Considering the Duty to Disclose in the Pension Context

The recent decision in Pryden v. Swiss Reinsurance Company considers the circumstances under which a trustee is obligated to disclose information to a beneficiary and, in particular, the application of the joint interest principle.

The case involved a class proceeding over a pension plan (which is a form of business trust) and specifically whether surplus assets attributable to the wind up of a company pension plan belonged to the class members (who were former employees of the company).  An issue raised was whether the respondent (who had employed the class members) had improperly amended the plan so as to recover surplus contributions.

The applicant brought a motion seeking the production of documents contained in the files of the law firm who had represented the company at the time the plan had been amended. She argued that she was joint in interest with the respondent (the employer) and, as such, no privilege attached to the files. 

The joint interest principle provides that when a lawyer’s advice is obtained for the administration of a trust or estate, there is no privilege since the advice is obtained for the interests of the beneficiaries and the trustees. There is a shared interest between trustees and beneficiaries because trustees have an obligation to act in the beneficiaries’ best interests and, accordingly, any legal advice obtained must be to further those interests. The court has previously held that the principle applies in the context of pension law.    

The respondent argued that there was no joint interest because if the law firm in question had given advice about the amendment it was to the company, not to the trustees of the plan. 

Master Glustein agreed with the respondent.  He pointed to the distinction between being a plan sponsor (i.e. the employer) and being the plan administrator (i.e. the trustee).  A plan sponsor does not owe trustee-like obligations to the plan members. If an employer in its capacity as plan sponsor (and not as plan administrator) obtains legal advice regarding the plan then it is not subject to the joint interest principle.  Here, Master Glustein found that it was clear the legal advice was provided to the company as plan sponsor, not to the trustees, and the joint interest principle did not apply.    

As Income Trust Tax Changes Draw Near, Earth's Rotation Continues Uninterrupted

October 31, 2006, was a dark day for Canadian investors.  That was when our federal Finance Minister, Jim Flaherty, surprised everyone with the news that the government was introducing policy changes aimed at eliminating the tax benefits associated with income trusts and that those changes would be implemented January 1, 2011.  

The news promptly caused the business trust sector to tank.  In a two day period, the $200 billion sector lost $35.6 billion (a 16% decline).  

Prior to the tax changes being announced, income trusts were wildly popular in Canada.  First introduced in the mid-1980s, they are an ownership vehicle for businesses or assets that sell units to investors (who are the beneficiaries of the trust). The assets pay a return to the trust, which is then paid out to investors as either cash distributions or a return of capital. 

The tax benefits came because the trusts were able to “flow through” income to investors so that tax was not paid at the entity (i.e. asset/business) level, only by the unit holders.  This differs from a corporate structure where taxes are paid by the corporation and then again by the shareholders receiving dividends.  The other tax benefit came from the fact that income trusts could pay out as a return of capital, which is received by the unit holders on a tax deferred basis.   

With the proposed tax changes, most of the income trusts decided to convert back to a corporate structure.  This prompted fears that the payouts to investors would dry up. 

As it turns out, despite the catastrophic predictions, things have not been as bad as originally feared.  Of the 226 income trusts in existence in 2006, 60 have already converted to a corporate structure and 65 have announced they will be doing so.  Only 4 have stated they intend to remain as trusts. 

While many investors have seen a reduction in payouts (the average being 33%), approximately half the trusts plan to maintain dividends at the same level once the conversion to corporation has been completed.