Martin Chrustie v. Minister of National Revenue, [1984] CTC 2533, [1984] DTC 1465

Kempo, TCJ:

I Issue

The appellant appeals from reassessments of income tax for his 1977 and 1978 taxation years; which reassessments disallowed rental losses from property described as “Confederation Place MURB” on the basis that the said property was not beneficially owned by the appellant but rather was legally and beneficially owned by a corporate entity, Russ-Mar Investments Ltd, of which the appellant was a 50 per cent shareholder. The computation of the amount of the losses was not in issue.

An amendment to the respondent’s reply to notice of appeal was allowed permitting him to rely additionally on sections 3 and 8 of the Statute of Frauds ((1676) Caroli IT). I believe, however, that counsel probably meant to refer to section 7 rather than section 8 of that Statute as section 8 is expressed to be an exception to the provisions of section 7.

II Decision

The appeal is allowed and the matter is to be referred back to the Minister for reconsideration and reassessment in accordance with the following reasons.

III Reasons

A. The Evidence

The appellant is a Winnipeg businessman who had been involved in land development and sales prior to 1976. In May of 1976 he became aware of and was invited to join a group of investors who had joint ventured their respective interests in land located in Saskatoon, Saskatchewan, for the purpose of constructing thereon a rental housing project known as the Confederation Place MURB (hereafter referred to as the “MURB Joint Venture”). This group, comprising of Messrs Woo N Tape, John J Popoff and Norman K Rebin, wanted $40,000 for a 25 per cent interest.

During May and June of 1976 the appellant discussed with and obtained a verbal agreement from three of his own friends, Messrs R Hoffman, S Ludwig and B Finegard, to enter into a partnership to acquire the aforesaid 25 per cent by which the latter three individuals would collectively put up $20,000 for a 12/2 per cent interest in the MURB Joint Venture and the appellant, for his own $20,000, would have the other 12/2 per cent.

It was also during May and June of 1976 that the appellant consulted his own lawyer in Winnipeg, Mr LR Crane of the law firm of Aikins, MacAulay, about this investment and instructed him to proceed with the incorporation of a company which, the appellant vigorously maintained, was always to be solely a cost control device such that its bids for the supply of materials, furniture and fixtures to the project would have to be accepted by the MURB Joint Venture if they were lower than or competitive with other bidders. The appellant was of the opinion that both himself and Mr Hoffman were sufficiently experienced to carry out this object. Through the efforts of the lawyer, Mr Crane, Russ-Mar Investments Ltd (hereafter referred to as “Russ-Mar”) was incorporated under the Canada Business Corporations Act on September 10, 1976, (Exhibit A-1) and was reported as such to the appellant by letter dated November 25, 1976 (Exhibit A-3).

The above elements apparently were the only involvements of the Winnipeg lawyer, Mr Crane.

However, prior to July 7, 1976, the appellant had turned to Woo Tape’s lawyer in Saskatoon, a Mr Lome Larson of the firm McKercher, McKercher, and it was Mr Larson who had prepared the ensuing formal documents in respect of the MURB Joint Venture. Neither of the lawyers, Mr Crane or Mr Larson, were called to give evidence. The difficulty that this appellant faces is that, while the initial offer to purchase was in his personal name, the formal documentation as to the acceptance of membership into the MURB Joint Venture as to a 25 per cent interest therein was expressed as being in the name of Russ-Mar.

The key formal documents submitted as evidencing Russ-Mar as having ownership therein can be summarized as follows:

— the joint venture agreement dated August 18, 1976, executed by the appellant ostensibly on behalf of and under the corporate seal of Russ- Mar (Exhibit A-10);

— letter amending agreement dated August 18, 1976, executed by the appellant ostensibly on behalf of Russ-Mar (Exhibit A-11);

— written confirmation addressed to Russ-Mar, c/o the appellant, of the receipt by the joint venture of the purchase price of $40,000 (Exhibit A-12);

— trust agreement in favour of Confederation Place Construction Ltd dated November 17, 1976, executed by the appellant and some other person ostensibly on behalf of and under the corporate seal of Russ- Mar (Exhibit A-16); and,

— transfer of land dated November 17, 1976, executed by the appellant ostensibly on behalf of and under the corporate seal of Russ-Mar (Exhibit A-17).

It is essentially these documents upon which the respondent relies and upon which his assumptions in the reply to notice of appeal are based, namely, inter alia:

(a) Russ-Mar Investments Ltd was a party to the purchase and joint venture agreement dated August 18, 1976 with respect to the said 25% interest in “Confederation Place MURB”;

(b) The Appellant signed the agreement dated August 18, 1976 as an executive officer on behalf of Russ-Mar Investments Ltd;

(c) The Appellant owns 50% of Russ-Mar Investments Ltd’s shares and FLH Holdings Ltd owns the remaining 50% of the company’s shares. FLH Holdings Ltd is owned by the Appellant’s associates, B Fingard, A Ludwig and R Hoffman;

(d) Russ-Mar Investments Ltd paid the bulk of the $40,000 purchase price for the said 25% interest in “Confederation Place MURB’’;

(e) Russ-Mar Investments Ltd with John Popoff and W N Tape Ltd conveyed legal title in the land Registry office of Confederation Place MURB to Confederation Place Construction Ltd on conditions of trust set out in an agreement dated November 17, 1976;

(f) The shareholders of Confederation Place Ltd are the joint venturers, John Popoff, W N Tape Ltd and Russ-Mar Investments Ltd;

(g) Although he has no knowledge of the exact relationship, there was no trust or agency arrangement between Russ-Mar Investments Ltd and the Appellant or other associates;

(h) Russ-Mar Investments Ltd entered into a joint venture agreement with John Popoff and W N Tape Ltd under which all profits were to belong to, and all losses were to be born, by, the three parties in proportion to their respective interests in the joint venture; and

(i) Russ-Mar Investments Ltd was the beneficial owner of the said 25% interest in Confederation Place MURB.

The appellant contends, in contradiction to the respondent’s position, that he and not Russ-Mar is and was at all times the sole beneficial owner of 12/2 per cent interest in the MURB Joint Venture and that Russ-Mar held his interest strictly as trustee and agent on his behalf.

The key documentary evidence submitted as supporting the appellant’s position can be summarized as follows:

— The written offer to purchase dated July 7, 1976, executed by the appellant on his own account and which is reproduced as follows (Exhibit A-2):

THIS AGREEMENT undertaken this 7th day of July, AD 1976 in the City of Saskatoon, Province of Saskatchewan.

I, MARTIN CHRUSTIE, Businessman, resident of the City of Winnipeg, Province of Manitoba, hereby offer to purchase 8*/ percent of each interest of WOO N TAPE, JOHN J POPOFF, and NORMAN K REBIN (totalling 25 percent overall interest) in the proposed Confederation Place, Joint Venture Assisted Rental Housing Project, in the City of Saskatoon, Province of Saskatchewan, for the sum of Thirteen Thousand, Three Hundred and Thirty-three ($13,333.00) Dollars for each 8'4 percent interest, totalling Forty Thousand ($40,000.00) Dollars cash together with all the benefits, obligations and responsibilities represented by said interest.

It is understood that providing my tenders for supplying building materials for this proposed project are competitive, as determined by the Project Manager and Controller of Confederation Place, I will be given preference for such supplying of materials and/or furnishings.

It is also understood that I will have twenty-four (24) hours to determine whether to proceed, and to determine whether to proceed singularly or in partnership with one or more of my partners.

“illegible”	“Martin Chrustie”
Witness	Martin Chrustie

We accept the above offer subject to the offeror providing us with a net worth statement and our approving the said net worth statement.

	“Woo N Tape”
	Woo N Tape
“illegible”	“John J Popoff”
Witness as to all three signatures	John J Popoff
	“Norman K Rebin”
	Norman K Rebin

— McKercher law firm trust receipt dated July 14, 1976 for $10,000 which the appellant states was issued to him in verification of his payment of part of the purchase price (Exhibit A-13);

— letter from Mr Larson dated July 19, 1976, addressed to the appellant and enclosing, inter alia, a sale agreement re purchase of interest by the appellant in Confederation Park and requesting, inter alia, the balance of the purchase price to be held in trust pending execution by the vendors (Exhibit A-14);

— balance sheet prepared by Buchan, Moore & Peters, Chartered Accountants, stated to be in relation to Confederation Place, a joint venture of the appellant, John Popoff, Norman K Rebin and Woo N Tape as at July 31, 1976 and prepared without audit or opinion (Exhibit A-4). This was the financial statement referred to in the Joint Venture agreement in the name of Russ-Mar and executed by the appellant ostensibly on behalf of Russ-Mar, (supra, Exhibit A-10);

— minutes of a meeting hand-written by the appellant on and dated August 18, 1976, and executed on the same day by the appellant, R Hoffman, and S Ludwig which is reproduced as follows (Exhibit R-2):

Telephone: 204-889-5472

Russ-Mar Investments Ltd August 18/76

Minutes of a Meeting of Russ-Mar Investments Ltd

On August 18th 1976 a meeting was held in the City of Saskatoon by a group of Investors of Russ-Mar Investments. The purpose of the meeting was to establish our investment position with respect to construction of a apartment block at 714 Confederation Drive, Saskatoon & Russ-Mar Investments Ltd. It was agreed Russ-Mar would enter into the position solely as suppliers for supply & materials for the construction of the apartment block. The investors position would be for private & individual investment to receive any tax benefit & enjoyment that would apply.

M Christie	Signed “M Christie”
R Hoffman	“R Hoffman”
S Ludwig	“S Ludwig”

— the typewritten version of the minutes of the above-mentioned meeting prepared shortly thereafter (Exhibit A-5);

— the appellant’s personal cheque dated August 18, 1976, for $2,500 payable to McKercher & Co (Exhibit A-6) which he stated to be his share of the $5,000 down payment on the purchase price;

— Agreement dated October 5, 1976, between Central Mortgage and Housing Corporation as mortgagee of the First Part, and Confederation Place Construction Limited, John Popoff, WN Tape and the appellant as landlord or mortgagor, of the Second Part (Exhibit A-9);

— letter from the Winnipeg lawyer, Mr L R Crane, addressed to the appellant dated November 25, 1976, reporting inter alia, the incorporation of Russ-Mar Investments Ltd as of September 10, 1976 (Exhibits A-l and A-3 respectively);

— corroborative documentary evidence as to the appellant’s activities in the giving of personal guarantees (Exhibits A-8 and A-19) and tendered to verify the appellant’s personal involvement;

— unaudited financial statements prepared by Thorne Riddell & Co, Chartered Accountants, in respect of Confederation Place which is stated to be a joint venture of, amongst other individuals, the appellant as to 12/2 per cent, and dated April 18, 1978, for the year ended December 31, 1977, and dated April 12, 1979, for the year ended December 31, 1978 (Exhibits A-22 and A-23 respectively);

— unaudited financial statements prepared by Robinson, Twigg & Co, Chartered Accountants, in respect of Russ-Mar Investments Ltd each of which is dated September 15, 1980, for the period as at December 31, 1977, and December 31, 1978, respectively (Exhibits A-24 and A-25 respectively).

It was the appellant’s oral testimony that he had always considered himself to be the sole beneficial owner of a 12/2 per cent interest in the MURB Joint Venture, that he thought only an individual could take advantage of any MURB tax write-offs, that he had paid for it out of his own resources, that Russ-Mar was always intended to be merely a cost control vehicle and that, of the documents he had signed purportedly on behalf of Russ-Mar, he did not read them carefully, if at all, and that at the particular times he would sign under the company name because to him Russ-Mar was merely the “terminology” used to express the overall interest of his group. He also stated that, while he knew the company was in the process of being formed, he became certain of its actual formation sometime between November 25 to 30 of 1976.

Evidence was heard from Mr S Ludwig (one of the appellant’s group investors) that he was interested in getting involved in the MURB Joint Venture as he was a salaried employee and he thought a MURB would be a good chance for some income tax relief for himself. As he too was concerned about cost control he agreed that a company should be formed to act as a “policeman” such that its bids for the supply of materials, furniture and fixtures would have to be accepted by the joint venture if they were lower than the other bids. Mr Ludwig stated that he signed for a $20,000 bank loan, that his share was one third of that amount, that Mr Finegard pledged some of his term deposits as security and that he is still paying off the loan which presently stands at some $32,000.

B. Analysis

The first matter to be dealt with is the fact that the corporate entity, Russ-Mar Investments Ltd, came into existence on September 10, 1976, which is approxi mately three weeks after the date that the formal Joint Venture Agreement had been ostensibly entered into on its behalf by its sole incorporator, the appellant.

Section 14 of the Canada Business Corporations Act (SC 1974-75-76, C 33) provides as follows:

14.(1) Except as provided in this section, a person who enters into a written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof.

(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its behalf, and upon such adoption

(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and

(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.

(3) Except as provided in subsection (4), whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between or among the corporation and a person who purported to act in the name of or on behalf of the corporation and upon such application the court may make any order it thinks fit.

(4) If expressly so provided in the written contract, a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.

No authorities were cited for the proposition that these subsections would be of application to a case such as the one before the bar, however, it seems to me that as between the appellant and Russ-Mar, and qua the respondent, Russ-Mar could only be a bare trustee by operation of law since there is a marked absence of evidence of any action or conduct clearly signifying a corporate intention to be bound;* [1] such action or conduct being through the appellant as its sole incorporator who did not know of the actual incorporation until late November, 1976, and who in any event always subjectively regarded one half of 25 per cent of the MURB Joint Venture as being his own.

While Bouchard v The Queen, ([1983] CTC 173; 83 DTC 5193) cited by counsel for the respondent is authority for the proposition that the respondent may invoke the provisions of the Statute of Frauds, it is my view that the five-question guidelines set out at 183 [5202] and adopted by Cattanach, J clearly are in respect of the degree or burden of proof that was upon the plaintiff taxpayer in that case to prove within a reasonable certainty the express or declaratory trust arrangement which he asserted he had made orally, ab initio, in favour of his son and daughter-in-law and upon which he (the plaintiff) relied.

I am also of the view that the requirement of the three certainties of trust law mentioned by counsel for the respondent (that is, there must be a certainty in the words that a trust was intended, that it would affect specific property and that it would benefit ascertainable beneficiaries) would be an evidentiary requirement to be met by the appellant if he were alleging or attempting to prove that an express or declaratory trust had been made or declared in his favour. But that position is not the one being taken by the appellant, nor is that the evidence.

In my opinion the main thrust of the Statute of Frauds concerns, and is applicable to, situations where it is being alleged that an express or declaratory trust agreement or arrangement had been made by one party in favour of another; it does not affect but rather by section 8 excepts trusts arising by operation or construction of law.

Succinctly stated, counsel for the appellant asserts that the appellant bought and paid for the 12/2 per cent interest in the MURB Joint Venture on his own account, with his own funds, that the formal documentation represents a glaring error arising out of carelessness on the part of the appellant, that Russ-Mar is and always has been a bare trustee at best and that the appellant is the beneficial owner of the subject matter of the bare trust by operation of law.

It is well settled in trust jurisprudence that the classical presumptive trust arising by operation of law is that of a resulting trust — which is presumed in favour of the person who actually advanced or paid the purchase money.

The resulting trust is said to have its origin in “the natural presumption, in the absence of all rebutting circumstances, that he who supplies the money means the purchase to be for his own benefit rather than for that of another; and that the conveyance in the name of the latter is a matter of convenience and arrangement between the parties for other collateral purposes’’.* [2]

In the King v Thompson ((1905), 6 Terr LR 204), Harvey, J quotes Lewin on Trusts, 9th ed, p 178 in stating that “the trust results to the real purchaser by presumption of law which is merely an arbitrary implication in the absence of reasonable proof to the contrary” and therefore was of the opinion that if an intention can be shown on the part of the purchaser that the beneficial interest should go to the title holder, the presumption would be removed and no trust would result.

As a first step there is no doubt that the presumption underlying the resulting trust does not operate unless the appellant can show he actually paid or advanced the purchase money, in the character of a purchaser (McKenzie v Ross (1900), 33 NSR 252).

One of the respondent’s key assumptions is set out in paragraph 6(d) of the reply to notice of appeal, that is:

Russ-Mar Investments Ltd. paid the bulk of the $40,000.00 purchase price for the said 25% interest in “Confederation Place MURB”.

The documentary evidence (Exhibits A-10 and A-12) acknowledging receipt of the purchase moneys as being received from Russ-Mar, while being prima facie proof thereof, and being supportive of reasonable grounds upon which the assumption is based, are not in and of themselves necessarily conclusive. The real purchaser may nonetheless prove his payment of the purchase money by parol evidence (McKinnon v Harris (1909), 14 OWR 876), including the introduction of probative circumstantial evidence (Vaselenak v Vaselenak, [1921] 57 DLR 370).

The parol and circumstantial documentary evidence adduced by the appellant to prove payment by him as the real purchaser was the McKercher law firm trust receipt dated July 14, 1976, for $10,000 (Exhibit A-13), his personal cheque dated August 18, 1976, for $2,500 (Exhibit A-6), his viva voce evidence that these were his own moneys which he paid towards the purchase of a 12/2 per cent interest in the joint venture on his own account, and that he did in fact pay the balance of $7,500 from his own resources, but that at the date of trial he was no longer able to specifically account for it.

In observing the manner and demeanour of the appellant while testifying and under cross-examination I am satisfied that he was forthright and honest in all his answers. The most cogent singular documentary evidence that this appellant had to overcome is that of the aforementioned letter of receipt dated September 14, 1976 (Exhibit A-12) wherein one of the other members of the MURB Joint Venture confirms receipt by the joint venture of the purchase price of $40,000 from Russ-Mar. In this respect, I accept the appellant’s evidence that he did not know of the fact of incorporation (ie September 10, 1976) until late November of 1976 which leads to the irrefutable inference that Russ-Mar could neither have had nor could it have paid the money (at least through the appellant) at that time, and that therefore the $20,000 representing the 12/2 per cent interest must have come from the appellant as he stated.

The other significant factors that cannot be ignored are that the aforementioned letter of receipt is not a document of the appellant or Russ-Mar and further that there is a dearth of evidence to support a finding on the balance of probabilities that Russ-Mar in any way intended to be bound by the pre-incor- poration events.

Having regard to all of the evidence and the factual circumstances of this case taken as a whole it is my opinion that the appellant has successfully established the existence of a resulting trust in his favour, ab initio, that he is the sole beneficial owner of 12/2 per cent in the Confederation Place MURB Joint Venture. Accordingly, this appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment in accordance with these reasons for judgment.

Appeal allowed.