Mary S. Caplan v. Minister of National Revenue, [1986] 2 CTC 2027, 86 DTC 1489

Sarchuk, T.C.J.:—Mary S. Caplan (Caplan) appeals from a reassessment of income tax for her 1978 taxation year. In filing her return for that year Caplan did not report any amount on account of the disposition of property at 412 - 414 St. Paul Street, St. Catharines, Ontario. The Minister of National Revenue reassessed and included in income the amount of $14,000 as a taxable capital gain made by the appellant on the disposition of the said property.

The issue is whether the Minister was correct in reassessing on the basis that pursuant to the provisions of paragraph 69(1)(b) of the Income Tax Act the appellant was deemed to have received proceeds of disposition of $45,000 as a result of which she was required to include in her income in 1978 the amount of the taxable capital gain earned.

Certain facts are not in dispute. At all material times the appellant, her husband, and her son Paul each owned one third of the issued shares of Edgedale Home Furnishings Limited (Edgedale). Edgedale carried on business in St. Catharines in adjoining premises located at 412 - 416 St. Paul Street. It owned 416 and occupied 412 - 414 as lessee. On February 4, 1977, the appellant purchased 412 - 414 for $17,000 (Ex. A-5). The consideration paid was $2 cash with the balance being secured by way of a mortgage back to the vendor. The deed of land was registered on February 15, 1977, and title to 412 - 414 was at all times thereafter registered in the name of the appellant until July 13, 1978, at which time the property was transferred to Edgedale for $17,000. On July 14, 1978, Edgedale disposed of the said property for proceeds of $45,000.

It was the respondent's position that at all times prior to the disposition of the said property the appellant was the legal and beneficial owner of it. Furthermore the respondent assumed as a fact that the appellant did not deal at arm's length with Edgedale. Relying on the provisions of paragraph 69(1 )(b) of the Act the respondent contends that the appellant is deemed to have made a taxable capital gain of $14,000 as a result of the sale of 412 - 414 St. Paul Street to Edgedale.

The appellant asserts that she was a bare trustee of the property; that she had no interest in the property and that accordingly section 69 of the Income Tax Act has no application. She relies principally on the evidence of Paul Caplan and on certain business records of Edgedale to support her position.

Paul Caplan is a financial consultant. He is the vice-president of Edgedale and appears to have been active in its management. He was responsible for the maintenance of Edgedale's books and records; he prepared all of the corporate income tax returns and provided the information to Edgedale's accountants upon which the financial statements for 1977 and 1978 were prepared.

According to Paul Caplan for some time Edgedale had an understanding with the owner of 412 - 414 that upon his death the property would be offered to Edgedale. That event occurred and as a result Paul Caplan met with a solicitor to draft an offer to purchase. According to Caplan he was concerned because the provisions of the Planning Act, R.S.O. 1970, c. 349, subsection 29(2) governed the acquisition of this property and it was feared that difficulties might arise if, at some future time, Edgedale sought to dispose of the adjoining property. Acting on the advice of counsel the offer to purchase was made by the appellant Mary Caplan. In due course the purchase was completed and the property was conveyed to her.

Paul Caplan conceded that the decision that the property was to be purchased by the appellant was made consciously and deliberately and was designed to avoid the potential consequences of the Planning Act. The decision was taken after discussion with counsel and it was at all times intended that 412 - 414 St. Paul Street would be owned by someone other than Edgedale, the owner of the adjacent property.

The expenses relating to the purchase including the $2 cash payment, the registration fee, the land transfer tax and legal fees amounting to $318 were paid by Edgedale. Following the purchase the property was administered by Edgedale and all expenses including tax and mortgage payments incurred in the period February 1977 to July 13, 1978, were paid by Edgedale.

Although the evidence was vague and imprecise, it appears that on or about December 31, 1976, prior to the execution of the deed of purchase, Edgedale purported to enter into a lease arrangement with Marnec Furnishings (Marnec) for all of its business premises. In the course of cross- examination of Paul Caplan, counsel elicited the fact that Edgedale had sold its business to Marnec, including inventory and goodwill, as at December 31, 1976, and that from January 1, 1977, Marnec traded as Edgedale Home Furnishings. It is apparent that Edgedale had discontinued its retail business and that it no longer required the premises for its own use.

Although rental payments made by Marnec are shown as receipts in the books of Edgedale, Mrs. Caplan included the amounts of $2,200 and $1,400 as rental income from 414 St. Paul Street in her income tax returns for 1977 and 1978. Furthermore Ex. A-13, another working paper prepared by Paul Caplan with respect to Edgedale's business affairs up to May 31, 1977, contains the entry: RENT — M. Caplan, $600. This amount is consistent with the rental income of $200 per month declared by the appellant.

To account for the rental income reported by the appellant Paul Caplan stated that during the period when the appellant was the owner he:

A. . .. showed an entry on Mrs. Caplan’s tax return of an amount equal to the mortgage payment as rental inome of $200 a month. On reflection this was an error, an accounting error.

Q. During what time frame did that occur?

A. 1977 for a period of 11 months and 1978 for a period of 7 months.

He did not offer any explanation for the entry found in Ex. A-13.

Other working papers (Ex. A-11, Edgedale Bank transactions June 1, 1978, May 31, 1979) establish that the proceeds of $15,586.66 realized on the sale of 412, 414 and 416 St. Paul Street were deposited to the account of Edgedale on July 18, 1978. Paul Caplan said that no part of the proceeds was paid to the appellant. However a working paper prepared by him dated May 31, 1979, (Ex. R-4, adjusting entries) under note 5 discloses the following:

His testimony in relation to this entry was as follows:

Q. Under 5 you have shown "Land & Building for 412 St. Paul Street, $17,000". I take it that is the subject property?

A. Yes, that is showing the transfer from Mrs. Caplan to Edgedale Home Furnishings of that property, this journal entry.

Q. It shows a "mortgage-Turner $15,450.23". I take it that was the balance outstanding on the mortgage given back to Janet Turner?

A. That is correct, yes.

Q. It shows a "Note-Caplan $1,549.77". I take it that is the equity?

A. That is right.

Q. It simply has "Note-Caplan". It doesn't say note Edgedale, does it?

A. No. This really is offset by the net income that Mrs. Caplan had declared on her tax return, the equity portion.

Q. You agree it doesn’t show the equity belongs to Edgedale. It shows it as Caplan?

A. It is a normal accounting treatment, Ma’am.

Q. Underneath that the words are “To record sale of 412 to 416 St. Paul Street by Mrs. H. Caplan.” That would be Mary Caplan?

A. Yes.

Q. “To Edgedale July 13, 1978.”

A. Yes.

No further explanation was offered.

Certain other facts were elicited from Paul Caplan in cross-examination. The financial statements for 1977 and 1978 which had been prepared by a firm of chartered accountants on the basis of information provided by Paul Caplan listed the property at 416 St. Paul Street as an asset and the mortgage thereon as a liability. 412 - 414 St. Paul Street is not listed as an asset, nor is any mention made of the property in any of the explanatory notes.

The appellant testified. She asserted “I knew nothing about it” (the purchase). With respect to the offer she said “I believe I signed it but I didn’t know what I was signing. I was just told to sign and I wasn't even told to read it.” She stated that she had never received any rental income nor any of the sale proceeds. She did not consider the building to be hers and when asked why she was involved she stated “I have no idea. I knew nothing about the business at all.” Indeed the appellant even testified that she was not aware of the fact that she was a shareholder and a director of Edgedale.

Mrs. Caplan was unable to account for the inclusion of rental income in her tax returns for 1977 and 1978. When shown the 1978 return she said that the signature was not hers and offered the explanation that the return was prepared by her son Paul. She denied having any knowledge of the content of the return. Similar evidence was given by her with respect to the mortgage executed by her at the time of purchase (Ex. A-5) and with respect to the Affidavit of Residence required by the provisions of the Land Transfer Tax Act, 1974, which was sworn by her on February 14, 1977. This affidavit contained the assertion that she was “‘A person to whom or in trust for whom the land conveyed in the above-described conveyance is being conveyed”.

It is the appellant’s position that the management of the property by Edgedale, the financing, the Marnec lease, the payment by Edgedale of the operating expenses and the alleged receipt by Edgedale of the proceeds of sale were all facts which supported a finding that the appellant was not the beneficial owner of the property but was merely holding the property in trust for Edgedale.

It is difficult to determine the nature of the trust alleged from the pleadings and from the argument advanced by counsel for the appellant. Was it an express trust as appears to have been pleaded? I believe not. Express trusts are those which come into existence because settlors have declared their intention to that effect. In Ernest Bouchard v. The Queen, [1983] C.T.C. 173 at 183; 83 D.T.C. 5193 at 5202 Cattanach, J. considered the degree and quality of the evidence necessary to establish a declaratory trust. He stated:

When a trust may be established by parol despite the Statute of Frauds, as I accept as a premise in this appeal, sound policy demands that its existence must be brought within reasonable certainty and not left within the realm of conjecture.

There is no evidence before me which meets that test.

If any argument can be advanced on behalf of the appellant it is that the facts support a finding that an implied trust existed. Such a conclusion can only be reached if the Court finds that Edgedale paid for the property in question and directed that it be transferred to the appellant, from which it could be implied that Edgedale’s intention in so doing was that the appellant was to hold the property in trust for it. This requires the Court to search for the intent of Edgedale in the evidence adduced. Waters in Law of Trusts in Canada at page 277 states:

The term “implied trust” is commonly used for two situations. First, where the intention to create a trust is not clearly expressed, but has to be discovered from indirect and ambiguous language. This is all that distinguishes such an implied trust from the express trust. Secondly, where one person has gratuitously transferred his property to another, or paid for property and had the property put into another's name. The intention of the transferor or purchaser is implied to be that the transferee is to hold the property on trust for the transferor or purchaser.

Intention is a question of fact which must be established on a balance of probabilities by the appellant. In my view that onus has not been met.

The intention of Edgedale was clear and unambiguous. To ensure that the Planning Act did not affect Edgedale's options for the disposition of 416 St. Paul Street it was an absolute requirement that the beneficial owner of 412 - 414 St. Paul Street be some person other than Edgedale. As a result it was imperative that Mary Caplan acquire the legal title to that property and that she possess the absolute right to deal with it as she pleased. That decision was made consciously and deliberately and to achieve a specific purpose. One may assume that no illegality was intended and that the existence of Mary Caplan as the beneficial owner of the land with full and absolute control over its disposition was not merely a facade to be presented to third parties. It seems inappropriate for the appellant, who incidentally is a director and shareholder of Edgedale to now allege the contrary.

Taking all of the evidence into consideration I cannot accept the submission that Mary Caplan held the property as a trustee.

The appellant further contended that even if the Court found that she was the owner of the property her appeal should nonetheless be allowed in part, because the respondent's calculation of the taxable capital gain was incorrect. This proposition is founded on the premise that the respondent was wrong in assuming that the proceeds of disposition were $45,000.Coun- sel submitted that the purchase price paid by the appellant for 412 - 414 St. Paul Street was $17,000. The price paid by Edgedale and subsequent improvements brought the total cost of 416 St. Paul Street to $25,136. Paul Caplan used these figures to calculate that the cost of 412 - 414 St. Paul Street represented 40.35 per cent of the aggregate cost of these properties.

Since both properties were sold by Edgedale to Interplanetary Investments Inc. and to Gary Clemmensen “in Trust", for $90,000, in what was alleged to have been one transaction, counsel contended that the same formula should be applied to the sale price and that the proceeds of disposition for 412 - 414 St. Paul Street calculated on that basis were no more than $36,315.

It is a fact that only one statement of adjustments was prepared for both transactions. For the purpose of calculating the balance due and owing by the purchaser the author of this statement did use aggregate figures for both the purchase price ($90,000) and for the amounts secured by the second mortgage ($43,000) (Ex. A-12).

It is also a fact that an allocation of the purchase price and the amounts secured by the mortgage was made at the time of the sale. With respect to the purchase price the president of Edgedale, Harry Caplan, swore an affidavit of value of the consideration which reads in part:

2. I have a personal knowledge of the facts stated in this affidavit.

3. (1) The total consideration for this transaction has been allocated as follows:

(a) land, building, fixture and goodwill	$45,000.00
(2) The true consideration for the transfer or conveyance for
Land Transfer Tax purposes is as follows:
(a) Monies paid in cash	8,049.77
(d) Balances of existing encumbrances with interest owing
at date of transfer	15,450.23
(e) Monies secured by mortgage under this transaction	21,500.00
Total Consideration	45,000.00

The amount secured by the second mortgage was allocated equally between the two properties and separate mortgages, each for $21,500, were registered (Ex. A-10).

On the basis of the documentary evidence before me I have concluded that the appellant's position is not tenable. I am not prepared to find that Harry Caplan swore a false affidavit. l do not accept Paul Caplan’s evidence on this issue nor do I accept that there was no attempt to “attribute the sale price between the two buildings” at the time of the sale.

For the foregoing reasons the appeal is dismissed.

Appeal dismissed.