Resulting Trusts Part 2: Joint Tenancy and Estate Planning

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

Last month’s article explored the legal concepts of resulting trusts and beneficial ownership of land.  There is a presumption that a “resulting trust” arises when property is held in the name of a party who provided no value for it.  The “legal owner” in whose name the property is held is considered to hold the property in trust for the true “beneficial owner” who actually did provide the value by which the property was acquired.  Prime examples of circumstances giving rise to resulting trusts are where a parent provides the purchase money for a property held in the name of an adult child or where the parent adds the child to title for no consideration.  The presumption of a resulting trust is rebuttable.  The child could demonstrate, for instance, that the transfer of the property interest was intended as an outright gift by the parent.

This month’s article is Part 2, because it just so happens that the Ontario Court of Appeal decided a case last December dealing with questions of beneficial ownership and resulting trusts in the context of estate planning that is worthy of attention.  In his reasons for the initial application decision that led to the appeal heard in the Court of Appeal, Justice Charney of the Superior Court of Justice had noted that the case was “a cautionary tale for persons who might be tempted to use joint tenancy as an estate planning mechanism to avoid the payment of probate fees.”

The case involved the residence of a Mr. J. that he had purchased in 2011 using the proceeds from the sale of another property that he had previously owned jointly with his former partner, Mr. T.  Mr. J. and Mr. T. had owned the other property as “joint tenants”, meaning that if one owner died, the other would receive the deceased owner’s interest by right of survivorship without the property interest entering the deceased owner’s estate and without requiring the payment of estate taxes or “probate fees”.  Mr. T. passed away and Mr. J. became the sole owner of the property by right of survivorship.  Mr. J. sold that property and used the proceeds to buy his new residence.

Mr. J. and Mr. T. had also made mirror wills in which they both named the other as sole beneficiary of their respective estates and named Mr. T.’s great-niece, Ms. R., as their alternate beneficiary.  Although the will didn’t apply to the property that was sold by Mr. J. (because Mr. J. and Mr. T. had owned the property as joint tenants), it was a relevant part of the factual background to the court case.  The year after he purchased his new residence, Mr. J. added Ms. R. to the title to his new residential property as a joint tenant.  Ms. R. didn’t live in the residence, but she would become the sole owner of the residence if Mr. J. predeceased her (similar to the way in which Ms. R. had been named as alternate beneficiary in the mirror wills made by Mr. T. and Mr. J.) and no probate fees would be payable.

Unfortunately, the relationship between Mr. J. and Ms. R broke down.  Based on a conversation with Ms. R.’s husband, Mr. J. came to believe that Ms. R had plans to sell Mr. J.’s residence and to buy another property where she and her husband and Mr. J. could live together.  In response, Mr. J. instructed his lawyer to “sever” the joint tenancy.  A transfer was registered by which Mr. J. conveyed his interest in the property to himself, with the result that he and Ms. R. were now co-owners of the property as “tenants in common” and not joint tenants.  Mr. J. and Ms. R. then each held separate 50% interests in the property. 

Justice Charney in the Superior Court and the Court of Appeal on appeal were tasked with determining whether Mr. J. had the right to sever the joint tenancy and what ownership situation currently exists.  Justice Charney found that Mr. J.’s transfer of an interest in his residence to Ms. R. involved a gift only of the right of survivorship.  Otherwise, Ms. R. held her interest in the property in trust for Mr. J. by way of resulting trust.  Justice Charney also found that Mr. J. was entitled to sever the joint tenancy.  The Court of Appeal agreed with Justice Charney’s decision on these points. 

However, the Court of Appeal did not agree with Justice Charney’s depiction of the resulting ownership situation.  Justice Charney’s opinion was that the right of survivorship that Mr. J. had gifted to Ms. R. still remained in effect as to a 50% interest in the property.  Mr. J. held a 50% interest as tenant in common in the property free and clear of any right of survivorship for Ms. R.  Ms. R. held a 50% interest as tenant in common in trust for Mr. J., but with a right of survivorship so that she would take over full legal and beneficial ownership of that 50% interest when Mr. J. died (if he still owned the property by then).  The Court of Appeal found instead that any right of survivorship disappeared when the joint tenancy was severed.  It could not continue to attach to the 50% interest that was held in the name of Ms. R.  By severing the joint tenancy, Mr. J. had effectively revoked the entirety of his gift of a right of survivorship, something that he was entitled to do while he was still alive.

Read the decision at:  2024 ONCA 875

Resulting Trusts and Beneficial Ownership of Property

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

There is a common law presumption that a transfer of land grants to the transferee an absolute right and title in the land (“beneficial ownership”).  However, there is also a presumption that a “resulting trust” arises when property is held in the name of a party who provided no value for it.  For instance, where a parent provides the purchase money for a property held in the name of an adult child or adds the child to title for no consideration, it is presumed that the child is not a beneficial owner and only holds title to the property in trust for the parent.  To rebut this presumption, the burden of proof rests on the child to demonstrate on a balance of probabilities that the property was received as an outright gift rather than being held in trust for the parent.

Under Ontario law, real property can be held personally or in trust for someone else.  When property is held in trust, the trustee is the legal title holder while the beneficiaries hold an unregistered beneficial interest in the trust property.  As there is no mechanism under Ontario’s Land Titles system of land registration to identify trust interests, the Land Register may not provide the full picture to those who are investigating property ownership.  Creditors looking to collect on debts are tasked with determining whether a registered owner holds a beneficial interest in a property or is merely holding title in trust.  A creditor who does not pay close attention risks pursuing a claim against a debtor who appears to own property only later to discover that the debtor has no real ownership interest in any property.  Just because a debtor is shown on title to be a registered owner does not mean that there is property against which to collect on a debt.

In a recent case, the Ontario Superior Court of Justice determined that a trial would be necessary to determine whether a registered owner of property held title in trust, thereby postponing the possible enforcement of a judgment against the registered owner’s recorded interest.  A creditor was seeking to enforce a judgment against a property held jointly by the judgment debtor and her mother.  The mother, seeking to avoid enforcement against the property, applied to the Court for a declaration that her judgment debtor daughter only held an interest in the property in trust for the mother.  The Court ultimately determined that the matter could not be decided on the basis of a paper record as a court application and that a mini trial would be necessary. 

Between 2016 and 2017, the mother and her late husband had added the judgment debtor to title of three properties they owned based on “natural love and affection”.  The Land Transfer Tax affidavits sworn in respect of the transactions stated: “Transfer from parents to themselves and their daughter for natural love and affection.”  In 2023, the creditor obtained judgment against the daughter for nearly $1.8 million. The judgment debtor daughter was found to have made false representations to the creditor in a transaction involving the supply of food products on credit. The daughter had failed to pay for these products and it was determined that a fraud had been committed. The creditor wanted to enforce its judgment against the properties owned (or apparently owned) by the daughter.

There were two issues examined by the Court in its ruling. The first issue was whether the transfer from parents to daughter was a gift, in which case the daughter was a beneficial owner of the properties, or created a resulting trust, in which case the daughter was only holding title in trust for her parents.  The Court referred to the seminal Supreme Court of Canada case of Pecore v. Pecore, which held that a transfer of property from a parent to an adult child without consideration leads to the rebuttable presumption of a resulting trust for the benefit of the parent.  In this case, the onus was on the judgment creditor to prove that the transfer of title was a gift and did not give rise to a resulting trust (so that the creditor could collect its judgment debt against the property). The Court found that this issue could not be resolved unless a mini trial was held.

The second issue was whether the entry of the daughter’s name in the Land Register as a registered owner in and of itself meant that she had a beneficial interest in the real estate properties (rather than just holding the property in trust for her parents).  Here the judgment creditor relied on a case called Bao v. Mok to argue that the Land Titles parcel register is definitive and makes the judgment debtor daughter a beneficial owner.  However, the Court found that the circumstances in the Bao v. Mok case were distinguishable.  There, land had been transferred to a bona fide purchaser for value without notice that the transferor (the registered owner on title) was not actually the beneficial owner of the property but was holding it in trust for someone else.  The bona fide purchaser for value was entitled to rely on the Land Register and didn’t have to investigate behind it to see whether a trust interest was present.  The Court found that the situation of a judgment creditor seeking to enforce a judgment against property is different.  The Land Titles Act doesn’t protect the creditor in the way that a bona fide purchaser for value without notice is protected.  Creditors beware!

Read the decision at: 2024ONSC 6155

Fraudulent Conveyances

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE: 

According to Ontario’s Fraudulent Conveyances Act, any conveyance of real property or personal property made with the intent to defeat, delay, or defraud creditors or others of their just and lawful actions is void as against such persons.  You can’t transfer ownership of your property to someone else in order to keep it out of the hands of your creditors.  The Courts have established a system for identifying the types of behaviour captured by fraudulent conveyance legislation. These guidelines, referred to as the “badges of fraud”, include:

a)    the donor continued in possession and continued to use the property as his own;

b)    the transaction was secret;

c)    the transfer was made in the face of threatened legal proceedings;

d)    the transfer documents contained false statements as to consideration;

e)    the consideration is grossly inadequate;

f)     there is unusual haste in making the transfer;

g)    some benefit is retained under the settlement by the settlor;

h)    embarking on a hazardous venture; and,

i)      a close relationship exists between parties to the conveyance.

Courts have interpreted the term “creditors and others” broadly to include potential beneficiaries of a guarantee (even if no demand has been made) and future creditors. In some cases, courts have held that the presence of existing creditors at the time of a transaction is not required to establish an intent to defeat creditors. In situations where there has been good and valuable consideration (i.e. an actual conveyance for real value), a transaction may still be deemed a fraudulent conveyance if it was not conducted in good faith or if it was made to an individual who knew of the debtor’s intent to defraud.  Some transactions like those done for estate planning may appear legitimate, but property transfers may be considered fraudulent conveyances and set aside where there is evidence that the estate planning was undertaken because of outstanding debts.

A case considered by the Court of Appeal for Ontario involved a creditor seeking to enforce a 2009 judgment against property owned by the spouse of the debtor.  The debtor had borrowed $250,000 and defaulted on the loan.  The creditor obtained default judgment against the debtor (“default” because the debtor didn’t defend the proceeding) for $268,920.  The debtor claimed to have no assets to pay the judgment, asserting that he dealt only in cash, kept no business records, and had a gambling problem. The debtor’s family home and a cottage were both registered in his wife’s name and the debtor claimed that he had made no contribution toward the purchase of the properties. The debtor also alleged that his wife made all mortgage payments from the income earned from her part-time jobs.

In 2018, the creditor commenced a new action against the debtor and the debtor’s wife claiming that the debtor held a beneficial interest in his wife’s properties against which the 2009 judgment could be enforced.  The creditor alleged that the transfer of title to the properties into the debtor’s wife’s name and not into their names jointly (or into the debtor’s name alone) constituted a fraudulent conveyance.  While the wife passed away prior to the trial, there was evidence from her admitted in the trial that she was to be the sole owner of the properties to safeguard them from any future debts arising from the debtor’s gambling habit.  She had attempted to demonstrate how she was able to pay for the mortgages without contributions from her husband.  The wife’s total income from 2010 to 2019 was only $15,471, yet bank records showed total debits to her account of $449,668 in the same period.  The source of these funds was redacted in the records, and neither the debtor’s wife nor her legal counsel disclosed the origin of the funds.  As the trial judge found no evidence that the debtor himself had provided any of the original funds to purchase the properties, the Fraudulent Conveyances Act claim seeking a declaration that the debtor had an ownership interest in the properties failed.  The debtor had never owned the properties or transferred them to his wife.

However, that’s not the end of the story.  The trial judge did find that the debtor’s wife had received $434,000 from unidentified sources and drew an adverse reference against her for the lack of disclosure regarding the sources of the funds. The trial judge also did not accept the claim that the debtor made no contributions to paying the mortgages or the household finances generally.  The judge considered that each spouse would be apportioned an equal share of the unidentified source funds, meaning that the debtor was considered to have contributed $217,000 in value to his wife. On that basis, the trial judge ordered that the transfer of $217,000 was a fraudulent conveyance and void as against the creditor.  He ordered the debtor’s wife’s estate to pay the creditor $217,000, which fell short of the full amount owed under the 2009 judgment.

The creditor appealed the decision to the Court of Appeal, arguing that the trial judge erred both in not attributing a 50% beneficial interest in the properties to the creditor and also in his analysis and computation of the amount of cash to be awarded to the creditor.  The Court of Appeal accepted the trial judge’s finding that that there was no fraudulent conveyance of real property.  However, the Court of Appeal found that the trial judge erred in designating only $217,000 as the amount fraudulently conveyed by the debtor to his wife (to be paid by the wife’s estate to the creditor).  The Court of Appeal decided that the correct interpretation of the trial judge’s adverse inference was that the entire $434,000 was attributable to the debtor and available to the creditor for execution of its judgment.

Read the decision at:  2024 ONCA 733 (CanLII).