Nicholas J. Fletcher v. Minister of National Revenue, [1987] 2 CTC 2341, 87 DTC 624

Sarchuk, T.CJ.:—The appeal of Nicholas J. Fletcher (Fletcher) is with respect to a notice of determination of a capital loss made by the respondent for Fletcher's 1982 taxation year.

Pursuant to the provisions of subsection 152(1.1) the appellant requested a determination of his loss on the disposition of a capital interest in a trust resident in Canada. By notice of determination of a loss dated June 7, 1984 the respondent determined the capital loss to be nil. The appellant filed a notice of objection. On June 5, 1985 the respondent confirmed the said determination as having been made in accordance with the provisions of the Income Tax Act and in particular on the ground that no allowable capital loss occurred under the provisions of subparagraph 115(1)(b)(vi) with respect to a disposition of a capital interest in a trust resident in Canada.

The issue arose out of the following circumstances. The appellant is an engineer. From 1977 to 1983 he was continuously employed in Brazil, returning to Canada for one or two weeks each year. On the occasion of one visit in November, 1980 Fletcher decided to sell the house that he owned and to buy a new one. Realizing that he would not be able to complete the purchase before his return to Brazil he approached an acquaintance, Aubrey Jack Hyman (Hyman) and asked him to complete the transaction and to invest the proceeds. In order to enable Hyman to carry out this responsibility, the appellant, on November 21, 1980 executed a power of attorney in favour of Hyman (Ex. A-1). Fletcher returned to Brazil at the beginning of December 1980. Shortly thereafter the real estate transactions were com- pleted and in February 1981 approximately $95,000 in cash, the surplus from the sale, was used by Hyman to purchase short-term notes. To this point of time there had been no discussions between Fletcher and Hyman as to the manner in which Hyman was to exercise his authority under the power of attorney nor had there been any discussion as to the manner or type of investment that was to be made by Hyman.

Fletcher told the Court that when he and Hyman next spoke in March 1981 Hyman advised him that the surplus funds had been invested in short-term notes. There ensued a brief discussion as to the use that the surplus funds could be put to. Fletcher considered and rejected a suggestion to pay down the mortgage on his new house, concluding "that as long as the money could be applied, and earned more money than I would save by paying down the mortgage, then he should apply the money elsewhere. . . . We discussed the specific period of six months for the maximum time the money should be committed for.” In the course of these discussions the legal ownership of any property acquired by Hyman was never specifically addressed nor was Hyman given any instructions as to reporting on the investments. Indeed, due to the nature of Fletcher's work this would have been next to impossible.

A Vancouver City Savings Credit Union bank statement dated June 30, 1981 (Ex. A-2) shows that a deposit of $92,606.74 was made to Fletcher's account on May 1, 1981. Fletcher understood the source of these funds to be the proceeds of disposition of the short-term notes. Relying on the May 1, 1981 deposit and other funds in Fletcher's account Hyman issued a cheque on May 5, 1981 drawn on that account for $95,000 payable to Joseph Doz, Hyman's solicitor in Edmonton, Alberta. These funds were used by Hyman to purchase a mortgage from R.A. Garon's Holding & Co. Ltd. (Garon's), (Ex. A-4) which mortgage was secured by property owned by a company, Overland Trading Co. Ltd., the principal owners of which were Hyman and his brother Barry. Hyman was a personal guarantor of this second mortgage and also of the first mortgage on this property. The mortgage in issue was initially assigned by Garon's to the Hyman brothers and then on July 7, 1981 Barry Hyman's interest therein was assigned to Aubrey Jack Hyman.

Fletcher subsequently discovered that the subject property was in an area where a tarsands project was to be built. When the project failed to go ahead property values fell substantially and the second mortgage became worthless. Fletcher first received this information in June 1982 when Hyman telephoned him in Brazil and advised him that there was a problem with the investment, which he was trying to sort out. Upon Fletcher's return to Canada in July he made further inquiries and only then was able to determine the full extent of the problem. His investigations led him to conclude that the mortgage was worthless and that Hyman could not indemnify him for his loss.

On August 24,1982 the appellant and Hyman entered into an agreement (Ex. A-6) which reduced to writing the arrangement which purportedly existed between Hyman as trustee and Fletcher as beneficiary. In particular the agreement dealt with the funds used to purchase the mortgage in the following words:

1. The Trustee acknowledges receipt of $95,000.00 from the Beneficiary to be invested by the Trustee in trust for the Beneficiary.

2. The funds so settled in trust on the Trustee, and all property substituted therefore, are held by the Trustee and his personal representatives solely for the benefit and advantage of the Beneficiary and his personal representatives.

5. This agreement is effective as of May 1, 1981.

On that same day, following the execution of this trust agreement, Fletcher sold his capital interest in the trust to James Richard Downie for $1, thereby crystallizing his loss in the sum of $95,000.

On May 24, 1984 Fletcher commenced legal proceedings against Hyman alleging that his loss was caused by breach of trust, fraud, embezzlement, misappropriation and defalcation by Hyman of Fletcher's funds. Judgment was rendered in his favour by the Supreme Court of British Columbia on July 11, 1986.

Counsel for the appellant submitted that the trust agreement between Fletcher and Hyman ” . . . validly constituted an express trust. It had the three certainties required, that is certainty of intent to create the trust; certainty of the object of the trust; and certainty as to the property that is the subject of the trust". Implicit in this contention was that such an express trust existed as at May 5, 1981 and the agreement (Ex. A-6) was merely written confirmation of this trust arrangement.

In the alternative counsel contended that the circumstances in this case gave rise to a constructive trust. He argued that at all times Hyman was acting in a fiduciary capacity and that Hyman never regarded either the money nor the mortgage as his property. The situation which existed was that legal ownership of the mortgage was in Hyman's name while the beneficial ownership thereof was Fletcher's. To disregard the existence of a constructive trust would result in the unjust enrichment of Hyman, a conclusion which would be contrary to the concept of constructive trust.

In determining the appellant's capital loss to be nil for the 1982 taxation year the respondent acted on certain assumptions, inter alia:

(a) the appellant was not a resident of Canada in 1982;

(b) at all material times Jack Hyman acted under a power of attorney granted by the appellant and that Jack Hyman was solely an agent of the appellant;

(c) no trust within the meaning of the Income Tax Act existed between Jack Hyman and the appellant;

(d) the appellant's actions in disposing of the property constituted a disposition of an interest in a mortgage and not a disposition of a capital interest in a trust wthin the meaning of the Income Tax Act;

(e) the value of the appellant's capital interest in the mortgage on or before August 24, 1982 was no greater than $1.00.

It is the respondent's position that the appellant's capital loss was properly determined to be nil as the appellant, being a non-resident of Canada, did not dispose of a capital interest in a trust resident in Canada. Secondly, the respondent contends that if Hyman was a constructive trustee for the appellant of the mortgage on the property of Overland Trading Co. Ltd. that such a constructive trust is not a trust for the purposes of the Income Tax Act. Finally, the respondent contended that if there was an express trust, it was effective only from August 24, 1982 with a value of no greater than $1 and that proceeds of disposition of $1 resulted in no capital gain or loss on the appellant's disposition of his interest in it.

The evidence adduced failed to convince me that an express trust had come into existence in December 1980 or on May 5, 1981. In the absence, at those times, of any oral or written words, stating clearly and unequivocally that certain property was to be held in trust it would be most difficult to find that Fletcher had created a trust. The agreement executed on August 24, 1982 (Ex. A-6) does not, in my view, reflect the arrangement made by Hyman and Fletcher in December 1980 and is not evidence of an express trust.

I turn now to the issue whether the circumstances in this case establish the existence of a constructive trust.

In arguing that a constructive trust is not a trust for the purposes of the Income Tax Act counsel for the respondent submitted that a constructive trust is essentially a remedy that the Courts impose and contended that 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. Counsel further argued that Hyman was the appellant's agent and that an action for a declaration that the agent was a constructive trustee of property for a beneficiary is one of the remedies a principal can seek from his agent. Relying on the decision of the Supreme Court of Canada in Pettkus v. Becker, [1980] 2 S.C.R. 834; 117 D.L.R.

(3d) 257, counsel argued:

But, as well, in this case, it is submitted that following the reasoning of Pettkus v. Becker, where a constructive trust was viewed as a remedy for unjust enrichment, Mr. Hyman got a mortgage paid off for no corresponding benefit that was paid to Mr. Fletcher, he got $95,000 and Mr. Fletcher got nothing. That's Mr. Hyman's unjust enrichment.

But, if it’s a remedy, it’s a remedy which must be imposed by the Court. And, for example, to see why this is necessary, we have a situation where Mr. Hyman has registered title to the mortgage, and until the court intervenes and says, yes, Mr. Hyman, you are a constructive trustee for Mr. Fletcher, what we have is a situation where Mr. Hyman can deal with all the world who don't have knowledge of Mr. Hyman's misappropriation, that he is the owner and he can transfer title without any consequences being imposed upon a subsequent purchaser.

He concluded this argument by stating:

Now, it doesn't appear that the courts have directly considered that question as to when the constructive trust arises. Whether it arises at the moment Mr. Fletcher is deprived of the $95,000.00 by Mr. Hyman's actions, or when the court intervenes.

In my view, if it's a remedy when the court orders it, there's been no such order in this case, therefore there is no constructive trust.

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.

In that case, Dickson, J. (as he then was), speaking for the majority of the Court stated:

In Murdoch v. Murdoch, Laskin, J., as he was then, introduced in a matrimonial property dispute the concept of constructive trust to prevent unjust enrichment. It is imposed without reference to intention to create a trust, and its purpose is to remedy a result otherwise unjust. It is a broad and flexible equitable tool which permits courts to gauge all the circumstances of the case, including the respective contributions of the parties, and to determine beneficial entitlement. It was described this way in Rathwell, at p. 455:

"The constructive trust, as so envisaged, comprehends the imposition of trust machinery by the court in order to achieve a result consonant with good conscience. As a matter of principle, the court will not allow any man unjustly to appropriate to himself the value earned by the labours of another. That principle is not defeated by the existence of a matrimonial relationship between the parties; but, for the principle to succeed, the facts must display an enrichment, a corresponding deprivation, and the absence of any juristic reason - such as a contract or disposition of law — for the enrichment.” [Emphasis added.]

At page 848 (D.L.R. 237) Dickson, J. considered how one might approach the question of unjust enrichment in matrimonial causes. He said:

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 corresponding 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.

It is clear that the majority concluded that the facts in Pettkus v. Becker disclosed the existence of a constructive trust arising out of and dependent upon the applicability of the doctrine of "unjust enrichment”.

In his article "The Development of the Remedial Constructive Trust"* [1] John L. Dewar cited the case of Hussey v. Palmer, [1972] 1 W.L.R. 1286 (C.A.) and made particular reference to the views of Denning, M.R. on the matter of the remedial constructive trust:

Although the plaintiff alleged that there was a resulting trust, I should have though[t] that the trust in this case, if there is one, was more in the nature of a constructive trust; but this is more a matter of words than anything else. The two go together. By whatever name it is described, it is a trust imposed by law whenever justice and good conscience require it. It is a liberal process, founded upon large principles of equity, to be applied in cases where the legal owner cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or the benefit of it or a share in it. The trust may arise at the outset when the property is acquired, or later on, as the circumstances may require. It is an equitable remedy by which the court can enable an aggrieved party to obtain restitution. [Emphasis added.]

Dewar went on to comment:

The suggestion by Lord Denning M.R. that the trust may arise at the outset, when the property is acquired, or subsequent to the acquisition of the property, as the circumstances may require, echoes the view which had been earlier put forward by Scott L.J. in Bannister v. Bannister, [1948] 2 All E.R. 133 (C.A.) although Bannister was not directly mentioned.

Although the foregoing view has not been universally adopted, I am of the opinion that it reflects the correct approach and is not inconsistent with Pettkus v. Becker (supra).

In considering the distinction to be drawn between a resulting trust and a constructive trust, Martland, J. in his dissenting opinion in Pettkus v. Becker (supra) made the following comments at page 858 (D.L.R. 261):

I turn now to the nature of a constructive trust as so far recognized. The areas in which a constructive trust has been found to exist have usually been in cases where a fiduciary relationship exists, e.g., a trustee or fiduciary taking advantage of his position to make a profit for himself. Such a trust has also been found to exist where a person having knowledge of an existing trust acquires the legal title to the trust property. [Emphasis added.]

I have already noted that the appellant, Fletcher, successfully sued Hyman in relation to this transaction. The suit was heard in the Supreme Court of British Columbia and on July 11, 1986 The Honourable Judge Skipp, local judge of the Supreme Court, rendered judgment in favour of the appellant. In the course of his judgment he found that Hyman was acting as a trustee and he was under a duty in that capacity to invest the appellant’s money properly. He went on to say:

I characterize the action of Mr. Hyman in investing the money of Mr. Fletcher in a second mortgage to be a misappropriation while acting in fiduciary capacity and, indeed, I lack, I suppose, the necessary descriptive powers to indicate the strength of my conclusion in that regard. I will content myself with the bare finding of the fact that this is a misappropriation while acting in a fiduciary Capacity.

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.

The evidence before this Court leaves no doubt that there 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.

The respondent took the further position that even if I found that a constructive trust existed, its remedial nature put it in a category different than that contemplated by the relevant provisions of the Income Tax Act. Counsel contended that the nature of a constructive trust makes it inconsistent with the trust provisions of the Income Tax Act. He argued that before the provisions of subsection 115(1) were operative it was necessary that there be "an express trust or a substantive trust or trust by intention”. No authority was cited in support of this argument.

I do not accept this proposition. For the purposes of this appeal the relevant subparagraph is 115(1)(b)(vi). It reads:

115. (1) For the purposes of this Act, a non-resident person's taxable income earned in Canada for a taxation year is the amount of his income for the year that would be determined under section 3 if

(b) the only taxable capital gains and allowable capital losses referred to in paragraph 3(b) were taxable capital gains and allowable capital losses from dispositions of property each of which was a disposition of property or an interest therein (in this Act referred to as a “taxable Canadian property") that was

(vi) a capital interest in a trust (other than a unit trust) resident in Canada,

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 exluding 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.

The word "trust" is defined in the Income Tax Act as follows:

248. (1) "Trust"—"trust" has the meaning assigned by subsection 104(1);

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, administra- tor, heir or other legal representative having ownership or control of the trust property.

Subsection 104(1) falls within Division B of the Income Tax Act. It is noteworthy that in this Division by paragraph 108(1)(j) the legislators defined a trust to include an inter vivos trust and a testamentary trust but specifically excluded from the meaning of trust items such as a unit trust and a trust governed by a registered pension fund or plan.

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.

The appeal is allowed with costs. The appellant did dispose of a capital interest in a trust resident in Canada, thereby sustaining a capital loss as claimed. The matter is therefore referred back to the respondent for redetermination in accordance with these reasons.

Appeal allowed.