Reversing the regretted farm transfer and other uses of the resulting trust

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

Most often (but not always) with the best of intentions, a parent may transfer part of his or her ownership interest in a farm property to a child for little or no consideration.  In some cases, the parent intends to gift the ownership interest outright with the understanding that the child will be the true owner of the interest going forward.  In other cases, the transfer might be in connection with a plan to operate the farm with the child, who will contribute labour to the operation going forward in repayment to the parent.  Often the parent makes the transfer in contemplation of an estate plan or farm succession plan; for instance, a parent may add a child on title to a property as a joint tenant so as to avoid payment of probate tax in the future on the death of the parent, at which time the parent’s ownership interest will pass automatically to the child. 

Unfortunately, life after a gratuitous transfer of ownership can fall far below the expectations of the parent.  Parent and child may not get along as joint operators of a farm.  A child may turn out to be an unexpected prodigal.  Whatever the reason, parents sometimes come to regret having transferred the ownership interest and look for ways to reverse the transfer.  In certain circumstances, the law will allow the parent, the transferor, to recover ownership from the child, the transferee, on the basis of a “resulting trust”.

Canadian law presumes that the transfer of ownership results from a fair bargain, not a gift.  If a transfer is made without proper consideration in return (i.e. a gratuitous transfer), the law normally presumes a resulting trust in favour of the transferor.  The transferee is presumed to be holding legal title in trust for the transferor’s benefit – the transferee may be registered as legal owner of a certain interest on title to a property, but the transferor remains the beneficial owner of that interest, which is to be returned to the transferor on demand.  The presumption is rebuttable by the transferee, who may show on a balance of probabilities that the transferor had an intention to gift the ownership interest outright.  The transferee might also show that the transfer was not in fact gratuitous at all – that there was an exchange of consideration and a “fair bargain”.

If persuaded that a transfer of ownership was gratuitous, and that the transferor did not intend to make a gift, the Court may make an order setting aside the original transfer and restoring full legal ownership to the transferor.  Although the presumption of resulting trust is a legal tool of general application, the Court’s analysis is heavily fact-driven, and the outcome of each case will depend on its particular circumstances. 

Ontario’s Court of Appeal has found that the resulting trust continues to apply where assets are held within a corporation, and the transferee receives shares in the corporation without proper consideration; the focus of the analysis should be on the substance of the transaction, not the form.  The transferee’s interest in the assets as a shareholder in the corporation would be subject to the presumption of resulting trust, rebuttable by showing that there was an intention to gift the interest in the assets to the transferee.  Where the resulting trust is found to apply, the Court could order that legal ownership of the shares be restored to the transferor.

A resulting trust can also be presumed in situations where two parties acquire property jointly, but only one of the parties puts up the consideration paid in the transaction.  Depending on the circumstances, the party who paid the consideration may be entitled to the beneficial ownership of the entire property while the other non-contributing owner holds his or her legal ownership interest in trust for the other.

Claims based on a resulting trust argument sometimes arise in the context of estate proceedings, after the transferor parent has passed away.  As noted above, a surviving joint tenant will become the full owner of a jointly owned property where the other joint tenant dies; the jointly owned property does not become part of the estate of the deceased available for distribution to beneficiaries under a will or otherwise.  Those beneficiaries may argue that a jointly held property should nevertheless form part of the estate of a deceased parent on account of a resulting trust. 

Similarly, in bankruptcy proceedings, creditors of a bankrupt may argue that a certain property legally owned by another party forms part of the bankrupt’s estate (for purposes of satisfying the bankrupt’s debts) by way of a resulting trust.  And the opposite situation can occur as well, with creditors of an alleged beneficial owner of a property arguing against the inclusion of the property in the estate of the bankrupt legal owner so as to keep it out of the hands of the bankrupt’s creditors.