Disbrowe v. The Queen, docket 98-2448-IT-G

Date: 20001030

Docket: 98-2448-IT-G

BETWEEN:

JOHN DISBROWE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1] This appeal was heard at Toronto, Ontario on October 5 and 6, 2000. Testimony was given by John Martin Disbrowe, his spouse, Lucinda Disbrowe ("Cindy"), by Wayne Robert Munday, the accountant for the Appellant and Cindy and for the various companies concerned during most of the years in question, and by Brenda Elaine White, the auditor for Canada Customs and Revenue Agency involved in this appeal.

ISSUE

[2] The issue in this appeal is whether in the 1995 taxation year the Appellant should be taxed on the full amount of a capital gain realized on the disposition of shares of Disbrowe, Pontiac, Buick, Cadillac Ltd. ("Company") or was he entitled to split the capital gain fifty-fifty with his spouse Cindy on the basis that he, although the legal owner of the shares, was not the beneficial owner of fifty percent of the shares as he was holding that fifty percent in a resulting trust in favour of Cindy.

FACTS

[3] The history of the Company and its predecessors (sometimes herein referred to as the "Dealership") is outlined at length in the Notice of Appeal and the Reply but I do not consider it essential to review that entire history. An overview of that history indicates that the Dealership commenced prior to 1977 and the Appellant joined the Dealership in 1977 as a salaried commission sales person. The Dealership was originally owned indirectly by the Appellant's father Martin Disbrowe and the Appellant's uncle George Disbrowe. Eventually the legal owner of the common shares of the Company became the Appellant.

[4] The Appellant married his spouse on May 15, 1985. Prior to that marriage they had lived in a common-law relationship for approximately 18 months. Prior to and after the marriage they had a joint bank account and neither one of them had separate personal accounts. The Appellant's testimony supported by that of Cindy, is that all monies of the Appellant and of Cindy, whether dividends, interest or proceeds of sale in the various reorganizations of the Dealership, were run through that account and all disbursements, whether for family or certain business purposes, also were charged against that account. Both the Appellant and Cindy had previous marriages, which ended in divorce, and Cindy brought two children into her marriage with the Appellant.

[5] Cindy was active in the running of the Dealership, at first working part-time as a receptionist and later taking on more responsible positions. She testified that all decisions with respect to the Dealership and the various companies involved were made jointly. Moreover Cindy from and after October, 1990, held directly or indirectly some shares in companies involved in the Dealership, namely, National Leasing Ltd. and 1000539 Ontario Inc. Also they jointly guaranteed loans to the Dealership totalling $260,000 secured by mortgages on their home.

SUBMISSIONS

[6] Counsel for the Respondent points to previous transactions where, in several instances, capital gains and dividends from companies in the Dealership operation were declared only on the returns of the Appellant. They were not shared fifty-fifty with Cindy. Counsel for the Respondent also points out that it was to the great advantage of the Appellant to split the gain in 1995 because, having utilized his capital gains deduction on previous occasions on the disposition of shares of a small business corporation, he would have exceeded his overall exemption of $400,000 (adjusted for different inclusion rates in years prior to 1995) if he had declared the taxable portion of the entire capital gain in 1995 as his income. Counsel concluded because of this the Appellant was obviously structuring matters to his advantage and he should not have been permitted to do so because of the previous treatment in the Appellant's tax returns of capital gains, dividends and interest as being his alone.

[7] Counsel for the Appellant submits that because of their mutual trust and their understanding that in marriage everything was a fifty-fifty split, there was no need to put shares in the name of Cindy and there was no need to sign any formal trust arrangement.

ANALYSIS AND DECISION

[8] I accept the testimony of the Appellant and Cindy as supported by the testimony of Mr. Munday, the accountant. Based upon that testimony and the documents submitted, I find that there was a resulting trust in regard to fifty percent of the shares of the Company with the result that the Appellant and Cindy were entitled to split the capital gain fifty-fifty on the disposition of the shares of the Company in 1995. The aspect of the joint account and the testimony given in that regard is important. In effect it is one element that distinguishes this case from the decision in Thomas N. Collins v. Her Majesty the Queen 98 DTC 6281. In that case the Federal Court of Appeal upheld a decision of Bowman, T.C.C.J. (as he then was) reported at 96 DTC 1034. In the Tax Court decision the learned judge stated as follows:

In 1981, Yvonne Collins bought Mr. Collins' one share of GCC and his four shares of CCC, and received from treasury 999 shares of GCC and four shares of CCC. Mr. Collins retained his interest in SF and CA. The result was that Mrs. Collins owned all of the shares of GCC and CCC and Mr. Collins owned all of the shares of SF and 80% of CA. The reorganization had as its purpose and effect to split the ownership in a manner that GCC and CCC were not associated with SF and CA so that each group enjoyed the preferential small business rate deduction under section 125 of the Income Tax Act. The absence of cross-holding of shares ensured that the companies in Mrs. Collins' group were not associated with those companies controlled by Mr. Collins. The plan was executed on the advice of and with the assistance of Mr. Collins' lawyer, Mr. Frank Fraser and Mr. Collins' accountant, Mr. George Waters. Both of these men testified. They were knowledgeable, competent and experienced in their respective professions and Mr. and Mrs. Collins relied upon their advice to arrange their affairs in the most tax effective way.

...

The Minister on assessing treated the shares and therefore the gain as belonging entirely to Mr. Collins.

The appellant's principal argument is that he held 50% of the Sherkston shares in trust for his wife or, alternatively that the shares were owned by a partnership of which Mr. and Mrs. Collins were equal partners.

Counsel for the appellant starts from what I believe are two unassailable propositions, one of fact and one of law:

(a) Mrs. Collins' contribution to, and participation in the business was almost as substantial, if not as substantial, as that of Mr. Collins, and both of them worked as a team and so perceived themselves.

(b) Ownership for the purposes of the Income Tax Act means beneficial ownership.

I agree with both propositions.

...

I turn now to the question of resulting trust. It is the unsatisfactory nature of this concept, substantially as the result of the difficulty in finding a "common intention" that led the Supreme Court of Canada to develop the doctrine of constructive trust. Nonetheless the doctrine of resulting trust unquestionably is alive and well. It does however require evidence from which the court can infer a common intent to create a trust between the legal owner and the person who seeks the status of cestui que trust.

Does such a common intent exist here? Like many spouses the Collins no doubt saw themselves as a team or, in a colloquial sense, a partnership. No doubt they saw the fortune that they have acquired in the form of family, business and investment assets as "ours" and not "his" and "hers", without differentiation of legal ownership. ...

I believe Collins is distinguishable. In Collins there was no joint bank account nor guarantees secured by joint mortgages. Moreover the parties were attempting to switch from one tax structure which ensured the companies involved were not associated with the tax advantages described above to another in an attempt to secure further tax advantages on a different basis.

[9] Also, I do not believe the previous treatment, on certain occasions, of capital gains, dividends and interest as being solely those of the Appellant on his returns, is all that significant given the testimony that the Appellant and Cindy considered everything to be fifty-fifty plus the factors of the joint bank account, no separate accounts and the guarantees secured by joint mortgages on their home.

[10] In Holizki v. Canada, [1995] F.C.J. No. 1186, Rothstein, J., then of the Federal Court, Trial Division, stated as follows:

5. In order to place the facts in context, it is necessary to outline the considerations relevant to resulting trusts. A resulting trust is concerned with intention ... In Rathwell v. Rathwell (1978), 83 D.L.R. (3d) 289 at 303 and 304 (S.C.C.), Dickson J. (as he then was) explains, in the context of matrimonial property, when the doctrine of resulting trust is engaged:

If at the dissolution of a marriage one spouse alone holds title to property, it is relevant for the Court to ask whether or not there was a common intention, or agreement, that the other spouse was to take a beneficial interest in the property and, if so, what interest? Such agreements, as have indicated, can rarely be evidenced concretely. It is relevant and necessary for the Courts to look to the facts and circumstances surrounding the acquisition, or improvement, of the property. If the wife without title has contributed, directly or indirectly, in money or money's worth, to acquisition or improvement, the doctrine of resulting trusts is engaged. An interest in the property is presumed to result to the one advancing the purchase moneys or part of the purchase moneys.

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: Murdock v. Murdock, Supra; Gissing v. Gissing, supra; Pettitt v. Pettitt, supra. The courts are looking for a common intention manifested by acts or words that property is acquired as a trustee.

As to the extent of the interest of the beneficiary of the resulting trust when there is no evidence about the exact amount of the beneficial interest, Dickson J. stated at page 304:

If there is a contribution in money or money's worth but absence of evidence of an agreement or common intention as to the quantum of the interest, doubts may arise as to the extent of the share of each spouse in the property. Lord Reid, in Pettitt's case, supra, at page 794, said that the respective shares might be determined in this manner: "...you ask what reasonable people in the shoes of the spouses would have agreed if they had directed their minds to the question of what claim the contributing spouse ought to have". This is a sensible solution and I would adopt it.

At pages 307 and 308, Dickson J. in addressing whether the doctrine of resulting trust applied to business property as well as matrimonial property, concluded that there was no reason in principle why a wife should not, in a proper case, share in the proceeds of business property, whence the couple operated the property as "one family unit...".

...

10. There was no express trust agreement and no discussion between Mervin and Maureen that he was holding any property in trust for her. Both Mervin and Maureen testified that it was just "understood" that the business belonged to both of them. ...

[11] On balance I find that, although there was no writing establishing a trust, the testimony of the Appellant, Cindy and their accountant, plus the facts of the joint bank account, the guarantees and Cindy's involvement with the Dealership indicate there was a resulting trust. Consequently the appeal is allowed with costs.

Signed at Ottawa, Canada, this 30^th day of October, 2000.

"T. O'Connor"

J.T.C.C.