The Rule Against Accumulations in Ontario

 In estate, wills and estate

Introduction
The rule against accumulations sets a time limit on the period during which income can be added to the original capital created by a settlement or the disposition of property, such as through the creation of a trust. The rule applies where a disposition carries a duty or a power to accumulate income by adding it to the capital created by a disposition. A direction to accumulate that exceeds a certain length of time will be invalid.
 

Statutory periods of accumulation
According to Ontario’s Accumulations Act,[1] no disposition of any real or personal property shall direct the income thereof to be accumulated for any longer than the following:

  1.  The life of the grantor.
  2.  21-years after an inter vivos disposition.
  3.  The duration of the minority of any person living or conceived at the date of making an inter vivos disposition.
  4.  Twenty-one years from the death of the grantor, settlor, or testator.
  5.  The duration of the minority of any person living or conceived but not born at the death of the grantor, settlor, or testator.
  6.  The duration of the minority of any person(s) who, under the instrument, would, for the time being, if of full age, be entitled to the income directed to be accumulated.[2]

 

Effect
An accumulation period contrary to Ontario’s Accumulations Act is void, and the income is to be paid out to the person(s) who would have been entitled to it had the accumulation not been directed.[3] The persons entitled to the income will vary. The instrument itself can designate an individual. If a testator’s will deals with the estate’s residue and disposes of all of the estate in a residue clause, the surplus income will accrue to the residuary estate (unless the will says otherwise).[4] If the testator’s will did not dispose of all of the estate, the surplus income is to be distributed as on an intestacy to the testator’s next-of-kin determined at the testator’s death.[5]
 

Exceptions
The Accumulations Act has a number of exceptions. It does not extend to the following:

  • Paying debts of a grantor or other person;
  • Raising portions for a child of a grantor, settlor; and
  • Relating to timber or wood upon any lands or tenements.[6]

The rule is also inapplicable to employee benefit funds or trusts[7] or to charitable purpose trusts.[8]
 

Discussion
The original purpose of this rule was both to prevent property from becoming unproductive and to prevent the accumulation of an ever increasing proportion of wealth or land through the use of trusts or other vehicles.[9] According to England’s Law Commission, the rule against accumulations suffers from three main defects: first it no longer fulfils (if ever it did) any compelling policy objective not otherwise met by the law (such as taxation); second its operation is needlessly complex and frustrates the reasonable wishes of settlors; and (3) it can produce anomalous results. Based on the Law Commission’s recommendations, the rule was abolished in England (except with regards to charitable trusts).[10] The rule has also been repealed in the provinces of Alberta, Manitoba, and British Columbia.
 

[1] Accumulations Act, R.S.O. 1990, c. A.5.
[2] Ibid s. 1(1).
[3] Ibid s. 1(6).
[4] Re Baragar (1973), 1 O.R. 831, 32 D.L.R. (3d) 529 (H.C.).
[5] Ibid.
[6] Accumulations Act, supra, note 1 at s. 2.
[7] Ibid.
[8] Ibid s. 4.
[9] These arguments were rejected by the House of Lords in Thellusson v Woodford (1799) 4 Ves 227, 338; 31 ER 117, 171, which resulted in the Accumulations Act 1800.
[10] Perpetuities and Accumulations Act 2009 (c. 18).

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