Todays blog has been co-written with Murray Braithwaite, Partner, Fasken Martineau DuMoulin LLP, Toronto

There has been case law in the past two years where the court has used its discretion to vary the rate of interest on legacies that have not been paid within the “executor’s year” from 5% to a lower rate of interest where the “rule of convenience” applies. Today’s blog will (i) provide a refresher on the “executor’s year” and the “rule of convenience”, (ii) briefly look at the recent cases, and (iii) consider what this may mean practically to an estate trustee.

The “Executor’s Year” and the “Rule of Convenience”

There is a common law rule that an estate trustee has one year after the deceased’s death to administer the estate before beneficiaries have a legal entitlement to demand payment. Referred to as the “executor’s year”, the rule is intended to give the estate trustee sufficient time to put the affairs of the deceased and the estate in order before distributing the assets of the estate in accordance with the terms of the will. The presumption is that legacies will be paid out within a year following the deceased’s death.

A related common law rule is the “rule of convenience”. Where a specific or general legacy is not paid within the executor’s year, simple interest at the rate of 5% per annum is payable to the legatee. Interest is payable even if the payment within the executor’s year is impractical or impossible. It is calculated starting one year after the deceased’s death to the date the legacy is paid, unless the will provides otherwise.[1] For example, the will provisions may extend the “interest free” period beyond the executor’s year, provide for a different rate of interest or eliminate the right to interest entirely. The provisions in the will override the rule of convenience. In effect the payment of interest to a legatee reallocates the estate between the legatee and the residuary beneficiaries since interest would be paid out of the residue of the estate.

The rule of convenience was extensively reviewed and explained by the Ontario Court of Appeal in the 2018 case of Rivard v. Morris.  The policy of the law is to have a simple and certain way of achieving the generally fair outcome to promote the full enjoyment of specific legacies when distribution is delayed (for whatever reason) beyond the executor’s year. The estate trustee can exercise discretion to delay payment for the convenience of the estate, but this is not to operate to the advantage of the residuary beneficiaries over the specific legatee. The payment of interest is not a reward to the legatee or a penalty to the residuary beneficiaries.

The Court in Rivard recognized that the rule of convenience could be altered by the terms of the will or if the equity of the situation would result in a clear unfairness. The issue of the appropriateness of a 5% rate was not before the court for decision, but the court made passing remarks suggesting it was appropriate to follow case precedent but that in view of low interest rates (at that time) it might be reconsidered in another case.

Recent Cases

In the April 2021 case of Campbell Estate v. Campbell, the court applied Rivard and ordered that interest was payable commencing from the one-year anniversary of the date of death. The only remaining issue was the rate of interest. The court noted that the estate trustee did not present any evidence that she had invested the legatee’s fund in an interest-bearing account, but had she done so she could have made the argument that the legatee was only entitled to the interest garnered by that investment. Notwithstanding the lack of evidence on the rate of interest, the court felt that a 5% rate would be a windfall in the circumstances of the case and reduced the interest to the rate of 1% per annum, a rate of interest equivalent to a Canadian GIC investment for the same time period.

In the December 2022 case of Veiga v. Veiga, the court similarly used equitable discretion to vary the rate, in the circumstances to 2%. Because of the lengthy delay, the interest component at 5% would have amounted to half the specific gift and used up most of the residue intended to benefit the grandchildren. The court felt that the testator’s intent was not to subordinate the residuary beneficiaries so much in the circumstances and exercised its equitable jurisdiction to modify the interest rate used for the presumptive rule of convenience.

Practically Speaking

As a law clerk, I am interested in the legal analysis, but I always want to know what it means practically speaking. Below are the questions that came to mind. Note that the answers provided and the other matters discussed in this blog are not a substitute for proper legal advice, particularly as every case will turn on its own facts.

Question:  Would an estate trustee still pay interest at the rate of 5% on a legacy not paid out during the executor’s year under the rule of convenience or has that changed given the recent cases?

Answer:     Generally, the rule of convenience still applies, and an estate trustee would pay 5% interest unless there were circumstances out of the ordinary to justify a different rate.

Question:  If an estate trustee wants to deviate from the rule of convenience, do they have to ask the court?

Answer:     The estate trustee does not have to ask the court. The estate trustee can exercise discretion to vary the rate, but it could be challenged and then reviewed by a court to assess whether the circumstances reasonably justified changing the rate. This may have an impact on an estate trustee’s compensation. An estate trustee must be sure they are acting with appropriate diligence.

Question:  Does the recent change to the Bank of Canada rates have an impact?

Answer:     The Interest Act default rate of 5%, being an Act of Parliament, is probably more significant, based on the reasons of courts over the years. The Bank rate would be relevant as indicative of commercial rates. The commercial rate would be potentially relevant to the extent the estate involved commercial aspects and more indicative of the loss to the legacy from being delayed in receipt of the specific gift.

Thanks for reading and enjoy the Civic Holiday long weekend.

[1] There are other exceptions to the general rule that are beyond the scope of this blog.