Saturday, May 06, 2006

Locus Poenitentiae

The recent Supreme Court of British Columbia decision in Tribe v. Soiseth, 2006 BCSC 652, contains an in-depth analysis of the affect of evidence of an illegal scheme is admissible to rebut a presumption that when a parent contributes funds to a child to purchase property in the child’s name the parent intends to make a gift to the child. This presumption of gift is called the presumption of advancement, and I have previously written about it here. [Since I wrote this post, the law on the presumption of advancement has changed. See this post for more information.]

The presumption of advancement is an exception to the presumption that when one person buys property in another’s name, the one who has title to the property is holding the property as a trustee for the benefit of the person who paid the purchase price. This is called the presumption of resulting trust, and I have written about it here.

Tribe v. Soiseth is a matrimonial case, but deals with trust law issues.

Ms. Tribe’s parents paid about $216,000 to purchase a condominium that was purchased in Ms. Tribe’s name. The rest of the purchase price was financed by a mortgage to a financial institution for $250,000, which was signed by Ms. Tribe and co-signed as covenantors by her parents. Ms. Tribe also granted her parents a second mortgage for the funds they had advanced to pay for the condominium. The second mortgage was without interest, payable on demand. She also gave her parents an option to buy the condominium for $10.

Ms. Tribe and her husband moved into the condominium, and made the mortgage and strata fee payments. Ms. Tribe’s parents paid the property taxes.

Unfortunately, Ms. Tribe’s marriage broke down about a year and a half later. Her husband, Mr. Soiseth, acknowledged the mortgage to Ms. Tribe’s parents, but argued that the equity belonged to Ms. Tribe, and was a family asset subject to division under the Family Relations Act. The condominium had increased in value significantly, and was appraised at between $825,000 to $850,000.

Ms. Tribe and her father testified that they always intended that the equity in the condominium belonged to the parents. They bought the condominium as an investment, but on the advice of an accountant, arranged with their daughter that she take the title in her own name so that if they sold it in the future at a profit, Ms. Tribe could claim the principal residence exemption from taxes under the Income Tax Act, Canada. Mr. Justice Sigurdson accepted their evidence.

Mr. Soiseth argued that Ms. Tribe and her parents were relying on evidence of a scheme to defraud Canada Revenue Agency to rebut the presumption of advancement. He further argued that evidence of an illegal scheme was not admissible for this purpose. Without evidence of the scheme, the presumption of advancement between parent and child applies, and he could claim an interest in the condominium on the breakdown of their marriage.

Mr. Justice Sigurdson analyzed two lines of authority in Canada, both stemming from an old decision of the Supreme Court of Canada in Scheuerman v. Scheuerman (1916) 52 S.C.R. 625. In Scheuerman, the husband transferred property into his wife’s name in order to avoid his creditors. When the husband sought to get the property back, the majority of the court refused on the grounds that to rebut the presumption of advancement, the husband had to rely on evidence of an illegal scheme. The majority stated that he could not recover even if the husband did not in fact avoid his creditors; it was sufficient if he transferred the property with the intent to avoid his creditors. The minority concurring and dissenting judges in Scheuerman said that intent was not enough; the husband would be prevented from recovering the property only if he did avoid creditors by transferring the property into his wife’s name.

Subsequent decisions, including Krys v. Krys (1928), [1929] S.C.R. 153, and the minority concurring judgment in Goodfriend v. Goodfriend (1971),[1972] S.C.R. 640, have cast doubt on whether the majority decision in Scheuerman remains good law, but have not expressly reversed the older authority.

Mr. Justice Sigurdson also considered English and Australian cases.

Mr. Justice Sigurdson held that because the condominium had not sold, and Ms. Tribe had not claimed a principal residence capital gains exemption, Ms. Tribe’s parents had not actually defrauded Canada Revenue Agency. Accordingly, it was not too late for Ms. Tribe’s father “to repent from the scheme and give evidence of his true intention in registering the property in his daughter’s name in order to rebut the presumption of advancement and recover the property.” In latin, this is called locus poenitentiae, which means place of repentance.

Mr. Justice Sigurdson also found that there was ample evidence for him to find that Ms. Tribe and her father rebutted the presumption of advancement without relying on the evidence of the illegal scheme. He said at paragraphs 84 and 85:

[82] In both Scheuerman and Tinsley v. Milligan, the courts found that it is only if the claimant’s confession of the illegal scheme is his sole or central means to contradict that presumption that he must fail.

[83] In the case at bar, I think that there is ample credible evidence, beyond the evidence of the illegal scheme, that persuades me that the intention of the parties to the transaction was that the beneficial ownership would remain in the parents. As I noted above, this case is unusual in that the presumption of advancement usually arises in cases where the parties are adverse or one party has died. Here, Mr. Tribe and, more significantly, his daughter, to whose benefit the presumption operates, have both testified that it was their mutual intention, at the time the property was purchased, that the parents would have the beneficial interest. I recognize that it may be convenient for the plaintiff and her father to take the position that they are taking now, given the divorce proceedings, but I have considered that in assessing their evidence, which I found to be credible.

[84] As well, I think that the documents drawn up at the time, the mortgage and, in particular, the option to purchase, both of which were registered, show an intention on the part of the parties that the true value of the land would be for the benefit of the parents. The effect of the documents signed by the daughter was to give the parents the means to ensure that that intention could be realized. These are not new or secret documents. The parents had full control of the property and these documents were registered on the closing of the transaction. The parents could have put legal title in their names at that time if they wished.
With respect, I have some difficulty with Mr. Justice Sigurdson’s reasoning in so far as the second mortgage is concerned. Arguably, the mortgage is evidence that Ms. Tribe’s parents lent her funds to enable her to buy herself a condominium, and is inconsistent with the notion that they were advancing funds as purchasers for themselves. If I am right, the relationship between Ms. Tribe and her parents is one of a debtor and creditors; rather than of a trustee and beneficiaries.

I suggest that apart from the evidence of the scheme to avoid income taxes, the evidence that Mr. Justice Sigurdson refers to in his reasons for judgment is at least as consistent with the notion that Ms. Tribe’s parents were endeavoring to assist her to get into a rising real estate market for her benefit, while protecting their advance of funds with the second mortgage and the option to purchase against such a contingency as a breakdown of their daughter’s marriage as with the notion that Ms. Tribe’s parents were buying the condominium as an investment for themselves.

1 comment:

Anonymous said...

Does the 2007 Pecore decision, which states that presumption of advancement does not apply to adult children any more in Canada, apply to transactions that occurred in 1998, but are being disputed and trialed now? Opposing counsel argues that the transactions occurred in 1998, but the law as it pertains to presumption of advancement changed in 2007. The Pecore transaction itself happened around the same time (1998) and decision was issued in 2007. Would very much appreciate your response. Thank you!