Kara Vos v. R., [1996] 1 CTC 2206, [1996] DTC 1001

Sarchuk J.T.C.C.— This is an appeal by John Karavos from an assessment of tax with respect to his 1990 taxation year. The circumstances giving rise to the assessment follow.

The appellant came to Canada in 1951. He found employment in a restaurant and worked there for a number of years. From 1967 to 1977 the appellant and James Christodoulou (Christodoulou), in partnership, leased and operated Palmers Lunch, a restaurant. In August 1977, again in partnership, they purchased a building located at 2440-2444 Yonge Street, Toronto, Ontario, (the property) and the restaurant business carried on therein. Following the purchase the appellant and Christodoulou continued to operate the restaurant in a portion of the building while the balance was leased to a third party. In 1981 they sold the restaurant business. The partnership continued to earn rental income from the property until April 29, 1988 when it too was sold, resulting in a total capital gain in the amount of $1,817,771. As part of the terms of sale the purchaser entered into a mortgage agreement with the appellant and Christodoulou to secure the unpaid balance of the purchase price. This mortgage was extended by an agreement dated April 29, 1990.

At all relevant times, title to the property was registered in the names of the appellant and Christodoulou. During the period from August 12, 1977 to April 29, 1988 50 per cent of all profits and losses arising from the restaurant and the property were reported by the appellant in his income tax returns. In his return for the 1988 taxation year the appellant reported a net capital gain in the amount of $908,885 representing 50 per cent of the total capital gain arising from the sale of the property. He claimed a reserve pursuant to subparagraph 40(l)(a)(iii) of the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”) and a deduction pursuant to subsection 110.6(3) in respect of the taxable capital gain reported.

With respect to the 1989 taxation year the appellant and his wife filed income tax returns on the basis that each had disposed of an undivided 25 per cent interest in the property. Each included in income a portion of the prior year’s reserve and claimed a reserve pursuant to subparagraphs 40(l)(a)(ii) and 40(l)(a)(iii) of the Act. Mrs. Karavos also claimed a deduction under subsection 110.6(3) of the Act. The Minister of National Revenue (the Minister) assessed the appellant and his wife on the basis that all of the capital gain and mortgage interest was to be included in the appellant’s income. No objections to these assessments were taken. At or about the same time both were advised that the Minister would not accede to their request for a reassessment of the 1988 taxation year on the basis that each had disposed of a 25 per cent interest in the property.

In the 1990 taxation year interest in the total amount of $197,420 was paid by the purchaser pursuant to his obligations to the appellant and Christodoulou under the mortgage. One-half of this amount, $98,710, being the appellant’s share, was deposited into a bank account allegedly maintained by the appellant and his wife. [1] Each then reported as investment income one-half of this amount, being $49,355, in their respective income tax returns for 1990. The appellant alone included in the calculation of his gain for this taxation year all amounts arising from the operation of subparagraph 40(l)(a)(ii) of the Act.

The Minister assessed the appellant to include an additional amount of $49,355 in the computation of his income for the 1990 taxation year on the basis that it was income of the appellant from property which he had transferred, directly or indirectly, to or for the benefit of his wife, and such income is deemed to be his income for the year pursuant to the provisions of subsection 74.1(1) of the Act.

Appellant’s position

The appellant submits that subsection 74.1(1) of the Act refers to a transfer of the beneficial ownership of a property as the transfer of bare legal title without changing beneficial ownership does not constitute a transfer of property. (Subparagraph 54(c)(v) of the Act: defition of “disposition”. Savoie v. R. (sub nom. Savoie v. Canada), [1993] 2 C.T.C. 2330, 93 D.T.C. 552.) A transfer of beneficial ownership of a property will occur when the transferor conveys the right of enjoyment associated with the property from himself to the transferee. There must be an alienation of rights by transferor and a corresponding acquisition of rights by the transferee (see Boiselle v. Minister of National Revenue, 89 D.T.C. 279 at page 285). If a wife has a beneficial interest in a particular property before the conveyance of legal title to her, then the conveyance of legal title, in and of itself, will not constitute a direct or indirect transfer of property for the purposes of subsection 74.1(1) of the Act. This principle, it was argued, also extends to the situation where the wife’s beneficial interest takes the form of an interest in a resulting or constructive trust and such an interest is “property” for the purposes of the Act.

The appellant’s primary assertion is that Mrs. Karavos was the beneficial owner of 25 per cent of the property from the time of its purchase in 1977 to the time of its disposition and subsequently was the beneficial owner of an equivalent portion of the mortgage received as consideration. It is contended that the evidence of the appellant and his wife more than adequately establishes “either a resulting or a constructive trust”. According to counsel for the appellant it follows that her “interest in a trust is ‘property’ for the purposes of the Act” and since she “is the sole beneficiary of the trust, then a conveyance of legal title to the trust property from the husband to the wife will not constitute a transfer of the property for the purposes of subsection 74.1(1) of the Act”.

The appellant asserts that at all times he and his wife had a common intention that the beneficial interest in the property should not belong solely to him as titled owner but rather, half was to be held upon trust for her. That fact is sufficient for this Court to infer the existence of a resulting trust. The appellant also asserts that his wife made a substantial contribution to the purchase of the property, both directly and indirectly, and the necessary common intention may also be inferred from this (see Rathwell v. Rathwell, [1978] 2 S.C.R. 436, 83 D.L.R. (3d) 289). Once a resulting trust is established it follows that it existed from the time of the acquisition of the property in 1977. Since their respective contributions to the acquisition of the property were comparable it is appropriate to presume that Mrs. Karavos held an equal share in the property (see Rathwell, supra).

In the alternative it is the appellant’s position that the doctrine of constructive trust is recognized for income tax purposes and may appropriately be taken into account in determining whether there is a transfer of property for tax purposes (Savoie v. Canada). The appellant contends that there does not need to be a common intention in order to determine whether a constructive trust exists, it need only be shown that the appellant was unjustly enriched and that there was a causal connection between the enrichment and the property which is the subject of the trust. Since the three elements referred to by Dickson C.J.C., i.e. an enrichment, a corresponding deprivation and the absence of a juristic reason for the enrichment are satisfied by the evidence, the existence of a constructive trust in favour of Mrs. Karavos should be found (see Pettkus v. Becker, [1980] S.C.R. 834, 117 D.L.R. (3d) 257, and Sorochan v. Sorochan, [1986] 2 S.C.R. 38, 29 D.L.R. (4th) 1). A constructive trust arises at the time when the constituent elements are found to exist, that is in this case, at the time of the acquisition of the property.

In the further alternative it is contended that the attribution of the rule found in section 74.1 of the Act requires what counsel for the appellant referred to as a “strict tracing concept’. Thus, property which originated from the appellant and was transferred to his wife is tainted and subject to attribution. However other property which did not come from the appellant (in this case the George Andrews loan and Mrs. Karavos’ personal contributions) is not subject to attribution. Counsel for the appellant argued that a loan from George Andrews provided over 50 per cent of the down payment made towards the purchase of the property and that “in a real sense the Yonge Street property was substituted for the down payment that both of them made and then the vendor take back mortgage in turn was substituting property for the Yonge Street property”. This tracing method, counsel argued, demonstrates that:

à significant portion of the original property which ultimately culminated in the bank account in 1990 did not originate with John Karavos, it originated with Betty Karavos’ brother and...there should not be attribution in respect of any property which is traceable or substituted property for that initial seed money.

It is the appellant’s position that the manner in which he and his wife treated the mortgage interest in their tax returns for the taxation year in issue is consistent with this view of the attribution rule.

Respondent’s position

The spousal contribution requirement is a necessary element to the creation of a constructive trust and is a factor to be considered in determining whether the evidence supports a finding of resulting trust. It is also a necessary element to avoid the attribution of income under subsections 74.1(1) and 74.2(1) of the Act. In this appeal no resulting trust in respect of the property has been established since there is insufficient evidence that Mrs. Karavos made a contribution which was sufficiently substantial and direct as to entitle her to a portion of the gain realized upon disposition of the property or to the income derived from the mortgage.

Aside from the spousal contribution requirement a resulting trust can only arise where there is evidence of an express declaration of common intention of joint ownership at the time of acquisition of the property. The respondent contends that no substantive evidence was adduced from which it could be concluded that the beneficial ownership of the property was to be shared and, it was argued, in actual fact the conduct of the parties was inconsistent with the sharing of beneficial ownership.

With regard to the appellant’s argument on the constructive trust issue the respondent’s position is that constructive trust is an equitable remedy which the Tax Court of Canada does not have authority to invoke in the exercise of its jurisdiction under section 171 of the Act. [2] It 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. The Tax Court of Canada ought not to 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. Nor should the Tax Court of Canada retroactively impose a declaration of a restitutory nature on financial transactions which occurred several years ago. In the alternative, in the event the Court concludes that it does have jurisdiction, the respondent contends that the evidence fails to support a finding that Mrs. Karavos made sufficiently substantial and direct contributions to give her a proprietary right in the property.

Conclusion

I propose to deal first with the resulting trust argument advanced on behalf of the appellant.

In Rathwell, supra, 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 nontitled 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.

In the present appeal there is no evidence of an express or implicit intention of joint ownership of the property. The appellant and his wife never discussed ownership or title to the property. The assertions of the appellant and Mrs. Karavos to the effect that everything they did was “based on mutual trust” and that they were “in this together” fall short of establishing the existence of a common intention that the beneficial ownership of the property was to be shared.

There is in addition to the absence of any such express declaration a lack of evidence of conduct relating to the acquisition of the property from which a “common intention” might properly be inferred. Indeed as counsel for the respondent noted, the conduct of the appellant and his wife is inconsistent with a finding of common intention. In acquiring title to the property, refinancing the property, granting the vendor take-back mortgage, in representing the financial status of the partnership between the appellant and Christodoulou, and in reporting profit and loss, capital gains and investment income in respect of the property, the property was treated as, and held out to be a property in which only the appellant and Christodoulou had an interest. By way of example, there is not a tittle of evidence that when the restaurant business was sold for $110,000 in 1981, consideration was given by the appellant or his wife to an apportionment of the gain arising from this sale. Similarly, following disposition of the property in 1988, the appellant reported his 50 per cent of the total capital gain in his income tax return. On August 1, 1989 the Minister assessed the appellant’s return as filed. It was not until May of 1990 that the appellant first claimed that his wife had an interest in the property. In my opinion it would be most inappropriate to imply 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” (see Pettkus, supra, at page 842-44).

With respect to the issue of spousal contribution I am satisfied the appellant provided the bulk of the capital needed to acquire the property. As to Mrs. Karavos’ contribution, the evidence is vague and imprecise. The appellant arranged passage to Canada for her in 1956 and they were married shortly after her arrival. She brought no assets with her other than a suitcase. In 1958 she obtained employment at Laura Secord and worked there until 1969 when illness made it impossible for her to continue working on a full-time basis. She testified that her earnings during this period of time were, by agreement, pooled with her husband’s and kept in his bank account. Questioned as to the quantum of her earnings, she was equivocal and left the impression that they were barely sufficient to cover weekly expenses. Mrs. Karavos was not employed between 1969 and the date of the acquisition of the property, 1977, but did on occasion assist her husband and Christodoulou in the operation of Palmers Lunch, usually to fill in for other staff on their days off. On the other hand the appellant was employed at all times following his arrival in Canada in 1951. In the 10 years that he and Christodoulou operated Palmers Lunch profits were generated in an amount sufficient to pay wages (including those of the appellant) and to provide some partnership profit at year end.

The evidence adduced lacks substance and fails to establish that Mrs. Karavos contributed capital either directly or indirectly to the acquisition of the property significant enough to entitle her to a portion of the gain realized upon its disposition. The appellant’s position that a resulting trust has been established cannot be sustained.

I turn next to the appellant’s submission that this Court should invoke a constructive trust in favour of his wife.

In Erickson v. Minister of National Revenue, [1988] 2 C.T.C. 2380, 88 D.T.C. 1705, at page 2385 (D.T.C. 1709), the Associate Chief Judge of the Tax Court of Canada noted:

Differing views have been expressed regarding the true nature of a constructive trust. In J.G. Riddall’s The Law of Trusts, 3rd ed. (1987) 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? [3]

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. The learned author goes on at the same page to observe that the remedial view prevails in some quarters in the United States and quotes this passage from P.G. Haskell, Preface to the Law of Trusts, page 145:

The subject of constructive trusts is a part of the law of restitution. The constructive trust is a remedial device that it employed to correct unjust enrichment. It has the effect of taking title to property from one person whose title unjustly enriches him, and transferring it to another person who has been unjustly deprived of it ... To correct the injustice, the court of equity declares that the unjustly enriched person shall be a constructive trustee for the benefit of the unjustly deprived person, and the court directs that legal title be transferred by the unjustly enriched person to the unjustly deprived person. The constructive trustee is not regarded as a fiduciary with respect to the constructive trust property; his only function is to act to place the title where it belongs. The equity court merely uses the trust analogy to achieve a restitutional result.

At page 360 of Riddall’s work it is said that this view has been both supported and opposed in England. The conclusion arrived at by the author at page 362, after a detailed comparison between an express trust and constructive

trust, 1s:

It is because the consequences of the property being trust property are the same whether the property is held under a constructive or an express trust that we are, it is submitted, correct to regard a constructive trust as a form of trust, and not merely as a form of remedy.

To my mind the language employed by Chief Justice Dickson in delivering the judgment of the Supreme Court of Canada in Sorochan v. Sorochan, [1986] 2 S.C.R. 38, leads to the conclusion that in Canada a constructive trust is to be regarded as a remedy and not a substantive institution.

Subsequent decisions of the Supreme Court of Canada support this conclusion. In Rawluk, supra Mr. Justice Cory, speaking for the majority, reviewed the doctrine of constructive trust. [4] 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, supra “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 (Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, at page 471 per Dickson). 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.”

In a recent decision of the Supreme Court Canada, Peter v. B eb low, supra, at page 631, 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.

It is also important to consider the ramifications of applying a remedial restitutory device in an income tax context. The following comments from the article “Constructive Trusts and the Income Tax Act: A Mismatch of Concepts” (by Ellen B. Zweibel, in Canadian Current Tax Law, April 1988, Vol. 2, No. 16, pages 177-83), are illustrative of the inherent problems that would arise if the constructive trust doctrine is applied in the context of a tax appeal:

Interpreting the trust provisions of the Income Tax Act to include constructive trusts does not advance the general purposes of the trust taxation scheme. It can have the effect of defeating the specific legislative intention of other Income Tax Act provisions and can lead to inconvenient and absurd results....

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?

The author concluded that:

Some of these troublesome questions could be dealt with on an ad hoc, case-by-case basis by determining that the particular constructive trust arose only when the Court declared it. However, the better view would be to acknowledge that the developing concept of constructive trust is not within the legislative intention of the provisions.

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. 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.

Had I concluded otherwise I would have held that the evidence adduced by the appellant fails to establish the existence of a constructive trust. In Pettkus, supra, at pages 847-48, Mr. Justice Dickson (as he then was) stated:

The principle of unjust enrichment lies at the heart of the constructive trust…

How then does one approach the question of unjust enrichment in matrimonial causes? In Rathwell I ventured to suggest there are three requirements to be satisfied before an unjust enrichment can be said to exist: an enrichment, a correspondent deprivation and absence of any juristic reason for the enrichment. This approach, it seems to me, is supported by general principles of equity that have been fashioned by the courts for centuries, though, admittedly, not in the context of matrimonial property controversies.

Even if the appellant had established the prerequisites which would enable this Court to find that unjust enrichment existed this appeal could not succeed. In order to determine whether it is appropriate in a given case to invoke the remedy, the Supreme Court proposed a “causal connection” test. This test was considered by Dickson C.J.C. in Sorochan, supra, where he said at page 5:

It is suggested simply that there should be a “clear link between the contribution and the disputed assets”. The question of a connection between the deprivation and the property is further explained as “an issue of fact”. That is, courts must ask whether the contribution is “sufficiently substantial and direct” to entitle the plaintiff in an interest in the property in question.

For this appeal the question may be stated as follows: Were Mrs. Karavos’ contributions, in a broad sense, sufficiently substantial and direct so as to entitle her to a portion of the profits realized upon the sale of the property? There must be a clear causal connection between the spousal contribution founding the unjust enrichment and the property which is alleged to the subject of the constructive trust. In my view there is no reasonable connection between the contribution or alleged deprivation and the property.

Last, for the reasons expressed hereinbefore the “strict tracing concept” proposed by counsel for the appellant as an answer to the provisions of section 74.1 of the Act fails. The spousal contribution requirement is a necessary element to avoid the attribution of income under subsections 74.1(1) and 74.2(1) of the Act. The evidence as a whole fails to provide any substantive support for the assertions by the appellant and his wife regarding her contributions or that the monies borrowed from George Andrews were a loan to her and thus reflected her contribution to the acquisition of the property. There is no evidence that she had any liability for that loan and in fact when the restaurant business was sold in 1981 the appellant paid the amount of $9,000 to George Andrews from his share of the profits received. The balance of the loan was repaid by the appellant in 1986, that is two years prior to the disposition of property, by way of a cheque drawn on his personal account.

It has not been demonstrated that the Minister erred in assessing as he did. The appeal is dismissed with costs to the respondent.

Appeal dismissed.