.
    Finally, because by 1997 the equity markets were performing very well while
    interest rates were in decline, it was felt that both classes of beneficiaries
    were losing out on overall returns because of the investment restrictions on
    the trustee regarding the need for income-producing assets. The trustee was not
    able to maximize the value of the Trust at a time when there were significant
    growth opportunities in the market for those with a more unconstrained
    investment mandate.

[18]

According
    to an affidavit on the motion to approve the 1997 variation sworn by Mike Ruf,
    a trust officer of the then trustee, National Trust Company, the second
    variation in 1997 was meant to resolve the interpretive issue, to give the
    trustee more discretion as to the management of the investments, and to make
    distributions to income beneficiaries more predictable.

[19]

Among
    other things, the 1997 variation was designed as a percentage trust or a
    unitrust, a new type of trust that had been recommended by the Ontario Law
    Reform Commissions
Report on the Law of Trusts
(Ministry of the
    Attorney General, 1984).

The percentage trust or unitrust would allow
    the trustee to use a balanced portfolio strategy of investing. Paragraph 26 of
    the Ruf affidavit explains:

The principal advantage of the revised method of distribution
    is that it will enable the Trustee to adopt a balanced portfolio strategy which
    most likely in the longer term will provide the greatest asset base for the
    capital beneficiaries, being the minor children and unborn issue of the
    Grandchildren.

[20]

As counsel
    for the trustee at the time of the 1997 variation, Mr. Martin Rochwerg explained
    in his evidence on this application that the advantage of a percentage trust is
    that it allows the trustee to invest for maximum returns, regardless of whether
    they result in capital gains or income. The total growth is then split between
    the income and capital beneficiaries on a specified percentage basis. He
    explained further that the interests of the income and capital beneficiaries
    would therefore be in tandem, because they would either both benefit or they
    both lose. The effect of the conversion to a percentage trust was that the
    income beneficiaries were no longer entitled to receive income from the Trust;
    instead they would receive a fixed amount of money from the Trust each year,
    based on a percentage formula that included mandatory minimum and maximum
    limits.

[21]

Prior to
    the approval of the 1997 variation, a no-tax ruling was sought and obtained from
    Revenue Canada (now the Canada Revenue Agency or CRA). By letter of June 1997
    addressed to Revenue Canada, Mr. Rochwerg enclosed a memorandum that explained
    the reasons for the proposed variation and that addressed the issue whether the
    proposed variation would result in a disposition of a capital interest for tax
    purposes.

[22]

One of the
    points covered in the memorandum was the legal requirement that the arrangement
    be for the benefit of minors and unborn and unascertained beneficiaries, who,
    in this case, were the capital beneficiaries. The memorandum opined that the
    court would not approve the proposed arrangement on behalf of those beneficiaries
    if the result was that their interest would be diminished. In this case, the
    benefit to the capital beneficiaries was said to come primarily from the
    Trustee being freed from restrictions on investing so that the Trustee [could]
    adopt an investment policy which will further enhance the value of the Trust.

[23]

After some
    back and forth between the CRA and the Trusts advisors, the CRA granted an
    advance tax ruling based on the facts as set out in the ruling letter, which
    included the following paragraph:

10. In no event will the annual distribution [to the Income
    Beneficiaries] be less than the previous years distribution. Where it is
    determined that the amount to be distributed based on the formula is less than
    the previous years distribution, the current year's distribution will be
    adjusted to the amount of the prior years distribution. The new system will
    also provide that the current years distribution cannot exceed 115% of the
    previous years distribution.
The Deed of Arrangement will also limit
    income distributions in any one year to the amount of cash dividends the Trust
    receives from [the] Holding Company in that year, ensuring there will be no
    encroachment on capital of the Trust on behalf of the Income Beneficiaries
.
    These provisions will have the effect of providing the Income Beneficiaries
    with a stable annual income, and ensuring some growth to the Capital
    Beneficiaries. In determining the appropriate Distribution Percentage (70%) for
    the years 2001 and onward, various asset mixes were tested and compared with
    the results using a rigid asset mix.  Rates of return for the last 10 years
    were used in these projections.  Provided these rates of return are a
    reasonable indication of future rates of return, the new formula will provide
    an after-tax increase for the Capital Beneficiaries and should also provide a
    slightly greater after-tax return for the Income Beneficiaries over the longer
    term. [Emphasis added.]

[24]

The basis
    for selecting 70 per cent in setting the Yearly Income to be distributed to
    income beneficiaries starting in 2002, which was the amount recommended and
    accepted as part of the arrangement, was explained in the Ruf affidavit at
    para. 23.  The distribution percentages of 25 per cent for 1997 and 33-1/3 per
    cent for 1998-2000 were the same as in the Trust deed as varied in 1988, which
    he refers to as the Settlement. He then states: In all years thereafter the
    Distribution Percentage represents a reduction of 30% from that set out in the
    Settlement. This was because the Settlement provided that, beginning in 2001, the
    trustee was to administer the Trust Funds annual income by dividing 100 per
    cent of the net income among the grandchildren on a
per capita
basis. Therefore,
    a 70 per cent distribution represented a 30 per cent reduction from what they
    would have received under the Settlement.

[25]

The CRA
    ruling required that income distributions be in the form of cash dividends paid
    by the Holding Company to the Trust in any year in order to ensure that there
    would be no encroachment on the capital of the Trust (the shares of the Holding
    Company). On that basis, the CRA was prepared to give the ruling that [t]here
    will not be a disposition of any income or capital interest in the Trust as a
    result of the proposed transactions. This ruling was needed in order to
    implement the proposed 1997 variation without adverse tax consequences.

[26]

The
    Childrens Lawyer consented to the 1997 variation on behalf of the capital
    beneficiaries who were unable to consent, namely those who were minor, unborn
    or unascertained persons.

[27]

Ernst &
    Young had prepared a number of calculations for the purpose of advising on the proposed
    variation, including a comparison of the projected capital using the then
    existing portfolio mix of 70 per cent debt and 30 per cent equities, and
    comparing that to an asset mix of 70 per cent equities and 30 per cent debt.
    Those calculations, which were provided to the Childrens Lawyer, showed an
    expected benefit to the capital beneficiaries of approximately $2 million after
    five years and $12 million after ten years.

[28]

In a 1996
    letter to the Childrens Lawyer explaining the background to the proposal, Mr.
    Rochwerg summarized five benefits of the proposed variation for the capital
    beneficiaries. It would: 1) increase growth from better investment performance;
    2) reduce costs of administration; 3) address the issue of 21-year planning to
    reduce imminent tax liability; 4) impose a cap on the income entitlement that would
    leave more growth for the capital beneficiaries; and 5)  accelerate the use of
    significant tax-free and refundable tax amounts.

[29]

This
    letter also explained the concept of the percentage trust that had been
    endorsed in 1984 by Ontarios Law Reform Commission in its
Report on the
    Law of Trusts
. The percentage trust allows the trustee to invest to
    increase the overall value of the trust and to allocate funds to the income or
    capital beneficiaries without regard to whether those funds themselves are
    income or capital of the trust.  In that regard, the
Report
recommended
    that the percentage payment to the income beneficiaries come first from the
    annual income, and if insufficient, then from capital: p. 303.

[30]

Justice
    Donna Haley, a Superior Court judge with significant expertise in wills and
    trusts, approved the 1997 variation. In her endorsement, she found that the
    proposed variation was in the best interests of the great-grandchildren as they
    would benefit both directly as capital beneficiaries and by the certainty of
    income provided by the variation to their parents who are all grandchildren
    under the trust.

[31]

Commenting
    on the context in which the 1997 variation application was made, the
    application judge below observed that at the time, interest rates were
    declining and capital markets were heating up. It was anticipated by all parties,
    he noted, that the rates of return which had been historically achieved on the
    assets of the Holding Company would be equalled or exceeded in the future.

[32]

However, a
    few years after the 1997 variation was approved, it transpired that investment
    returns were not consistently as strong as predicted, which has had a
    significant effect on the Trust and its value.

[33]

The
    application judge further observed:

[A] decrease in market performance of the Trusts assets has
    resulted in the calculation of Yearly Income in each year being less than the
    Yearly Income which was paid to the income beneficiaries in 2002. Because the
    definition of Yearly Income in clause 0.1(g) of the Trust Deed as Varied
    provides that the Yearly Income cannot be less than the prior years Yearly
    Income, the result has been that the amount the Trust has distributed to the
    income beneficiaries for each year after 2002 has been the 2002 amount.

In order to be able to pay the Yearly Income to the
    income beneficiaries as required, the trustee was obliged to cause the Holding
    Company to sell assets.

[34]

In 2003,
    the trustee commissioned a report on the expected life of the Trust, assuming
    distributions were maintained at then current levels.  The report indicated
    that, depending on investment returns, the capital of the Trust would be
    expended in 18 to 20 years.

[35]

The
    respondent income beneficiaries rely on a more recent report obtained by the
    trustee in 2007 that estimates that the projected value of the Trust in 2022 could
    be about $90 million depending on investment returns.

[36]

Because of
    the concerns of the trustee, the Childrens Lawyer and other beneficiaries that
    the minimum annual percentage distributions to the income beneficiaries were
    depleting the Trust capital, the trustee applied to the court for direction on
    the extent of the trustees discretion not to make the minimum percentage
    distributions to the income beneficiaries in order to preserve the value of the
    Trust corpus for the capital beneficiaries.

[37]

In
    particular, the trustee wanted to know whether it retained a duty to maintain
    an even hand between the income and capital beneficiaries in managing Trust
    distributions, and therefore a discretion to stop making the prescribed percentage
    payments to the income beneficiaries that were eroding the value of the Trust.

APPLICATION JUDGES DECISION
    AND REASONS

[38]

The
    application judge provided detailed reasons explaining his interpretation of
    the Trust Deed as Varied. The relevant provisions of the Trust deed are set out
    in the Appendix to these reasons.

[39]

He found
    the provisions of the Trust Deed as Varied to be clear and unequivocal and thus
    all that needed to be considered apart from the agreement was the factual
    matrix. In his view, the Ruf affidavit best summarized the circumstances at the
    time of the 1997 variation. He concluded that the evidence of the discussions
    leading up to the agreement and subsequent approval of the 1997 variation,
    communications with the CRA, the parties understandings as to what was
    intended by the 1997 variation or what was communicated to them subsequently,
    and any legal opinions as to what the 1997 variation means, constituted
    extrinsic evidence that was inadmissible for the purposes of interpreting the
    Trust Deed as Varied.

[40]

In
    bringing the application, the trustee set out two questions to be answered by
    the application judge. The first question was: does the trustee have the
    discretion to cause the Holding Company that is controlled by the Trust to
    distribute sufficient income to the Trust to meet the minimum annual
    distribution requirements to the income beneficiaries? In order to answer that
    question, the application judge was required to consider the meaning of the
    following provisions of the Trust Deed as Varied: the definitions of Yearly Income,
    Applicable Percentage, Net Income, and paras. 1(a), 1(c) and 5(vi).

[41]

The
    application judge first found that clause 1(a) together with the definition of
    Yearly Income in clause 0.1(g)(vi) are clear and unambiguous. He concluded
    that the requirement in clause 1(a) to pay the Yearly Income and associated
    taxes to the income beneficiaries was mandatory. Those provisions read:

Yearly Income for a calendar year shall mean the amount equal
    to:



(vi)  in 2002, and in each year thereafter, 70% of the
    Applicable Percentage for the year of the Net Fair Market Value of the trusts
    assets valued as of the first business day of the calendar year, provided
    further that the Yearly Income
shall not be less than the Yearly Income of
    the previous calendar year, nor greater than 115% of the Yearly Income of the
    previous calendar year
.

1.   The Trustee shall keep invested the Trust Fund until the
    date of the death of the first of the grandchildren of Primo Poloniato alive at
    the date of this agreement (hereinafter collectively referred to as the
    Grandchildren and individually as a Grandchild) to die (hereinafter
    referred to as the time of division) and until the time of division, the
    Trustee shall deal with the Trust Fund as follows:

(a)
the Trustee shall pay the Yearly Income
to or for
    the benefit of the Grandchildren in equal shares in each calendar year. The
    Trustee shall also from time to time as determined by the Trustee but at least
    annually pay amounts out of the income of the trust to a

Grandchild to
    compensate him or her for any taxes payable by such Grandchild or withheld by
    the Trustees from such Grandchild pursuant to the Income Tax Act in respect of
    the Yearly Income from the trust.  The Trustee shall also have the discretion
    to additionally compensate a Grandchild, who is a non-resident of Canada for
    purposes of the
Income Tax Act
, for any foreign taxes or similar
    amounts paid or payable by the Grandchild on account of the receipt by the
    Grandchild of a distribution hereunder  Any income of the trust for a calendar
    year in excess of the Yearly Income ... shall be added to the capital; [Emphasis
    added.]

[42]

He observed
    that the mandatory duty created in clause 1(a) is qualified by clause 1(c),
    which ensures that the mandatory payments are made from the Net Income of the Trust,
    which means cash dividends paid by the Holding Company (or income from other
    assets of the trust) and not from a sale or other disposition of the shares of
    the Holding Company, which would constitute a disposition of the capital of the
    trust. Paragraph 1(c) provides:

(c)  notwithstanding the foregoing subparagraphs of this
    paragraph 1, the total of all amounts on account of Yearly Income and any
    additional payments to a Grandchild paid in a year, shall not exceed the Net
    Income of the trust
.


[43]

The application
    judge then turned to clause 5(vi) which reads:

5.    The Trustee in addition to all other powers available to
    it by law or otherwise, shall have the following powers, authorities and
    discretions:

...

(vi)  to determine whether any payments made by the Trustee in
    the due administration of the Trust Fund shall be charged against the capital
    of the Trust Fund or against the income therefrom or partly against capital and
    partly against the income and such determination shall be final and binding
    upon all persons concerned  and
to manage the investments of the trust,
    including any distributions from any corporations controlled by the Trustee in
    order that the Net Income, of any trust hereunder shall be no less than the
    amount required to be distributed to a Grandchild during a calendar year
;
    [Emphasis added.]

[44]

He
    concluded that this clause grants powers to the trustee, including the power to
    manage the investments and pay the distributions, in a manner that will achieve
    the objective of creating sufficient net income to pay the minimum annual
    amounts to the income beneficiaries. The highlighted portion of clause 5(vi)
    did not create a duty or obligation on the trustee, but an objective or purpose
    to guide the trustee.

[45]

The
    application judge found that the power to manage investments in clause 5(vi)
    carried with it a discretion in the trustee to determine the way in which the
    investments would be managed. It followed that the power to manage
    distributions, which by the wording of clause 5(vi) was included in the power
    to manage investments, must also give rise to discretion in the trustee to
    determine how distributions were managed.

[46]

Moreover,
    clause 5(vi) made clear that the trustees discretion to manage investments,
    including distributions from the Holding Company of cash dividends, was guided
    by the investment objective to ensure that the Net Income shall be no less
    than the amount required to be distributed to a Grandchild during a calendar
    year.

[47]

Based on
    this analysis, the application judge concluded in answer to the first question that,
    under the Trust Deed as Varied, the trustee does have a discretion regarding
    both the investment and distribution of the Trust assets.

[48]

The second
    question put to the application judge was: if the answer to the first question
    is yes, is the trustee still subject to the duty to maintain an even hand
    between the income beneficiaries and the capital beneficiaries when exercising
    the discretion to manage distributions?

[49]

Citing
Waters Law of Trusts in Canada
, the application judge noted that the duty
    to maintain an even hand could be excluded by the terms of the trust deed. The
    duty can be ousted either by express words or by implication. In every case it is
    a matter of construction: Donovan W.M. Waters, Mark R. Gillen & Lionel D.
    Smith,
Waters Law of Trusts in Canada
, 3d ed. (Toronto: Thomson
    Carswell, 2005) at pp. 966  969.

[50]

In this
    case, the application judge considered whether the even hand principle continued
    to apply in two contexts - the investment of the Trust assets and their
    distribution to the beneficiaries.

[51]

Dealing
    first with the trustees duty with respect to the investment of the Trust
    assets, the application judge found it was clear that, when read together, the
    terms of the Trust Deed as Varied ousted the duty on the trustee to maintain an
    even hand. Because the income beneficiaries were now entitled to receive their
    percentage share from the total return on investment, whether by income or
    capital appreciation, there was no longer any necessity to maintain a distinction
    between interest and capital for investment purposes. Instead, the trustee
    could invest in a balanced portfolio for the benefit of all. He noted that this
    finding was consistent with the intentions of the parties as reflected in the
    Trust Deed as Varied.

[52]

The
    application judge came to a similar conclusion regarding the trustees
    obligation to maintain an even hand in managing distributions. He found that, too,
    had been ousted by the terms of the Trust Deed as Varied and the way it was designed
    to operate with a prescribed minimum payment to the income beneficiaries each
    year.

[53]

The power
    to manage distributions in clause 5(vi) was included in the power to manage
    investments. He reasoned that if the duty to maintain an even hand did not
    apply to the power to manage the investments of the Trust, it could not apply
    to the included power to manage distributions.

[54]

The application
    judge found that the wording of the Trust Deed as Varied clearly required that
    capital assets held by the Holding Company would be sold, if necessary, to fund
    the obligations to the income beneficiaries. For the trustee to meet the
    obligation to pay the Yearly Income to the income beneficiaries, it must
    require the Holding Company to pay sufficient cash dividends to the Trust and
    those dividends must be sourced from the Holding Companys returns on its
    investments, which included both income and capital appreciation. To the extent
    that the obligations of the Trust could not be met from the income earned on
    investments, it was intended that they would be met from the sale of assets in
    the Holding Company sufficient to generate the required cash dividends.

[55]

The
    application judge also found that to interpret the Trust deed to require the
    trustee to maintain an even hand between income and capital in respect of the
    distribution of monies from the Holding Company, so that the trustee could
    distribute only income from the Holding Company to the Trust to fund the
    obligations to the income beneficiaries, would render the clear language of
    clause 1(a) and the definition of Yearly Income in clause 0.1(g) completely
    ineffective.

[56]

He further
    concluded that that interpretation would also fly in the face of the stated
    objective of the parties to the 1997 variation  to permit the income
    beneficiaries to share (with the capital beneficiaries) in the overall
    appreciation of the Trusts assets on an annual basis, while still providing them
    with a degree of certainty in respect of the annual amount they would receive.

[57]

The
    application judge rejected the submission that the settlors original intent,
    as discerned from the original Trust deed, was relevant to the interpretation
    of the Trust Deed as Varied. He also rejected the relevance of the court
    approval of the 1997 variation by Haley J. He said that it had no bearing on
    the issue before the court on the application, as the issue before the court
    was whether the 1997 variation was in the best interests of the capital
    beneficiaries and the material before the court at that time clearly confirmed
    that it was.

[58]

Finally,
    he did not agree that the 1997 variation would obliterate the interests of
    the capital beneficiaries. There was an indirect benefit to the capital
    beneficiaries  who were all children of the income beneficiaries  and, as
    well, a return to previously projected rates of return would no doubt go a
    long way to maintaining and perhaps increasing the capital. The negative
    projections were all based on the assumption that current low rates would
    continue.

[59]

To
    conclude, in answer to the second question, the application judge found that
    the duty to maintain an even hand was ousted by the terms and necessary
    operation of the Trust Deed as Varied.

ISSUE ON APPEAL

[60]

The issue
    on appeal is whether the application judge made a fundamental error in his
    interpretation of the Trust Deed as Varied by finding that minimum percentage
    payments to the income beneficiaries were mandatory and that the even hand rule
    had been ousted with respect to the management of Trust distributions, leaving
    open the potential for depletion of the capital of the Trust to the detriment
    of the capital beneficiaries.

[61]

The appellant
    takes the position that the application judge erred in the following specific ways:

1) He erred in law by applying only contractual as opposed to
    trust interpretation principles to the interpretation of the Trust Deed as
    Varied and in particular:

a)  He narrowly
    construed the factual matrix so as to exclude any consideration of the role of
    the court and its jurisdiction in approving the 1997 variation.

b)  He excluded
    other evidence relevant to the factual matrix, specifically the CRA ruling.

c)  He ignored
    the intention of the settlor in the interpretive exercise.

d)  He made
    inconsistent interpretive findings concerning the trustees ability to
    encroach.

e) He failed
    to consider the objective of the 1997 variation that there be capital growth.

f)   He failed
    to consider whether his interpretation was consistent with the language of the Trust
    agreement when read as a whole.

2)  He erred in law by finding, contrary to trust principles
    and the language of the Trust Deed as Varied, when read as a whole, that the
    obligation of the trustee to maintain an even hand with respect to the
    management of Trust distributions was ousted.

[62]

Three of
    the income beneficiaries participated in this appeal. They take the position
    that the appellant is essentially asking the court to find that the trustee may
    pay less than the stipulated Yearly Income in the years in which the investment
    portfolio does not create sufficient returns in the form of income to fund the
    Yearly Income. They say that there is nothing in the wording of the Trust Deed
    as Varied or the factual matrix to support this interpretation.

[63]

The
    current trustee says it takes a neutral position on this appeal.

ANALYSIS

Principles of Interpretation

[64]

The appellant argues that the application judge
    erred by interpreting the Trust Deed as Varied only as a contract, and that he failed
    to apply trust principles as part of the interpretive process. When the court
    is interpreting a trust that has been varied on consent of the beneficiaries,
    contractual interpretation principles are applied to determine the objective intent
    of the parties. However, because the agreement is a trust, trust principles
    must also inform that interpretation.

[65]

Before he embarked on the interpretation of the Trust
    Deed as Varied, the application judge acknowledged that regard must also be
    had to the fact that the document under review is a trust deed and not strictly
    a commercial instrument. The appellants specific concerns will be addressed
    individually in the course of the following analysis.

Issue 1- Factual Matrix  General Principles


[66]

Before
    addressing the appellants specific arguments, it is important to review what
    is meant by the factual matrix of an agreement.

[67]

It is well
    established that in interpreting a contract, the court may consider the
    factual matrix surrounding the contract, even where there is no ambiguity.
    Indeed, because words always take their meaning from their context, evidence
    of the circumstances surrounding the making of a contract has been regarded as
    admissible in every case:
Hi-Tech Group Inc. v. Sears Canada Inc.
(2001), 52 O.R. (3d) 97 (C.A.), at para. 23.

[68]

In
Dumbrell
    v. The Regional Group of Companies Inc.
(2007), 85 O.R. (3d) 616, at para.
    53, this court affirmed the relevance of the factual matrix to contractual
    interpretation:

[53] The text of the written agreement must be read as a whole
    and in the context of the circumstances as they existed when the agreement was
    created. The circumstances include facts that were known or reasonably capable
    of being known by the parties when they entered into the written agreement

[69]

This court
    noted in
Dumbrell,
at para. 55, that while there is some debate about
    the outer limits of the scope of factual matrix, it clearly encompasses the
    genesis of the agreement, its purpose, and the commercial context in which the
    agreement was made.

[70]

In
Glaswegian
    Enterprises Inc. v. BC Tel Mobility

Cellular Inc.
(1997), 49
    B.C.L.R. (3d) 317, at para. 18, the British Columbia Court of Appeal described
    the factual matrix as the background of the contract:

The factual matrix is the background of relevant facts, that
    the parties must clearly have been taken to have known and to have had in mind
    when they composed the written text of their agreement. It can throw light on
    what the parties must have meant by the words they chose to express their
    intention.

The factual matrix is the background which may deepen an
    understanding of what the parties meant by the language they used, but the
    Court cannot make a new agreement.

[71]

While the
    scope of the factual matrix is broad, it excludes evidence of negotiations,
    except perhaps in the most general terms, and evidence of a contracting partys
    subjective intentions: Geoff R. Hall,
Canadian Contractual Interpretation
    Law
, 2d ed. (Markham: LexisNexis, 2012), at p. 27.  As the cases above
    suggest, the factual matrix includes only objective facts known to the parties
    at or before the date of the agreement, and what is common to both parties:
    Hall, p. 30.  Hall goes on to state that while the factual matrix can be used
    to clarify the parties intentions as expressed in a written agreement, it
    cannot be used to contradict that intention, create an ambiguity which
    otherwise does not exist in the written document, or have the effect of making
    a new agreement: p. 31 (footnotes omitted). Ultimately, the words of the
    agreement are paramount.

Issue 1(a) - Court Approval of the 1997 Variation

[72]

The
    appellants position is that if the interpretation of the 1997 variation is not
    one that could have been approved by the court, then it could not have been
    what the parties intended or the court understood or approved at that time. The
    appellant submits that the application judge erred in finding that the approval
    of the variation has no bearing on the issue before the Court in this
    application. To the contrary, the basis for the courts approval must form
    part of the factual matrix.

[73]

Under s. 2
    of the
Variation of Trusts Act
, R.S.O. 1990, c.  V.1, the court must
    be assured that any variation approved constitutes a benefit for those whose
    interests it has a duty to protect. It cannot ever have been intended, argues
    the appellant, that the interests of the capital beneficiaries would be diminished
    or defeated entirely. Had that been the intention or considered a reasonable
    consequence of the proposed variation, it would not have been approved by the
    court, nor could the Childrens Lawyer have consented to it.

[74]

The
    problem with the appellants submission is that the variation application was
    brought on a record that explained how the variation would be beneficial to the
    capital beneficiaries, primarily by increasing the value of the capital through
    investment in equities with growth potential as part of a balanced portfolio.
    The expert evidence suggested that, based on past performance, such a portfolio
    would increase in value in the future. The Childrens Lawyer agreed to the
    variation on that basis and the court approved it on that basis.

[75]

The application
    from which this appeal is brought is not a variation application, nor is it a
    late appeal from that application. Rather, it is an application to the court to
    interpret the Trust Deed as Varied.

[76]

The
    appellants submission is that the approving court would not have found the
    variation to be for the benefit of the minor, unborn and unascertained capital
    beneficiaries had it known that markets would fall and not continue to perform
    as they did through the late 1990s. Therefore this court should interpret the
    words of the variation in a manner that would allow the trustee to disregard
    the mandatory provisions of the Trust Deed as Varied. Instead, the court should
    read the deed as implicitly giving the trustee a discretion to reduce the
    payments to the income beneficiaries in order to preserve the capital of the Trust
    for the capital beneficiaries, on the basis that the even hand principle
    remains in effect under the Trust Deed as Varied.

[77]

Stated
    another way, the appellant submits in para. 47 of its factum that: if [the
    application judges] interpretation of the 1997 Variation is not one that could
    have been approved by the court, then of necessity, it could not have been what
    the parties intended or the court understood or approved at that time.

[78]

The appellants
    first argument to support this submission is that the application judge erred
    by stating that the variation approval and its basis were irrelevant to his
    interpretation of the Trust Deed as Varied. The appellant says the factual
    matrix includes the court approval and the record that formed the basis of the
    approval application and that the application judge was required to consider
    those factors as part of the factual matrix.

[79]

I agree
    with the appellants submission that the court approval of the 1997 variation and
    the material that supported it are an important part of the factual matrix that
    informs the interpretation of the Trust Deed as Varied. And I agree that it
    would have been an error for the application judge to ignore the court approval
    of the 1997 variation in his analysis. However, it is clear that that is not
    what occurred.

[80]

As the
    basis for the factual matrix he considered, the application judge relied on the
    affidavit of Mr. Ruf that was used to support the court approval variation application.
    The application judge explicated in detail how the variation had to benefit the
    capital beneficiaries before it could be approved and that the court found, and
    the material stated, that it did so.

[81]

What the application
    judge stated near the end of his reasons is that, on the application before
    him, the court was not performing an approval function but an interpretation
    function. In other words, on this application  as distinct from the 1997
    variation application  the court was not deciding what was in the best
    interests of the capital beneficiaries.

[82]

That said,
    the application judge also went on to dispute the position of the appellant
    that the effect of the 1997 variation would necessarily be to obliterate the
    interests of the capital beneficiaries. The value of the Trust did increase for
    a few years following 1997. Although markets later took a downturn, the
    appellants pessimistic forecasts are based on a continuation of that downturn.
    The application judge observed that a return to previously projected rates of return
    would go a long way to maintaining and possibly even increasing the capital.  Obviously
    no one knows the future. However, it was open to the application judge to make
    this observation based on the evidence in the record before him, including the
    2007 projection report.

Issue 1(b) - CRA Tax Ruling

[83]

The second
    aspect of the factual matrix that the appellant says the application judge
    failed to consider was the CRA tax ruling and related correspondence. In the
    appellants submission, the CRA ruling made explicit that the definition of Net
    Income was included to ensure that there would be no disposition of the
    capital assets of the Trust for the benefit of the income beneficiaries.
    Moreover, the CRA stated that the purpose of the 1997 variation was to ensure
    growth of the capital assets for the benefit of the capital beneficiaries and trustees
    counsel confirmed in correspondence to the CRA that capital assets would not be
    diminished as a result of the 1997 variation.

[84]

Contrary
    to this submission, it is clear that the application judge considered, as part
    of the factual matrix, the CRA ruling that was appended to the Ruf affidavit,
    as important relevant background.

[85]

To the
    extent that the application judge did not consider the correspondence to the
    CRA and from the tax authorities, I agree with the appellant that this
    correspondence is helpful in understanding the full factual context of the 1997
    variation and I have included some references to it in the statement of facts
    in these reasons. However, the appellant has not pointed to anything in the
    ruling or in that correspondence that contradicts or changes the factual matrix
    as described by the application judge or the basis on which the court approval
    was obtained in 1998.

[86]

The appellant
    also argues that the CRA inserted clause 1(c) and the definition of Net
    Income as cash dividends from the Holding Company into the Trust Deed as
    Varied to ensure that the trustee would not encroach on capital to the
    detriment of the capital beneficiaries.

[87]

I would
    not accede to this argument. This interpretation is not supported by anything
    in the correspondence from the CRA. That correspondence was directed to
    ensuring that cash dividends would be paid from the Holding Company to the Trust.
    It was the form of those dividends as income to the Trust that would govern
    their tax treatment, which was the sole concern of the CRA. This is consistent
    with the form rule, used in the administration of trusts, which says that for
    trust accounting purposes, the form of a distribution determines its
    characterization as income or capital:
Report on the Law of Trusts
, p.
    292. In its submission to the CRA dated November 26, 1997, Ernst & Young
    stated:

The Deed of Arrangement will also limit income distributions in
    any one year to the amount of cash dividends the Trust receives from Holding
    Company in that year, ensuring there will be no encroachment on capital of the
    Trust on behalf of Income Beneficiaries.

[88]

The capital
    of the Trust being referred to is the shares of the Holding Company. Their
    disposal would amount to a capital disposition that would be taxable as such.
    Clause 1(c) ensures that income distributions will only come from cash
    dividends paid by the Holding Company, taking the form of income.

Other Correspondence that is Part of the Factual Matrix

[89]

In my
    view, the correspondence by the trustees lawyer and by the income
    beneficiaries lawyer with the Childrens Lawyer that explained the purpose of
    the variation and its intended effect and benefits also forms part of the
    factual matrix. In that correspondence, reference was made to the fact that the
    variation was to be a percentage trust, a new financial approach to the
    investment and disbursement of trust funds by trustees that was approved by the
    Ontario Law Reform Commission in its 1984
Report on the Law of Trusts
.

[90]

In
Waters
    Law of Trusts in Canada
, the authors explain that a percentage trust
    allows the trustee to maximize the overall value of the trust assets for the
    benefit of all beneficiaries. It dispenses with the distinction between income
    and capital, instead guaranteeing the income beneficiary a regular return of
    a fixed percentage on the value of the trust property: p.1059. If, in a
    particular year, the traditional income from investments exceeds the percentage
    to be paid to the income beneficiaries, the excess remains part of the trust
    property. However, if the income is less, the percentage is made up out of
    the trust property: p. 1059.

Issue 1(c) - Intention of the Settlor

[91]

The appellant
    next submits that the application judge erred in finding the intention of the
    settlor was irrelevant in interpreting the Trust Deed as Varied. Relying on
Re
    Irving
(1975), 11 O.R. (3d) 443 (H.C.J.), the appellant argues that before
    a trust can be varied, one of the issues is whether the variation keeps intact
    the settlors basic intention. Here the basic intention of the settlor was to
    benefit two generations of the Poloniato family through the creation of income
    and capital beneficiaries. Yet the interpretation of the 1997 variation by the
    application judge, the appellant argues, permits unlimited capital encroachment,
    thus possibly destroying any benefit of the Trust for the second generation.

[92]

In my
    view, there are three responses to this submission. The first is one already
    referred to - that this was not an application for a variation, but an
    application to interpret a Trust Deed as Varied. Therefore, if the varying
    court approved a variation that did not take the settlors intent into account,
    and its meaning is clear, it is not the role of the interpreting court to
    distort the meaning of the deed as varied.

[93]

Second,
    the case law both in Ontario since
Re Irving
, as well as in other
    provinces, suggests that the original intention of the settlor need not be
    considered when the court approves a variation as long as the necessary
    criteria are met: See
Russ v. British Columbia (Public Trustee
) (1994),
    89 B.C.L.R. (2d) 35 (C.A.);
Teichman v. Teichman Estate
(1996), 134
    D.L.R. (4th) 155 (Man. C.A.);
Finnell v. Schumacher Estate
(1990), 74
    O.R. (2d) 583 (C.A.). However, because of my first and third responses to the
    appellants submission, it is not necessary in this case to finally decide this
    issue.

[94]

The third
    response is that I do not agree with the appellants suggestion that the intent
    and effect of the 1997 variation was to benefit only the income beneficiaries
    at the expense of the capital beneficiaries. That was clearly not the intent of
    the approving court, which was obliged to approve the variation only if it was
    for the benefit of the capital beneficiaries on whose behalf the approval was
    given. As the application judge was entitled to find, if the economy improves,
    the value of the trust should also see improvement. Moreover, the capital
    beneficiaries have had the indirect benefit, referred to by Haley J., of a
    consistent income flowing to their parents since the date of the variation.

Issue 1(d) - Inconsistent Findings

[95]

The
    appellant contends that the application judge erred in making an inconsistent finding.
    On the one hand, he found the parties intended that the trustee would have the
    power to encroach on capital assets of the Trust by selling the assets of the
    Holding Company. That finding is inconsistent, says the appellant, with his
    earlier finding, at para. 50 of his reasons, that the purpose of the definition
    of Net Income was to ensure that there would be no encroachment on the
    capital of the Trust.

[96]

As
    discussed above, the premise of this submission is incorrect. This submission
    has been answered in the section dealing with the factual matrix surrounding
    the CRA ruling.

Issue 1(e) - Objective of 1997 Variation

[97]

In the
    appellants view, the application judge erred in failing to take into account
    an important objective of the 1997 variation: to ensure some growth to the
    capital beneficiaries. There is no merit in this submission. The application
    judge did not fail to take this objective into account: see, for example,
    paras. 37-39 of his reasons. For economic reasons, the trustee has been unable,
    at least up until the application, to continue to achieve the hoped for growth
    of the Trust corpus, despite the clear objective of the Trust and of the
    trustee to do so.

Issue 1(f) - Interpretation of the Trust Deed as Varied, Read
    as a Whole

[98]

In the
    appellants submission, the application judge erred in failing to consider
    whether his interpretation was consistent with the language of the Trust Deed
    as Varied, when read as a whole. For instance, counsel points to the fact that
    the 1988 variation gave the trustee an express power of encroachment on capital
    to a limited amount for the purpose of benefitting capital beneficiaries. It is
    argued that when the parties intended to permit encroachment on the capital of
    the Trust, they did so in clear and unequivocal terms.

[99]

In my
    view, this submission fails. In his analysis, which is set out in detailed and
    comprehensive reasons, the application judge takes into account the agreement
    as a whole. The appellant has provided no suggestion as to how to read the Trust
    Deed as Varied without giving full effect to the mandatory language to which it
    objects.

[100]

The Trust document is
    internally consistent in providing the mandatory percentage distribution scheme
    to the income beneficiaries. As already explained, to the extent that satisfaction
    of the percentage distribution may require using capital assets, this is a
    function of the balanced investment strategy employed in a percentage trust to
    achieve overall growth of the trust corpus. It is not an encroachment on
    capital in the traditional sense, which is a discretionary exercise by a
    trustee to benefit a specific beneficiary for specific or general needs, over
    and above that beneficiarys regular entitlement under the trust.

Issue 2 - Even Hand Rule

[101]

The appellant submits that
    the application judge erred in his interpretation of the Trust Deed as Varied
    by failing to recognize and give effect to the duty of the trustee to maintain
    an even hand between the interests of the income and capital beneficiaries. The
    obligation of a trustee to treat different classes of beneficiaries fairly and
    impartially can only be displaced, contends the appellant, by an express
    intention to the contrary in the trust deed. In the appellants submission, the
    1997 variation did not displace the duty to maintain an even hand in managing
    distributions.

[102]

It is trite law that
    executors and trustees have a duty to maintain an even hand between the
    interests of the income and the capital beneficiaries, unless that duty is
    ousted explicitly or implicitly by the words of the instrument. Justice Middleton
    described this duty in the following way in
Armstrong (Re),
[1924]
    O.L.R. 639 (C.A.), at p. 8:

[I]t must be borne in mind by trustees that they are trustees
    not for the remaindermen alone in disregard of the rights of the life-tenant,
    nor for the life-tenant disregarding the interests of the remaindermen. 
    Trustees must preserve an even hand as between these two conflicting interests.
    The duty towards the capital is to preserve it intact. The duty towards the tenant
    for life is to obtain as large a yield as is consistent with safety and the
    observance of the law under the instrument of trust as to the class of
    investment made; and, furthermore, so to adjust the investments that the
    life-tenant will receive annually his due proportion.

[103]

However, in a percentage
    trust, the trustees duty is not to obtain a large income yield while
    preserving the capital but, instead, to increase the size of the entire trust
    for the benefit of both classes of beneficiaries. This includes increasing the
    capital rather than preserving it, and therefore involves an investment
    strategy that may include more risk. Because in a percentage trust the trustee
    is investing to increase the entire value of the trust to benefit all, the
    issue is not whether the trustees even hand duty is ousted in respect of the
    management of the trusts investments. What is disputed is whether the duty has
    been ousted in respect of the obligation of the trustee to make distributions
    to the beneficiaries.

[104]

The role of the even hand
    duty in the administration of a percentage trust was addressed in the Law
    Reform Commissions
Report on the Law of Trusts
. That
Report
recommends that when trustees administer a percentage trust, they continue to
    maintain an even hand in the periodic valuation of the trust and when making
    the distributions. Specifically, the
Report
states at p. 303:

We therefore recommend that the revised
    [Trustee] Act should

contain a
    provision to the effect that, where trustees are expressly directed by the
    trust instrument to hold trust assets on percentage trusts, they shall value
    the assets periodically and, instead of any income arising from the assets, pay
    to the person who would otherwise be the income beneficiary a percentage of
    that valuation in each year of the valuation period.
In so doing,
    trustees should be required to maintain an even hand between income and capital
    beneficiaries
. [Emphasis added.]
[1]

[105]

There is no clear explanation as to what the Commission means when
    it says that the trustees should maintain an even hand when valuing the assets
    and making the annual percentage payment to the income beneficiaries. My
    interpretation is that the Commission contemplates a periodic review and, if
    necessary, a re-set of the percentage payable to income beneficiaries, based on
    the value of the trust assets and on the even hand rule.

[106]

The problem here is that in
    the Trust Deed as Varied, the percentage payable to the income beneficiaries is
    based on a fixed formula for determining the Applicable Percentage and the
    amount to be paid can never go below the highest amount previously paid in a
    year.  That is why the trustee continues to be obliged to cause the Holding Company
    to sell assets, if necessary, to meet the obligation to the income
    beneficiaries, despite the effect on the Trust corpus.

[107]

To the extent the Trust Deed
    as Varied sets forth a minimum annual payment to the income beneficiaries, the
    even hand duty on the trustee has been ousted, implicitly, by the words and
    intended operation of the Trust Deed as Varied. The application judge made no
    error in making that finding.

Conclusion

[108]

The experience of this Trust
    has reinforced the need for percentage trusts to be drafted with specific
    safeguard mechanisms in place that will allow the trustee to review and revise the
    annual percentage payable to the income beneficiaries based on the changing
    value of the trust to ensure that one set of beneficiaries is not favoured over
    the other. Commentators on the percentage trust concept have recommended
    including a force majeure clause to protect against unforeseen anomalies: see
    for example, Anne Werker, The Percentage Trust  Uniting the Objectives of the
    Life Tenant and Remainderperson in Total Return Investing by Trustees (Paper
    delivered at the Law Society of Upper Canadas 8th Annual Estates and Trusts Summit,
    November 30, 2005), p. 251.

[109]

Two options would be to
    include a clause providing for a periodic reset by the trustee of the
    percentage payable to income beneficiaries, or an option for the trustee to
    apply to the court for advice and directions on such a reset.

[110]

It is also clear that the
    material provided to the court in support of a variation application seeking to
    convert a trust into a percentage trust must include not only upside projections
    but also potential downside projections that take into account a possible
    future market downturn. This will give the approving court the basis to include
    the appropriate safeguards that will ensure, to the extent possible, that the
    variation will in fact continue to be for the benefit of the future capital
    beneficiaries.

[111]

However, there are no such provisions
    in this Trust Deed as Varied. The trustee is obliged to continue to make the
    minimum percentage distributions provided by its terms.


DISPOSITION OF THE APPEAL

[112]

For these reasons, I would
    dismiss the appeal. In the circumstances of this case, I would award full
    indemnity costs in accordance with their Bills of Costs to each of the parties,
    payable out of the estate. To the Childrens Lawyer, $116,855.13; to the
    trustee, $145,061.32; to the respondents on the appeal, $122,473.29, all
    inclusive of disbursements and H.S.T.

Released:
KF December 7, 2012                          K.
    Feldman J.A.

I
    agree Janet Simmons J.A.

I
    agree E.A. Cronk J.A.


APPENDIX

0.1  In this Trust Deed ...
    the following terms shall have the following meanings: ...

(a)       
Applicable Percentage

    for a calendar year shall mean the average Rate of Return of the trust over the
    previous three calendar years.



(d)    
Net Fair Market Value

    shall mean the fair market value of the trusts assets at the particular time,
    provided that where the trust owns shares in a private corporation, the fair
    market value of such shares shall be deemed to be equal to the fair market
    value of the assets of the corporation less all the corporations liabilities,
    including an amount equal to the current tax liabilities of the corporation
    with respect to unrealized capital gains on its assets, less:

(i)    liabilities of
    the trust;

(ii)
       an amount equal to the current tax liabilities of the trust with respect to
    unrealized capital gains on its assets other than shares in a private
    corporation; and

(iii)   the value of
    any outstanding interest-free loans to Grandchildren;

(e)       
Net Income
 of the
    trust for a calendar year shall mean the cash dividends received by the trust
    in the calendar year from 679312 Alberta Limited ... and any income that is
    earned on the other assets of the trust, net of expenses incurred and taxes
    paid by the Trustee in the calendar year on account of the income of the trust;

(f)        
Rate of Return
 for a
    calendar year shall mean the resulting percentage when [sic] the difference
    determined when

(A)       the Fair Market
    Value of the trust calculated on the first business day of the next calendar
    year is added to the Yearly Income Distribution and other permissible
    distributions to beneficiaries in respect of the calendar year, and is reduced
    by receipts during the calendar year for life insurance proceeds

is then reduced by

(B)       the Fair Market
    Value if the trust calculated on the first business day of the calendar year,

is then divided by

(C)     the Fair Market Value
    of the trust on the first business day of the calendar year;

(g)       
Yearly Income
 for a
    calendar year shall mean the amount equal to:



(vi)      in 2002, and in
    each year thereafter, 70% of the Applicable Percentage for the year of the Net
    Fair Market Value of the trusts assets valued as of the first business day of
    the calendar year, provided further that the Yearly Income shall not be less
    than the Yearly Income of the previous calendar year, nor greater than 115% of
    the Yearly Income of the previous calendar year.

1.         The Trustee shall
    keep invested the Trust Fund until the date of the death of the first of the grandchildren
    of Primo Poloniato alive at the date of this agreement (hereinafter
    collectively referred to as the Grandchildren and individually as a
    Grandchild) to die (hereinafter referred to as the time of division) and
    until the time of division, the Trustee shall deal with the Trust Fund as
    follows:

(a)       the Trustee shall
    pay the Yearly Income to or for the benefit of the Grandchildren in equal
    shares in each calendar year. The Trustee shall also from time to time as
    determined by the Trustee but at least annually pay amounts out of the income
    of the trust to a Grandchild to compensate him or her for any taxes payable by
    such Grandchild or withheld by the Trustees from such Grandchild pursuant to
    the
Income Tax Act
in respect of distributions of the Yearly Income
    from the trust.  The Trustee shall also have the discretion to additionally
    compensate a Grandchild, who is a non-resident of Canada for purposes of the
Income
    Tax Act
, for any foreign taxes or similar amounts paid or payable by the
    Grandchild on account of the receipt by the Grandchild of a distribution
    hereunder  Any income of the trust for a calendar year in excess of the Yearly
    Income ... shall be added to the capital;



(c)        notwithstanding the foregoing subparagraphs of
    this paragraph 1, the total of all amounts on account of Yearly Income and any
    additional payments to a Grandchild paid in a year, shall not exceed the Net
    Income of the trust.

5.         The Trustee in addition to all other powers
    available to it by law or otherwise, shall have the following powers,
    authorities and discretions: ...

(vi)       to determine whether any payments made by the
    Trustee in the due administration of the Trust Fund shall be charged against
    the capital of the Trust Fund or against the income therefrom or partly against
    capital and partly against the income and such determination shall be final and
    binding upon all persons concerned and to manage the investments of the trust,
    including any distributions from any corporations controlled by the Trustee in
    order that the Net Income, of any trust hereunder shall be no less than the
    amount required to be distributed to a Grandchild during a calendar year;





[1]

This recommendation has not been incorporated into the
Trustee Act
,
    R.S.O. 1990, c. T.23.


