Mervin Holizki v. Her Majesty the Queen, [1995] 2 CTC 420

Rothstein J.:—This is a case involving the attribution rules of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The attribution rules are intended to protect the integrity of the progressive tax rate system as it applies to individuals. They prevent a taxpayer from splitting income or capital gains among his or her family members and reducing the total amount of tax that would otherwise be payable. [1]

In 1985, 1986 and 1987, the plaintiffs wife, Maureen Holizki, disposed of certain of her shares in a family corporation. The Minister, by way of reassessment, attributed the capital gain on the disposition of Maureen’s shares to the plaintiff. The Minister’s position was that the shares disposed of by Maureen had been transferred to her by the plaintiff and that the transfer fell afoul of subsection 74(2) of the Act thereby requiring that the gain be attributed to the plaintiff. [2] Subsection 74(2) provides in part:

74(2) Where a person has, after 1971, transferred property either directly or indirectly by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, (which property is referred to in this subsection as "transferred property"), the following rules apply:

(a) the amount, if any, by which

(i) the aggregate of the transferees’ taxable capital gains for the year from dispositions of transferred properties other than listed personal property and from dispositions of property (other than listed personal property) substituted for transferred property

exceeds

(ii) the aggregate of the transferees’ allowable capital losses for the year from dispositions of transferred property other than listed personal property and from dispositions of property (other than listed personal property) substituted for transferred property,

shall, during the lifetime of the transferor while the transferor is resident in Canada and the transferee is his spouse, be deemed to be a taxable capital gain of the transferor for the year from the disposition of property other than listed personal property;

[Emphasis added.]

In this action the plaintiff asserts that subsection 74(2) of the Act is contrary to section 15 of the Canadian Charter of Rights and Freedoms. The plaintiff also says that if the attribution rules are constitutional, they do not apply in this case because he held the shares transferred to Maureen under a resulting or constructive trust in favour of Maureen.

I turn first to the question of resulting trust. The issue here is whether the evidence sufficiently demonstrates that Maureen and Mervin Holizki intended, in common, from the commencement of his electrical contracting business in 1973, for Mervin to hold one half the property of the business in trust for Maureen. If so, subsequent legal transfers of shares would not be transfers of property within the meaning of subsection 74(2) of the Act as Maureen was always the beneficial owner of the shares and the attribution rules would not be applicable.

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 (as opposed to a constructive trust which is imposed as a matter of equity by a court irrespective of the intention of the parties). In Rathwell v. Rathwell, [1978] 2 S.C.R. 436, 83 D.L.R. (3d) 289 at pages 451-452, (D.L.R. 303-04), 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 I 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: Murdoch v. Murdoch, 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 452 (D.L.R. 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 reason- able 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 457 (D.L.R. 307-08), 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...".

With this legal framework in mind, the relevant question is whether Mervin’s and Maureen’s actions were consistent with a resulting trust.

Mervin and Maureen were married in 1968. He was an apprentice electrician working towards getting his journeyman’s papers. She was a registered nurse. They lived in Estevan, a town in southern Saskatchewan. In 1973, they moved to Gull Lake, a small community on the Trans Canada Highway in western Saskatchewan where they set up an electrical contracting business. At first the business was run as Mervin’s sole proprietorship. It was operated out of the Holizki’s home which they both owned. Mervin performed the electrical work on job sites. Maureen would answer the phone as this was the only way of getting business. She would pick up equipment and deliver it to job sites. She did the books and looked after the inventory.

The equity capital for the business was provided by Mervin and Maureen on a pooled basis. Maureen had worked as a nurse. Mervin’s evidence was:

Q. And what happened to her income? Was...how did you, as a family, deal with her income and what-the costs you had in starting up the business and so forth.

A. Right. She would just put her money into our bank account and, like, when Holizki Electric’s bank account was sort of short, we’d give to here, and when Holizki Electric was good, we’d draw out of there and put into our personal and...we owned....

In testimony, Mervin indicated that when a bank loan had to be obtained to purchase equipment, the loan was taken out in Mervin’s name but Maureen signed as guarantor.

During the time the business was run as a sole proprietorship, assets requiring registration were registered in Mervin’s name. All income from the business was reported by Mervin for income tax purposes. Mervin made decisions on hiring and firing.

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. In cross-examination, Maureen testified:

Q. How did you view your finances...let me rephrase it this way. Did you view, when you were planning your finances, the matter from a family perspective? Was it always from the point of view of how the family would best be served by certain steps, financially speaking?

A. Right, yeah. Whether we had to borrow money to operate the business or whether it was money that we can save, it was for all of us.

Q. So you viewed your family as a unit, when it came to financial matters?

A. Mmhmm, yes.

Q. And in terms of the money that was used to make those purchases, was it ever identified as either being your money or your husband’s money? How was that done?

A. No, it was-it was our money. I did have my own money from nursing as such, that I would put into our own-you know, into our own account, money that I had earned that was used too, but it wasn’t, you know, specifically for a certain-certain thing. It was whatever was-you know, what he could contribute and what I could contribute to, you know, to the marriage and to the business operation.

In 1973, the business had an income of some $6,000. In 1974, the income was $19,000 and in 1975, about $25,000. Although this clearly was a very small business, Mervin’s brother-in- law as well as the accountant that had been retained in 1974, Delmar Robertson, recommended that the business be incorporated.

Holizki Electric Limited was incorporated in 1975. One reason for incorporation was so that Maureen could be paid a salary which the Holizkis’ advisors did not think was possible in the case of a sole proprietorship. Mervin acquired 99 shares of the company, Maureen one share. Maureen’s evidence was:

Q. Now was that-you were working equally with him or sharing a great deal of the work with your husband-was that your intention, to only own one share of that company at the time?

A. No, we both sort of felt that it was just sort of a matter on paper, that it was just how the company was incorporated, but yet I felt that I owned half of the company, as my husband I think did, too.

Q. And did you-did you find out later that that wasn’t so and that you had to do something about it?

A. Right, it was-we left it. It was, you know really didn’t-it wasn’t a pressing matter as such until we found—but when looking at the figures saying 99 to 1, we felt it wasn’t correct. And then also the bookkeeper felt-the bookkeeper felt too that we should change it, and it was changed.

In the context of determining the Holizki’s intentions, and the possible implication that the 99-1 share split indicated an intention that Mervin was essentially to own the business, it is of significance that Mervin and Maureen did not deal with the lawyer who incorporated the company. They only dealt with the accountant, Robertson. Robertson had an arrangement with a law firm in Regina, Thauberger & Company, that where a client did not have a lawyer and wished to incorporate, they would use one of the Thauberger "shelf companies" to try to keep the costs manageable. The 99-1 share split was arranged by Mr. Thauberger and was the same as, or similar to, the split in a number of other companies in which Robertson and Thauberger were involved. Robertson remembered his discussions with Thauberger who was having marital difficulties at the time and strongly encouraged the 99-1 split.

Mervin testified that both he and Maureen considered they owned the business and that the share split was something done by the accountant:

Q. Now, if you were pooling the earnings and she was involved in the company, how is it that you get 100 Class A shares and she only gets one? Or you get 99 and she gets one, rather?

A. I guess at that time we just took it as we were jointly owning and the process of the way our bookkeeper or our accountant did it, it just ended up that way. It didn’t make any difference to us. You know, like, today with all this women’s liberation, now my wife says, I can’t believe that I let that happen. But at that time we were no wiser, and we didn’t really care. We knew whose it was.

Q. So after ’78, you and your wife own the business, 50-50?

A. Yes. Did before, but I guess now legally we owned it 50-50.

In cross-examination Mervin testified:

Q. Mr. Bendin: Mr. Holizki, I just want to draw you back to when you were discussing the reason why when Holizki Electric was first set up you obtained 99 shares and your wife obtained onelt’s my understanding that no real thought was given to that-to the split?

A. No.

Q. It was just done without thinking? Is that-is my understanding of your testimony correct in that regard?

A. Yes.

Robertson testified that Maureen and Mervin were never satisfied with the 99-1 split. The issue would arise periodically but because the business was very small and the amounts in issue were not large, it was not a “driving issue".

However, in 1978, a redivision of the shares took place in which Mervin transferred 49 shares to Maureen so that each would hold 50 shares. By this time, Robertson was dealing with another lawyer at the Thauberger firm whose attitude about ownership was different than Mr. Thauberger’s. According to the evidence, the reason for the redivision was to recognize the Holizkis’ intention of 50-50 ownership between Mervin and Maureen and to permit Maureen to receive dividends. On the advice of their accountants, Maureen paid the sum of $2,016.35 for the 49 shares she acquired from Mervin which was calculated by Robertson to be the fair market value of the shares in 1978. [3]

Until 1980, Holizki Electric Limited continued as a small electrical contracting business. However, in 1980, Holizki Electric Limited went into the oil business. The early 1980s were prosperous times in the oil business in Saskatchewan with world prices being as high as $40 U.S. per barrel and much drilling activity in the area. The Holizkis’ oil business was successful.

In 1983, Holizki Holdings Limited was incorporated. Mervin and Maureen each sold their shares in Holizki Electric Limited to Holizki Holdings Limited for $775,000, each of them receiving in payment 775,000 Class E preference shares of Holdings.

Paragraphs 11 and 12 of the agreed statement of facts set out the details of the dispositions by Maureen of some of her shares in Holizki Holdings Limited in 1985, 1986 and 1987 which give rise to the Minister’s reassessment:

11. Maureen Holizki redeemed 100,000 of her Class E preference shares of Holdings for the sum of $1 per share as follows:

Redemption Date Number of Shares

December 31, 1985: 20,000

January 31, 1986: 30,000

January 12, 1987: 50,000

12. On December 31, 1986 plaintiff and Maureen Holizki, for consideration of $1, transferred Class E preference shares of Holdings to each of their four children as follows:

(a) 100,000 Class E preference shares of Holdings transferred by plaintiff to each of Tamara and Heather Holizki; and

(b) 100,000 Class E preference shares of Holdings transferred by Maureen Holizki to each of Tara and Joseph Holizki.

By notice of reassessment dated April 5, 1989, the Minister reassessed Mervin in respect of the capital gain resulting from Maureen’s dispositions of her shares through redemption and transfer. The Minister reassessed Mervin because he was of the opinion that the transfer of the 49 shares from Mervin to Maureen in 1978 was caught by subsection 74(2) of the Act. Accordingly, the capital gain realized on the disposition of Maureen’s shares in 1985, 1986 and 1987 were attributed to Mervin. The taxable capital gains were:

1985: $9,973.45

1986: $106,965.27

1987: $24,933.63

On the face of the transaction, the transfer of 49 shares from Mervin to Maureen in 1978 appears to fall under subsection 74(2) of the Act. However, the real question to be decided is whether there was a beneficial transfer of property in 1978. If Mervin and Maureen intended that his ownership of the property of the sole proprietorship commencing in 1973 was subject to a trust under which he held one half the property of the proprietorship for Maureen, the transfer in 1978 did not affect any beneficial interest Maureen had. She was already the beneficial owner of 50 per cent of the property of the business. In other words, the transfer of legal title to the 49 shares in 1978 only recognized Maureen’s beneficial ownership of 50 per cent of the electrical contracting business since its inception in 1973.

The evidence is that Maureen contributed her earnings to the establishment and, when necessary, working capital of the business. She worked in the business. She guaranteed loans for the business.

This was a "Ma and Pa" small business in which both spouses contributed and in which both spouses undertook liabilities. As stated by Maureen in her cross-examination, the Holizkis operated their family as a unit when it came to financial matters. Having regard to Maureen and Mervin’s assertions that they intended to share the property of the business equally, the financial contribution of each, their common labour, and shared responsibility for the liabilities of the business, it is reasonable to conclude that there was a common intention for Mervin to hold a portion of the property of the business in trust for Maureen. A resulting trust is not possible where the imputation of intention is impossible or unreasonable or where the conduct of the parties is wholly ambiguous. See Pettkus v. Becker, [1980] 2 S.C.R. 834 at 844, 117 D.L.R. (3d) 257. That is not the case here.

There is no conclusive evidence before me as to the precise contribution of Mervin and Maureen on a quantified basis. However, the evidence is that Mervin and Maureen pooled their earnings. The initial equity contribution to the proprietorship was quite small. The business required the ongoing contributions of work by both Mervin and Maureen. While the details of the bank guarantees were not before me, there is no suggestion in the evidence that Maureen’s liability was in any way limited.

The 99-1 share split in 1975 was not pursuant to instruction of the Holizkis. They did not deal with the lawyer that incorporated the company. The 1978 transfer of shares, which was at their instructions, resulted in a 50-50 legal ownership of Holizki Electric Limited between Maureen and Mervin. It is clear that at least in 1978 Mervin and Maureen intended a 50-50 sharing of the property of the business. The 1978 transfer took place when the business was still very small. I am satisfied, based on all the circumstances relating to contribution to the business, which is not inconsistent with equal contributions and which is reflected in the share redivision in 1978, that had they directed their minds in 1973 to the question of what portion Maureen ought to have, it would be that Mervin was holding 50 per cent of the property of the business from its commencement in 1973 for Maureen.

It is necessary to deal with three arguments raised by the defendant.

1. The business in 1973-75 was a sole proprietorship.

2. The transfer in 1978 was for valuable consideration.

3. Only oral evidence supports the resulting trust.

In the absence of any other evidence, evidence that a business was a sole proprietorship might be inconsistent with the trust intention. But in this case, it is only one factor of many to consider. I do not think the notions of sole proprietorship and holding the property of the sole proprietorship in trust are mutually exclusive. The legal title to the assets of an unincorporated business may well be held by the sole proprietor. But that does not preclude the possibility that the sole proprietor is holding some portion of those assets in trust for another. Indeed, the situation, as I perceive it, is not different from cases such as Rathwell, supra, in which the registered owner of property is found to be holding the property in trust for his spouse by virtue of a resulting trust.

As for the consideration paid by Maureen for the shares in 1978, certainly in the absence of extenuating circumstances the inference would be that she had no previous beneficial ownership interest in the shares. However, the evidence is clear that payment was made on the advice of the Holizkis’ accountants. Exactly why that advice was given is not clear as the payment of consideration at that time would not have avoided operation of the attribution rules if subsection 74(2) of the Act was otherwise applicable. The evidence is also clear however, that insofar as legal and accounting matters were concerned, Holizkis did what was recommended to them. They had no expertise or experience with such matters. In the context of the way in which the Holizkis operated payment for the shares would have no particular significance because as Maureen testified in cross-examination, they considered their family as a unit when it came to financial matters. I am satisfied that the only reason for the payment was the advice given by the accountants. Accordingly, I consider that the payment was superfluous. Maureen already beneficially owned the property that was being legally transferred to her. The fact that she paid for it twice is of no consequence.

I would observe, however, that in view of the fact that fair market value was paid by Maureen and the attribution rules were changed in 1985 to exempt from attribution transfers made after May 22, 1985 between spouses for fair market value, [4] I was surprised that in 1989 the Minister would have reassessed Mervin Holizki. There is no doubt of course that the Minister was legally entitled to rely on subsection 74(2) as it continued to apply to transfers made prior to May 23, 1985 with or without fair market value consideration. But in this case, the splitting of significant capital gains was not a motivation for the 1978 transfer of shares. In any event as I have said, subsection 74(2) did indeed continue to apply to the transfer in this case and the Minister was entitled to rely on it.

As to the argument that the evidence of intention is only oral, I agree with counsel for the respondent that by itself, assertions about intentions must be considered carefully when they are self-serving. The Minister was not present and has no opportunity to bring contradictory evidence. That is why evidence of conduct and surrounding circumstances is important. Here, there is evidence of Maureen’s financial and work contributions to the electrical contracting business from its inception.

However, I have also considered the fact that the evidence is not exclusively that of Mervin and Maureen but of their accountant as well. Further, most of the evidence on which I have relied was given in 1992 when the sole issue before the Court was the plaintiff’s Charter challenge to subsection 74(2). The trust issue did not arise until after the 1992 hearing; it cannot be said that the plaintiffs’ evidence given in 1992 was tailored to fit a claim to a resulting trust.

I have taken account of Dickson J.’s admonition in Pettkus, supra, that a resulting trust is not available where the imputation of intention is impossible or unreasonable or where conduct is wholly ambiguous. In my view, the existence of an resulting trust is not impossible or unreasonable in the circumstances of this case. While there is some ambiguity in the evidence, as there likely will be in most resulting trust situations, the parties’ conduct was not wholly ambiguous or its association with a trust agreement altogether tenuous. On a balance of probabilities and considering all the evidence, I accept that the evidence is indeed consistent with a resulting trust.

I conclude that a resulting trust existed from the commencement of the sole proprietorship in 1973 whereby Mervin held 50 per cent of the business for Maureen. Subsequent transactions did not change that intention and the transfer of shares in 1978 legally recognized Maureen’s beneficial interest. There was no transfer of property that came within the operation of subsection 74(2) of the Act and there should be no attribution of taxable capital gains to Mervin. The Minister must issue a reassessment accordingly.

In view of my conclusion in respect of the resulting trust issue, it is not necessary to deal with the constructive trust or Charter questions.

Within 14 days of receipt of these reasons, counsel for the plaintiff shall prepare a formal of judgment consistent with the reasons and submit it to counsel for the defendant for agreement as to form. Counsel for the plaintiff shall thereupon convene a conference call with counsel for the defendant and the Court to finalize the form of the judgment. The parties may speak to cost at that time.

Plaintiff's motion granted.