In the role of Trustee, a Trustee typically has the power to invest the funds. This begs the question as to what this power entails. It is imperative that a Trustee is aware of the limits of this power to prevent liability. Unless the Trust Deed explicitly sets out the scope and limits of the power, the Trustee Act, RSBC 1996 and case law govern.
Section 15 of the Trustee Act
Under section 15.1 of the Trustee Act, the standard stated is that of a prudent investor. Section 15.2 provides the standard of care, which mandates a “[trustee] must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments”. Section 15.3 limits the liability of the Trustee in the event of losses so long as the overall investment strategy is prudent. A Trustee may also utilize an agent to make investment decisions if it is consistent with ordinary business practice to delegate. A Trustee would need to be prudent in who it selects as its agent, in establishing the terms and limits of the authority and in monitoring the performance of the agent to ensure compliance with the given authority.
Case law
Legislation does not explicitly describe what a prudent investor is. Case law can be elucidating for this matter.
The power to invest is informed by the what the primary duty of a Trustee is. The Supreme Court of Canada held in Fales v Canada Permanent Trust Co., [1977] 2 SCR 302 that the primary duty of a Trustee is to preserve trust assets, even if wide discretionary powers are contained in the trust deed. This need to preserve the assets suggests a level of conservatism as to how a Trustee is to exercise its power to invest. In essence, a Trustee would not be able to invest freely in anything if that could mean losing the assets of the trust.
In the persuasive English trusts law case, Cowan v Scargill [1985] 1 Ch 270, the main takeaway is that the investment policy is up to the Trustee so long as it is reasonable. In being reasonable, it held that the duty to invest must consider the financial interests of the beneficiaries and employees. This means that to reduce risk, a Trustee should know the needs and goals of the beneficiaries. The case outlines that an ordinary prudent person is someone who will get advice on investments, particularly where their own personal knowledge is limited. The case also emphasized the need to look at investments in the broadest way. This means considering different investments to ensure diversification. Diversification is prudent as it moderates risk by not investing too heavily in a limited number of investments. The concept for diversification can be illustrated by a British Columbia case, Miles v Vince, 2014 BCCA 289, where the Trustee invested only into one investment. Here, it was held that a Trustee must assess whether diversification is required to preserve the trust assets.
Given the discussion above, liability is not imposed on a Trustee for simply having a loss on the investment, where the Trustee has acted within the prudent investor standard. The Supreme Court of Canada held in Ermineskin Indian Band and Nation v Canada, 2009 SCC 9 that a Trustee does not have a duty to guarantee against risk of loss to the trust due to the investment nor to guarantee a return on the investment.
The Main Takeaways
First, it is important that a trust deed is explicit about the scope and limitation of the power. If a trust deed does not provide for this, then the power of investment is going to be informed by the existing case law and the limited Trustee Act. Therefore, it is good practice to be explicit with what a Trustee can or cannot do with respect to its power to invest.
Secondly, as a Trustee, it is necessary to know the needs and objectives of the beneficiaries. They may be in a position where they need steady income, in which case a regular income bearing investment may be a good option whereas for some beneficiaries, an investment focused on long term capital growth may be the better route.
Lastly, managing the investment itself is important. This starts with developing an investment plan in writing at the beginning and seeking professional assistance when necessary. When making the investment, it is important to practice both diversification and conservatism to limit liability. Subsequently, a Trustee must continue to monitor that investment to continuously reassess its performance and its fit with the overall investment objectives.
