The accounts of estate trustees in Ontario are quite complicated. They follow an unusual format foreign to most accounting professionals. For one, the accounts are done on a cash basis as opposed to on an accrual basis. I have done some research in an attempt to identify the origins of some of the features of Ontario estate accounts.
The duty to account can be traced back to the medieval English law. Over time, the use of trusts (known as "uses" in medieval English law) became popular as a means of avoiding certain obligations to the King upon the devolution of land on the death of the landlord. Title would be held by a feoffee (the trustee) for the use (or benefit) of the cestui que use (the beneficiary). At common law, there was no means for a cestui que use to enforce the obligations of the feoffee. The chancery courts, however, would protect beneficiaries of these early trusts.
English ecclesiastical courts had the power to order an executor to produce an inventory of the assets of an estate. This obligation found its way into English legislation dating back to 1529. This was imported to what was then called Upper Canada in 1792. Accounts of executors then found their way into the jurisdiction of the surrogate courts.
The 1892 Surrogate Court Rules, at section 19, reads as follows:
"Executors and administrators shall within a period of eighteen months after grant made, and sooner if the Judge shall so direct, exhibit under oath a true and perfect inventory of the property of the testator or intestate (as the case may be), and render a just and full account of their executorship or administration. The Judge shall upon application made to him for that purpose have power to extend the said period of eighteen months. If the executor, or administrator with the will annexed, is the sole legatee or devisee of the property devolving, the Judge may direct that he shall be relieved from the operation of this rule, provided there are no creditors of the estate. …"
By 1917, the Surrogate Court Rules had evolved substantially. At sections 36 to 41, the Rules provided at this time that the accounts "shall contain a true and perfect inventory of the whole property in question". They further detail that the accounts must include "an account shewing of what the original estate consisted", accounts of all moneys received and disbursed, an account of all property remaining on hand, and "such other accounts as the Judge may require". The Rules, as they read at this time, specified that "[w]hen by the will or instrument creating any trust estate, principal and income are dealt with separately, the accounts shall be divided so as to shew receipts and disbursements in respect of principal and income separately." The Rules at this time also provided a framework for fixing the compensation of trustees as well.
Modern estate accounts in Ontario still typically distinguish between capital and income accounts. Capital receipts and capital disbursements are tracked separately from income receipts and income disbursements. The rationale is the natural tension between the interests of income beneficiaries and of capital beneficiaries where an estate or trust has both. Consider a trust in which beneficiary A has a life interest, and B is entitled to the remainder upon A’s death. The trustee has a hypothetical choice between investing in an asset which will depreciate in capital value but will yield high monthly dividends or an asset which will yield only low monthly returns, but will increase in value. What should the trustee do if he or she is required to maintain an even hand between A and B? Whatever the trustee decides, in order to allow for transparency and to allow beneficiaries, counsel and the Court to supervise the actions of trustees, their accounts are presented in this unique format.
Today, the Surrogate Court has morphed into the Estates List of the Ontario Superior Court of Justice. The form of Ontario estate accounting is currently governed by Rule 74.17 of the Rules of Civil Procedure. The wording of the rules regarding the format of Estate accounts has not changed since 1994.
The unique format of the accounts has evolved to meet the various functions that the accounts perform. They provide an inventory of assets on the day the estate trustee begins acting. They provide a summary of the actions of the estate trustee for the beneficiaries and for the Court. They provide a basis for calculating compensation. They also provide information in a useful format for computing the taxes owed by the estate as well.
For a tour of a set of Court format accounts, see the June 2010 edition of the Hull & Hull Breakfast Series. It will be interesting to see how the format of estate accounts continues to evolve in the future. Thank you for reading!