Constructive and Resulting Trusts: Challenging Tax Boundaries

Catherine Brown and Cindy L. Rajan* PRÉCIS Au cours des dernières années, un nombre croissant de demandes d’allégement fiscal ont été présentées fondées sur l’existence supposée d’une fiducie judiciaire ou d’une fiducie par déduction. Les décisions du fisc à l’égard des fiducies judiciaires traduisent l’incertitude doctrinale entourant les fiducies judiciaires à titre de mesure corrective ou de droit fondamental. La fiducie découlant de la loi, bien qu’elle ne fasse pas l’objet du même débat doctrinal, doit être prouvée par une intention commune évidente. Un examen de la jurisprudence dans ce domaine permet de découvrir plusieurs questions récurrentes. La compétence de la Cour canadienne de l’impôt à établir l’existence d’une fiducie judiciaire corrective constitue une de ces questions. La Cour canadienne de l’impôt a également été appelée à se prononcer sur le traitement fiscal approprié aux parties lorsqu’une fiducie judiciaire a été établie par un tribunal supérieur compétent. Une autre question récurrente est le moment de l’établissement d’une fiducie judiciaire : s’agit-il du moment de l’enrichissement sans cause ou de l’acte préjudiciable, lorsque l’obligation de restitution survient, ou d’un autre moment déterminé par le tribunal? Cette question du moment de la création de la fiducie est étroitement liée au débat doctrinal sur la nature de la fiducie judiciare. Enfin, la question fondamentale de savoir si les fiducies judiciaires et les fiducies par déduction devraient être admises pour l’application de la Loi de l’impôt a été soulevée à maintes reprises, mais aucune réponse décisive n’a été donnée. Bien qu’un certain nombre de solutions à ces questions aient été proposées dans la jurisprudence, il faudra peut-être finalement s’en remettre à l’intervention du législateur pour résoudre le problème. Des suggestions de modifications législatives sont apportées en conclusion de cet article.

* Catherine Brown of the Faculty of Law, University of Calgary, and Cindy L. Rajan, CA, of Felesky Flynn, Calgary. The authors wish to thank Bruce Wakeham for his research assistance and officers of Revenue Canada, Calgary District Office, for their insightful comments.

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ABSTRACT In recent years, an increasing number of claims have been made for tax relief based on the presumed existence of a constructive or resulting trust. The tax decisions in respect of constructive trusts reflect the doctrinal uncertainty surrounding the constructive trust as a remedy or a substantive right. The resulting trust, while not plagued by the same doctrinal debate, requires a clear finding of common intention. A review of the tax jurisprudence in this area reveals several recurring issues. One issue is the jurisdiction of the Tax Court of Canada to determine the existence of a remedial constructive trust. The Tax Court also has been called upon to determine the proper tax treatment of the parties in situations in which a constructive trust has been found by a competent superior court acting within its jurisdiction. Another recurring issue is the point in time at which a constructive trust arises: is it the time of the unjust enrichment or wrongdoing, when the duty to make restitution arises, or some other time determined by the court? This timing issue is closely tied to the doctrinal debate as to the nature of the constructive trust. Finally, the fundamental issue of whether constructive and resulting trusts should be recognized at all for purposes of the Income Tax Act has been raised on numerous occasions, but not conclusively determined. While a number of solutions to these issues have been advanced in the case law, their resolution may ultimately rely on legislative intervention. The article concludes with some suggestions for such legislative amendment.

INTRODUCTION Since the decision of the Supreme Court of Canada in Pettkus v. Becker,1 there has been a marked increase in the number of claims by taxpayers for tax relief based on the notion of a constructive or resulting trust. These claims have arisen in matrimonial situations,2 in the case of im- proper conduct or unjust enrichment,3 to avoid a deemed disposition on death,4 or to gain a more favourable overall tax result on the disposition of property.5 These claims raise interesting issues about the proper tax treatment of the parties while the constructive or resulting trust is in existence, as well as at the time of disposition of the trust property. Constructive and resulting trusts also raise potential attribution issues and

1 [1980] 2 SCR 834; 117 DLR (3d) 257. 2 Stockman v. The Queen, [1996] 1 CTC 3001 (TCC). 3 Fletcher v. MNR, 87 DTC 624; [1987] 2 CTC 2341 (TCC); and Forest Oil Corpora- tion v. R, [1996] ETC 2192 (FCTD). 4 Anderson Estate v. The Queen, 95 DTC 758 (TCC). 5 Wong v. The Queen, 96 DTC 3223(S); [1996] 1 CTC 2655 (TCC); and Collins v. The Queen, 96 DTC 1034 (TCC).

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 661 the more general question of whether the statutory regime in subdivision k of the Income Tax Act,6 otherwise applicable to express trusts, is intended to apply to constructive and resulting trusts. These issues and some suggestions for their resolution are the subject of this article. Under current Canadian law, a constructive trust may arise in two situations: first, as a substantive right, particularly in cases of misconduct by a fiduciary (non-remedial constructive trust); and second, looking to recent Canadian trends, as a remedy for unjust enrichment (remedial constructive trust). As discussed further below, a remedial constructive trust is a remedy granted by a court of equity in its discretion. As a remedy, the constructive trust has arisen most frequently in cases of matrimonial breakdown and regardless of the intention of the parties; however, it is clear that the constructive trust is an evolving concept that extends far beyond matrimonial cases. The resulting trust also is often considered in the matrimonial context. Unlike the finding of a remedial constructive trust, the finding of a resulting trust does not require the court to exercise its equitable discretion. Resulting trusts arise by operation of law in three situations: first, where a trustee holds property under an express trust that fails; second, when A purchases property and title is taken in the name of B; and, finally, when A voluntarily transfers property into the name of B or into the name of A and B jointly. Common to each of these resulting trusts, and differing from the constructive trust, is the notion that the parties intended that the property be held in trust. Tax issues arising out of the existence of a resulting or constructive trust may arrive before a court in one of two ways. First, a hopeful taxpayer may claim for relief based on a finding by the Tax Court that a constructive or resulting trust was in existence, with consequences for beneficial ownership and taxable income. Such claims may raise jurisdictional issues in respect of remedial constructive trusts which do not arise in respect of non-remedial constructive trusts or resulting trusts, particularly if the matter is heard in the Tax Court. Alternatively, a dispute may come before the Tax Court if another court of competent jurisdiction has made a finding of a constructive or resulting trust, and the taxpayer and the minister of national revenue (“the minister”) disagree on the specific tax consequences that should follow. In the absence of specific direction in the Act, the starting point in analyzing the proper tax treatment of the parties alleging or otherwise governed by a relationship of constructive or resulting trust is found in the rules of private law. As will be seen, determination of the proper tax treatment of the parties is further complicated by the position in Canadian tax law that the trust, or at least a trust for purposes of subdivision k, is a separate taxpayer for tax purposes. If a constructive or resulting trust is

6 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unless otherwise stated, statutory references in this article are to the Act.

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CONSTRUCTIVE TRUSTS Historical Background The Canadian position on constructive trusts has been set out by the Supreme Court of Canada in a number of decisions, including Pettkus, Sorochan,7 Rawluk,8 and Beblow.9 Its complex history can be summarized by the comments of Sarchuk J in Karavos: In Rawluk v. Rawluk,... Mr. Justice Cory, speaking for the majority, re- viewed the doctrine of constructive trust. He noted that under traditional English law, constructive trust was regarded as a substantive institution similar to an express trust, i.e. requiring a finding of an actual or presumed intention, without making a distinction between implied, resulting or constructive trusts. In the United States, on the other hand, the constructive trust had long been recognized, not as an institution, but as a broad restitutory device. According to Mr. Justice Cory, Mr. Justice Laskin’s reasons in Murdoch v. Murdoch indicate that he was closely aligned to the American approach, and Mr. Justice Dickson’s reasons in Pettkus v. Becker “clearly demonstrate the broad and equitable nature of the remedial constructive trust and its applicability to any property dispute.” Until Pettkus, constructive trust was viewed largely in terms of law of trusts, hence the need for the existence of an actual fiduciary relationship. In Pettkus, the Court moved to an approach more in line with restitutory principles by explicitly recognizing constructive trust as one of the remedies for unjust enrichment. According to Mr. Justice Cory: These cases show that in Canada the doctrine of remedial constructive trust has been accepted for almost a decade as an important remedial device whose prime function is to remedy situations of unjust enrichment.10 The constructive trust established under the Pettkus test was essentially a response to the need to find an equitable method of dividing property in cases of matrimonial dispute. It is commonly referred to as a remedial constructive trust since its purpose is to prevent unjust enrichment, and it requires the court to exercise its equitable discretion to grant

7 Sorochan v. Sorochan, [1986] 2 SCR 38; 29 DLR (4th) 1. 8 Rawluk v. Rawluk, [1990] 1 SCR 70; 65 DLR (4th) 161. In addition to Pettkus, Sorochan, and Rawluk, see Murdoch v. Murdoch, [1975] 1 SCR 423; 41 DLR (3d) 367; Rathwell v. Rathwell, [1978] 2 SCR 436; 83 DLR (3d) 289; and Hunter Engineering Co. v. Syncrude, [1989] 1 SCR 426. 9 Peter v. Beblow, [1993] 1 SCR 980; (1993), 101 DLR (4th) 621 (SCC). 10 Karavos v. The Queen, 96 DTC 1001, at 1005-6; [1996] 1 CTC 2206, at 2214 (TCC). Sarchuk J went on to add, “In a recent decision of the Supreme Court Canada, Peter v. Beblow, involving the doctrine of constructive trust, both Mme. Justice McLachlin and Mr. Justice Cory referred to constructive trust as an important judicial means of remedying unjust enrichment. They also noted that other remedies were available such as monetary damages which in some instances might be a more appropriate remedy.”

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 663 the remedy. Under the Pettkus test, three requirements must be satisfied as a condition to a finding of unjust enrichment:11 an enrichment, a corresponding deprivation, and the absence of any juristic reason for the enrichment, such as a contract or a gift. In Canada, this form of remedial constructive trust has evolved beyond the matrimonial context.12 The history of the constructive trust has created uncertainty about its current doctrinal basis.13 Although it has been argued that the current position in Canada is that the constructive trust is to be regarded as a remedy and not a substantive institution,14 it is not clear that a court would refuse to impose a non-remedial constructive trust on the basis of the British institutional notion of the trust as a cause of action in appropriate circumstances.15 As will be seen, the specific nature of the constructive trust may have important tax consequences since at least one Tax Court decision appears to have distinguished between the remedial and non-remedial constructive trust when providing tax relief.16 Notwithstanding decisions of the Supreme Court of Canada that focus on the constructive trust as a remedy, the break away from the traditional

11 These elements were previously set out in the dissenting judgment in Rathwell, supra footnote 8, by Dickson J (as he then was), with Laskin CJ (as he then was) and Spence J concurring. 12 See, for example, Syncrude, supra footnote 8; Lac Minerals Ltd. v. Int’l Corona Resources (1989), 61 DLR (4th) 14 (SCC); and Sarchuk J’s comments in Karavos, supra footnote 10. 13 For a discussion of the evolution of the nature of the constructive trust as a substantive right or a remedy, see John L. Dewar, “The Development of the Remedial Constructive Trust” (February 1984), 6 Estates and Trusts Quarterly 312-65; and D.W.M. Waters, “The Constructive Trust in Evolution: Substantive and Remedial” (June 1991), 10 Estates and Trusts Journal 334-84. 14 See, for example, the comments of Sarchuk J in Karavos, supra footnote 10. 15 See Eileen E. Gillese, The Law of Trusts (Toronto: Irwin Law, 1997), 106-7: “Many legal academics view all constructive trusts as a remedy for a cause of action based on unjust enrichment or breach of confidence. However, no single theory or principle ex- plains all the situations in which constructive trusts will be found to exist or be imposed. We do know that the constructive trust exists as a cause of action based on the English approach. We also know that the constructive trust as a remedial device has been accepted by Canadian courts.” Also see Dewar and Waters, supra footnote 13. 16 For example, see Fletcher, supra footnote 3, where the court found that the constructive trust was a trust for purposes of subdivision k. McLachlin J discussed the remedial nature of the constructive trust in Beblow, supra footnote 9, at 995-96; 649: The other difficult aspect of this case is the question of whether the remedy which the trial judge awarded—title to the matrimonial home—is justified on the principles governing the action for unjust enrichment. Two remedies are possible: an award of money on the basis of the value of the services rendered, i.e., quantum meruit; and the one the trial judge awarded, title to the house based on a constructive trust.... As I wrote in Rawluk, supra, for a constructive trust to arise, the plaintiff must establish a direct link to the property which is subject to the trust by reason of the plaintiff ’s contribution. This is the notion underlying the constructive trust in Pettkus v. Bekker, supra, and Sorochan v. Sorochan, supra, as I understand those cases. It was also affirmed by La Forest J. in Lac Minerals, supra.

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British approach of a constructive trust as a substantive right has not been a clean break. Although the remedial constructive trust is clearly part of our common law, the non-remedial constructive trust also appears to remain.

Tax Cases The nature of the constructive trust for tax purposes is important for two reasons. First, if the constructive trust is an equitable remedy ordered by a court in its discretion, the question arises whether the Tax Court of Canada, as a court of first instance, has jurisdiction to find, or even to consider the existence of, a constructive trust. Second, whether the constructive trust is a remedy imposed by a court of competent jurisdiction or whether it is a substantive right raises the issue of timing surrounding the creation of the trust, an issue about which there appears to be some disagreement.17 Claims for tax relief on the grounds of a resulting or constructive trust began in earnest in Canada in the 1990s18 after the decision in Fletcher.19 Previously, few cases considered the resulting or constructive trust relationship, although early claims indicated some promise that such a relationship might be recognized between the parties for tax purposes.20 A number of the recent resulting and constructive trust cases involve spouses, including Nelson,21 Holizki,22 and Collins.23 Unlike the 1980s when spouses attempted to split income from work activities on the basis of a partnership, the 1990s mark the advent of attempts by taxpayers to split proceeds from the disposition of property, which they argue is beneficially owned by both. The argument, particularly in the case of constructive trusts, is based largely on matrimonial property law concepts.24

17 For example, does the trust arise at the date of the court order, or when the unjust enrichment arose? See Waters, supra footnote 13, and the discussion below under the heading “When Does the Trust Arise?” 18 Until recently, attempts to split income, particularly between spouses, were based on partnership or more rarely on the existence of a constructive trust as an alternative to a claim of partnership. See, for example, Boles v. MNR, 82 DTC 1643; [1982] CTC 2638 (TRB); Feder v. MNR, 81 DTC 311; [1981] CTC 2327 (TRB) (where the taxpayer was successful); and Erickson v. MNR, 88 DTC 1705; [1988] 2 CTC 2380 (TCC). 19 Supra footnote 3. 20 See, for example, Feder, supra footnote 18; Erickson, supra footnote 18; and Savoie v. The Queen, 93 DTC 552; [1993] 2 CTC 2330 (TCC). 21 Nelson et al. v. MNR, 91 DTC 37; [1990] 2 CTC 2525 (TCC). 22 Holizki v. The Queen, 95 DTC 5591; [1995] 2 CTC 420 (FCTD). 23 Collins, supra footnote 5. 24 A similar argument was made before the Supreme Court of Canada more than 25 years ago, in Sura v. MNR, 62 DTC 1005; [1962] CTC 1 (SCC). Frank Sura argued that since he lived in Quebec, a province that had a community of property regime, half his salary and rental income should be taxed to his wife. The Supreme Court of Canada held that income from the property was under the control of Mr. Sura, that he received the benefit of it, and that it should therefore be taxed to him. The court took a quite different (The footnote is continued on the next page.)

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Other decisions rendered since the late 1980s provide an eclectic view of the range of circumstances in which the taxpayer will argue, or the Tax Court will find, a constructive trust. In Fletcher, the constructive trustee was a wrongdoer. In Forest Oil,25 the Federal Court—Trial Division found a constructive trust as a remedy for unjust enrichment by the Crown. In Savoie,26 a constructive trust was found to limit tax liability of a taxpayer’s spouse under section 160. In Funk,27 the court found a constructive trust to enable a taxpayer, as beneficial owner of the equitable estate in a development property, to deduct certain construction expenses. Throughout this broad spectrum of circumstances in which a constructive trust may arise, there is evidence that the two historical categories in which such trusts have been found for tax purposes—cases of misconduct (the British approach) and a remedy for unjust enrichment (the US and current Canadian approach)—remain. There is also evidence of an emerg- ing trend in income splitting in which the taxpayer (the “volunteer”) appears to be doing some retroactive tax planning based on the argument that a constructive or a resulting trust exists. Each of these categories will be dealt with in turn.

Cases of Misconduct The ground-breaking decision in the recognition of a constructive trust for tax purposes was Fletcher. In that case, the taxpayer, a non-resident of Canada, gave the wrongdoer, Mr. Hyman, power of attorney to sell his home. Mr. Hyman used the sale proceeds to acquire a second mortgage on a piece of tarsands property in which he was personally involved. The value of the tarsands property fell, and the second mortgage became worth- less. The taxpayer sought to claim a capital loss under section 115 on the disposition of his capital interest in a Canadian trust. The taxpayer’s argument based on the existence of an express trust failed. Tax planners were then startled to learn that not only was a constructive trust to be recognized for tax purposes, or at least for purposes of section 115, but in addition, the constructive trust was to be recognized as arising at a date some five years before the date of the actual judgment.28 In fact, the

24 Continued... view of the ownership of the property upon Mr. Sura’s death and confirmed that his wife would be the co-owner of the community property with respect to succession duties and estate tax. Unfortunately, the logic in Sura may apply only if the parties have ended the community of property regime by death or divorce. Constructive and resulting trusts may therefore remain as ways to effectively split tax liability while the parties are together. 25 Forest Oil, supra footnote 3. 26 Supra footnote 20. 27 Funk v. MNR, 92 DTC 1296; [1992] 1 CTC 2349 (TCC). 28 See also “Revenue Canada Round Table,” in Report of Proceedings of the Fortieth Tax Conference, 1988 Conference Report (Toronto: Canadian Tax Foundation, 1989), 53:1-188, question 31, at 53:47, where Revenue Canada recognized the constructive trust for tax purposes in response to a question that referred to the Fletcher decision: “It is our (The footnote is continued on the next page.)

(1997), Vol. 45, No. 4 / no 4 666 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE constructive trust was deemed to have arisen at the time of the misappropriation of funds by Mr. Hyman.29 Sarchuk J explained the reason as follows: [T]here was a fiduciary relationship between the appellant and Hyman, which relationship gave rise to the placing of trust and confidence by Fletcher in the fiduciary. This relationship existed at the time that the “misappropriation” by Hyman took place. Furthermore that “misappropriation” occurred while Hyman was acting within the general scope of his fiduciary duty. It is my understanding of the various decisions including Pettkus v. Becker that equity imposes express trust obligations upon the fiduciary who abuses that trust and confidence. Applying these principles to the evidence in the present appeal the existence of a constructive trust is obvious and the fiduciary, Hyman, in these circumstances was a constructive trustee.30 Sarchuk J’s finding of a constructive trust in Fletcher is consistent with the reasoning of the British courts that a non-remedial constructive trust is imposed in cases where a fiduciary is guilty of wrongdoing.31

Unjust Enrichment The remedial constructive trust also has found its way into the tax jurisprudence. In 1996, the Federal Court—Trial Division was faced with the issue of constructive trusts and unjust enrichment in Forest Oil. In that case, the minister refused to refund overpaid taxes under the former Pe- troleum and Gas Revenue Tax Act. Gibson J concluded that the doctrine of unjust enrichment was firmly entrenched in Canadian law and held that it was open to the court to find a constructive trust by reason of unjust enrichment flowing from an absence of juristic reason for the enrichment of the minister. In short, the overpayment was to be returned to the taxpayer on the basis of “principles of equity and a lack of clear language to the contrary in the Act.”32

28 Continued... view that a constructive trust will be a trust that is subject to the application of all relevant provisions of the Act. In these trusts, the constructive trustee usually has control of the trust property within the meaning of subsection 104(1) of the Act. Such a trust would be deemed to have been created at the time the property or control thereof is acquired by the ultimate constructive trustee, or later on, as the circumstances may require. Normally, the time of the court judgment would not be relevant to this determination. In our opinion, a constructive trust would be a personal trust within the meaning of the definition contained in subsection 248(1) of the Act.” 29 It may be of some significance that in Fletcher, Sarchuk J considered a prior civil proceeding with respect to the property. The language used by the judge in the civil matter implied that a constructive trust relationship arose between the parties at the time of the misappropriation. Sarchuk J stated, supra footnote 3, at 628; 2347: “While the learned trial judge did not specifically state that a constructive trust had been created that conclusion is implicit in his reasoning. Although I am not bound by the judgment it is relevant to the issues before me and is entitled to careful consideration.” 30 Ibid. 31 It followed that Mr. Fletcher could hold a capital interest in the trust for other purposes of the Act, including the disposition rules. It also followed that he could claim a loss on the disposition of his capital interest under section 115. 32 Forest Oil, supra footnote 3.

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Volunteers Initial attempts to rely on the doctrine of unjust enrichment enunciated in Pettkus have met with little success in the Tax Court where taxpayers have “volunteered” their constructive trust relationship. In fact, attempts to split income on the basis of a constructive trust in harmonious family situations have generally been met with considerable skepticism by the Tax Court and, it seems, are considered both inappropriate and tax-motivated. In Nelson, Sarchuk J stated: [T]he doctrine of constructive trust is considered a valuable remedial device the primary purpose of which is to remedy situations of unjust enrichment and which has more recently been utilized particularly in marital property disputes. In such cases it is fair to say that the parties “have at each other with considerable gusto” and the assertions of unjust enrichment are thoroughly and methodically canvassed. That is not the norm in appeals under the Income Tax Act such as this.33 Sarchuk J reached a similar conclusion in Karavos, where both the husband and the wife reported in their income tax returns one-half of the proceeds from the sale of a restaurant held in Mr. Karavos’s name. In finding that no constructive trust existed, Sarchuk J stated unequivocally that to make the inquiry necessary over the “totality of a marital relationship... is inappropriate in an income tax context.”34 Attempts to split income by virtue of a constructive trust were also defeated by Bowman J in Collins. In that case, the taxpayer and his wife owned the shares of their respective corporations in such a manner as to avoid the associated corporations provisions in the Act. Shares of one of the corporations, Sherkston Resorts Inc. (“Sherkston”), were sold at a profit. Mr. Collins, the registered owner of the Sherkston shares, argued the existence of a constructive trust in an attempt to split the gain thereon with his wife. Bowman J made short work of the taxpayer’s assertion. He found that even if unjust enrichment and corresponding detriment could be found, there was no absence of juristic reason for the enrichment and deprivation. In fact, according to Bowman J, the juristic reason for Mr. Collins’s ownership of the Sherkston shares was that the two intelligent and profes- sionally advised spouses chose to arrange their affairs in this way.35 Other Tax Court decisions involving volunteers and constructive trusts have met with better results for the taxpayer. In Anderson Estate36 and Savoie, both involving family situations, the Tax Court found sufficient evidence of contribution to support a claim of beneficial ownership in the property.37 In Anderson Estate, there was no need to find a constructive

33 Nelson, supra footnote 21, at 40-41; 2530. 34 Karavos, supra footnote 10, at 1006; 2215. 35 Collins, supra footnote 5. 36 Anderson Estate, supra footnote 4. 37 It is perhaps ironic that in both of these cases the so-called constructive trustee was deceased and could provide no evidence.

(1997), Vol. 45, No. 4 / no 4 668 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE trust, according to Mogan J, since the property had already been transferred to the beneficial owner pursuant to minutes of settlement. The only issue to be resolved was whether the claimant had a beneficial interest in the property before the taxpayer’s death.38 If so, subsection 70(5) could not apply in respect of the transferred property on the death of the testator and legal title holder, since it was already beneficially owned by the claimant before the testator’s death.39 That beneficial interest was found on the evidence. Savoie involved the beneficial ownership of land by a taxpayer who had been married to her husband for over 30 years and with whom she had raised eight children. Bowman J found both a constructive and a resulting trust.40 Therefore, a sufficient interest in the subject property was held by the transferee to avoid liability under subsection 160(1) for the tax liability of the transferor/constructive trustee.

RESULTING TRUSTS The Resulting Trust at Common Law Resulting trusts, like constructive trusts, arise by operation of law. How- ever, a key element of the resulting trust is the inferred or presumed intention to create a trust.41 The circumstances under which a resulting trust will arise can be traced to two House of Lords decisions, Pettitt42 and Gissing,43 neither of which produced a majority opinion. Nonetheless, it is clear from these cases that

38 Mogan J stated that he was certain that a court of competent jurisdiction would have imposed a constructive trust had the parties not resolved the matter by minutes of settlement. 39 In Anderson Estate, the deceased taxpayer was cared for by his deceased wife’s sister for almost 50 years. In issue was whether this care entitled the latter to part of Anderson’s farm property. 40 Contrast Savoie, supra footnote 20, with the concurrent section 160 case of Ramey v. The Queen, 93 DTC 791; [1993] 2 CTC 2119 (TCC). In Ramey, Bowman J referred to the “compelling evidence” in Savoie and held that there was insufficient evidence to support the doctrine of constructive trust. 41 As discussed by Dickson J (as he then was) in Rathwell, supra footnote 8, at 452-53; 304-5: 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.... The courts are looking for a common intention manifested by acts or words that property is acquired as a trustee.... The difficulty experienced in the cases is the situation where no agreement or common intention is evidenced, and the contribution of the spouse without title can be characterized as performance of the usual duties growing out of matrimony. There are many examples of this.... Some of these situations may be analyzed as agreement or common intention situations. Such intention is generally presumed from a financial contribution. The doctrine of resulting trusts applies. In others a common intention is clearly lacking and cannot be presumed. The doctrine of resulting trust then cannot apply. It is here that we must turn to the doctrine of constructive trust. 42 Pettitt v. Pettitt, [1970] AC 777 (HL). 43 Gissing v. Gissing, [1971] AC 886 (HL).

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 669 a common intention must be found, and such intention cannot be found or imputed if it is not supported by the evidence.44 While the resulting trust is not plagued by the same doctrinal debate as the constructive trust as to whether it is a remedy or a substantive right, it is not without its difficulties since the requisite element of intention must be found to establish the trust relationship.

Tax Cases Tax cases in which resulting trusts are considered rely in large measure on the tests set out in Pettkus and in Rathwell. For example, in describing the resulting trust in Karavos, Sarchuk J referred to the reasoning of the Supreme Court in Rathwell: In Rathwell v. Rathwell, the Supreme Court of Canada confirmed that a resulting trust may arise in circumstances where the parties have a “common intention” that the beneficial interest should not belong solely to the person holding legal title but is to be shared between such persons. Such common intention can be ascertained by examining whether evidence exists of an express declaration of common intention that the non-titled party was to have a beneficial interest in the property. The Supreme Court also noted that it is appropriate for a court to consider whether a “common intention” existed by examining the facts and circumstances surrounding the acquisition of the property. If the person without title has contributed to acquisition or improvement of the property the doctrine of resulting trust may be engaged.45 In recent years, a number of tax decisions have grappled with the resulting trust, most commonly in situations where tax relief is being sought by the taxpayer. These cases have met with mixed results and have created additional confusion about the facts necessary to support either a constructive or a resulting trust. In general, however, those tax cases in which a resulting trust has been found have expressly relied on a finding of intention by the parties, which either has been directly communicated or can clearly be inferred from the evidence.

44 The inherent difficulties with the test of common intention were summarized in Pettkus, supra footnote 1, by Dickson J (as he then was) at 842-43; 270: “In Murdoch, it was held that there was no evidence of common intention. In Rathwell, supra, common intention was held to exist. Although the notion of common intention was endorsed in Murdoch and in Rathwell, many difficulties, chronicled in the cases and in the legal literature on the subject, inhered in the application of the doctrine in matrimonial property disputes. The sought-for ‘common intention’ is rarely, if ever, express; the courts must glean ‘phantom intent’ from the conduct of the parties. The most relevant conduct is that pertaining to the financial arrangements in the acquisition of property. Failing evidence of direct contribution by a spouse, there may be evidence of indirect benefits conferred: where, for example, one partner pays for the necessaries while the other retires the mortgage loan over a period of years.” 45 Karavos, supra footnote 10, at 1004; 2211-12.

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Cases Where Common Intention Was Found Fortunately, the news is not all bad in the quest for tax relief on the basis of a resulting trust. In Holizki, Rothstein J found that there was no attribution to the taxpayer of income arising on the sale of shares which was included in the wife’s income since the wife was the beneficial owner of the shares under a resulting trust. A common thread in the finding of intent in this decision was that the parties were unsophisticated and had been following the advice of their accountant with respect to ownership matters.46 Both spouses contributed to the business, and both spouses undertook liabilities. Both spouses also asserted that at all times they had intended to share the property of the business equally. It was therefore reasonable to conclude, according to Rothstein J, that there was a common intention for the appellant to hold a portion of the property of the business on a resulting trust for his wife. Most recently, in Cooray,47 resulting trusts were found in circumstances where a parcel of land was purchased by a group of people for the purpose of building family homes. The family homes were not built, and the land was sold eight years later at a substantial profit. One issue before the court was whether the spouses of the purchasers had a beneficial interest in the land and a corresponding entitlement to share in the profits arising from the sale of the land. Bowie J referred to the decision in Rathwell and concluded that there was a resulting trust in favour of the wives. Bowie J found that the evidence supported the common intention of all the appellants and their wives to be equal owners of the tenancies in common. In particular, he referred to the fact that the appellants and their wives had all worked continuously since immigrating to Canada and contributed their earnings to joint bank accounts, which funds were used to satisfy both joint needs and individual needs. Although there was some disparity in the amounts earned by the husbands and the wives, Bowie J had no difficulty inferring that the intention of each couple was to share equally in the proceeds of their efforts. Similarly, Bowie J was satisfied that each couple had a common intention to share equally the ownership of their particular parcel of land, the payments in respect of which were made from the joint bank accounts. As discussed previously, Bowman J also found the necessary intention for a resulting trust in Savoie. Although Mr. Savoie was deceased at the date of the trial, Bowman J found the necessary intent in Mrs. Savoie’s evidence and from all the surrounding circumstances, including her work- ing as a team with her husband, her contribution to the family finances, the pooling of their resources, and the assertion that they generally regarded

46 Holizki, supra footnote 22. See also Savoie, supra footnote 20, and Erickson, supra footnote 18, where the taxpayer’s lack of sophistication seems to be directly related to a favourable finding of either a constructive or a resulting trust. 47 Cooray et al. v. The Queen, June 13, 1997, file no. 95-1656(IT)G (TCC) [not yet reported].

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 671 their family assets as common assets. Bowman J also noted that the parties were both uneducated, although it is unclear whether this factor influenced his finding of intent. The matter may be moot, however, since Bowman J also stated that the facts supported the finding of a constructive trust.

Cases Where Common Intention Was Not Found In those tax cases where the court was reluctant to find a resulting trust, the comments in Pettkus that a resulting trust is not available “where the importation of intention is impossible or unreasonable” were referred to with approval. Such was the case in Nelson. In Nelson, the taxpayer sold farmland, which was registered in his name alone. The farmland had been held by the taxpayer’s parents in joint ownership before being transferred by his mother to the taxpayer in joint ownership with her after his father’s death. The taxpayer farmed the land with his mother and subsequently with his brother. Ultimately, the taxpayer acquired all the relevant farmland. When the taxpayer disposed of the farm, he realized a substantial capital gain, one-half of which he included in his income and the other half of which his wife included in her income. The minister included the full amount of the capital gain in the taxpayer’s income. The taxpayer appealed to the Tax Court on the basis that he held a one-half interest in the relevant property for his wife on either a resulting trust or a constructive trust. The taxpayer’s appeal was dismissed on both arguments.48 In respect of the resulting trust, the court concluded that there was no substantive evidence to establish that Mrs. Nelson and her husband had always viewed the beneficial ownership of the farm as joint and that she had a one-half interest in it from the time of its acquisition. As a result, the intention requirement for a resulting trust was not met. In reaching his conclusion, Sarchuk J focused on the fact that the farmland had always been in Mr. Nelson’s family and, despite various intrafamily transfers over the years, there was never any express desire or intention other than to ultimately transfer the land to Mr. Nelson and not into the joint names of Mr. and Mrs. Nelson. Further, there was no evidence that Mrs. Nelson had ever paid part of the purchase price for the farm properties, nor was her involvement over the years in the farming operations such that it constituted a contribution in kind to the purchase price. Sarchuk J then referred to Pettkus and concluded that there was little or no evidence consistent with the existence of expressed or implied intention and resulting trust. Sarchuk J also concluded that there was no constructive trust in Nelson.49

48 Nelson, supra footnote 21. 49 Query whether the same result would have been reached if these facts had been put before a court where tax considerations were not in issue.

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Sarchuk J also did not find the requisite intention to support the finding of a resulting trust in Karavos. Half the proceeds from the sale of a restaurant held in Mr. Karavos’s name were included in his wife’s income. The minister sought to attribute the entire sale proceeds to Mr. Karavos under subsection 74.1(1). Sarchuk J did not find an express declaration of common intention and noted a lack of evidence relating to the acquisition of the property from which a common intention might properly be inferred: In my opinion it would be most inappropriate to imply [sic] a common intention where the [parties’] conduct before and after the acquisition of the property is “wholly ambiguous” or its association with the alleged agreement is “altogether tenuous.”50 Sarchuk J also concluded that there was no constructive trust in Karavos. It appears that Sarchuk J’s views on the clear intent necessary to find a resulting trust are shared by other judges. In 1996, in Wong,51 Teskey J refused to find a resulting trust, again referring to Pettkus and the comments therein that a resulting trust is not available where the imputation of intent is impossible or unreasonable. In Wong, the taxpayer claimed a loss on the disposition of shares he claimed were held on a resulting trust by his brother. Teskey J found that the resulting trust relationship was not proven and there was no reasonable explanation for why the shares were held in his brother’s name.

RECURRING ISSUES Regardless of the court’s findings in decisions involving constructive and resulting trusts, a number of recurring issues have emerged.

Constructive Trusts and Jurisdiction of the Tax Court Does the Tax Court of Canada Have Jurisdiction To Determine the Existence of a Remedial Constructive Trust? In Nelson, the minister argued that the doctrine of constructive trust was essentially an equitable remedy and that its application required an order of a court of competent jurisdiction such as the superior court of a province; the Tax Court of Canada, as a statutory court, clearly lacked that equitable jurisdiction. Notwithstanding, Sarchuk J concluded for purposes of the appeal, and without deciding the issue, that the right existed in the Tax Court of Canada to apply a remedial constructive trust in exercising its powers pursuant to section 171. This type of remedial constructive trust is the type alluded to in Pettkus, which was intended to prevent unjust enrichment. In 1993, three years after Nelson, the minister again argued in Savoie that the Tax Court of Canada did not have jurisdiction to impose a constructive trust. Bowman J shared none of Sarchuk J’s seeming reluctance

50 Karavos, supra footnote 10, at 1004; 2212. 51 Supra footnote 5.

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 673 about addressing the issue. He responded to the minister’s argument by specifically referring to Nelson and Sarchuk J’s decision to leave the matter of jurisdiction open for determination at a later date. He stated: I have found, on the evidence in this case, that all of the elements necessary to support both a resulting trust and a constructive trust of a 50 percent interest in the property are present and I must therefore answer the question which my brother Sarchuk, J.T.C.C. left open. I do not think that the doctrine can be invoked only by a court having jurisdiction to make a declaration as between two conflicting spouses. It is a substantive doctrine that goes to a determination of the true ownership of the property—a matter that is germane in an income tax appeal where the Minister of National Revenue seeks in effect, to cause a spouse’s liability for tax to follow property that he says was owned by the husband and transferred to his wife. This court has an obligation in such a dispute to determine the true ownership.52 The matter was not to end there. Two years later, in Karavos, the minister again argued before Sarchuk J that the constructive trust was an equitable remedy which the Tax Court of Canada did not have authority to invoke in the exercise of its jurisdiction under section 171.53 The minister urged Sarchuk J to “not make assumptions in the context of a particular tax appeal as to whether the equitable remedy of constructive trust would be granted by a court having jurisdiction to do so” or “retro- actively impose a declaration of a restitutory nature on financial transactions which occurred several years ago.”54 Sarchuk J again responded with concern, this time about the appropriateness of the imposition of a remedial constructive trust in a tax context: A constructive trust is a mechanism by virtue of which a court with equitable jurisdiction can grant redress to an unjustly deprived person. In determining whether unjust enrichment exists and restitution through the invocation of a constructive trust is appropriate a court may take into account the deprived person’s actual financial contributions, (which may properly include the contribution of earnings towards household bills and maintenance), all work performed in relation to the property, both physical and otherwise, and other factors as the performance of housekeeping duties, the raising of children[,] etc. The result is that effectively a court is required to embark on an examination of the totality of a marital relationship extending over a period of 30 years to determine whether an unjust enrichment occurred and whether it would be appropriately remedied by a declaratory order vesting the claimant with title to property or by granting a monetary award. In my view such an inquiry is inappropriate in an income tax context.55

52 Savoie, supra footnote 20, at 555; 2334-35. 53 Specifically, the minister argued that the constructive trust “is a remedy of restitution, which may be imposed by courts having equitable jurisdiction to do so as one of several possible alternative remedies in the face of unjust enrichment.” Karavos, supra footnote 10, at 1004; 2211. 54 Ibid. 55 Ibid., at 1006; 2215.

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Sarchuk J then left open the question of the form of inquiry necessary to meet the duties of the Tax Court: The use of a restitutory device to remedy situations of unjust enrichment should not be equated with the determination of a collateral issue necessary in order for this Court to carry out its statutory function, that is, to dismiss or allow an appeal or vacate or vary an assessment.56 It appears that Sarchuk J is of the opinion that the role of the Tax Court is to determine a collateral issue (for example, the beneficial ownership of the property), not to impose a remedy currently used by Canadian courts in cases of unjust enrichment. The latest word on the role of the remedial constructive trust in the Tax Court of Canada is from Bowman J.57 In Collins, decided some 20 days after Karavos, Bowman J specifically raised the question of the jurisdiction of the Tax Court of Canada to consider whether a constructive trust existed. He stated his conclusions as follows: The problem in this court is whether I am entitled even to entertain an argument that the elements that would, in the Ontario Court, give rise to a finding of constructive trust exist. In other words may this court, which has no jurisdiction to make a finding of unjust enrichment and a declaration that a constructive trust exists in respect of the Sherkston shares that would be binding as between the spouses, even consider the question...? If this court is to exercise the jurisdiction that it has to determine the existence of legal rights that are relevant to the determination of tax liability under the Income Tax Act it must be able to consider such questions.58 After quoting from the comments of McLachlin J in Beblow, Bowman J went on to add: I do not think that this court is barred from considering whether the ingredients exist that would permit the application of a remedy arising out of a constructive trust by a court having jurisdiction to do so. If the Tax Court of Canada concludes that they are present it can then go on to determine a point in issue in an appeal under the Income Tax Act.59 In the final analysis, the most recent positions of these two judges may not be as far apart as they might appear to be with respect to the role of the Tax Court in considering the existence of a remedial constructive trust. The determination of a collateral issue referred to by Sarchuk J in

56 Ibid. 57 Mogan J also confronted this issue in Anderson Estate, supra footnote 4, which was decided in 1995. The minister again argued that the Tax Court did not have jurisdiction to apply equitable principles as a remedy. Mogan J avoided the issue and concluded that he was not required to address the question since the matter of property distribution was already settled. In Forest Oil, supra footnote 3, Gibson J had no difficulty concluding that it was open to the Federal Court—Trial Division to find a constructive trust by reason of unjust enrichment against the minister for the amount of a refund not repaid to the taxpayer under the applicable legislation. 58 Collins, supra footnote 5, at 1038. 59 Ibid.

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Karavos and the most recent conclusion by Bowman J in Collins, that the court is not barred from considering whether the ingredients exist that would permit the application of a remedy arising out of a constructive trust to determine a point in issue in an income tax appeal, may lead to the same result. In neither case will the equitable remedy of specific performance or monetary damages be awarded by the court, but the necessary tax consequences will nonetheless follow. Whether or not either judge is correct about jurisdiction may also be a moot point. Given its historic origins, it is clear that the Tax Court of Canada lacks equitable jurisdiction to find a remedial constructive trust.60 However, it appears that as a practical matter, judges of the Tax Court of Canada will continue to assume jurisdiction.61 This arguably provides the fairest overall result since it would be manifestly unjust if a taxpayer were precluded at the court of first instance from arguing a claim based on a remedy that is clearly available in equity. In consequence, it seems that the Tax Court of Canada should, at a minimum, be able to consider the underlying issue of beneficial ownership in the context of the remedial constructive trust. This is particularly so since the Federal Court—Trial Division has equitable jurisdiction,62 and Gibson J had no difficulty concluding that it was open to this court to find a constructive trust by reason of unjust enrichment in Forest Oil.

60 The Tax Court of Canada is a statutory creation with one purpose of the legislation being the improvement of public perception of decisions of the prior Tax Appeal Board and Tax Review Board (see Canada, House of Commons, Debates, June 28, 1983, 26891). Since the Tax Court is a statutory court that evolved from the original administrative boards, powers and jurisdiction must be restricted to the evolution of statutes that eventu- ally resulted in its existence. Both the original Tax Appeal Board and the subsequent Tax Review Board were created for a simple redress procedure for taxpayers wishing to chal- lenge a tax assessment. Any questions of law were to be directed to the Exchequer Court. The simple procedures were carried over to the Tax Court of Canada, which was not given jurisdiction or powers broader than those of its predecessors. The Honourable Mark MacGuigan (then minister of justice) stated that the name change would assist in eliminat- ing the impression that the arbiter hearing the assessment was merely an agent of the federal government and also in reinforcing the judicial nature of the hearing (see Canada, House of Commons, Debates, June 28, 1983, 26891). 61 See, for example, Judge Tremblay’s comments on this court’s jurisdiction to hear Charter-based argument: “In my view, indeed, the Tax Court of Canada has the jurisdiction to hear all contentions of any appellant related to the computation of his net income, his taxable income or his tax.” (Prior v. MNR, 87 DTC 26, at 37; [1987] 1 CTC 2076, at 2091 (TCC).) See also Alison Scott Butler, “Making Charter Arguments in Civil Tax Cases: Can the Courts Help Taxpayers?” (1993), vol. 41, no. 5 Canadian Tax Journal 847-80, at 860. 62 During the debate on Bill C-192 (the Federal Court Bill respecting constitution, jurisdiction, and administration, among other things) proposed by the then minister of justice, the Honourable John N. Turner, the point was raised that the new Federal Court was “the son of the Exchequer Court Act” but with “the flexibility of provincial supreme courts [and] the ability to move about the country and exercise jurisdiction in certain fields” (Canada, House of Commons, Debates, March 25, 1970, 5475 (Mr. McCleave)). Any equitable jurisdiction would have to have origins in the Exchequer Court Act, RSC 1927, c. 34, the Act creating the former court. Amendments to that Act (SC 1928, c. 23) (The footnote is continued on the next page.)

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Constructive Trusts Found by Other Courts In addition to resolving issues of recognition and timing for constructive trusts within its own jurisdiction, the Tax Court has been and will continue to be called upon to determine the proper tax treatment of the parties in situations in which a constructive trust has been found by a competent superior court acting within its jurisdiction. In Hassanali,63 Ms Georg obtained judgment in the Ontario Court Gen- eral Division against Count Hassanali in the amount of $725,000 for constructive trust as a result of the breakdown of their relationship. Count Hassanali deducted this amount as a business expense in his 1989 taxa- tion year. Ms Georg did not include any of the amount in her income for 1989. The minister disallowed Count Hassanali’s deduction. The taxpayer appealed. The minister brought an application pursuant to section 174 to add Ms Georg as a third party. The matter of the proper tax treatment of the constructive trustee and the beneficial owner was never resolved. Ms Georg declared personal bankruptcy, and the minister did not pursue the matter. The issue remains, therefore, as to how the matter should have been resolved by the Tax Court given that a superior court had confirmed the existence of the constructive trust. Some guidance on the question on the proper tax treatment of constructive trustees and beneficial owners may be drawn from the Australian courts.64 In two decisions involving constructive trusts, the court held that the beneficial owner of the property, and not the constructive trustee, was taxable with respect to the income. The first decision65 involved a small- time tax evader who was reassessed when profits were understated in his business tax return. The taxpayer argued in his defence that his wife was beneficially entitled to half the income and, since equity would decree a resulting or constructive trust in her favour, she should be liable for one- half of the taxes. His claim was rejected at first instance on the basis that it was “fiscally inefficacious until relief was actually granted.”66 The Fed- eral Court disagreed and determined that the commissioner must assess

62 Continued... included the intention to expand the jurisdiction of the Exchequer Court to include common law remedies to patent and trademark issues. As stated by the Honourable Ernest Lapointe (then minister of justice), “[I]n relations between the crown and the subject when the crown is plaintiff or petitioner, it is specifically stated that the court has jurisdiction at common law or in equity, but in relations between subject and subject the court has no such jurisdiction. This is to give the exchequer court the same jurisdiction as the other courts have in the matter” (Canada, House of Commons, Debates, April 23, 1928, 2265). Hence, although a creation of statute, the Federal Court—Trial Division inherited the equitable jurisdiction of the Exchequer Court. 63 Hassanali Estate v. The Queen, 96 DTC 1384; [1996] 1 CTC 2464 (TCC). 64 For a discussion of these decisions, see J. Glover, “Taxing the Constructive Trustee: Should a Revenue Statute Address Itself to Fictions,” in A.J. Oakley, ed., Trends in Con- temporary Trust Law (Oxford: Clarendon Press, 1996), 315-31. 65 MacFarlane v. FCT (1986), 13 FCR 356 (Fed. Ct.). 66 Glover, supra footnote 64, at 315.

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 677 the parties according to their position at general law, that being that the business income had been derived equally by Mr. MacFarlane and his wife. It was not necessary at general law for a court order to first confirm the existence of a constructive trust since equity regards as done what ought to be done. It therefore followed that the commissioner’s assessment of the husband for all of the business income was incorrect. In a somewhat surprising decision,67 the Australian Federal Court also found that a thief, who had stolen funds from his employer and then claimed and paid tax on the interest earned thereon, was not liable for the tax, given that the theft was acknowledged and the funds returned. The judge reasoned that since the constructive trust took effect from the time at which the conduct that gave rise to its imposition arose, the interest earned was a gain of the owner and not of the thief.68 The logic of these decisions, at least with respect to the tax treatment of the beneficial owner for tax purposes, is consistent with that applied in Canada in Stockman.69 In that case, the taxpayer and her former spouse, Mr. Bucci, were divorced in 1989. In 1990 and 1991, rental losses were incurred in connection with four condominium apartments acquired in 1987 from joint funds and from money jointly borrowed from the bank. Mr. Bucci claimed 100 percent of the losses incurred with respect to the properties in 1990 and 1991.70 On April 10, 1992, the taxpayer obtained an order of the Ontario Court General Division which had the effect of granting her a 50 percent constructive trust interest in the properties. At issue was whether the taxpayer was entitled to deduct 50 percent of the rental losses incurred in 1990 and 1991 with respect to those properties. The court held that at the time the rental losses were incurred, the taxpayer was the beneficial owner of 50 percent of the properties. The taxpayer was therefore entitled to deduct 50 percent of the losses. It is clear from these decisions that, whether or not the Tax Court of Canada should or will undergo the analysis necessary to determine if a tax result should be based on its finding that the ingredients for a constructive trust exist at common law, the Tax Court will be called upon to respond to the finding of a constructive trust by a court of competent jurisdiction. Issues will therefore remain as to how this type of trust should be treated for tax purposes.71

67 Zobory v. FCT (1995), 129 ALR 484 (Fed. Ct.). 68 It is not clear that the same result would follow in Canada since Canada taxes illegal income. See Interpretation Bulletin IT-256R, “Gains from Theft, Defalcation or Embezzle- ment,” August 27, 1979. 69 Supra footnote 2. 70 The losses were actually paid by a corporation of which the taxpayer and Mr. Bucci were the only shareholders. The records of the corporation showed that payments made by the corporation were on the account of Mr. Bucci. 71 See the discussion below under the heading “Should Constructive and Resulting Trusts Be Recognized for Purposes of the Act?”

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When Does the Trust Arise? Common Law The time when a constructive trust arises also appears to be in dispute both within and outside the tax arena. Again, the confusion appears to be focused largely on the character of the constructive trust in the Canadian context. As previously discussed, under traditional English law the constructive trust was regarded as a substantive institution similar to an express trust. In contrast, in the United States the constructive trust is viewed not as an institution, but as a broad restitutory device. It has been argued that in Canada a constructive trust is to be regarded as a remedy and not a substantive institution.72 In Rawluk, the Supreme Court of Canada, in a split 4:3 decision, determined the matter of the remedial constructive trust by addressing the question of when the constructive trust arises. Cory J, for the majority, held that the constructive trust remedy arose as of the date of the unjust enrichment, thereby treating the constructive trust as a property interest. The minority view, per McLachlin J, was that, as a discretionary remedy, the constructive trust did not arise until the order pursuant to which the court exercised its discretion to determine that the trust was the appropriate restitutionary remedy. If the constructive trust is a remedy, it is argued, the claimant’s property interest under the constructive trust becomes effective “at the time the remedy is raised from an unjust enrichment, instance of unconscion- ability, or other generative circumstance.”73 There are, nonetheless, others who have suggested that the remedial constructive trust does not arise until the date of the court decree.74 Still others suggest that the trust takes effect from the time at which the conduct that gave rise to its imposition arose.75 This seems to be more in keeping with the British institutional approach. It has also been suggested that courts should have the discretion to move the operative date of a constructive trust to “meet the circumstances of the case.”76 The effect of most of these suggestions is that beneficial entitlement, to the extent that it exists, will certainly pre- cede the court order and most probably the date of court application.

72 See the discussion in Karavos, supra footnote 10, at 1005-7; 2213-16; and Waters, supra footnote 13. 73 Glover, supra footnote 64, at 327, citing from A.J. Oakley, “The Precise Effect of the Imposition of a Constructive Trust,” in Equity and Contemporary Legal Developments 427, at 433. See also section 160 of the American Law Institute’s Restatement of the Law of Restitution: Quasi Contracts and Constructive Trusts (Philadelphia: American Law In- stitute, 1937). 74 See comments by Christie ACJ (as he then was) in Erickson, supra footnote 18, at 1709; 2385. 75 For example, see Fletcher as discussed below. 76 Glover, supra footnote 64, at 328.

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Tax Cases The tax decisions that address the issue of when a constructive trust arises also provide an array of answers. Such cases may be divided into several distinct camps. First is the Fletcher situation, in which a wrong has been done. In that case, the court found that the trust arose at the time of the wrongdoing—that is, when the misappropriation of funds arose. The second camp involves the constructive trust in the family context. In Anderson Estate, Mogan J cited with approval two Canadian texts that state that the constructive trust is generally considered to arise when the duty to make restitution arises.77 In addition, Mogan J added the following analysis: It seems to me that a beneficiary of a constructive trust can have an interest in property prior to the imposition of such a trust by a court and without regard to whether the constructive trust is only a remedy.78 Sarchuk J took a totally different tack in Karavos. He cited with approval the following comments of Christie ACJ (as he then was) in Erickson: Differing views have been expressed regarding the true nature of a constructive trust. In J.G. Riddall’s The Law of Trusts, 3rd (1987) ed. at page 359 the question in debate is put thus: Should a constructive trust be regarded not as a substantive institution—a thing with its own existence—but rather as a remedy granted by the court, just as an injunction is not an institution, but merely a remedy? If the correct view is that it is a remedy it follows, in my opinion, that it does not come into existence until it is granted by a court having jurisdiction.79 This is a complete reversal of Sarchuk J’s position in Fletcher: I do not accept the view that a constructive trust does not exist until the Court so declares in the course of, for example, an action by the beneficiary against the trustee. There is nothing in Pettkus v. Becker (supra) which supports such a conclusion.80 Hamlyn J, in Stockman, also addressed the question of when a constructive trust arose when he sought to determine whether the now estranged spouse was entitled to a claim of half the losses that had arisen in respect of property that her husband was found to have held as constructive trustee on her behalf. He cited with approval the Supreme Court of Canada decision in Rawluk that a constructive trust comes into existence “not when the trust is judicially declared but from the time when the unjust enrichment first arose.”81 This endorsement of Rawluk by the Tax

77 Supra footnote 4, at 765. 78 Ibid. 79 Supra footnote 10, at 1005; 2213. 80 Fletcher, supra footnote 3, at 627; 2345. 81 Rawluk, supra footnote 8, at 91; 176, per Cory J.

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Court might have led to a simple and principled resolution of the question for tax purposes. Unfortunately, Hamlyn J then concluded, not that the constructive trust arose when the property was acquired by the husband with jointly held funds,82 but rather that “this property was in a constructive trust from the date of separation.”83 The third camp of cases on the question of when a constructive trust arises for tax purposes is reflected in Funk, where the right to deduct expenses was at issue. Hamlyn J held that in the case of a valid contract for sale, “the constructive trust comes into existence . . . when the law imposes upon a party an obligation to hold specific property for another.”84 Tax cases dealing with resulting trusts do not offer much more guidance as to when the trust arose than those that deal with constructive trusts. In Holizki, Rothstein J found that the resulting trust dated back to the commencement of the Holizkis’ sole proprietorship in 1973. In Savoie, unfortunately Bowman J did not specifically identify when the resulting trust arose, instead simply finding that it existed at some point before the transfer of the property for purposes of liability under section 160. The only conclusion that can be drawn from all of these decisions is that there is no apparent consensus about when a constructive or resulting trust begins for either tax or other purposes, a view that seems to be shared by Revenue Canada.85

Should Constructive and Resulting Trusts Be Recognized for Purposes of the Act? Closely related to the question of whether the Tax Court of Canada can find or even consider the potential existence of a constructive trust is a more fundamental question that applies to both constructive and resulting trusts. Are these trusts for purposes of the Act86 and, if so, what is the proper tax treatment of the parties and the trust property? Judicial response to these questions in the Tax Court again reflects the underlying doctrinal uncertainty currently plaguing the constructive trust in Canada. In Fletcher, counsel for the respondent essentially advanced a purposive approach to interpreting the trust provisions of the Act.87 The respondent

82 The facts of this decision appear more correctly to support a finding that a resulting trust existed. 83 Supra footnote 2, at 3004. 84 Funk, supra footnote 27, at 1298; 2352. 85 “Revenue Canada Round Table,” supra footnote 28. 86 “Trust” is defined in the Act in subsection 248(1) by reference to subsection 104(1): “In this Act, a reference to a trust or estate (in this subdivision referred to as a ‘trust’) shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property.” 87 For a review of recent Canadian case law on the proper approach to statutory interpretation in a tax context, see Brian A. Felesky and Cindy L. Rajan, “Judicial Anti- Avoidance: Where Are We?” (1996), vol. 9, no. 2 Canadian Petroleum Tax Journal 1-36.

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 681 submitted that the remedial nature of the constructive trust put it in a different category than, and was inconsistent with, the notion of a trust contained in the provisions of the Act: [A] constructive trust is essentially a remedy that the Courts impose and . . . the only manner in which a constructive trust can be created is by operation of law. It did not arise out of some implied intention but must be viewed strictly as a remedy for unjust enrichment.88 Sarchuk J disagreed with these submissions and took a plain meaning approach to interpreting the relevant provisions of the Act: This subparagraph falls within Division D and as far as I can discern the legislators did not choose to qualify the word “trust” or to limit its meaning in any way other than by excluding unit trusts. If the legislators had intended to exclude constructive trusts and resulting trusts from the operation of subparagraph 115(1)(b)(vi) they would have done so in clear and unam- biguous language.89 And: The careful manner in which the word “trust” has been used in Divisions B and D of the Income Tax Act and the fact that the legislators chose not to define the term “trust” for the purposes of Division D, or to exclude a constructive trust or a resulting trust, can only be taken to mean that for the purposes of subparagraph 115(1)(b)(vi) the term “trust” encompasses all forms of trusts.90 What should be readily apparent from the facts in Fletcher is that this trust falls within the notion of the non-remedial constructive trust—that is, as a substantive right to correct a wrong, and not as a remedy designed to prevent unjust enrichment. This may explain Sarchuk J’s apparent about- face in Karavos on the question of whether a remedial constructive trust is a trust for tax purposes.91 In Karavos, Sarchuk J identified potential ramifications of applying a remedial restitutory device in an income tax context. In particular, he was concerned with whether interpreting the trust provisions of the Act to include constructive trusts had the effect of defeating the specific legislative intention of other provisions of the Act and would lead to inconvenient and absurd results.

88 Fletcher, supra footnote 3, at 627; 2345. 89 Ibid., at 629; 2347. 90 Ibid., at 629; 2348. 91 Supra footnote 10, at 1006; 2214-15. On the one hand, it may seem that the position in Canada as to whether constructive trusts are trusts for tax purposes remains unclear in the Canadian context in situations other than Fletcher. On the other hand, Sarchuk J may not really have been changing his mind. Instead, he might just have been responding to situations where the constructive trust was being employed simply as a remedy to prevent unjust enrichment. Sarchuk J may have concluded that such a remedial trust raises different issues in the analysis of whether it should be recognized for purposes of the Act.

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A number of authors share these concerns about the appropriateness of recognizing constructive trusts as trusts for tax purposes.92 Ellen Zweibel has commented as follows: Similarly, the inconvenient and absurd results would occur in the context of a marital property constructive trust. Unless we assume that the constructive trust does not arise until the court declares it, we may have to unravel the relationship for tax purposes. These cases are based on unjust enrichment and require some demonstrable contribution in money or money’s worth to the acquisition or maintenance of the property sought. Does the beneficiary therefore have a capital cost in the trust capital equal to the fair market value of his or her financial contribution? Under some circumstances the financial contribution might be construed as a transfer giving rise to income attribution. What is the tax position of the parties pending an appeal from a trial court finding of constructive trust?93 Whether a plain meaning approach or a purposive approach is advanced to determine the issue of the application of the provisions of the Act to remedial constructive trusts, a principled approach is essential, particularly since this question is also relevant to resulting trusts. Some- what surprisingly, however, decisions involving resulting trusts have not raised the question of whether a resulting trust, once found, should be recognized for purposes of the Act other than the specific matter under appeal.94 Other tax issues also arise if subdivision k applies. For example, once the constructive trust is found, who is responsible for the tax on the income? If we assume that the beneficial owner should pay the tax, the limitation periods may have expired. Even if the reassessment period is

92 See, for example, Maurice C. Cullity, “General Concepts and Types of Trusts for Tax Purposes,” in the 1988 Conference Report, supra footnote 28, 36:1-27; S.W. Bowman “Constructive Trusts—Whether Recognized for Tax Purposes,” Current Cases feature (1987), vol. 35, no. 6 Canadian Tax Journal 1464-66; Ellen B. Zweibel, “Constructive Trusts and the Income Tax Act: A Mismatch of Concepts” (April 1988), 2 Canadian Current Tax Law J79-83; and Glover, supra footnote 64. 93 Zweibel, supra footnote 92, at J82-83. 94 The matter of income splitting, for example, for the years in which the resulting trust was in existence, has not been raised, nor has the issue of disposition of the property at the time the trust was created. It seems logical that there would be no disposition of property in the case of a resulting trust, since beneficial ownership of the property has not changed but has simply been recognized. With respect to income splitting, if retroactive income splitting is not proposed by the resulting trustee and the income is taxed in his or her hands, the matter may be of some indifference to the minister. However, if subsections 104 through 108 do apply and income splitting is attempted by the taxpayer, it appears that the minister could reassess, at least for the non-statute-barred years, on the basis that the income had been taxed to the wrong taxpayer. The result may give rise to tax in the trust at the top marginal tax rates applicable to inter vivos trusts on any income not actually distributed by the resulting trustee and taxed in the beneficiary’s hands. In addition, had the resulting trusts in Savoie, supra footnote 20, or Holizki, supra footnote 22, been in existence for long enough, the issue of the commencement date for purposes of the 21- year deemed disposition rule may have arisen.

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 683 not statute-barred,95 the beneficial owner may argue that during the subject period he or she did not have access to or control over funds claimed by the holder of the legal title and should not be required to pay tax on the income now.96 The constructive trustee will, of course, argue that beneficial ownership was not hers but rather that of the beneficial owner, thus attempting to exonerate herself from the obligation to pay tax. In this situation, the only remaining taxpayer is the trust itself, which will presumably be taxable at the top personal rate.97 Other issues in respect of constructive and resulting trusts include the following: • Is there a disposition98 at the time of the transfer of the property to the trust?99 • Can taxpayers dispose of their income or capital interest in the trust? • Are statute-barred assessments open for reassessment once a constructive trust relationship has been found?100 • What is the tax result to the respective parties during years while the case is under appeal? • Does the character of the property change in the beneficiary’s hands?101

95 Normally, the minister cannot reassess statute-barred years unless there is fraud or negligence. Where a constructive trust is found by the courts, it appears that neither claim could be made. 96 See Sura, supra footnote 24. 97 See sections 104 to 108 and subsection 122(1). 98 It might be argued that there is no disposition (as defined in section 54) at the time the constructive trust is identified. Under this approach, the constructive trust arrangement merely identifies what the relationship was with respect to beneficial ownership of the property all along. In short, there is no change in beneficial ownership when a constructive trust exists. This approach suggests that the constructive trust arose much earlier than the date at which the parties separated and, in fact, may date back to when the trust property was initially acquired by the constructive trustee, if such a date can be identified. One can easily envision a Murdoch, supra footnote 8, or Anderson Estate, supra footnote 4, type of situation in which a right to the property was earned over time. Under those circumstances, it would seem an almost insurmountable task to select the correct date for the commencement of the constructive trust for tax purposes. 99 There are a number of potential disposition dates: first, the date on which the asset is transferred to the constructive or resulting trustee; second, the date selected by the court when a finding of constructive or resulting trust is made; and, finally, the 21-year deemed disposition date applicable to all trusts other than spouse trusts (see subsection 104(4)). 100 In Hassanali, supra footnote 63, and Stockman, supra footnote 2, the court resolved the tax issues without directly facing the question of reassessment for statute-barred years. In Hassanali, the issue was avoided by the signing of a waiver by the statute-barred party. In Stockman, the years in dispute were not yet statute-barred. An obvious issue in the application of tax legislation to constructive trusts will be the tax liability of the parties in statute-barred periods. 101 Consider, for example, the tax results that may arise on the facts in Cooray, supra footnote 47. In that case, the other issue decided by the Tax Court was that the particular (The footnote is continued on the next page.)

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• Is there a danger of inconsistent results in different courts depending on whether tax planning is an issue?102

Case Law Solutions Although many issues will continue to arise with respect to the proper tax treatment of resulting and constructive trusts, two fundamental issues are in need of resolution: whether resulting and constructive trusts should be recognized for purposes of the Act (particularly subdivision k) and, if so, when such trusts arise for tax purposes. Once these two matters are resolved, the tax consequences under the Act will flow from the particular facts under consideration. While there is no easy resolution to either of these questions, various suggestions have been put forward in the case law. Following a discussion of these suggestions, some proposals for legislative amendments are advanced.

Recognition for Purposes of the Act One potential solution to the problem of recognizing constructive and resulting trusts for tax purposes may be found in Sarchuk J’s invitation in Karavos to consider the collateral issue rather than the restitutory remedy. This leaves open the opportunity for ignoring the constructive trust, and presumably the resulting trust, altogether for tax purposes.103 For example, a determination of the collateral issue of what consideration had been provided for the transferred property by the spouse could have provided the solution in Savoie where it was necessary to determine the extent of the spouses’ joint liability. In other words, it may not have been necessary to find or even consider a constructive trust in Savoie. A similar result could have been reached by simply determining what consideration was given by the transferee spouse for purposes of paragraph 160(1)(e). If the consideration for purposes of paragraph 160(1)(e) included the relinquishment of the taxpayer’s inchoate right to apply to a provincial superior court for a declaration that she held a 50 percent beneficial interest in the property, that consideration arguably had a value equal to 50 percent of the property. Her liability for her husband’s share of tax

101 Continued... transaction did not constitute an adventure in the nature of trade. However, if the Tax Court had determined that the husbands’ gain on the sale of the property was to be on account of income, query whether, on the basis of a finding of secondary intention, the same treatment would be appropriate for their spouses as beneficial owners of the property under a resulting trust. 102 While it may be expected that on a particular set of facts the same conclusion as to the existence of a resulting or constructive trust would be reached by a Tax Court as by any other court, at least some of the tax cases do not bear this out when income splitting is an issue. Consider the Nelson decision, supra footnote 21, for example. 103 This approach would not be inconsistent with the non-recognition of bare trusts as trusts for purposes of the Act. See Income Tax Technical News, no. 7, January 3, 1996 for the department’s views on when a bare trust exists. (Also published as Michael Hiltz, “Revenue Canada Review,” in Report of Proceedings of the Forty-Seventh Tax Conference, 1995 Conference Report (Toronto: Canadian Tax Foundation, 1996), 52:1-12.)

(1997), Vol. 45, No. 4 / no 4 CONSTRUCTIVE AND RESULTING TRUSTS 685 could thus not extend beyond the remaining 50 percent which he beneficially owned. A determination of who had beneficial ownership of the property also created the necessary result in Anderson Estate, when Mogan J neatly avoided the issue of whether the Tax Court could find a constructive trust and simply decided that subsection 70(5) could not apply on a transfer of property on death since the property was already beneficially owned by the recipient. Similarly, a finding of beneficial interest in Erickson “in the sense of an enforceable right, in favour of the appellant’s wife in respect of the assets of the business in an amount equal to or in excess of the value of the alleged gift,”104 avoided the application of the indirect gift rule in paragraph 85(1)(e.2).105 Equally, it seems that the determination of who held beneficial ownership or interest in the property in Funk would be sufficient for the court to determine whether expenses could be deducted by Mr. Funk, notwithstanding that title to the property had not yet been transferred. That the purchaser had such beneficial ownership is beyond dispute since he had an action for breach of contract if the vendor failed to perform and an action for specific performance if he wanted specific performance rather than damages. On the other hand, a consideration of the collateral issue alone may not provide the appropriate tax relief in all cases. The constructive trust in Fletcher, which was recognized for purposes of subdivision k, was critical to Mr. Fletcher’s ability to deduct the loss on the disposition of his capital interest in the trust under section 115.106 Although this decision may be an anomaly, there may well be other situations where the appropriate tax result will follow only if the constructive trust is recognized for all purposes of the Act.

Timing A number of Tax Court judges have made recommendations with respect to timing. For example, Sarchuk J took the view in Karavos that the remedial constructive trust did not come into existence until it was granted by a court having jurisdiction. However, Bowman J rejected this position in Savoie. In Stockman, which dealt with the issue in a matrimonial context, Hamlyn J held that the constructive trust arose from the date of separation.

104 Erickson, supra footnote 18, at 1711; 2387. 105 In reaching this conclusion, Christie ACJ (as he then was) went on to say, ibid.: “I believe that Mrs. Erickson’s contribution to the business was such that had a dispute arisen between her and her husband regarding those assets and consequently she had instituted proceedings in the Saskatchewan Court of Queen’s Bench the evidence before me would authorize a finding that there had been an unjust enrichment justifying the imposition of the constructive trust remedy in relation to at least 20% of the assets.” 106 Recall that in this case the trust imposed was not a remedy to prevent unjust enrichment but rather a trust imposed to address a wrong committed by Mr. Hyman on the misappropriation of the taxpayer’s funds. It is perhaps of some interest to note that Sarchuk J relied on the comments of the judge in the prior civil trial with respect to the misappropriation to conclude that a constructive trust was clearly implied.

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Hamlyn J’s choice of the date of separation in Stockman as the time when the trust was created is arguably completely inconsistent with the underlying equitable principles governing any notion of a constructive trust.107 In its favour, the date selected offers the benefit of simplicity in answering related questions—for example, when will the trust property be considered to have been disposed of, and when will attribution arise? The Stockman case also illustrates the practical problems, once a court chooses a date, in tracking the potential tax results. For example, in Stock- man, which of the two taxpayers should be responsible for any accrued gain on a subsequent disposition of the property and on what adjusted cost base should the proceeds be based? If the trust arose when the property was initially acquired, both spouses would share in the tax liability arising from any subsequent proceeds of disposition calculated from the original adjusted cost base of the property. If the trust arises on separation, is there a disposition at the time the property is transferred to the trust? May the parties elect that the disposition occur at fair market value at that time and step up the cost base of the property to the trust? If there is a disposition and no rollover is available, the brunt of any tax liability for the increase in value of the property from the time of acquisition would be borne by the constructive trustee to the benefit of the beneficial owner. Problems also arise with respect to any attempt to deem a date for acquisition of the beneficial interest for purposes of the Act. Suppose, for example, that the date of the order of a court is selected. If the Tax Court is not the court of first instance, as in Fletcher, should the Tax Court order be the determinative date? If the case is appealed, does the appel- late court order date prevail? Of what relevance is the date of the court order if the trust property was disposed of in a prior year? How will the parties’ filing positions in prior tax years be affected if such positions are based on a resulting or constructive trust that is yet to be recognized by a court of competent jurisdiction?

Proposals for Legislative Amendment The volume of tax cases since the Fletcher decision highlights both the accelerated rate at which claims for relief based on a finding of resulting or constructive trust are arising for tax purposes and the range of potential tax issues when such claims are recognized. Tax decisions to date also illustrate the difficulties in finding a consistent approach or workable solution to the issues raised. This is not surprising. There is controversy and residual ambiguity surrounding the constructive trust, even in decisions of the Supreme Court of Canada. Nonetheless, a consistent and principled approach must be found. It is unfair to foist this uncertainty on Tax Court judges and taxpayers. One potential solution may be found in tax legislation.

107 If the remedy is based on unjust enrichment, the unjust enrichment likely occurs over time, not on the date of separation, although there may be disagreement on this timing issue.

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One obvious legislative solution would be a provision that would limit the recognition of the constructive or resulting trust relationship for all purposes of the Act. This is clearly not the approach taken by Revenue Canada,108 nor does it appear to be the direction that the court has taken in tax cases to date.109 Notwithstanding, it is not at all clear that constructive and resulting trusts were ever intended to come within the legislative intention of the Act. Limiting the recognition of resulting and constructive trusts for purposes of the Act would eliminate the need to resolve the jurisdictional and timing issues discussed above, and it would offer a clear, simple, and consistent resolution for all resulting and constructive trust cases that may come before the court. However, such a provision would have resulted in a different outcome in cases such as Fletcher and Forest Oil, and perhaps in Savoie, Funk, and Cooray, where such trusts were found in the taxpayers’ favour. Rather than a deeming provision for all purposes of the Act, the definition of trust in subsection 104(1) could be amended to specify that, for purposes of subdivision k, references to a trust shall not include constructive or resulting trusts. This would enable a court to apply other provisions of the Act in appropriate circumstances, such as those relating to beneficial ownership, and to determine the tax consequences arising from a finding of constructive or resulting trust by a court of competent jurisdiction. Such an approach, however, still leaves unresolved matters of jurisdiction and timing of recognition, particularly for remedial constructive trusts. A single deeming rule as to the applicability of subdivision k also would fail to respond to the range of potential tax issues that may arise. For example, the distinction between the appropriate tax relief in the circumstances of remedial versus non-remedial constructive trusts illustrates the deficiencies of such an approach. The tax relief sought in the case of a remedial constructive trust is generally based on income splitting and can be provided through a determination of the beneficial ownership of the property without the imposition of the express trust provisions. In effect, the constructive trustee in this case could be treated in much the same way as a bare trustee for purposes of the Act—that is, as an agent for the beneficial owner. In contrast, only the finding of a trust for purposes of subdivision k could provide the relief sought in Fletcher where a non-remedial constructive trust was found. It might, however, prove workable to enact a deeming rule that requires automatic joinder110 of the parties in any case where a claim for

108 Revenue Canada has expressed its view, supra footnote 28, that the constructive trust is a trust subject to the application of the relevant provisions of the Act. 109 See, for example, Fletcher, supra footnote 3. 110 For example, section 174 provides a process whereby two or more parties may be joined as a party to any appeal in circumstances where the determination of questions of law, fact, or mixed law and fact will affect the tax liability of two or more taxpayers.

(1997), Vol. 45, No. 4 / no 4 688 CANADIAN TAX JOURNAL / REVUE FISCALE CANADIENNE relief is made based on a finding of constructive or resulting trust. Such a deeming provision would permit the Tax Court to consider all aspects of a claim for relief based on the trust relationship, including potential liability of another taxpayer under section 160. Such a deeming provision could provide a solution for volunteers who assert a constructive trust or resulting trust during non-statute-barred years. Joinder might even be required as a condition for relief in appropriate cases where relief is claimed for statute-barred periods.111 In the joined action, tax issues arising outside subdivision k, such as attribution, also could be addressed. In the alternative, the deeming provision might provide that relief on the basis of a constructive or resulting trust will not be provided for any period that is statute-barred other than when the court order is made by a court other than the Tax Court. Given our self-assessment tax system, such a provision is consistent with Canadian tax principles, and it would ensure that taxpayers would not be able to take different filing positions for a statute-barred period. The same cannot be said where another court makes the order that a constructive or resulting trust exists. In that case, however, joinder should be required before the tax issues are addressed by the Tax Court. Filings by both affected parties, similar to those currently required under subsection 74.5(3) to prevent attribution on a matrimonial breakdown, could be required before income is reallocated for tax purposes. With time, such tax considerations might form part of the matrimonial property order, a precedent for which has already been set in the tax treatment of alimony and maintenance payments.112 Some of the key tax issues surrounding non-remedial constructive trusts also could be resolved through a deeming provision. Such trusts frequently arise where the complainant is an innocent third party and not a volunteer seeking income splitting as a form of tax relief based on the trust relationship. Perhaps it would be easier in a joinder application for the Tax Court to consider the full range of remedies available and, in particular, the potential application of subdivision k in those cases.113 Since the non-remedial constructive trust as a cause of action is generally imposed against the wrongdoer, whatever tax relief is necessary in respect of the wronged party could be provided, leaving any outstanding tax liability to fall on the shoulders of the wrongdoer. Again, this approach is consistent with general Canadian tax principles, which provide that even wrongful income and gains are taxable under the Act.

111 The deeming provision might apply as a condition to the finding of a constructive trust and would require a waiver by the parties for any tax liability arising out of that specific issue during the statute-barred period. 112 See, for example, paragraphs 60(b) and (c). 113 It is suggested that the resulting and non-remedial constructive trust not be ordinar- ily recognized for purposes of subdivision k. There is ample precedent for ignoring trusts other than express trusts for purposes of the Act. For example, certain bare trusts, voting trusts, and other family arrangements are often ignored for tax purposes. See generally Cullity, supra footnote 92.

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A statutory deeming provision requiring automatic joinder would clearly not resolve all of the issues arising out of a finding of resulting or constructive trust. However, such a provision would cause taxpayers, particularly volunteers, to carefully consider the potential impact of the relief they are claiming on all of the parties to the transaction, and it would provide a clear avenue for Revenue Canada to fairly assess the parties and collect the appropriate tax revenue.

CONCLUSION While an increasing number of tax cases in recent years have grappled with constructive and resulting trusts, many recurring and unresolved issues remain. Whatever solution is ultimately chosen to deal with such trusts, it is clear that one must be found. Tax cases in the area of resulting and constructive trusts will continue to come before the Tax Court. Judges, taxpayers, and tax practitioners are entitled to some guidance in this ex- tremely complex and evolving area of law.

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