Constructive and Resulting Trusts

Transcription

Constructive and Resulting Trusts:
Challenging Tax Boundaries
Catherine Brown and Cindy L. Rajan*
PRÉCIS
Au cours des dernières années, un nombre croissant de demandes
d’allégement fiscal ont été présentées fondées sur l’existence supposée
d’une fiducie judiciaire ou d’une fiducie par déduction. Les décisions du
fisc à l’égard des fiducies judiciaires traduisent l’incertitude doctrinale
entourant les fiducies judiciaires à titre de mesure corrective ou de droit
fondamental. La fiducie découlant de la loi, bien qu’elle ne fasse pas
l’objet du même débat doctrinal, doit être prouvée par une intention
commune évidente.
Un examen de la jurisprudence dans ce domaine permet de
découvrir plusieurs questions récurrentes. La compétence de la Cour
canadienne de l’impôt à établir l’existence d’une fiducie judiciaire
corrective constitue une de ces questions. La Cour canadienne de
l’impôt a également été appelée à se prononcer sur le traitement fiscal
approprié aux parties lorsqu’une fiducie judiciaire a été établie par un
tribunal supérieur compétent. Une autre question récurrente est le
moment de l’établissement d’une fiducie judiciaire : s’agit-il du moment
de l’enrichissement sans cause ou de l’acte préjudiciable, lorsque
l’obligation de restitution survient, ou d’un autre moment déterminé par
le tribunal? Cette question du moment de la création de la fiducie est
étroitement liée au débat doctrinal sur la nature de la fiducie judiciare.
Enfin, la question fondamentale de savoir si les fiducies judiciaires et les
fiducies par déduction devraient être admises pour l’application de la
Loi de l’impôt a été soulevée à maintes reprises, mais aucune réponse
décisive n’a été donnée.
Bien qu’un certain nombre de solutions à ces questions aient été
proposées dans la jurisprudence, il faudra peut-être finalement s’en
remettre à l’intervention du législateur pour résoudre le problème. Des
suggestions de modifications législatives sont apportées en conclusion
de cet article.
* Catherine Brown of the Faculty of Law, University of Calgary, and Cindy L. Rajan,
CA, of Felesky Flynn, Calgary. The authors wish to thank Bruce Wakeham for his research
assistance and officers of Revenue Canada, Calgary District Office, for their insightful
comments.
(1997), Vol. 45, No. 4 / no 4
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CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE
ABSTRACT
In recent years, an increasing number of claims have been made for tax
relief based on the presumed existence of a constructive or resulting
trust. The tax decisions in respect of constructive trusts reflect the
doctrinal uncertainty surrounding the constructive trust as a remedy or a
substantive right. The resulting trust, while not plagued by the same
doctrinal debate, requires a clear finding of common intention.
A review of the tax jurisprudence in this area reveals several recurring
issues. One issue is the jurisdiction of the Tax Court of Canada to
determine the existence of a remedial constructive trust. The Tax Court
also has been called upon to determine the proper tax treatment of the
parties in situations in which a constructive trust has been found by a
competent superior court acting within its jurisdiction. Another recurring
issue is the point in time at which a constructive trust arises: is it the time
of the unjust enrichment or wrongdoing, when the duty to make
restitution arises, or some other time determined by the court? This
timing issue is closely tied to the doctrinal debate as to the nature of the
constructive trust. Finally, the fundamental issue of whether constructive
and resulting trusts should be recognized at all for purposes of the
Income Tax Act has been raised on numerous occasions, but not
conclusively determined.
While a number of solutions to these issues have been advanced in
the case law, their resolution may ultimately rely on legislative
intervention. The article concludes with some suggestions for such
legislative amendment.
INTRODUCTION
Since the decision of the Supreme Court of Canada in Pettkus v. Becker,1
there has been a marked increase in the number of claims by taxpayers
for tax relief based on the notion of a constructive or resulting trust.
These claims have arisen in matrimonial situations,2 in the case of improper conduct or unjust enrichment,3 to avoid a deemed disposition on
death,4 or to gain a more favourable overall tax result on the disposition
of property. 5 These claims raise interesting issues about the proper tax
treatment of the parties while the constructive or resulting trust is in
existence, as well as at the time of disposition of the trust property.
Constructive and resulting trusts also raise potential attribution issues and
1 [1980]
2 SCR 834; 117 DLR (3d) 257.
v. The Queen, [1996] 1 CTC 3001 (TCC).
3 Fletcher v. MNR, 87 DTC 624; [1987] 2 CTC 2341 (TCC); and Forest Oil Corporation v. R, [1996] ETC 2192 (FCTD).
4 Anderson Estate v. The Queen, 95 DTC 758 (TCC).
5 Wong v. The Queen, 96 DTC 3223(S); [1996] 1 CTC 2655 (TCC); and Collins v. The
Queen, 96 DTC 1034 (TCC).
2 Stockman
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CONSTRUCTIVE AND RESULTING TRUSTS
661
the more general question of whether the statutory regime in subdivision k
of the Income Tax Act,6 otherwise applicable to express trusts, is intended
to apply to constructive and resulting trusts. These issues and some suggestions for their resolution are the subject of this article.
Under current Canadian law, a constructive trust may arise in two
situations: first, as a substantive right, particularly in cases of misconduct
by a fiduciary (non-remedial constructive trust); and second, looking to
recent Canadian trends, as a remedy for unjust enrichment (remedial constructive trust). As discussed further below, a remedial constructive trust
is a remedy granted by a court of equity in its discretion. As a remedy, the
constructive trust has arisen most frequently in cases of matrimonial breakdown and regardless of the intention of the parties; however, it is clear
that the constructive trust is an evolving concept that extends far beyond
matrimonial cases.
The resulting trust also is often considered in the matrimonial context.
Unlike the finding of a remedial constructive trust, the finding of a resulting trust does not require the court to exercise its equitable discretion.
Resulting trusts arise by operation of law in three situations: first, where
a trustee holds property under an express trust that fails; second, when A
purchases property and title is taken in the name of B; and, finally, when
A voluntarily transfers property into the name of B or into the name of A
and B jointly. Common to each of these resulting trusts, and differing
from the constructive trust, is the notion that the parties intended that the
property be held in trust.
Tax issues arising out of the existence of a resulting or constructive
trust may arrive before a court in one of two ways. First, a hopeful
taxpayer may claim for relief based on a finding by the Tax Court that a
constructive or resulting trust was in existence, with consequences for
beneficial ownership and taxable income. Such claims may raise jurisdictional issues in respect of remedial constructive trusts which do not arise
in respect of non-remedial constructive trusts or resulting trusts, particularly if the matter is heard in the Tax Court. Alternatively, a dispute may
come before the Tax Court if another court of competent jurisdiction has
made a finding of a constructive or resulting trust, and the taxpayer and
the minister of national revenue (“the minister”) disagree on the specific
tax consequences that should follow.
In the absence of specific direction in the Act, the starting point in
analyzing the proper tax treatment of the parties alleging or otherwise
governed by a relationship of constructive or resulting trust is found in
the rules of private law. As will be seen, determination of the proper tax
treatment of the parties is further complicated by the position in Canadian
tax law that the trust, or at least a trust for purposes of subdivision k, is a
separate taxpayer for tax purposes. If a constructive or resulting trust is
6 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unless
otherwise stated, statutory references in this article are to the Act.
(1997), Vol. 45, No. 4 / no 4
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recognized for all purposes of the Act, this will result in a new taxable
entity that must be factored into the overall tax treatment of the parties
when such a trust is found.
CONSTRUCTIVE TRUSTS
Historical Background
The Canadian position on constructive trusts has been set out by the
Supreme Court of Canada in a number of decisions, including Pettkus,
Sorochan, 7 Rawluk, 8 and Beblow.9 Its complex history can be summarized
by the comments of Sarchuk J in Karavos:
In Rawluk v. Rawluk, . . . Mr. Justice Cory, speaking for the majority, reviewed the doctrine of constructive trust. He noted that under traditional
English law, constructive trust was regarded as a substantive institution
similar to an express trust, i.e. requiring a finding of an actual or presumed
intention, without making a distinction between implied, resulting or constructive trusts. In the United States, on the other hand, the constructive
trust had long been recognized, not as an institution, but as a broad
restitutory device. According to Mr. Justice Cory, Mr. Justice Laskin’s reasons in Murdoch v. Murdoch indicate that he was closely aligned to the
American approach, and Mr. Justice Dickson’s reasons in Pettkus v. Becker
“clearly demonstrate the broad and equitable nature of the remedial constructive trust and its applicability to any property dispute.” Until Pettkus,
constructive trust was viewed largely in terms of law of trusts, hence the
need for the existence of an actual fiduciary relationship. In Pettkus, the
Court moved to an approach more in line with restitutory principles by
explicitly recognizing constructive trust as one of the remedies for unjust
enrichment. According to Mr. Justice Cory:
These cases show that in Canada the doctrine of remedial constructive trust has been accepted for almost a decade as an important
remedial device whose prime function is to remedy situations of unjust
enrichment. 10
The constructive trust established under the Pettkus test was essentially a response to the need to find an equitable method of dividing
property in cases of matrimonial dispute. It is commonly referred to as a
remedial constructive trust since its purpose is to prevent unjust enrichment, and it requires the court to exercise its equitable discretion to grant
7 Sorochan
v. Sorochan, [1986] 2 SCR 38; 29 DLR (4th) 1.
v. Rawluk, [1990] 1 SCR 70; 65 DLR (4th) 161. In addition to Pettkus,
Sorochan, and Rawluk, see Murdoch v. Murdoch, [1975] 1 SCR 423; 41 DLR (3d) 367;
Rathwell v. Rathwell, [1978] 2 SCR 436; 83 DLR (3d) 289; and Hunter Engineering Co. v.
Syncrude, [1989] 1 SCR 426.
9 Peter v. Beblow, [1993] 1 SCR 980; (1993), 101 DLR (4th) 621 (SCC).
10 Karavos v. The Queen, 96 DTC 1001, at 1005-6; [1996] 1 CTC 2206, at 2214 (TCC).
Sarchuk J went on to add, “In a recent decision of the Supreme Court Canada, Peter v.
Beblow, involving the doctrine of constructive trust, both Mme. Justice McLachlin and Mr.
Justice Cory referred to constructive trust as an important judicial means of remedying
unjust enrichment. They also noted that other remedies were available such as monetary
damages which in some instances might be a more appropriate remedy.”
8 Rawluk
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the remedy. Under the Pettkus test, three requirements must be satisfied
as a condition to a finding of unjust enrichment:11 an enrichment, a corresponding deprivation, and the absence of any juristic reason for the
enrichment, such as a contract or a gift. In Canada, this form of remedial
constructive trust has evolved beyond the matrimonial context.12
The history of the constructive trust has created uncertainty about its
current doctrinal basis.13 Although it has been argued that the current
position in Canada is that the constructive trust is to be regarded as a
remedy and not a substantive institution,14 it is not clear that a court
would refuse to impose a non-remedial constructive trust on the basis of
the British institutional notion of the trust as a cause of action in appropriate circumstances. 15 As will be seen, the specific nature of the
constructive trust may have important tax consequences since at least one
Tax Court decision appears to have distinguished between the remedial
and non-remedial constructive trust when providing tax relief.16
Notwithstanding decisions of the Supreme Court of Canada that focus
on the constructive trust as a remedy, the break away from the traditional
11 These elements were previously set out in the dissenting judgment in Rathwell, supra
footnote 8, by Dickson J (as he then was), with Laskin CJ (as he then was) and Spence J
concurring.
12 See, for example, Syncrude, supra footnote 8; Lac Minerals Ltd. v. Int’l Corona
Resources (1989), 61 DLR (4th) 14 (SCC); and Sarchuk J’s comments in Karavos, supra
footnote 10.
13 For a discussion of the evolution of the nature of the constructive trust as a substantive right or a remedy, see John L. Dewar, “The Development of the Remedial Constructive
Trust” (February 1984), 6 Estates and Trusts Quarterly 312-65; and D.W.M. Waters, “The
Constructive Trust in Evolution: Substantive and Remedial” (June 1991), 10 Estates and
Trusts Journal 334-84.
14 See, for example, the comments of Sarchuk J in Karavos, supra footnote 10.
15 See Eileen E. Gillese, The Law of Trusts (Toronto: Irwin Law, 1997), 106-7: “Many
legal academics view all constructive trusts as a remedy for a cause of action based on
unjust enrichment or breach of confidence. However, no single theory or principle explains all the situations in which constructive trusts will be found to exist or be imposed.
We do know that the constructive trust exists as a cause of action based on the English
approach. We also know that the constructive trust as a remedial device has been accepted
by Canadian courts.” Also see Dewar and Waters, supra footnote 13.
16 For example, see Fletcher, supra footnote 3, where the court found that the constructive trust was a trust for purposes of subdivision k. McLachlin J discussed the remedial
nature of the constructive trust in Beblow, supra footnote 9, at 995-96; 649:
The other difficult aspect of this case is the question of whether the remedy which the
trial judge awarded—title to the matrimonial home—is justified on the principles
governing the action for unjust enrichment. Two remedies are possible: an award of
money on the basis of the value of the services rendered, i.e., quantum meruit; and
the one the trial judge awarded, title to the house based on a constructive trust. . . .
As I wrote in Rawluk, supra, for a constructive trust to arise, the plaintiff must
establish a direct link to the property which is subject to the trust by reason of the
plaintiff ’s contribution. This is the notion underlying the constructive trust in Pettkus
v. Bekker, supra, and Sorochan v. Sorochan, supra, as I understand those cases. It
was also affirmed by La Forest J. in Lac Minerals, supra.
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British approach of a constructive trust as a substantive right has not been
a clean break. Although the remedial constructive trust is clearly part of
our common law, the non-remedial constructive trust also appears to remain.
Tax Cases
The nature of the constructive trust for tax purposes is important for two
reasons. First, if the constructive trust is an equitable remedy ordered by
a court in its discretion, the question arises whether the Tax Court of
Canada, as a court of first instance, has jurisdiction to find, or even to
consider the existence of, a constructive trust. Second, whether the constructive trust is a remedy imposed by a court of competent jurisdiction
or whether it is a substantive right raises the issue of timing surrounding
the creation of the trust, an issue about which there appears to be some
disagreement.17
Claims for tax relief on the grounds of a resulting or constructive trust
began in earnest in Canada in the 1990s18 after the decision in Fletcher.19
Previously, few cases considered the resulting or constructive trust relationship, although early claims indicated some promise that such a
relationship might be recognized between the parties for tax purposes.20
A number of the recent resulting and constructive trust cases involve
spouses, including Nelson,21 Holizki, 22 and Collins. 23 Unlike the 1980s
when spouses attempted to split income from work activities on the basis
of a partnership, the 1990s mark the advent of attempts by taxpayers to
split proceeds from the disposition of property, which they argue is beneficially owned by both. The argument, particularly in the case of
constructive trusts, is based largely on matrimonial property law concepts.24
17 For example, does the trust arise at the date of the court order, or when the unjust
enrichment arose? See Waters, supra footnote 13, and the discussion below under the
heading “When Does the Trust Arise?”
18 Until recently, attempts to split income, particularly between spouses, were based on
partnership or more rarely on the existence of a constructive trust as an alternative to a
claim of partnership. See, for example, Boles v. MNR, 82 DTC 1643; [1982] CTC 2638
(TRB); Feder v. MNR, 81 DTC 311; [1981] CTC 2327 (TRB) (where the taxpayer was
successful); and Erickson v. MNR, 88 DTC 1705; [1988] 2 CTC 2380 (TCC).
19 Supra footnote 3.
20 See, for example, Feder, supra footnote 18; Erickson, supra footnote 18; and Savoie
v. The Queen, 93 DTC 552; [1993] 2 CTC 2330 (TCC).
21 Nelson et al. v. MNR, 91 DTC 37; [1990] 2 CTC 2525 (TCC).
22 Holizki v. The Queen, 95 DTC 5591; [1995] 2 CTC 420 (FCTD).
23 Collins, supra footnote 5.
24 A similar argument was made before the Supreme Court of Canada more than 25
years ago, in Sura v. MNR, 62 DTC 1005; [1962] CTC 1 (SCC). Frank Sura argued that
since he lived in Quebec, a province that had a community of property regime, half his
salary and rental income should be taxed to his wife. The Supreme Court of Canada held
that income from the property was under the control of Mr. Sura, that he received the
benefit of it, and that it should therefore be taxed to him. The court took a quite different
(The footnote is continued on the next page.)
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Other decisions rendered since the late 1980s provide an eclectic view
of the range of circumstances in which the taxpayer will argue, or the Tax
Court will find, a constructive trust. In Fletcher, the constructive trustee
was a wrongdoer. In Forest Oil,25 the Federal Court—Trial Division found
a constructive trust as a remedy for unjust enrichment by the Crown. In
Savoie, 26 a constructive trust was found to limit tax liability of a taxpayer’s spouse under section 160. In Funk, 27 the court found a constructive
trust to enable a taxpayer, as beneficial owner of the equitable estate in a
development property, to deduct certain construction expenses.
Throughout this broad spectrum of circumstances in which a constructive trust may arise, there is evidence that the two historical categories in
which such trusts have been found for tax purposes—cases of misconduct
(the British approach) and a remedy for unjust enrichment (the US and
current Canadian approach)—remain. There is also evidence of an emerging trend in income splitting in which the taxpayer (the “volunteer”)
appears to be doing some retroactive tax planning based on the argument
that a constructive or a resulting trust exists. Each of these categories will
be dealt with in turn.
Cases of Misconduct
The ground-breaking decision in the recognition of a constructive trust
for tax purposes was Fletcher. In that case, the taxpayer, a non-resident
of Canada, gave the wrongdoer, Mr. Hyman, power of attorney to sell his
home. Mr. Hyman used the sale proceeds to acquire a second mortgage
on a piece of tarsands property in which he was personally involved. The
value of the tarsands property fell, and the second mortgage became worthless. The taxpayer sought to claim a capital loss under section 115 on the
disposition of his capital interest in a Canadian trust. The taxpayer’s
argument based on the existence of an express trust failed. Tax planners
were then startled to learn that not only was a constructive trust to be
recognized for tax purposes, or at least for purposes of section 115, but in
addition, the constructive trust was to be recognized as arising at a date
some five years before the date of the actual judgment.28 In fact, the
24
Continued . . .
view of the ownership of the property upon Mr. Sura’s death and confirmed that his wife
would be the co-owner of the community property with respect to succession duties and
estate tax. Unfortunately, the logic in Sura may apply only if the parties have ended the
community of property regime by death or divorce. Constructive and resulting trusts may
therefore remain as ways to effectively split tax liability while the parties are together.
25 Forest Oil, supra footnote 3.
27 Funk v. MNR, 92 DTC 1296; [1992] 1 CTC 2349 (TCC).
28 See also “Revenue Canada Round Table,” in Report of Proceedings of the Fortieth
Tax Conference, 1988 Conference Report (Toronto: Canadian Tax Foundation, 1989),
53:1-188, question 31, at 53:47, where Revenue Canada recognized the constructive trust
for tax purposes in response to a question that referred to the Fletcher decision: “It is our
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666
constructive trust was deemed to have arisen at the time of the misappropriation of funds by Mr. Hyman.29 Sarchuk J explained the reason as follows:
[T]here was a fiduciary relationship between the appellant and Hyman,
which relationship gave rise to the placing of trust and confidence by
Fletcher in the fiduciary. This relationship existed at the time that the
“misappropriation” by Hyman took place. Furthermore that “misappropriation” occurred while Hyman was acting within the general scope of his
fiduciary duty. It is my understanding of the various decisions including
Pettkus v. Becker that equity imposes express trust obligations upon the fiduciary who abuses that trust and confidence. Applying these principles to the
evidence in the present appeal the existence of a constructive trust is obvious
and the fiduciary, Hyman, in these circumstances was a constructive trustee.30
Sarchuk J’s finding of a constructive trust in Fletcher is consistent with
the reasoning of the British courts that a non-remedial constructive trust
is imposed in cases where a fiduciary is guilty of wrongdoing.31
Unjust Enrichment
The remedial constructive trust also has found its way into the tax jurisprudence. In 1996, the Federal Court—Trial Division was faced with the
issue of constructive trusts and unjust enrichment in Forest Oil. In that
case, the minister refused to refund overpaid taxes under the former Petroleum and Gas Revenue Tax Act. Gibson J concluded that the doctrine
of unjust enrichment was firmly entrenched in Canadian law and held that
it was open to the court to find a constructive trust by reason of unjust
enrichment flowing from an absence of juristic reason for the enrichment
of the minister. In short, the overpayment was to be returned to the taxpayer on the basis of “principles of equity and a lack of clear language to
the contrary in the Act.” 32
28
Continued . . .
view that a constructive trust will be a trust that is subject to the application of all relevant
provisions of the Act. In these trusts, the constructive trustee usually has control of the
trust property within the meaning of subsection 104(1) of the Act. Such a trust would be
deemed to have been created at the time the property or control thereof is acquired by the
ultimate constructive trustee, or later on, as the circumstances may require. Normally, the
time of the court judgment would not be relevant to this determination. In our opinion, a
constructive trust would be a personal trust within the meaning of the definition contained
in subsection 248(1) of the Act.”
29 It may be of some significance that in Fletcher, Sarchuk J considered a prior civil
proceeding with respect to the property. The language used by the judge in the civil matter
implied that a constructive trust relationship arose between the parties at the time of the
misappropriation. Sarchuk J stated, supra footnote 3, at 628; 2347: “While the learned trial
judge did not specifically state that a constructive trust had been created that conclusion is
implicit in his reasoning. Although I am not bound by the judgment it is relevant to the
issues before me and is entitled to careful consideration.”
30 Ibid.
31 It followed that Mr. Fletcher could hold a capital interest in the trust for other
purposes of the Act, including the disposition rules. It also followed that he could claim a
loss on the disposition of his capital interest under section 115.
32 Forest Oil, supra footnote 3.
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667
Volunteers
Initial attempts to rely on the doctrine of unjust enrichment enunciated in
Pettkus have met with little success in the Tax Court where taxpayers
have “volunteered” their constructive trust relationship. In fact, attempts
to split income on the basis of a constructive trust in harmonious family
situations have generally been met with considerable skepticism by the Tax
Court and, it seems, are considered both inappropriate and tax-motivated.
In Nelson, Sarchuk J stated:
[T]he doctrine of constructive trust is considered a valuable remedial device the primary purpose of which is to remedy situations of unjust
enrichment and which has more recently been utilized particularly in marital property disputes. In such cases it is fair to say that the parties “have at
each other with considerable gusto” and the assertions of unjust enrichment
are thoroughly and methodically canvassed. That is not the norm in appeals
under the Income Tax Act such as this. 33
Sarchuk J reached a similar conclusion in Karavos, where both the
husband and the wife reported in their income tax returns one-half of the
proceeds from the sale of a restaurant held in Mr. Karavos’s name. In
finding that no constructive trust existed, Sarchuk J stated unequivocally
that to make the inquiry necessary over the “totality of a marital relationship . . . is inappropriate in an income tax context.”34
Attempts to split income by virtue of a constructive trust were also
defeated by Bowman J in Collins. In that case, the taxpayer and his wife
owned the shares of their respective corporations in such a manner as to
avoid the associated corporations provisions in the Act. Shares of one of
the corporations, Sherkston Resorts Inc. (“Sherkston”), were sold at a
profit. Mr. Collins, the registered owner of the Sherkston shares, argued
the existence of a constructive trust in an attempt to split the gain thereon
with his wife. Bowman J made short work of the taxpayer’s assertion. He
found that even if unjust enrichment and corresponding detriment could be
found, there was no absence of juristic reason for the enrichment and deprivation. In fact, according to Bowman J, the juristic reason for Mr. Collins’s
ownership of the Sherkston shares was that the two intelligent and professionally advised spouses chose to arrange their affairs in this way.35
Other Tax Court decisions involving volunteers and constructive trusts
have met with better results for the taxpayer. In Anderson Estate36 and
Savoie, both involving family situations, the Tax Court found sufficient
evidence of contribution to support a claim of beneficial ownership in the
property.37 In Anderson Estate, there was no need to find a constructive
33 Nelson,
supra footnote 21, at 40-41; 2530.
supra footnote 10, at 1006; 2215.
35 Collins, supra footnote 5.
36 Anderson Estate, supra footnote 4.
37 It is perhaps ironic that in both of these cases the so-called constructive trustee was
deceased and could provide no evidence.
34 Karavos,
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668
trust, according to Mogan J , since the property had already been transferred to the beneficial owner pursuant to minutes of settlement. The only
issue to be resolved was whether the claimant had a beneficial interest in
the property before the taxpayer’s death. 38 If so, subsection 70(5) could
not apply in respect of the transferred property on the death of the testator and legal title holder, since it was already beneficially owned by the
claimant before the testator’s death.39 That beneficial interest was found
on the evidence. Savoie involved the beneficial ownership of land by a
taxpayer who had been married to her husband for over 30 years and with
whom she had raised eight children. Bowman J found both a constructive
and a resulting trust.40 Therefore, a sufficient interest in the subject property was held by the transferee to avoid liability under subsection 160(1)
for the tax liability of the transferor/constructive trustee.
RESULTING TRUSTS
The Resulting Trust at Common Law
Resulting trusts, like constructive trusts, arise by operation of law. However, a key element of the resulting trust is the inferred or presumed
intention to create a trust.41
The circumstances under which a resulting trust will arise can be traced
to two House of Lords decisions, Pettitt 42 and Gissing, 43 neither of which
produced a majority opinion. Nonetheless, it is clear from these cases that
38 Mogan J stated that he was certain that a court of competent jurisdiction would have
imposed a constructive trust had the parties not resolved the matter by minutes of settlement.
39 In Anderson Estate, the deceased taxpayer was cared for by his deceased wife’s
sister for almost 50 years. In issue was whether this care entitled the latter to part of
Anderson’s farm property.
40 Contrast Savoie, supra footnote 20, with the concurrent section 160 case of Ramey v.
The Queen, 93 DTC 791; [1993] 2 CTC 2119 (TCC). In Ramey, Bowman J referred to the
“compelling evidence” in Savoie and held that there was insufficient evidence to support
the doctrine of constructive trust.
41 As discussed by Dickson J (as he then was) in Rathwell, supra footnote 8, at 452-53;
304-5:
The presumption of a resulting trust is sometimes explained as the fact of contribution evidencing an agreement; it has also been explained as a constructive
agreement. . . . All of this is settled law. . . . The courts are looking for a common
intention manifested by acts or words that property is acquired as a trustee. . . .
The difficulty experienced in the cases is the situation where no agreement or
common intention is evidenced, and the contribution of the spouse without title can
be characterized as performance of the usual duties growing out of matrimony.
There are many examples of this. . . . Some of these situations may be analyzed as
agreement or common intention situations. Such intention is generally presumed
from a financial contribution. The doctrine of resulting trusts applies. In others a
common intention is clearly lacking and cannot be presumed. The doctrine of resulting trust then cannot apply. It is here that we must turn to the doctrine of
constructive trust.
42 Pettitt v. Pettitt, [1970] AC 777 (HL).
43 Gissing v. Gissing, [1971] AC 886 (HL).
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a common intention must be found, and such intention cannot be found or
imputed if it is not supported by the evidence.44
While the resulting trust is not plagued by the same doctrinal debate as
the constructive trust as to whether it is a remedy or a substantive right, it
is not without its difficulties since the requisite element of intention must
be found to establish the trust relationship.
Tax Cases
Tax cases in which resulting trusts are considered rely in large measure
on the tests set out in Pettkus and in Rathwell. For example, in describing
the resulting trust in Karavos, Sarchuk J referred to the reasoning of the
Supreme Court in Rathwell:
In Rathwell v. Rathwell, the Supreme Court of Canada confirmed that a
resulting trust may arise in circumstances where the parties have a “common intention” that the beneficial interest should not belong solely to the
person holding legal title but is to be shared between such persons. Such
common intention can be ascertained by examining whether evidence exists
of an express declaration of common intention that the non-titled party was
to have a beneficial interest in the property. The Supreme Court also noted
that it is appropriate for a court to consider whether a “common intention”
existed by examining the facts and circumstances surrounding the acquisition of the property. If the person without title has contributed to acquisition or improvement of the property the doctrine of resulting trust may be
engaged.45
In recent years, a number of tax decisions have grappled with the
resulting trust, most commonly in situations where tax relief is being
sought by the taxpayer. These cases have met with mixed results and have
created additional confusion about the facts necessary to support either a
constructive or a resulting trust. In general, however, those tax cases in
which a resulting trust has been found have expressly relied on a finding
of intention by the parties, which either has been directly communicated
or can clearly be inferred from the evidence.
44 The inherent difficulties with the test of common intention were summarized in
Pettkus, supra footnote 1, by Dickson J (as he then was) at 842-43; 270: “In Murdoch, it
was held that there was no evidence of common intention. In Rathwell, supra, common
intention was held to exist. Although the notion of common intention was endorsed in
Murdoch and in Rathwell, many difficulties, chronicled in the cases and in the legal
literature on the subject, inhered in the application of the doctrine in matrimonial property
disputes. The sought-for ‘common intention’ is rarely, if ever, express; the courts must
glean ‘phantom intent’ from the conduct of the parties. The most relevant conduct is that
pertaining to the financial arrangements in the acquisition of property. Failing evidence of
direct contribution by a spouse, there may be evidence of indirect benefits conferred:
where, for example, one partner pays for the necessaries while the other retires the mortgage loan over a period of years.”
45 Karavos, supra footnote 10, at 1004; 2211-12.
(1997), Vol. 45, No. 4 / no 4
670
Cases Where Common Intention Was Found
Fortunately, the news is not all bad in the quest for tax relief on the basis
of a resulting trust. In Holizki, Rothstein J found that there was no attribution to the taxpayer of income arising on the sale of shares which was
included in the wife’s income since the wife was the beneficial owner of
the shares under a resulting trust. A common thread in the finding of
intent in this decision was that the parties were unsophisticated and had
been following the advice of their accountant with respect to ownership
matters.46 Both spouses contributed to the business, and both spouses
undertook liabilities. Both spouses also asserted that at all times they had
intended to share the property of the business equally. It was therefore
reasonable to conclude, according to Rothstein J , that there was a common intention for the appellant to hold a portion of the property of the
business on a resulting trust for his wife.
Most recently, in Cooray,47 resulting trusts were found in circumstances
where a parcel of land was purchased by a group of people for the purpose of building family homes. The family homes were not built, and the
land was sold eight years later at a substantial profit. One issue before the
court was whether the spouses of the purchasers had a beneficial interest
in the land and a corresponding entitlement to share in the profits arising
from the sale of the land. Bowie J referred to the decision in Rathwell and
concluded that there was a resulting trust in favour of the wives.
Bowie J found that the evidence supported the common intention of all
the appellants and their wives to be equal owners of the tenancies in
common. In particular, he referred to the fact that the appellants and their
wives had all worked continuously since immigrating to Canada and contributed their earnings to joint bank accounts, which funds were used to
satisfy both joint needs and individual needs. Although there was some
disparity in the amounts earned by the husbands and the wives, Bowie J
had no difficulty inferring that the intention of each couple was to share
equally in the proceeds of their efforts. Similarly, Bowie J was satisfied
that each couple had a common intention to share equally the ownership
of their particular parcel of land, the payments in respect of which were
made from the joint bank accounts.
As discussed previously, Bowman J also found the necessary intention
for a resulting trust in Savoie. Although Mr. Savoie was deceased at the
date of the trial, Bowman J found the necessary intent in Mrs. Savoie’s
evidence and from all the surrounding circumstances, including her working as a team with her husband, her contribution to the family finances,
the pooling of their resources, and the assertion that they generally regarded
46 Holizki, supra footnote 22. See also Savoie, supra footnote 20, and Erickson, supra
footnote 18, where the taxpayer’s lack of sophistication seems to be directly related to a
favourable finding of either a constructive or a resulting trust.
47 Cooray et al. v. The Queen, June 13, 1997, file no. 95-1656(IT)G (TCC) [not yet
reported].
(1997), Vol. 45, No. 4 / no 4
671
their family assets as common assets. Bowman J also noted that the parties were both uneducated, although it is unclear whether this factor
influenced his finding of intent. The matter may be moot, however, since
Bowman J also stated that the facts supported the finding of a constructive trust.
Cases Where Common Intention Was Not Found
In those tax cases where the court was reluctant to find a resulting trust,
the comments in Pettkus that a resulting trust is not available “where the
importation of intention is impossible or unreasonable” were referred to
with approval. Such was the case in Nelson.
In Nelson, the taxpayer sold farmland, which was registered in his
name alone. The farmland had been held by the taxpayer’s parents in
joint ownership before being transferred by his mother to the taxpayer in
joint ownership with her after his father’s death. The taxpayer farmed the
land with his mother and subsequently with his brother. Ultimately, the
taxpayer acquired all the relevant farmland. When the taxpayer disposed
of the farm, he realized a substantial capital gain, one-half of which he
included in his income and the other half of which his wife included in
her income. The minister included the full amount of the capital gain in
the taxpayer’s income. The taxpayer appealed to the Tax Court on the
basis that he held a one-half interest in the relevant property for his wife
on either a resulting trust or a constructive trust. The taxpayer’s appeal
was dismissed on both arguments.48
In respect of the resulting trust, the court concluded that there was no
substantive evidence to establish that Mrs. Nelson and her husband had
always viewed the beneficial ownership of the farm as joint and that she
had a one-half interest in it from the time of its acquisition. As a result,
the intention requirement for a resulting trust was not met. In reaching his
conclusion, Sarchuk J focused on the fact that the farmland had always
been in Mr. Nelson’s family and, despite various intrafamily transfers
over the years, there was never any express desire or intention other than
to ultimately transfer the land to Mr. Nelson and not into the joint names
of Mr. and Mrs. Nelson. Further, there was no evidence that Mrs. Nelson
had ever paid part of the purchase price for the farm properties, nor was
her involvement over the years in the farming operations such that it
constituted a contribution in kind to the purchase price.
Sarchuk J then referred to Pettkus and concluded that there was little
or no evidence consistent with the existence of expressed or implied
intention and resulting trust. Sarchuk J also concluded that there was no
constructive trust in Nelson.49
48 Nelson,
supra footnote 21.
whether the same result would have been reached if these facts had been put
before a court where tax considerations were not in issue.
49 Query
(1997), Vol. 45, No. 4 / no 4
672
Sarchuk J also did not find the requisite intention to support the finding of a resulting trust in Karavos. Half the proceeds from the sale of a
restaurant held in Mr. Karavos’s name were included in his wife’s income. The minister sought to attribute the entire sale proceeds to Mr.
Karavos under subsection 74.1(1). Sarchuk J did not find an express declaration of common intention and noted a lack of evidence relating to the
acquisition of the property from which a common intention might properly be inferred:
In my opinion it would be most inappropriate to imply [sic] a common
intention where the [parties’] conduct before and after the acquisition of
the property is “wholly ambiguous” or its association with the alleged
agreement is “altogether tenuous.” 50
Sarchuk J also concluded that there was no constructive trust in Karavos.
It appears that Sarchuk J ’s views on the clear intent necessary to find a
resulting trust are shared by other judges. In 1996, in Wong, 51 Teskey J
refused to find a resulting trust, again referring to Pettkus and the comments therein that a resulting trust is not available where the imputation
of intent is impossible or unreasonable. In Wong, the taxpayer claimed a
loss on the disposition of shares he claimed were held on a resulting trust
by his brother. Teskey J found that the resulting trust relationship was not
proven and there was no reasonable explanation for why the shares were
held in his brother’s name.
RECURRING ISSUES
Regardless of the court’s findings in decisions involving constructive and
resulting trusts, a number of recurring issues have emerged.
Constructive Trusts and Jurisdiction of the Tax Court
Does the Tax Court of Canada Have Jurisdiction To Determine
the Existence of a Remedial Constructive Trust?
In Nelson, the minister argued that the doctrine of constructive trust was
essentially an equitable remedy and that its application required an order
of a court of competent jurisdiction such as the superior court of a province; the Tax Court of Canada, as a statutory court, clearly lacked that
equitable jurisdiction. Notwithstanding, Sarchuk J concluded for purposes
of the appeal, and without deciding the issue, that the right existed in the
Tax Court of Canada to apply a remedial constructive trust in exercising
its powers pursuant to section 171. This type of remedial constructive
trust is the type alluded to in Pettkus, which was intended to prevent
unjust enrichment.
In 1993, three years after Nelson, the minister again argued in Savoie
that the Tax Court of Canada did not have jurisdiction to impose a constructive trust. Bowman J shared none of Sarchuk J ’s seeming reluctance
50 Karavos,
51 Supra
footnote 5.
(1997), Vol. 45, No. 4 / no 4
673
about addressing the issue. He responded to the minister’s argument by
specifically referring to Nelson and Sarchuk J’s decision to leave the
matter of jurisdiction open for determination at a later date. He stated:
I have found, on the evidence in this case, that all of the elements necessary to support both a resulting trust and a constructive trust of a 50 percent
interest in the property are present and I must therefore answer the question which my brother Sarchuk, J. T. C . C . left open. I do not think that the
doctrine can be invoked only by a court having jurisdiction to make a
declaration as between two conflicting spouses. It is a substantive doctrine
that goes to a determination of the true ownership of the property—a matter that is germane in an income tax appeal where the Minister of National
Revenue seeks in effect, to cause a spouse’s liability for tax to follow
property that he says was owned by the husband and transferred to his
wife. This court has an obligation in such a dispute to determine the true
ownership. 52
The matter was not to end there. Two years later, in Karavos, the
minister again argued before Sarchuk J that the constructive trust was an
equitable remedy which the Tax Court of Canada did not have authority
to invoke in the exercise of its jurisdiction under section 171.53 The minister urged Sarchuk J to “not make assumptions in the context of a
particular tax appeal as to whether the equitable remedy of constructive
trust would be granted by a court having jurisdiction to do so” or “retroactively impose a declaration of a restitutory nature on financial
transactions which occurred several years ago.”54 Sarchuk J again responded
with concern, this time about the appropriateness of the imposition of a
remedial constructive trust in a tax context:
A constructive trust is a mechanism by virtue of which a court with equitable jurisdiction can grant redress to an unjustly deprived person. In
determining whether unjust enrichment exists and restitution through the
invocation of a constructive trust is appropriate a court may take into account the deprived person’s actual financial contributions, (which may
properly include the contribution of earnings towards household bills and
maintenance), all work performed in relation to the property, both physical
and otherwise, and other factors as the performance of housekeeping duties, the raising of children[,] etc. The result is that effectively a court is
required to embark on an examination of the totality of a marital relationship extending over a period of 30 years to determine whether an unjust
enrichment occurred and whether it would be appropriately remedied by a
declaratory order vesting the claimant with title to property or by granting
a monetary award. In my view such an inquiry is inappropriate in an income tax context.55
52 Savoie,
supra footnote 20, at 555; 2334-35.
the minister argued that the constructive trust “is a remedy of restitution, which may be imposed by courts having equitable jurisdiction to do so as one of
several possible alternative remedies in the face of unjust enrichment.” Karavos, supra
footnote 10, at 1004; 2211.
54 Ibid.
55 Ibid., at 1006; 2215.
53 Specifically,
(1997), Vol. 45, No. 4 / no 4
674
Sarchuk J then left open the question of the form of inquiry necessary
to meet the duties of the Tax Court:
The use of a restitutory device to remedy situations of unjust enrichment
should not be equated with the determination of a collateral issue necessary
in order for this Court to carry out its statutory function, that is, to dismiss
or allow an appeal or vacate or vary an assessment. 56
It appears that Sarchuk J is of the opinion that the role of the Tax Court is
to determine a collateral issue (for example, the beneficial ownership of
the property), not to impose a remedy currently used by Canadian courts
in cases of unjust enrichment.
The latest word on the role of the remedial constructive trust in the Tax
Court of Canada is from Bowman J . 57 In Collins, decided some 20 days
after Karavos, Bowman J specifically raised the question of the jurisdiction of the Tax Court of Canada to consider whether a constructive trust
existed. He stated his conclusions as follows:
The problem in this court is whether I am entitled even to entertain an
argument that the elements that would, in the Ontario Court, give rise to a
finding of constructive trust exist. In other words may this court, which has
no jurisdiction to make a finding of unjust enrichment and a declaration
that a constructive trust exists in respect of the Sherkston shares that would
be binding as between the spouses, even consider the question. . . ?
If this court is to exercise the jurisdiction that it has to determine the
existence of legal rights that are relevant to the determination of tax liability under the Income Tax Act it must be able to consider such questions. 58
After quoting from the comments of McLachlin J in Beblow, Bowman J
went on to add:
I do not think that this court is barred from considering whether the ingredients exist that would permit the application of a remedy arising out of a
constructive trust by a court having jurisdiction to do so. If the Tax Court
of Canada concludes that they are present it can then go on to determine a
point in issue in an appeal under the Income Tax Act. 59
In the final analysis, the most recent positions of these two judges may
not be as far apart as they might appear to be with respect to the role of
the Tax Court in considering the existence of a remedial constructive
trust. The determination of a collateral issue referred to by Sarchuk J in
56 Ibid.
57 Mogan J also confronted this issue in Anderson Estate, supra footnote 4, which was
decided in 1995. The minister again argued that the Tax Court did not have jurisdiction to
apply equitable principles as a remedy. Mogan J avoided the issue and concluded that he
was not required to address the question since the matter of property distribution was
already settled. In Forest Oil, supra footnote 3, Gibson J had no difficulty concluding that
it was open to the Federal Court—Trial Division to find a constructive trust by reason of
unjust enrichment against the minister for the amount of a refund not repaid to the taxpayer under the applicable legislation.
58 Collins, supra footnote 5, at 1038.
59 Ibid.
(1997), Vol. 45, No. 4 / no 4
675
Karavos and the most recent conclusion by Bowman J in Collins, that the
court is not barred from considering whether the ingredients exist that
would permit the application of a remedy arising out of a constructive
trust to determine a point in issue in an income tax appeal, may lead to
the same result. In neither case will the equitable remedy of specific
performance or monetary damages be awarded by the court, but the necessary tax consequences will nonetheless follow.
Whether or not either judge is correct about jurisdiction may also be a
moot point. Given its historic origins, it is clear that the Tax Court of
Canada lacks equitable jurisdiction to find a remedial constructive trust.60
However, it appears that as a practical matter, judges of the Tax Court of
Canada will continue to assume jurisdiction.61 This arguably provides the
fairest overall result since it would be manifestly unjust if a taxpayer
were precluded at the court of first instance from arguing a claim based
on a remedy that is clearly available in equity. In consequence, it seems
that the Tax Court of Canada should, at a minimum, be able to consider
the underlying issue of beneficial ownership in the context of the remedial constructive trust. This is particularly so since the Federal Court—Trial
Division has equitable jurisdiction,62 and Gibson J had no difficulty concluding that it was open to this court to find a constructive trust by reason
of unjust enrichment in Forest Oil.
60 The Tax Court of Canada is a statutory creation with one purpose of the legislation
being the improvement of public perception of decisions of the prior Tax Appeal Board
and Tax Review Board (see Canada, House of Commons, Debates, June 28, 1983, 26891).
Since the Tax Court is a statutory court that evolved from the original administrative
boards, powers and jurisdiction must be restricted to the evolution of statutes that eventually resulted in its existence. Both the original Tax Appeal Board and the subsequent Tax
Review Board were created for a simple redress procedure for taxpayers wishing to challenge a tax assessment. Any questions of law were to be directed to the Exchequer Court.
The simple procedures were carried over to the Tax Court of Canada, which was not given
jurisdiction or powers broader than those of its predecessors. The Honourable Mark
MacGuigan (then minister of justice) stated that the name change would assist in eliminating the impression that the arbiter hearing the assessment was merely an agent of the
federal government and also in reinforcing the judicial nature of the hearing (see Canada,
House of Commons, Debates, June 28, 1983, 26891).
61 See, for example, Judge Tremblay’s comments on this court’s jurisdiction to hear
Charter-based argument: “In my view, indeed, the Tax Court of Canada has the jurisdiction
to hear all contentions of any appellant related to the computation of his net income, his
taxable income or his tax.” (Prior v. MNR, 87 DTC 26, at 37; [1987] 1 CTC 2076, at 2091
(TCC).) See also Alison Scott Butler, “Making Charter Arguments in Civil Tax Cases: Can
the Courts Help Taxpayers?” (1993), vol. 41, no. 5 Canadian Tax Journal 847-80, at 860.
62 During the debate on Bill C-192 (the Federal Court Bill respecting constitution,
jurisdiction, and administration, among other things) proposed by the then minister of
justice, the Honourable John N. Turner, the point was raised that the new Federal Court
was “the son of the Exchequer Court Act” but with “the flexibility of provincial supreme
courts [and] the ability to move about the country and exercise jurisdiction in certain
fields” (Canada, House of Commons, Debates, March 25, 1970, 5475 (Mr. McCleave)).
Any equitable jurisdiction would have to have origins in the Exchequer Court Act, RSC
1927, c. 34, the Act creating the former court. Amendments to that Act (SC 1928, c. 23)
(1997), Vol. 45, No. 4 / no 4
676
Constructive Trusts Found by Other Courts
In addition to resolving issues of recognition and timing for constructive
trusts within its own jurisdiction, the Tax Court has been and will continue to be called upon to determine the proper tax treatment of the
parties in situations in which a constructive trust has been found by a
competent superior court acting within its jurisdiction.
In Hassanali,63 Ms Georg obtained judgment in the Ontario Court General Division against Count Hassanali in the amount of $725,000 for
constructive trust as a result of the breakdown of their relationship. Count
Hassanali deducted this amount as a business expense in his 1989 taxation year. Ms Georg did not include any of the amount in her income for
1989. The minister disallowed Count Hassanali’s deduction. The taxpayer
appealed. The minister brought an application pursuant to section 174 to
add Ms Georg as a third party. The matter of the proper tax treatment of
the constructive trustee and the beneficial owner was never resolved. Ms
Georg declared personal bankruptcy, and the minister did not pursue the
matter. The issue remains, therefore, as to how the matter should have
been resolved by the Tax Court given that a superior court had confirmed
the existence of the constructive trust.
Some guidance on the question on the proper tax treatment of constructive trustees and beneficial owners may be drawn from the Australian
courts.64 In two decisions involving constructive trusts, the court held that
the beneficial owner of the property, and not the constructive trustee, was
taxable with respect to the income. The first decision65 involved a smalltime tax evader who was reassessed when profits were understated in his
business tax return. The taxpayer argued in his defence that his wife was
beneficially entitled to half the income and, since equity would decree a
resulting or constructive trust in her favour, she should be liable for onehalf of the taxes. His claim was rejected at first instance on the basis that
it was “fiscally inefficacious until relief was actually granted.” 66 The Federal Court disagreed and determined that the commissioner must assess
62
Continued . . .
included the intention to expand the jurisdiction of the Exchequer Court to include common law remedies to patent and trademark issues. As stated by the Honourable Ernest
Lapointe (then minister of justice), “[I]n relations between the crown and the subject when
the crown is plaintiff or petitioner, it is specifically stated that the court has jurisdiction at
common law or in equity, but in relations between subject and subject the court has no
such jurisdiction. This is to give the exchequer court the same jurisdiction as the other
courts have in the matter” (Canada, House of Commons, Debates, April 23, 1928, 2265).
Hence, although a creation of statute, the Federal Court—Trial Division inherited the
equitable jurisdiction of the Exchequer Court.
63 Hassanali Estate v. The Queen, 96 DTC 1384; [1996] 1 CTC 2464 (TCC).
64 For a discussion of these decisions, see J. Glover, “Taxing the Constructive Trustee:
Should a Revenue Statute Address Itself to Fictions,” in A.J. Oakley, ed., Trends in Contemporary Trust Law (Oxford: Clarendon Press, 1996), 315-31.
65 MacFarlane v. FCT (1986), 13 FCR 356 (Fed. Ct.).
66 Glover, supra footnote 64, at 315.
(1997), Vol. 45, No. 4 / no 4
677
the parties according to their position at general law, that being that the
business income had been derived equally by Mr. MacFarlane and his
wife. It was not necessary at general law for a court order to first confirm
the existence of a constructive trust since equity regards as done what
ought to be done. It therefore followed that the commissioner’s assessment of the husband for all of the business income was incorrect.
In a somewhat surprising decision,67 the Australian Federal Court also
found that a thief, who had stolen funds from his employer and then
claimed and paid tax on the interest earned thereon, was not liable for the
tax, given that the theft was acknowledged and the funds returned. The
judge reasoned that since the constructive trust took effect from the time
at which the conduct that gave rise to its imposition arose, the interest
earned was a gain of the owner and not of the thief.68
The logic of these decisions, at least with respect to the tax treatment
of the beneficial owner for tax purposes, is consistent with that applied in
Canada in Stockman. 69 In that case, the taxpayer and her former spouse,
Mr. Bucci, were divorced in 1989. In 1990 and 1991, rental losses were
incurred in connection with four condominium apartments acquired in
1987 from joint funds and from money jointly borrowed from the bank.
Mr. Bucci claimed 100 percent of the losses incurred with respect to the
properties in 1990 and 1991.70 On April 10, 1992, the taxpayer obtained
an order of the Ontario Court General Division which had the effect of
granting her a 50 percent constructive trust interest in the properties. At
issue was whether the taxpayer was entitled to deduct 50 percent of the
rental losses incurred in 1990 and 1991 with respect to those properties.
The court held that at the time the rental losses were incurred, the taxpayer was the beneficial owner of 50 percent of the properties. The
taxpayer was therefore entitled to deduct 50 percent of the losses.
It is clear from these decisions that, whether or not the Tax Court of
Canada should or will undergo the analysis necessary to determine if a
tax result should be based on its finding that the ingredients for a constructive trust exist at common law, the Tax Court will be called upon to
respond to the finding of a constructive trust by a court of competent
jurisdiction. Issues will therefore remain as to how this type of trust
should be treated for tax purposes.71
67 Zobory
v. FCT (1995), 129 ALR 484 (Fed. Ct.).
is not clear that the same result would follow in Canada since Canada taxes illegal
income. See Interpretation Bulletin IT-256R, “Gains from Theft, Defalcation or Embezzlement,” August 27, 1979.
70 The losses were actually paid by a corporation of which the taxpayer and Mr. Bucci
were the only shareholders. The records of the corporation showed that payments made by
the corporation were on the account of Mr. Bucci.
71 See the discussion below under the heading “Should Constructive and Resulting
Trusts Be Recognized for Purposes of the Act?”
68 It
(1997), Vol. 45, No. 4 / no 4
678
When Does the Trust Arise?
Common Law
The time when a constructive trust arises also appears to be in dispute
both within and outside the tax arena. Again, the confusion appears to be
focused largely on the character of the constructive trust in the Canadian
context. As previously discussed, under traditional English law the constructive trust was regarded as a substantive institution similar to an express
trust. In contrast, in the United States the constructive trust is viewed not
as an institution, but as a broad restitutory device. It has been argued that
in Canada a constructive trust is to be regarded as a remedy and not a
substantive institution.72
In Rawluk, the Supreme Court of Canada, in a split 4:3 decision, determined the matter of the remedial constructive trust by addressing the
question of when the constructive trust arises. Cory J , for the majority,
held that the constructive trust remedy arose as of the date of the unjust
enrichment, thereby treating the constructive trust as a property interest.
The minority view, per McLachlin J, was that, as a discretionary remedy,
the constructive trust did not arise until the order pursuant to which the
court exercised its discretion to determine that the trust was the appropriate restitutionary remedy.
If the constructive trust is a remedy, it is argued, the claimant’s property interest under the constructive trust becomes effective “at the time
the remedy is raised from an unjust enrichment, instance of unconscionability, or other generative circumstance.”73 There are, nonetheless, others
who have suggested that the remedial constructive trust does not arise
until the date of the court decree.74 Still others suggest that the trust takes
effect from the time at which the conduct that gave rise to its imposition
arose. 75 This seems to be more in keeping with the British institutional
approach. It has also been suggested that courts should have the discretion to move the operative date of a constructive trust to “meet the
circumstances of the case.”76 The effect of most of these suggestions is
that beneficial entitlement, to the extent that it exists, will certainly precede the court order and most probably the date of court application.
72 See the discussion in Karavos, supra footnote 10, at 1005-7; 2213-16; and Waters,
supra footnote 13.
73 Glover, supra footnote 64, at 327, citing from A.J. Oakley, “The Precise Effect of the
Imposition of a Constructive Trust,” in Equity and Contemporary Legal Developments
427, at 433. See also section 160 of the American Law Institute’s Restatement of the Law
of Restitution: Quasi Contracts and Constructive Trusts (Philadelphia: American Law Institute, 1937).
74 See comments by Christie ACJ (as he then was) in Erickson, supra footnote 18, at
1709; 2385.
75 For example, see Fletcher as discussed below.
76 Glover, supra footnote 64, at 328.
(1997), Vol. 45, No. 4 / no 4
679
Tax Cases
The tax decisions that address the issue of when a constructive trust
arises also provide an array of answers. Such cases may be divided into
several distinct camps. First is the Fletcher situation, in which a wrong
has been done. In that case, the court found that the trust arose at the time
of the wrongdoing—that is, when the misappropriation of funds arose.
The second camp involves the constructive trust in the family context.
In Anderson Estate, Mogan J cited with approval two Canadian texts that
state that the constructive trust is generally considered to arise when the
duty to make restitution arises.77 In addition, Mogan J added the following analysis:
It seems to me that a beneficiary of a constructive trust can have an interest
in property prior to the imposition of such a trust by a court and without
regard to whether the constructive trust is only a remedy.78
Sarchuk J took a totally different tack in Karavos. He cited with approval the following comments of Christie ACJ (as he then was) in
Erickson:
Differing views have been expressed regarding the true nature of a constructive trust. In J.G. Riddall’s The Law of Trusts, 3rd (1987) ed. at page
359 the question in debate is put thus:
Should a constructive trust be regarded not as a substantive institution—a thing with its own existence—but rather as a remedy granted
by the court, just as an injunction is not an institution, but merely a
remedy?
If the correct view is that it is a remedy it follows, in my opinion, that
it does not come into existence until it is granted by a court having
jurisdiction. 79
This is a complete reversal of Sarchuk J ’s position in Fletcher:
I do not accept the view that a constructive trust does not exist until the
Court so declares in the course of, for example, an action by the beneficiary against the trustee. There is nothing in Pettkus v. Becker (supra) which
supports such a conclusion.80
Hamlyn J , in Stockman, also addressed the question of when a con-
structive trust arose when he sought to determine whether the now
estranged spouse was entitled to a claim of half the losses that had arisen
in respect of property that her husband was found to have held as constructive trustee on her behalf. He cited with approval the Supreme Court
of Canada decision in Rawluk that a constructive trust comes into existence “not when the trust is judicially declared but from the time when the
unjust enrichment first arose.”81 This endorsement of Rawluk by the Tax
77 Supra
footnote 4, at 765.
78 Ibid.
79 Supra
footnote 10, at 1005; 2213.
81 Rawluk, supra footnote 8, at 91; 176, per Cory J.
80 Fletcher,
(1997), Vol. 45, No. 4 / no 4
680
Court might have led to a simple and principled resolution of the question
for tax purposes. Unfortunately, Hamlyn J then concluded, not that the
constructive trust arose when the property was acquired by the husband
with jointly held funds,82 but rather that “this property was in a constructive trust from the date of separation.”83
The third camp of cases on the question of when a constructive trust
arises for tax purposes is reflected in Funk, where the right to deduct
expenses was at issue. Hamlyn J held that in the case of a valid contract
for sale, “the constructive trust comes into existence . . . when the law
imposes upon a party an obligation to hold specific property for another.”84
Tax cases dealing with resulting trusts do not offer much more guidance as to when the trust arose than those that deal with constructive
trusts. In Holizki, Rothstein J found that the resulting trust dated back to
the commencement of the Holizkis’ sole proprietorship in 1973. In Savoie,
unfortunately Bowman J did not specifically identify when the resulting
trust arose, instead simply finding that it existed at some point before the
transfer of the property for purposes of liability under section 160.
The only conclusion that can be drawn from all of these decisions is
that there is no apparent consensus about when a constructive or resulting
trust begins for either tax or other purposes, a view that seems to be
shared by Revenue Canada.85
Should Constructive and Resulting Trusts Be Recognized
for Purposes of the Act?
Closely related to the question of whether the Tax Court of Canada can
find or even consider the potential existence of a constructive trust is a
more fundamental question that applies to both constructive and resulting
trusts. Are these trusts for purposes of the Act 86 and, if so, what is the
proper tax treatment of the parties and the trust property? Judicial response to these questions in the Tax Court again reflects the underlying
doctrinal uncertainty currently plaguing the constructive trust in Canada.
In Fletcher, counsel for the respondent essentially advanced a purposive
approach to interpreting the trust provisions of the Act.87 The respondent
82 The facts of this decision appear more correctly to support a finding that a resulting
trust existed.
83 Supra footnote 2, at 3004.
84 Funk, supra footnote 27, at 1298; 2352.
85 “Revenue Canada Round Table,” supra footnote 28.
86 “Trust” is defined in the Act in subsection 248(1) by reference to subsection 104(1):
“In this Act, a reference to a trust or estate (in this subdivision referred to as a ‘trust’)
shall be read as a reference to the trustee or the executor, administrator, heir or other legal
representative having ownership or control of the trust property.”
87 For a review of recent Canadian case law on the proper approach to statutory interpretation in a tax context, see Brian A. Felesky and Cindy L. Rajan, “Judicial AntiAvoidance: Where Are We?” (1996), vol. 9, no. 2 Canadian Petroleum Tax Journal 1-36.
(1997), Vol. 45, No. 4 / no 4
681
submitted that the remedial nature of the constructive trust put it in a
different category than, and was inconsistent with, the notion of a trust
contained in the provisions of the Act:
[A] constructive trust is essentially a remedy that the Courts impose and . . .
the only manner in which a constructive trust can be created is by operation of law. It did not arise out of some implied intention but must be
viewed strictly as a remedy for unjust enrichment.88
Sarchuk J disagreed with these submissions and took a plain meaning
approach to interpreting the relevant provisions of the Act:
This subparagraph falls within Division D and as far as I can discern the
legislators did not choose to qualify the word “trust” or to limit its meaning
in any way other than by excluding unit trusts. If the legislators had intended to exclude constructive trusts and resulting trusts from the operation
of subparagraph 115(1)(b)(vi) they would have done so in clear and unambiguous language. 89
And:
The careful manner in which the word “trust” has been used in Divisions B
and D of the Income Tax Act and the fact that the legislators chose not to
define the term “trust” for the purposes of Division D , or to exclude a
constructive trust or a resulting trust, can only be taken to mean that for the
purposes of subparagraph 115(1)(b)(vi) the term “trust” encompasses all
forms of trusts. 90
What should be readily apparent from the facts in Fletcher is that this
trust falls within the notion of the non-remedial constructive trust—that
is, as a substantive right to correct a wrong, and not as a remedy designed
to prevent unjust enrichment. This may explain Sarchuk J’s apparent aboutface in Karavos on the question of whether a remedial constructive trust
is a trust for tax purposes. 91 In Karavos, Sarchuk J identified potential
ramifications of applying a remedial restitutory device in an income tax
context. In particular, he was concerned with whether interpreting the
trust provisions of the Act to include constructive trusts had the effect of
defeating the specific legislative intention of other provisions of the Act
and would lead to inconvenient and absurd results.
88 Fletcher,
at 629; 2347.
90 Ibid., at 629; 2348.
91 Supra footnote 10, at 1006; 2214-15. On the one hand, it may seem that the position
in Canada as to whether constructive trusts are trusts for tax purposes remains unclear in
the Canadian context in situations other than Fletcher. On the other hand, Sarchuk J may
not really have been changing his mind. Instead, he might just have been responding to
situations where the constructive trust was being employed simply as a remedy to prevent
unjust enrichment. Sarchuk J may have concluded that such a remedial trust raises different issues in the analysis of whether it should be recognized for purposes of the Act.
89 Ibid.,
(1997), Vol. 45, No. 4 / no 4
682
A number of authors share these concerns about the appropriateness of
recognizing constructive trusts as trusts for tax purposes.92 Ellen Zweibel
has commented as follows:
Similarly, the inconvenient and absurd results would occur in the context
of a marital property constructive trust. Unless we assume that the constructive trust does not arise until the court declares it, we may have to
unravel the relationship for tax purposes. These cases are based on unjust
enrichment and require some demonstrable contribution in money or money’s worth to the acquisition or maintenance of the property sought. Does
the beneficiary therefore have a capital cost in the trust capital equal to the
fair market value of his or her financial contribution? Under some circumstances the financial contribution might be construed as a transfer giving
rise to income attribution. What is the tax position of the parties pending
an appeal from a trial court finding of constructive trust?93
Whether a plain meaning approach or a purposive approach is advanced to determine the issue of the application of the provisions of the
Act to remedial constructive trusts, a principled approach is essential,
particularly since this question is also relevant to resulting trusts. Somewhat surprisingly, however, decisions involving resulting trusts have not
raised the question of whether a resulting trust, once found, should be
recognized for purposes of the Act other than the specific matter under
appeal. 94 Other tax issues also arise if subdivision k applies. For example,
once the constructive trust is found, who is responsible for the tax on the
income? If we assume that the beneficial owner should pay the tax, the
limitation periods may have expired. Even if the reassessment period is
92 See, for example, Maurice C. Cullity, “General Concepts and Types of Trusts for Tax
Purposes,” in the 1988 Conference Report, supra footnote 28, 36:1-27; S.W. Bowman
“Constructive Trusts—Whether Recognized for Tax Purposes,” Current Cases feature (1987),
vol. 35, no. 6 Canadian Tax Journal 1464-66; Ellen B. Zweibel, “Constructive Trusts and
the Income Tax Act: A Mismatch of Concepts” (April 1988), 2 Canadian Current Tax Law
J79-83; and Glover, supra footnote 64.
93 Zweibel, supra footnote 92, at J82-83.
94 The matter of income splitting, for example, for the years in which the resulting trust
was in existence, has not been raised, nor has the issue of disposition of the property at the
time the trust was created. It seems logical that there would be no disposition of property
in the case of a resulting trust, since beneficial ownership of the property has not changed
but has simply been recognized. With respect to income splitting, if retroactive income
splitting is not proposed by the resulting trustee and the income is taxed in his or her
hands, the matter may be of some indifference to the minister. However, if subsections 104
through 108 do apply and income splitting is attempted by the taxpayer, it appears that the
minister could reassess, at least for the non-statute-barred years, on the basis that the
income had been taxed to the wrong taxpayer. The result may give rise to tax in the trust
at the top marginal tax rates applicable to inter vivos trusts on any income not actually
distributed by the resulting trustee and taxed in the beneficiary’s hands. In addition, had
the resulting trusts in Savoie, supra footnote 20, or Holizki, supra footnote 22, been in
existence for long enough, the issue of the commencement date for purposes of the 21year deemed disposition rule may have arisen.
(1997), Vol. 45, No. 4 / no 4
683
not statute-barred,95 the beneficial owner may argue that during the subject period he or she did not have access to or control over funds claimed
by the holder of the legal title and should not be required to pay tax on
the income now. 96 The constructive trustee will, of course, argue that
beneficial ownership was not hers but rather that of the beneficial owner,
thus attempting to exonerate herself from the obligation to pay tax. In
this situation, the only remaining taxpayer is the trust itself, which will
presumably be taxable at the top personal rate. 97
Other issues in respect of constructive and resulting trusts include the
following:
• Is there a disposition98 at the time of the transfer of the property to the
trust?99
• Can taxpayers dispose of their income or capital interest in the trust?
• Are statute-barred assessments open for reassessment once a constructive trust relationship has been found?100
• What is the tax result to the respective parties during years while the
case is under appeal?
• Does the character of the property change in the beneficiary’s hands?101
95 Normally, the minister cannot reassess statute-barred years unless there is fraud or
negligence. Where a constructive trust is found by the courts, it appears that neither claim
could be made.
96 See Sura, supra footnote 24.
97 See sections 104 to 108 and subsection 122(1).
98 It might be argued that there is no disposition (as defined in section 54) at the time
the constructive trust is identified. Under this approach, the constructive trust arrangement
merely identifies what the relationship was with respect to beneficial ownership of the
property all along. In short, there is no change in beneficial ownership when a constructive
trust exists. This approach suggests that the constructive trust arose much earlier than the
date at which the parties separated and, in fact, may date back to when the trust property
was initially acquired by the constructive trustee, if such a date can be identified. One can
easily envision a Murdoch, supra footnote 8, or Anderson Estate, supra footnote 4, type of
situation in which a right to the property was earned over time. Under those circumstances, it would seem an almost insurmountable task to select the correct date for the
commencement of the constructive trust for tax purposes.
99 There are a number of potential disposition dates: first, the date on which the asset is
transferred to the constructive or resulting trustee; second, the date selected by the court
when a finding of constructive or resulting trust is made; and, finally, the 21-year deemed
disposition date applicable to all trusts other than spouse trusts (see subsection 104(4)).
100 In Hassanali, supra footnote 63, and Stockman, supra footnote 2, the court resolved
the tax issues without directly facing the question of reassessment for statute-barred years.
In Hassanali, the issue was avoided by the signing of a waiver by the statute-barred party.
In Stockman, the years in dispute were not yet statute-barred. An obvious issue in the
application of tax legislation to constructive trusts will be the tax liability of the parties in
statute-barred periods.
101 Consider, for example, the tax results that may arise on the facts in Cooray, supra
footnote 47. In that case, the other issue decided by the Tax Court was that the particular
(1997), Vol. 45, No. 4 / no 4
684
• Is there a danger of inconsistent results in different courts depending
on whether tax planning is an issue?102
Case Law Solutions
Although many issues will continue to arise with respect to the proper tax
treatment of resulting and constructive trusts, two fundamental issues are
in need of resolution: whether resulting and constructive trusts should be
recognized for purposes of the Act (particularly subdivision k) and, if so,
when such trusts arise for tax purposes. Once these two matters are resolved, the tax consequences under the Act will flow from the particular
facts under consideration. While there is no easy resolution to either of
these questions, various suggestions have been put forward in the case
law. Following a discussion of these suggestions, some proposals for
legislative amendments are advanced.
Recognition for Purposes of the Act
One potential solution to the problem of recognizing constructive and
resulting trusts for tax purposes may be found in Sarchuk J ’s invitation in
Karavos to consider the collateral issue rather than the restitutory remedy.
This leaves open the opportunity for ignoring the constructive trust, and
presumably the resulting trust, altogether for tax purposes.103 For example, a determination of the collateral issue of what consideration had been
provided for the transferred property by the spouse could have provided
the solution in Savoie where it was necessary to determine the extent of
the spouses’ joint liability. In other words, it may not have been necessary to find or even consider a constructive trust in Savoie. A similar
result could have been reached by simply determining what consideration
was given by the transferee spouse for purposes of paragraph 160(1)(e).
If the consideration for purposes of paragraph 160(1)(e) included the
relinquishment of the taxpayer’s inchoate right to apply to a provincial
superior court for a declaration that she held a 50 percent beneficial
interest in the property, that consideration arguably had a value equal to
50 percent of the property. Her liability for her husband’s share of tax
101
Continued . . .
transaction did not constitute an adventure in the nature of trade. However, if the Tax
Court had determined that the husbands’ gain on the sale of the property was to be on
account of income, query whether, on the basis of a finding of secondary intention, the
same treatment would be appropriate for their spouses as beneficial owners of the property
under a resulting trust.
102 While it may be expected that on a particular set of facts the same conclusion as to
the existence of a resulting or constructive trust would be reached by a Tax Court as by
any other court, at least some of the tax cases do not bear this out when income splitting
is an issue. Consider the Nelson decision, supra footnote 21, for example.
103 This approach would not be inconsistent with the non-recognition of bare trusts as
trusts for purposes of the Act. See Income Tax Technical News, no. 7, January 3, 1996 for
the department’s views on when a bare trust exists. (Also published as Michael Hiltz,
“Revenue Canada Review,” in Report of Proceedings of the Forty-Seventh Tax Conference,
1995 Conference Report (Toronto: Canadian Tax Foundation, 1996), 52:1-12.)
(1997), Vol. 45, No. 4 / no 4
685
could thus not extend beyond the remaining 50 percent which he beneficially owned. A determination of who had beneficial ownership of the
property also created the necessary result in Anderson Estate, when Mogan
J neatly avoided the issue of whether the Tax Court could find a constructive trust and simply decided that subsection 70(5) could not apply on a
transfer of property on death since the property was already beneficially
owned by the recipient. Similarly, a finding of beneficial interest in
Erickson “in the sense of an enforceable right, in favour of the appellant’s
wife in respect of the assets of the business in an amount equal to or in
excess of the value of the alleged gift,” 104 avoided the application of the
indirect gift rule in paragraph 85(1)(e.2).105 Equally, it seems that the
determination of who held beneficial ownership or interest in the property in Funk would be sufficient for the court to determine whether
expenses could be deducted by Mr. Funk, notwithstanding that title to the
property had not yet been transferred. That the purchaser had such beneficial ownership is beyond dispute since he had an action for breach of
contract if the vendor failed to perform and an action for specific performance if he wanted specific performance rather than damages.
On the other hand, a consideration of the collateral issue alone may
not provide the appropriate tax relief in all cases. The constructive trust
in Fletcher, which was recognized for purposes of subdivision k, was
critical to Mr. Fletcher’s ability to deduct the loss on the disposition of
his capital interest in the trust under section 115. 106 Although this decision may be an anomaly, there may well be other situations where the
appropriate tax result will follow only if the constructive trust is recognized for all purposes of the Act.
Timing
A number of Tax Court judges have made recommendations with respect
to timing. For example, Sarchuk J took the view in Karavos that the
remedial constructive trust did not come into existence until it was granted
by a court having jurisdiction. However, Bowman J rejected this position
in Savoie. In Stockman, which dealt with the issue in a matrimonial context, Hamlyn J held that the constructive trust arose from the date of
separation.
104 Erickson,
reaching this conclusion, Christie ACJ (as he then was) went on to say, ibid.: “I
believe that Mrs. Erickson’s contribution to the business was such that had a dispute arisen
between her and her husband regarding those assets and consequently she had instituted
proceedings in the Saskatchewan Court of Queen’s Bench the evidence before me would
authorize a finding that there had been an unjust enrichment justifying the imposition of
the constructive trust remedy in relation to at least 20% of the assets.”
106 Recall that in this case the trust imposed was not a remedy to prevent unjust enrichment but rather a trust imposed to address a wrong committed by Mr. Hyman on the
misappropriation of the taxpayer’s funds. It is perhaps of some interest to note that Sarchuk J
relied on the comments of the judge in the prior civil trial with respect to the misappropriation to conclude that a constructive trust was clearly implied.
105 In
(1997), Vol. 45, No. 4 / no 4
686
Hamlyn J ’s choice of the date of separation in Stockman as the time
when the trust was created is arguably completely inconsistent with the
underlying equitable principles governing any notion of a constructive
trust.107 In its favour, the date selected offers the benefit of simplicity in
answering related questions—for example, when will the trust property
be considered to have been disposed of, and when will attribution arise?
The Stockman case also illustrates the practical problems, once a court
chooses a date, in tracking the potential tax results. For example, in Stockman, which of the two taxpayers should be responsible for any accrued
gain on a subsequent disposition of the property and on what adjusted
cost base should the proceeds be based? If the trust arose when the property was initially acquired, both spouses would share in the tax liability
arising from any subsequent proceeds of disposition calculated from the
original adjusted cost base of the property. If the trust arises on separation,
is there a disposition at the time the property is transferred to the trust?
May the parties elect that the disposition occur at fair market value at that
time and step up the cost base of the property to the trust? If there is a
disposition and no rollover is available, the brunt of any tax liability for
the increase in value of the property from the time of acquisition would
be borne by the constructive trustee to the benefit of the beneficial owner.
Problems also arise with respect to any attempt to deem a date for
acquisition of the beneficial interest for purposes of the Act. Suppose, for
example, that the date of the order of a court is selected. If the Tax Court
is not the court of first instance, as in Fletcher, should the Tax Court
order be the determinative date? If the case is appealed, does the appellate court order date prevail? Of what relevance is the date of the court
order if the trust property was disposed of in a prior year? How will the
parties’ filing positions in prior tax years be affected if such positions are
based on a resulting or constructive trust that is yet to be recognized by a
court of competent jurisdiction?
Proposals for Legislative Amendment
The volume of tax cases since the Fletcher decision highlights both the
accelerated rate at which claims for relief based on a finding of resulting
or constructive trust are arising for tax purposes and the range of potential tax issues when such claims are recognized. Tax decisions to date
also illustrate the difficulties in finding a consistent approach or workable
solution to the issues raised. This is not surprising. There is controversy
and residual ambiguity surrounding the constructive trust, even in decisions of the Supreme Court of Canada. Nonetheless, a consistent and
principled approach must be found. It is unfair to foist this uncertainty on
Tax Court judges and taxpayers. One potential solution may be found in
tax legislation.
107 If the remedy is based on unjust enrichment, the unjust enrichment likely occurs
over time, not on the date of separation, although there may be disagreement on this
timing issue.
(1997), Vol. 45, No. 4 / no 4
687
One obvious legislative solution would be a provision that would limit
the recognition of the constructive or resulting trust relationship for all
purposes of the Act. This is clearly not the approach taken by Revenue
Canada,108 nor does it appear to be the direction that the court has taken
in tax cases to date.109 Notwithstanding, it is not at all clear that constructive and resulting trusts were ever intended to come within the legislative
intention of the Act. Limiting the recognition of resulting and constructive trusts for purposes of the Act would eliminate the need to resolve the
jurisdictional and timing issues discussed above, and it would offer a
clear, simple, and consistent resolution for all resulting and constructive
trust cases that may come before the court. However, such a provision
would have resulted in a different outcome in cases such as Fletcher and
Forest Oil, and perhaps in Savoie, Funk, and Cooray, where such trusts
were found in the taxpayers’ favour.
Rather than a deeming provision for all purposes of the Act, the definition of trust in subsection 104(1) could be amended to specify that, for
purposes of subdivision k, references to a trust shall not include constructive or resulting trusts. This would enable a court to apply other provisions
of the Act in appropriate circumstances, such as those relating to beneficial ownership, and to determine the tax consequences arising from a
finding of constructive or resulting trust by a court of competent jurisdiction. Such an approach, however, still leaves unresolved matters of
jurisdiction and timing of recognition, particularly for remedial constructive trusts.
A single deeming rule as to the applicability of subdivision k also
would fail to respond to the range of potential tax issues that may arise.
For example, the distinction between the appropriate tax relief in the
circumstances of remedial versus non-remedial constructive trusts illustrates the deficiencies of such an approach. The tax relief sought in the
case of a remedial constructive trust is generally based on income splitting and can be provided through a determination of the beneficial
ownership of the property without the imposition of the express trust
provisions. In effect, the constructive trustee in this case could be treated
in much the same way as a bare trustee for purposes of the Act—that is,
as an agent for the beneficial owner. In contrast, only the finding of a
trust for purposes of subdivision k could provide the relief sought in
Fletcher where a non-remedial constructive trust was found.
It might, however, prove workable to enact a deeming rule that requires automatic joinder110 of the parties in any case where a claim for
108 Revenue Canada has expressed its view, supra footnote 28, that the constructive
trust is a trust subject to the application of the relevant provisions of the Act.
109 See, for example, Fletcher, supra footnote 3.
110 For example, section 174 provides a process whereby two or more parties may be
joined as a party to any appeal in circumstances where the determination of questions of
law, fact, or mixed law and fact will affect the tax liability of two or more taxpayers.
(1997), Vol. 45, No. 4 / no 4
688
relief is made based on a finding of constructive or resulting trust. Such a
deeming provision would permit the Tax Court to consider all aspects of
a claim for relief based on the trust relationship, including potential liability of another taxpayer under section 160. Such a deeming provision
could provide a solution for volunteers who assert a constructive trust or
resulting trust during non-statute-barred years. Joinder might even be required as a condition for relief in appropriate cases where relief is claimed
for statute-barred periods. 111 In the joined action, tax issues arising outside subdivision k, such as attribution, also could be addressed. In the
alternative, the deeming provision might provide that relief on the basis
of a constructive or resulting trust will not be provided for any period
that is statute-barred other than when the court order is made by a court
other than the Tax Court. Given our self-assessment tax system, such a
provision is consistent with Canadian tax principles, and it would ensure
that taxpayers would not be able to take different filing positions for a
statute-barred period. The same cannot be said where another court makes
the order that a constructive or resulting trust exists. In that case, however, joinder should be required before the tax issues are addressed by the
Tax Court. Filings by both affected parties, similar to those currently
required under subsection 74.5(3) to prevent attribution on a matrimonial
breakdown, could be required before income is reallocated for tax purposes.
With time, such tax considerations might form part of the matrimonial
property order, a precedent for which has already been set in the tax
treatment of alimony and maintenance payments.112
Some of the key tax issues surrounding non-remedial constructive trusts
also could be resolved through a deeming provision. Such trusts frequently arise where the complainant is an innocent third party and not a
volunteer seeking income splitting as a form of tax relief based on the
trust relationship. Perhaps it would be easier in a joinder application for
the Tax Court to consider the full range of remedies available and, in
particular, the potential application of subdivision k in those cases.113
Since the non-remedial constructive trust as a cause of action is generally
imposed against the wrongdoer, whatever tax relief is necessary in respect of the wronged party could be provided, leaving any outstanding
tax liability to fall on the shoulders of the wrongdoer. Again, this approach is consistent with general Canadian tax principles, which provide
that even wrongful income and gains are taxable under the Act.
111 The deeming provision might apply as a condition to the finding of a constructive
trust and would require a waiver by the parties for any tax liability arising out of that
specific issue during the statute-barred period.
112 See, for example, paragraphs 60(b) and (c).
113 It is suggested that the resulting and non-remedial constructive trust not be ordinarily recognized for purposes of subdivision k. There is ample precedent for ignoring trusts
other than express trusts for purposes of the Act. For example, certain bare trusts, voting
trusts, and other family arrangements are often ignored for tax purposes. See generally
Cullity, supra footnote 92.
(1997), Vol. 45, No. 4 / no 4
689
A statutory deeming provision requiring automatic joinder would clearly
not resolve all of the issues arising out of a finding of resulting or constructive trust. However, such a provision would cause taxpayers,
particularly volunteers, to carefully consider the potential impact of the
relief they are claiming on all of the parties to the transaction, and it
would provide a clear avenue for Revenue Canada to fairly assess the
parties and collect the appropriate tax revenue.
CONCLUSION
While an increasing number of tax cases in recent years have grappled
with constructive and resulting trusts, many recurring and unresolved
issues remain. Whatever solution is ultimately chosen to deal with such
trusts, it is clear that one must be found. Tax cases in the area of resulting
and constructive trusts will continue to come before the Tax Court. Judges,
taxpayers, and tax practitioners are entitled to some guidance in this extremely complex and evolving area of law.
(1997), Vol. 45, No. 4 / no 4

Constructive and Resulting Trusts

Transcription

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