Fourney v. The Queen

Fourney v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-11-14
Neutral citation
2011 TCC 520
File numbers
2010-14(IT)G
Judges and Taxing Officers
Robert James Hogan
Subjects
Income Tax Act
Decision Content
Docket: 2010-14(IT)G
BETWEEN:
SHIRLEY FOURNEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of SJC Property Management Inc. (2009‑3339(IT)G and 2009‑3337(GST)I), DSD Properties Inc. (2009‑3859(IT)I), and Learning Boost Inc. (2009‑3866(IT)I),
on May 9, 10 and 11, 2011, at Saskatoon, Saskatchewan.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Amanda S.A. Doucette
Beaty F. Beaubier
Counsel for the Respondent:
John Krowina
____________________________________________________________________
JUDGMENT
The appeal of the Appellant from the reassessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons for judgment.
The parties will have 30 days to agree on costs, failing which each of the Respondent, SJC Property Management Inc., DSD Properties Inc., Learning Boost Inc. and the Appellant shall file written submissions - not to exceed 10 pages for each party - on costs.
Signed at Ottawa, Canada, this 14th day of November 2011.
Robert J. Hogan
Hogan J.
Dockets: 2009-3339(IT)G
2009-3337(GST)I
BETWEEN:
SJC PROPERTY MANAGEMENT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeals of
Shirley Fourney (2010‑14(IT)G), DSD Properties Inc. (2009‑3859(IT)I), and Learning Boost Inc. (2009‑3866(IT)I),
on May 9, 10 and 11, 2011, at Saskatoon, Saskatchewan.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Amanda S.A. Doucette
Beaty F. Beaubier
Counsel for the Respondent:
John Krowina
____________________________________________________________________
JUDGMENT
The appeal of the Appellant from the reassessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons for judgment.
The appeal of the Appellant from the reassessments made under the Excise Tax Act is dismissed.
The parties will have 30 days to agree on costs, failing which each of the Respondent, Shirley Fourney, DSD Properties Inc., Learning Boost Inc. and the Appellant shall file written submissions - not to exceed 10 pages for each party – on costs.
Signed at Ottawa, Canada, this 14th day of November 2011.
Robert J. Hogan
Hogan J.
Docket: 2009-3859(IT)I
BETWEEN:
DSD PROPERTIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Shirley Fourney (2010‑14(IT)G),
SJC Property Management Inc. (2009‑3339(IT)G and 2009‑3337(GST)I), and Learning Boost Inc. (2009‑3866(IT)I),
on May 9, 10 and 11, 2011, at Saskatoon, Saskatchewan.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Amanda S.A. Doucette
Beaty F. Beaubier
Counsel for the Respondent:
John Krowina
____________________________________________________________________
JUDGMENT
The appeal of the Appellant from the reassessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons for judgment.
The parties will have 30 days to agree on costs, failing which each of the Respondent, Shirley Fourney, SJC Property Management Inc., Learning Boost Inc. and the Appellant shall file written submissions - not to exceed 10 pages for each party – on costs.
Signed at Ottawa, Canada, this 14th day of November 2011.
Robert J. Hogan
Hogan J.
Docket: 2009-3866(IT)I
BETWEEN:
LEARNING BOOST INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Shirley Fourney (2010‑14(IT)G),
SJC Property Management Inc. (2009‑3339(IT)G and 2009‑3337(GST)I), and DSD Properties Inc. (2009‑3859(IT)I),
on May 9, 10 and 11, 2011, at Saskatoon, Saskatchewan.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Amanda S.A. Doucette
Beaty F. Beaubier
Counsel for the Respondent:
John Krowina
____________________________________________________________________
JUDGMENT
The appeal of the Appellant from the assessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons for judgment.
The parties will have 30 days to agree on costs, failing which each of the Respondent, Shirley Fourney, SJC Property Management Inc., DSD Properties Inc. and the Appellant shall file written submissions - not to exceed 10 pages for each party – on costs.
Signed at Ottawa, Canada, this 14th day of November 2011.
Robert J. Hogan
Hogan J.
Citation: 2011 TCC 520
Date: 20111114
Dockets: 2010-14(IT)G
2009-3339(IT)G, 2009-3337(GST)I
2009-3859(IT)I
2009-3866(IT)I
BETWEEN:
SHIRLEY FOURNEY,
SJC PROPERTY MANAGEMENT INC.,
DSD PROPERTIES INC.,
LEARNING BOOST INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. INTRODUCTION
[1] These appeals are brought by Shirley Fourney (the “Appellant”), SJC Property Management Inc. (“SJC”), DSD Properties Inc. (“DSD”), and Learning Boost Inc. (“Learning Boost”) from reassessments for each of their respective tax returns for the years 2003, 2004 and 2005. The Appellant alleges that the three companies she incorporated, SJC, DSD and Learning Boost, were merely acting as her agents and bare nominees, and that she never gave up beneficial ownership of her business assets and activities. A summary of the reassessments at issue in these appeals is to be found in Schedule 1 to these reasons for judgment.
II. FACTS
[2] The Appellant received notices of reassessment dated June 7, 2007 with respect to her 2003, 2004 and 2005 personal returns as well as with respect to the corporate returns filed for SJC, DSD, and Learning Boost for those same years. On October 2, 2009, in response to the Appellant’s duly filed objections to all the reassessments, the Minister of National Revenue the (“Minister”) varied the reassessments and issued notices of reassessment.
[3] The Appellant is a retired teacher who has been involved in the rental property business since the late 1980s, originally as a property manager and later by purchasing and renting out part or all of various properties. She has also been running a tutorial business since her retirement as a teacher. The evidence shows that the Appellant has no formal tax or accounting training other than a 12‑hour course on the accounting software QuickBooks.
[4] In the late 1990s, a conflict arose between the Appellant’s mother and brother regarding a contract between them. The Appellant supported her mother and continued, as executor of her mother’s estate, a legal action that her mother had brought against her brother. A decision in favour of the Appellant’s mother was rendered by the Ontario Court of Justice in 2009, and is currently being appealed. The Appellant claims that her main motivation in incorporating the businesses was to have the ability to transfer to them the title to her properties in order to hide her assets from her brother, who, angry that she had sided with her mother in the legal dispute, had threatened to sue her.
[5] In 2001 and 2002, the Appellant incorporated three Saskatchewan corporations, of which she is the director and majority shareholder:
(a) SJC, described as a property management business, incorporated June 4, 2001;
(b) DSD, described as a property ownership business, incorporated June 10, 2002; and
(c) Learning Boost, described as a tutorial business, incorporated December 31, 2002.
The evidence shows that a lawyer incorporated DSD and SJC and that the Appellant then incorporated Learning Boost without legal assistance. The Appellant’s two sons are listed in all the documents of incorporation and annual returns as minority shareholders, each holding 10% of the corporations’ shares. The Appellant insists this was only done to fulfil incorporation requirements, and the sons never invested money in or received income from the corporations.
[6] In 2003, the Appellant transferred the titles to all her properties (the “properties”) to DSD by filing the appropriate forms at the Land Titles Registry office. The following are the properties that were transferred:
(a) 1706 – 14th Street East, Saskatoon, Saskatchewan (described by Ms. Fourney as her principal residence throughout the periods in question);
(b) 116 – 126 Edinburgh Place, Saskatoon, Saskatchewan;
(c) 1312 – 13th Street East, Saskatoon, Saskatchewan;
(d) 1333 – 14th Street East, Saskatoon, Saskatchewan;
(e) 1307 Main Street East, Saskatoon, Saskatchewan.
The Appellant asserts that she did not receive any tax advice on the implications of transferring the properties to DSD, and her accountant, Garnet Chambers, testified that he never gave her tax advice regarding the transfers. She did not receive any consideration for the properties transferred to DSD.
[7] For each of the years in question, the Appellant herself prepared her personal income tax returns, in which she claimed rental and business income and expenses. Similar or the same income, losses and expenses were reported and claimed in the corporate tax returns, which were prepared for the Appellant by Mr. Chambers and filed electronically because the Appellant could not understand how to complete the returns herself. The Appellant insists she was not aware that Mr. Chambers was also reporting and claiming the business income and expenses in the corporate returns.
[8] The Appellant provided Mr. Chambers with copies of her personal returns and financial spreadsheets every year, which, she asserts, should have made him aware that she had already reported and claimed the income and expenses personally. She claims that she never reviewed the corporate returns with Mr. Chambers before they were electronically filed and that she did not have the capacity to understand them when she did see them later. Mr. Chambers, however, testified that in the spring of 2005 he saw the Appellant’s 2004 personal tax return and advised her to amend it to eliminate the amounts reported and claimed with respect to the businesses as they also appeared in the corporate returns.
[9] Mr. Chambers has worked as an accountant since 1970, but does not hold an accounting designation. While he claims to have done some tax planning, he described the majority of his work as relating to tax filing. Mr. Chambers testified that he did not ask to see conveyance forms, that he could not recall filing any rollover forms for the Appellant, and that he thought it was unlikely that such forms were filed. Mr. Chambers did not recall working with any lawyers on the Appellant’s files, but added that he did know that the Appellant’s lawyer, who did not testify in this case, had little corporate law experience.
[10] At trial, Linda Nystuen, an appeals officer with the Canada Revenue Agency (the “CRA”), conceded during cross-examination that corporate tax returns are very difficult to decipher for lay people and that new employees at the CRA are provided with training specifically to enable them to read the corporate return printouts.
[11] Two previous audits were conducted regarding the Appellant before the incorporation of the appellant corporations. The subjects of the audits were expense claims, the capitalization of expense items, and unreported capital gains. The Appellant submits that those audits are not relevant because they were for minor dollar amounts and occurred prior to the incorporations. The Respondent argues that the audits indicate that the Appellant should have known her bookkeeping system and accounting knowledge were inadequate.
III. THE REASSESSMENTS
[12] The Minister’s June 7, 2007 reassessments assumed that the Appellant should not have reported and claimed the rental and business income and expenses personally.
[13] From September 2008 to July 2009 the Appellant provided additional documentation to the CRA regarding the adjusted cost base of the rental properties, as well as the adjusted cost base of the Lloydminster property and details about its usage during the entire period of ownership. The Appellant also provided information supporting her claim that she never transferred beneficial ownership of her business assets and interests to DSD, SJC and Learning Boost.
[14] In March 2009, the CRA proposed reducing the capital gains assessed in 2003, reducing the capital gain assessed on the Lloydminster property in 2004, and eliminating some of the shareholder benefits assessed for each year, but found that the corporations were not mere agents and bare nominees of the Appellant. The Appellant’s habitation of the property at 1706 – 14th Street East, which she argued was her principal residence, was considered a shareholder benefit.
[15] The appeals division also confirmed the significant gross negligence penalties imposed, stating that the Appellant “knew or ought to have known” that amounts were being double-claimed, since it was the Appellant’s responsibility to provide the information needed to complete the tax returns. The appeals division did, however, reassess the capital gains on the rental properties to take into account the additional information provided by the Appellant regarding the adjusted cost base of the properties.
IV. ISSUES
[16] The issues are the following, and each will be dealt with in turn:
(a) Did beneficial ownership of the assets and businesses reside with DSD, SJC and Learning Boost or the Appellant?
(b) Should gross negligence penalties be imposed?
V. BENEFICIAL OWNERSHIP
Appellant’s Position
[17] The Appellant submits that she always saw DSD, SJC, and Learning Boost as merely her agents and bare nominees, and that she never gave up the beneficial ownership of her rental properties and tutorial business. Throughout her pleadings and in her testimony, the Appellant claimed a lack of understanding of tax and accounting concepts and of the consequences of incorporation. The Appellant insists that a review of her behaviour with regard to the corporations clearly indicates that she did not transfer beneficial ownership to the corporations and that, therefore, many of the reassessed tax liabilities should be cancelled, including the capital gains tax on transfers of title and the tax on numerous shareholder benefits.
[18] The factors that the Appellant listed as demonstrating that she remained the beneficial owner, with DSD, SJC and Learning Boost acting as her agents and bare nominees, are as follows:
• All invoices for repairs and renovations to the rental properties were addressed to the Appellant personally.
• All of the utility bills for each of the rental properties are in the Appellant’s personal name.
• SJC and DSD did not have their own bank accounts. Monies referable to SJC and DSD were transferred through chequing accounts held in the Appellant’s name.
• All rent cheques and other documents pertaining to the rental properties were addressed to the Appellant personally.
• The Appellant advertised the rental properties, collected rent cheques, cleaned the properties, looked after the landscaping, completed minor repairs to the rental homes, and was listed as the “landlord” on correspondence with the Office of the Rentalsman.
• The T2s filed with respect to DSD, SJC, and Learning Boost do not reflect any asset ownership (other than a Suburban owned by SJC). More to the point, none of the properties or business interests were ever reflected in the T2s as being owned by any of the corporations. Further, no balance sheet was prepared by the accountant, Garnet Chambers, for any of the corporations during the years in issue in these tax appeals.
• The Appellant created the television and print advertisements for Learning Boost.
• The Appellant designed and created the Learning Boost logo.
• The Appellant collected the fees from Learning Boost students.
• The Appellant converted her single-car garage into a “Learning Boost Office”.
• The Appellant personally contracted with tradespeople to effect renovations to the Learning Boost teaching space.
• The Appellant travelled to students’ homes to sign contracts and assist with tutoring.
• The Appellant hired tutors to work with Learning Boost students.
• The Appellant used personal funds during the tax years in question to cover operating expenses for the Learning Boost business.
[19] Additional submissions and witness testimony revealed the following other factors in support of the Appellant’s beneficial ownership claim:
• The audit conducted by the CRA concluded that SJC was in fact doing nothing, having no income and no expenses.
• The main reason the CRA concluded the Appellant did not meet the test for beneficial ownership was that the titles are registered in DSD’s name, despite the fact that, in many real estate agency relationships, a corporation will hold legal title while beneficial ownership lies elsewhere.
• No section 85 forms were filed to roll‑over the assets to the corporations.
• There is a lack of evidence of a true conveyance of the properties because there was no consideration for the transfer of title to the properties.
• There was no indication of the Appellant’s documenting the transfers in order to protect herself and to clarify the impact of any transfers on the minority shareholders.
• In the absence of consideration, transfers of properties and other business assets could be considered gifts, but valid gifts require clear intention, and there is no evidence of such here.
• When DSD acquired the 1430 – 12th Street East property in 2003, the Appellant personally provided the financial backing, even though the mortgage was put in the name of DSD.
• All of the mortgages were in the Appellant’s personal name until 2005.
• Throughout the years in question, the Appellant always reported and claimed the rental property and tutorial income and expenses in her own returns.
Respondent’s Position
[20] The Respondent argues that the Appellant’s intent in incorporating her businesses was to transfer the risks and responsibilities of ownership to the corporations. Retrospective findings of an implied agency relationship are inappropriate in this case, the Respondent argues, as the non‑arms length relationship between the Appellant and the corporations requires clear documentation in support of an intention to create such an agency relationship. The Respondent calls the credibility of the Appellant into question and argues that, as a former teacher with a post‑graduate degree in education and as a person having had the benefit of legal and accounting assistance, the Appellant must have known about and sought the risk-reducing benefits of incorporation. The Respondent submits that the Appellant is now attempting to recharacterize the way in which she structured her businesses because of the tax consequences she faces. On the Respondent’s theory of the case, the factors listed below clearly establish that the Appellant intended to transfer both legal and beneficial ownership of her businesses to the corporations:
• SJC entered into tenancy agreements.
• The tenancy agreements were between SJC and its tenants.
• SJC issued eviction notices to its tenants on SJC letterhead.
• The SJC letterhead said “SJC Management Inc., Shirley Fourney, Manager”.
• SJC identified itself as a landlord to the Office of the Rentalsman.
• SJC maintained its own e‑mail address, which appeared on SJC tenancy agreements and on SJC letterhead.
• SJC was the registered holder of an HSBC bank account.
• SJC obtained and operated under a business licence issued in its name.
• SJC contracted with third parties.
• In or around March 2003, Shirley Fourney transferred title of five properties to DSD.
• In or around July 2003, DSD made an offer to purchase property located at 807 Cumberland.
• In or around July 2003 DSD purchased property at 1430 ‑ 12th Street East.
• In or around September 2004, DSD sold 116 ‑ 126 Edinburgh Place.
• In or around September 2005, DSD purchased a property at 1401 ‑ 13th Street East.
• DSD had mortgages with HSBC on six properties.
• DSD was the registered owner of a GMC Suburban.
• DSD was the registered holder of an HSBC bank account.
• Building permits were issued in the name of DSD.
• A notice of lien was issued against DSD.
• Property tax notices were issued in the name of DSD.
• DSD was responsible for repairing and maintaining the rental properties.
• DSD filed its 2003, 2004 and 2005 annual returns with the Saskatchewan Corporations Branch.
• A City of Saskatoon Notice of Zoning By‑law Violation was issued to DSD.
• Learning Boost filed its 2004 annual return with the Saskatchewan Corporations Branch.
• Learning Boost is the registered holder of an HSBC corporate bank account.
• Learning services contracts were between Learning Boost and parents or guardians of Learning Boost students.
• The learning service contracts were marked “© . . . Learning Boost Inc.”.
• Payment for services under the learning service contracts was to be made to Learning Boost.
• The independent contractor agreements were between Learning Boost and the individual tutors the Appellant contracted with.
• The confidentiality agreements were between Learning Boost and its tutors.
• The Franchise agreement was between Learning Boost and the franchisee.
• Learning Boost obtained, and operated under, a business license issued in its name.
• T4s were issued under the name and business number of Learning Boost.
• The T4 Summary was issued under the name and business number of Learning Boost.
• Learning Boost maintained its own e‑mail address, Web site and telephone number.
• Learning Boost received an invoice from SJC for one-sixth of the expenses for the residence at 1706 – 14th Street East.
• Learning Boost kept its own financial statements, including statements showing profits and loss details.
[21] The Respondent’s additional written submissions and witness testimony provided the following further factors in support of the Respondent’s position:
• When the Appellant purchased the 1430 – 12th Street East property in 2003, her bank at the time, ScotiaBank, refused to take on the additional mortgage. At that point the Appellant transferred all her mortgages to HSBC, which was willing to take on the new mortgage as well as the older ones, and all the mortgages were then put in DSD’s name.
• Learning Boost had an account in its own name, and the Respondent argues that the DSD and SJC accounts were only using the Appellant’s personal accounts because she wanted to avoid the higher banking fees on corporate accounts with numerous transactions.
• There was no agency agreement between the Appellant and the corporations, and, in this situation involving non-arm’s length parties, finding an implied agency relationship is inappropriate.
• Section 35 of the Saskatchewan Land Titles Act, 2000, S.S. 2000, c. L‑5.1, forbids having a trustee registered on title.
• In preparation for the CRA audit, the Appellant created a contract between herself and SJC in 2006, which she backdated to 2003 and in which she describes her duties as those of property manager and holds herself out to be an agent of SJC, contrary to her claim in this appeal that SJC is her agent.
Analysis: Beneficial Ownership
[22] Subsection 248(1) of the Income Tax Act (the “Act”) specifically excludes certain transfers where no change in beneficial ownership occurs. In the present case, the relevant provision is as follows:
248(1) Definitions — In this Act,
. . .
“disposition” of any property, except as expressly otherwise provided, includes
(a) . . .
but does not include
(e) any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property, except where the transfer is
(i) from a person or a partnership to a trust for the benefit of the person or the partnership,
(ii) from a trust to a beneficiary under the trust, or
(iii) from one trust maintained for the benefit of one or more beneficiaries under the trust to another trust maintained for the benefit of the same beneficiaries,
[Emphasis added.]
[23] Subsection 104(1) of the Act provides that references to trusts in paragraph (e) of the definition of “disposition” in subsection 248(1) do not include transfers to bare trusts, which will not be considered dispositions under subsection 248(1) when the trust acts entirely as the agent of the beneficiary, holding title with no change in beneficial ownership:
104(1) Reference to trust or estate − In this Act, a reference to a trust or estate (in this subdivision referred to as a “trust”) shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property, but, except for the purposes of this subsection, subsection (1.1), subparagraph (b)(v) of the definition “disposition” in subsection 248(1) and paragraph (k) of that definition, a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property unless the trust is described in any of paragraphs (a) to (e.1) of the definition “trust” in subsection 108(1).
[24] In this case, the Appellant argues that there was no disposition under subsection 248(1) of the Act because only the legal ownership of the business assets and interests was transferred, with no actual taxable disposition occurring because the incorporated entities were merely holding title to the properties as the Appellant’s bare nominees or agents, without acquiring beneficial ownership thereof. The Appellant argues that the lack of consideration for any of the properties, combined with the lack of intent to create a trust or give a gift, shows that true ownership was never transferred. She further submits that any additional purchases or sales of property were made through the corporations in their roles as agents.
[25] In considering this argument, I will explore the meaning of beneficial ownership, the law regarding transfers of property for no consideration, and the factors required in order to establish an agent-principal relationship. First, with regard to beneficial ownership, the concept emerges from the need in equity to distinguish between a person who holds title to a property (the “legal owner”) and the person who has the true right to the benefits of ownership. As recognized by the Supreme Court of Canada in Covert et al. v. Minister of Finance of Nova Scotia,[1] citing Hart J. in MacKeen Estate v. Minister of Finance of Nova Scotia (1977), 36 A.P.R. 572:
It seems to me that the plain ordinary meaning of the expression "beneficial owner" is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the "beneficial owner" is the one who can ultimately exercise the rights of ownership in the property.
[26] More recently, the Supreme Court of Canada, in Pecore v. Pecore, addressed the meaning of beneficial ownership,[2] acknowledging the distinction between legal and beneficial ownership as emerging from equity considerations:
Equity . . . recognizes a distinction between legal and beneficial ownership. The beneficial owner of property has been described as "[t]he real owner of property even though it is in someone else's name": Csak v. Aumon (1990), 69 D.L.R. (4th) 567 (Ont. H.C.J.), at p. 570.[3]
[27] When the person who has legal ownership by holding title is different from the person having beneficial ownership of the same property and the legal owner has no discretion to do anything with the property, the property is understood to be held in a bare trust, whether by an agent or a trustee. In De Mond v. The Queen,[4] the Tax Court of Canada explored the meaning of bare trust:
. . . Professor Waters defines a bare trust as follows:
The usually accepted meaning of the term "bare," "naked" or simple trust is a trust where the trustee or trustees hold property without any further duty to perform except to convey it to the beneficiary or beneficiaries upon demand.
. . .
Every fiduciary, which includes an agent holding the title to property for a principal, is a bare trustee of the property he holds for another.[5]
. . . it has also been stated that a bare trustee is a person who holds property in trust at the absolute disposal and for the absolute benefit of the beneficiaries (see Halsbury's Laws of England, 4th ed., volume 48, paragraph 641, and The Queen v. Robinson et al., 98 DTC 6232 (F.C.A.)).[6]
[28] Judge Lamarre then reviewed the relationship between the concepts of bare trustee and agent:
Bare trustees have also been compared to agents. The existence of a bare trust will be disregarded for income tax purposes where the bare trustee holds property as a mere agent or for the beneficial owner. In Trident Holdings Ltd. v. Danand Investments Ltd., 64 O.R. (2d) 65 (Ont. C.A.), Mr. Justice Morden, speaking for the Ontario Court of Appeal, made the distinction between an ordinary trust and a bare trust. He reproduced the following passages from Scott, The Law of Trusts, 4th ed. (1987):
. . .
A person may be both agent of and trustee for another. If he undertakes to act on behalf of the other and subject to his control he is an agent; but if he is vested with the title to property that he holds for his principal, he is also a trustee. In such a case, however, it is the agency relation that predominates, and the principles of agency, rather than the principles of trust, are applicable [Vol. 1, p. 95].
[38] Mr. Justice Morden also quoted with approval from an article by M.C. Cullity, "Liability of Beneficiaries - A Rejoinder", (1985-86), 7 Estates & Trusts Quarterly 35, at p. 36:
It is quite clear that in many situations trustees will also be agents. This occurs, for example, in the familiar case of investments held by an investment dealer as nominee or in the case of land held by a nominee corporation. In such cases, the trust relationship that arises by virtue of the separation of legal and equitable ownership is often described as a bare trust and for tax and some other purposes it is quite understandably ignored.
The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals --- the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee.[7]
[29] For the Appellant’s theory of the case to stand up, the transfers (and any subsequent purchases) of property must have resulted in legal ownership in bare trust by the corporations. Any further activity undertaken by the corporations with the properties held in bare trust would need to be conducted as agents of their principal, the Appellant.
[30] A transfer of property for no consideration generally results in a rebuttable presumption of a resulting trust. The transferee is obligated to prove the transferor’s intent to make a gift in order to rebut the presumption that the property is merely being held in trust for the transferor. As stated by the Supreme Court of Canada in Pecore:
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: see D.W.M. Waters, M.R. Gillen and L.D. Smith, eds., Waters' Law of Trusts in Canada (3rd ed. 2005), at p. 362. . .
24. The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers. When a transfer is challenged, the presumption allocates the legal burden of proof. Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended: see Waters' Law of Trusts, at p. 375, and E. E. Gillese and M. Milczynski, The Law of Trusts (2nd ed. 2005), at p. 110. This is so because equity presumes bargains, not gifts.[8]
[31] While in Pecore, the Supreme Court went on to evaluate the appropriate burden of proof that the transferee must meet in order to show the transferor’s intent to gift, such considerations are not relevant in this case. The Appellant denies having had the requisite intent to transfer the property gratuitously, and as she was the majority shareholder of the transferee, it would lie with her to rebut the presumption that, having received the properties by way of gratuitous transfers, the corporation held those properties in resulting trust.
[32] Further, a gift will not be valid unless the donor’s intention to gift was absolutely unambiguous:
Inter vivos gifts are gifts from one living person to another living person, literally between the living. Inter vivos gifts can be oral or by deed.
(a) − Oral
The intention to gift must be unequivocal. If a donor’s words or actions are equivocal or consistent with a possible intention to give or not to give, the courts will not infer a gift. The difference between a complete and an incomplete gift often turns on the use of specific words (Jones v. Lock (1865), LR 1 Ch App 25).
Delivery is not merely evidence of a gift being made. Courts demand full transfer of possession to complete an oral gift. The donor must put the good out of his control. . . .
(b) −By Deed
To make a gift by deed, the donor must deliver to the donee a sealed instrument in writing that states the intention to give and the subject of the gift. The seal is needed to corroborate the intent in the written document. The sealed instrument must be delivered out of the possession of the donor. It is now less clear how formal the instrument needs to be. While a sealed instrument many no longer be required, there must still be sufficient formality to corroborate an informed and considered intention to gift.[9]
[33] As the Land Titles Registry’s transfer documents are deeds, it might be argued that no consideration was required when such deeds were used to transfer real property to DSD. Such an argument was considered and rejected by the Supreme Court of Canada in Niles v. Lake, [1947] S.C.R. 291, [1947] S.C.J. No. 13 (QL):
. . . the mere fact of the document in question being under seal does not prevent the appellants from showing that there was no consideration. That, they have done, and the resulting trust follows.[10]
[34] In the present case, the evidence suggests that there was no meeting of the minds with regard to forming a valid contract between the Appellant and the corporations. As submitted by the Appellant:
A contract can only arise if there is the animus contrahendi between the parties. With the expressed or implicit intention that a contract should emerge as a result of the language or conduct of the alleged parties, no contractual obligations can be said to exist and be capable of enforcement.[11]
[35] The resulting trust doctrine should apply to all the properties transferred in this case. All transfers of business assets and interests to the corporation were done gratuitously. There is no evidence to indicate an intention to gift. Further, as outlined below, the conduct of the Appellant and the corporations over the three-year period does not indicate an intention to transfer property to the corporation. Instead, an implied agent-principal relationship is indicated, with the Appellant always maintaining beneficial ownership of the properties and businesses.
[36] The Appellant contends that although there was no written agreement, the agency relationship between her, the alleged principal, and the three corporations, her alleged agents, is implied by their behaviour during the taxation years at issue. The Federal Court of Appeal explored the meaning of the term “agency”, and how an agency relationship arises, in Kinguk Travel Inc. v. Canada:[12]
The term agency has been defined as:
". . . a fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly consents so to act or so acts." (Bowstead & Reynolds on Agency (17th edition, Sweet & Maxwell 2001)).
In Royal Securities Corp. Ltd. v. Montreal Trust Co. et. al 59 D.L.R. (2d) 666, Gale C.J.H.C. identified the essential ingredients of an agency relationship as follows:
1. The consent of both the principal and the agent;
2. Authority given to the agent by the principal, allowing the former to affect the latter's legal position;
3. The principal's control of the agent's actions.
In reality, points 2 and 3 are often overlapping, as the principal's control over the actions of his agent is manifested in the authority given to the agent.[13]
[37] Bowstead and Reynolds on Agency explains that an agency relationship can emerge in the following ways:
(1) The relationship of principal and agent may be constituted −
(a) by agreement, whether contractual or not, between principal and agent, which may be express, or implied from the conduct or situation of the parties;
(b) retrospectively, by subsequent ratification by the principal of acts done on his behalf.[14]
[Emphasis added.]
[38] The Respondent submits that the Appellant is trying to retroactively recharacterize her business transactions and calls her credibility into question, insisting that she is a capable and educated woman who chose whatever form was most convenient at various times. The Respondent argues that the Court should not now allow her to pick beneficial ownership with an agency relationship as the current most convenient choice because it avoids the adverse tax consequences she is facing. Counsel includes in his case law authorities that refer to the frequently cited passage in the Federal Court of Appeal’s decision, in The Queen v. Friedberg, 92 OTC 6031 at page 6032, [1991] F.C.J. No. 1255 (QL), regarding the importance of form in tax matters:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasio