Resulting Trusts: Tax Filings as Evidence of Transferor’s Intent

A “resulting trust” arises when title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner. There is a presumption of resulting trust where property is acquired with one person’s money and title is put in the name of another (except where title is taken in the name of a minor child, in which case, the rebuttable “presumption of advancement” applies).

Evidence of transferor’s intention when property is transferred

Where a gratuitous transfer is challenged, “[t]he trial judge will commence his or her inquiry with the applicable presumption and will weigh all of the evidence in an attempt to ascertain, on a balance of probabilities, the transferor’s actual intention.”(Pecore v. Pecore, 2007 SCC 17 at para. 44.)  The focus in any dispute over a gratuitous transfer is the actual intention of the transferor at the time of the transfer. Evidence of intention that arises subsequent to a transfer must be relevant to the intention of the transferor at the time of the transfer.

Tax treatment is a relevant – but not conclusive – consideration

Tax filings are often relied on as evidence of intention arising subsequent to a transfer. What happens when tax filings are contrary to the transferor’s argument that he or she is the beneficial owner of the property? That question was considered in Andrade v. Andrade, 2016 ONCA 368 , where the Ontario Court of Appeal held that there is no strict bar preventing a party from taking one position when dealing with the Revenue Canada, and another when confronted with claims against their property. Instead, a representation to the Canada Revenue Agency is just one fact to consider alongside all of the other evidence of actual intention. The Andrade decision was recently cited with approval by the BC courts: Hu v. Li, 2016 BCSC 2131.

Facts in Andrade v. Andrade

At issue was the beneficial ownership of a house that has been in the Andrade family for over 40 years. The house, located on Crawford Street in Toronto, was purchased in 1974 and registered in the name of Henry and Maria Jesus, two of Luisa Andrade’s seven children. In 1979, title was transferred to Henry and his brother Joseph. Joseph paid nothing for the transfer. Henry and Joseph remained on title thereafter as the legal owners of the house. While living in the house, the Andrade children worked and gave money to their mother, which she used to pay the mortgage and other expenses. Over time, each of the seven children (except one) married, moved out and stopped giving their earnings to their mother. Luisa continued to live in the house, while Henry and Joseph purchased houses for their own families in the 1980s. Luisa collected and kept the rent from the two upper floors that had been subdivided into apartments. Luisa paid all the bills in relation to the house, including the mortgages, property taxes, insurance and the cost of repairs.

Joseph died in 2007 and shortly thereafter Joseph’s widow, Manuela, transferred his half interest in the house into her own name. In 2009, Manuela brought an action against Henry and Luisa seeking a declaration that she was the beneficial owner of a half interest in the house, and an order for partition and sale. Luisa counterclaimed for a declaration that she was the beneficial owner of the house and an order that Manuela and Henry transfer all of their right, title and interest in the house to her.

All of the surviving siblings and Luisa resisted the sale, claiming that the house belonged to Luisa as beneficial owner. In 2011, Henry transferred his half interest to Luisa. In 2014, a few months before the trial commenced, Luisa died. The action continued against her estate and Henry. Manuela was successful at trial. The Court of Appeal overturned the lower court’s decision, finding that Henry and Joseph held the house by way of resulting trust for Luisa who was, at the time of her death, its sole beneficial owner. Accordingly, Manuela’s action was dismissed and the court declared Luisa’s estate to be the sole beneficial owner of the house. Manuela was ordered to transfer her legal half interest in the house to Luisa’s estate.

Intention at the time of transfer

The question was Luisa’s intention and the critical time for determining intention was at the time of the transfer. Having contributed the money toward the purchase of the property, did she intend to confer beneficial ownership of the property on the legal title holders, to the exclusion of herself and her other children? Evidence of Luisa’s intention at two points is important to the resulting trust analysis – in 1974 when the property was first acquired, and in 1979, when Joseph went on title:

• At the time of purchase in 1974, legal title was taken in the names of two of Luisa’s children, Henry and Maria Jesus. The reason title was taken in their names was that, with the exception of another daughter who was already married, they were the only two family members of age who had sufficient income to qualify for a mortgage.

• As for the circumstances in 1979, there was no dispute that Joseph went on title at the time of a mortgage renewal, and at his mother’s direction. Maria Jesus testified that she did what her mother directed, as it was her mother’s house. There was no evidence to suggest a change in Luisa’s intention – that is, to give Joseph a beneficial interest in the property when Maria Jesus had held no such interest. The transfer to Joseph occurred without any consideration.

The evidence established that Luisa considered herself the owner of the house. Although the house was in two of her children’s names, her intention was not to benefit the title holders to the exclusion of her other children by giving them a property interest in the house.

Subsequent conduct: Tax returns in relation to the property  

In erroneously rejecting the resulting trust claim, the trial judge placed significant emphasis on how the parties dealt with the house for income tax purposes. Henry and Joseph paid tax on the net rental income, including a deemed rent for Luisa, and Luisa took a tax credit for rent “paid” to her sons. The trial judge regarded the tax treatment as evidence that Henry and Joseph were in fact the “real, beneficial owners” of the house. The Court of Appeal disagreed (emphasis added):

[95]      Similarly, in the present case, the analysis cannot not begin and end with the tax treatment of the house. The court was entitled to consider the fact that Luisa’s tax filings are contrary to her estate’s argument that she was a beneficial owner of the property, as well as all of the evidence as to how this came to be. The tax treatment is some evidence of intention, but Luisa’s actual intention at the time of the transaction remains a question of fact to be determined on the whole of the evidence.

The Court of Appeal found that the tax returns shed little light on whether it was Luisa’s intention to confer beneficial ownership of the property on her sons. The way the parties dealt with the property for tax purposes was consistent with legal title, but did not reflect what was actually occurring. Luisa received the rents; her sons did not. Luisa never paid rent to her sons, and a fictional amount was used as the rent she “paid” in the parties’ returns. Luisa did not account to her sons for the rent received and expenses on the house, which were paid by Luisa. Further, there was no evidence that Luisa was involved in any decisions about her taxes or her sons’ taxes. To the contrary, Luisa, who did not speak, read or write English, had her tax returns prepared first by a local travel agent, then by her daughter Maria Ludevina, who simply followed the pattern that had been established.

Resulting trusts: The bottom line on tax filings as evidence of transferor’s intent

Evidence that a party took one position for tax purposes and another in respect of litigation can be evidence that they intended to gift their entire interest in the property. However, the analysis does not begin and end with the tax treatment of the property in question. Even if a party has transferred ownership of property in one way for one purpose (such as to defeat creditors), a resulting trust claim is not precluded. The question remains one of the transferor’s intent at the time of the transfer; this is a question of fact to be determined on the whole of the evidence.