Court Finds County’s Property Purchase to be a Breach of Trust
Feb 2022 Charity & NFP Law Update
Published on February 24 2022

By Jacqueline M. Demczur

A decision from the Ontario Superior Court of Justice emphasized that a tax-exempt organization that receives a gift from an individual’s estate cannot spend the funds as it wishes. Rather, funds must be used according to the terms of use set out in the will. The court, in its January 31, 2022 unreported decision of County of Bruce v Office of the Public Guardian and Trustee, ultimately concluded that the funds from the estate were misused and that there had been a breach of trust.

Bruce Krug was an expert in local and natural history, well known for his financial support of Bruce and Grey County museums and historical societies. In his will, he gave $500,000 to the County of Bruce “for the archives building for the storage and display of the archives of the county”, thus creating a restricted charitable purpose trust. The will also set out that if any beneficiaries named in the will declined or refused to comply with the conditions attached to the legacy bequeathed to them, then that amount would lapse and fall into the residue of his estate.

In March 2014, about a year after Mr. Krug passed, the County of Bruce (the “County”) passed a by-law to establish the Bruce County Archives Krug Reserve Fund (the “Fund”). The County spent about $30,000 of the Fund commissioning plans regarding the development of its museum, but the majority of the Fund was spent in March 2018 when the County purchased the property adjacent to its museum (the “property”) for $550,000.

The Southampton Cultural Heritage Conservancy (“Southampton”) brought an application before the court seeking, among other things, an order that the County breached the restricted purpose charitable trust when it purchased the property using money from the Fund. The County also brought an application requesting an order dismissing Southampton’s application and confirming that the language of Mr. Krug’s will was broad enough to encompass the County’s plans.

In reviewing the facts before it, the court expressed concern regarding the County’s actions, noting that the County had unlawfully closed to the public at least 18 of its meetings relating to the purchase and use of the property, that it had demonstrated extreme reluctance to produce relevant records, and that “on the admitted record, the County’s behaviour has been atrocious throughout.” The court also highlighted concerns that “the County has not spent any of the Krug trust funds on the archives building” nor on “the storage and display of the archives of the County” contrary to the terms of the will.

The County’s submission urged the court to consider whether the words of Mr. Krug’s will, particularly regarding the gift “for the archives building for the storage and display of the archives of the county”, meant that “approval should be given to the County to expend funds for a new archival structure”. However, in reviewing the record, the court found that there was no clear intent by the County to use the property for the archives building; the County could only provide that it had “no intent not to use this property for archival storage” (emphasis added). Further, there was no explanation regarding why the Fund was used to pay for the entire lot “when the archive did not need the full lot”. Ultimately, the court found that the Fund was “used to buy land in the name of the County for its own benefit”.

The County had also requested that, in the alternative, the court consider if the cy-près doctrine applied. The cy-près doctrine allows a court to make orders to give effect to a charitable gift where the charitable objectives of the gift are clear but are impossible or impracticable to carry out. The County requested that because the existing archives building had reached its capacity and it would be impossible or impracticable to spend money from the Fund to expand the building, the court should apply the cy-près doctrine to allow the Fund to be used for the purpose of maintaining a museum archives at a different location and in a different building. However, the court disagreed that it would be impossible or impracticable to use the Fund for the purposes set out in the will. Even if that were true, the will set out a “gift over clause” that if any of the beneficiaries declined or refused to comply with the conditions attached to the legacy, the legacy would lapse and fall into the residue of Mr. Krug’s estate. Ultimately, the court concluded that it “need not apply the cy-près doctrine in these circumstances and on this record”.

The court found that the County was in breach of trust for using the majority of the Fund to buy the property and “required the assistance of both the [Public Guardian and Trustee] and Estate Trustee” to make submissions “with respect to what should occur next”. This decision is a reminder for charities and other qualified donees (such as municipalities) that when they receive a gift from an individual’s will, there are obligations to use the property in accordance with the restricted terms of the will. Failure to do so will be a breach of trust and may result in consequences, including a review by the Ontario Public Guardian and Trustee as well as possibly the court.

Read the February 2022 Charity & NFP Law Update