Wednesday, April 01, 2009

Do-It-Yourself Trust: Canada v. Rudolf

Mr. Jozef Rudolf owes over $185,000 in taxes. Canada Revenue Agency has registered a judgment against land registered in Mr. Rudolf’s name, and is seeking to have the land sold to collect the taxes from Mr. Rudolf.

Mr. Rudolf bought the land in 1989 for $30,000. In 1999, he transferred the land from himself to himself in trust. He also registered a document entitled “Orol 120 Trust.”

When Canada Revenue Agency brought the proceedings to have the land sold, Mr. Rudolf argued that he really held the land in trust for his sister, Ludmila Kukuckova. He didn’t have any beneficial interest in the land.

If the court accepted Mr. Rudolf’s claim that he held the land in trust—and if the transfer to himself at trustee was not done for the improper purpose of fraudulently avoiding his creditors—then Canada Revenue Agency would not be entitled to have the land sold. This is because the essence of a trust is that although the trustee has title, the beneficial ownership belongs to the beneficiaries. Canada Revenue Agency can’t take something that doesn’t really belong to Mr. Rudolf to satisfy his debt.

But Canada Revenue Agency argued that Mr. Rudolf did not create a valid trust. The document registered on the title to the land identifies Mr. Jaroslav Stepan, who is a friend of Mr. Rudolf, as the “grantor.” This document then says that Mr. Rudolf would receive and hold the land for the “use and benefit” of his sister. But Mr. Stepan had no interest in the land when he signed the document. He could not be the grantor or settlor of the trust.

Mr. Justice McEwan, in Canada v. Rudolf, 2009 BCSC 77, agreed with Canada Revenue Agency’s position that the trust was invalid. He found that the trust documents did not meet all of what are known as the three certainties of a trust: certainty of the intention to create a trust, certainty of the trust property, and certainty of the beneficiaries. Mr. Justice McEwan wrote at paragraphs 11 and 12:

[11] It is clear that Mr. Stepan had no interest in the property that could qualify him as a grantor. He maintained that when Canada Revenue asked him and he testified to that effect. Mr. Rudolf’s evidence is to the effect that he had advice from non-lawyers he trusted who told him this was the way he had to do it. No property passed from Mr. Stepan to Mr. Rudolf as Trustee. It was his own property.

[12] The document itself only identifies Ms. Kukuckova’s interest as the “use and benefit” of the property. There is no provision for her, as beneficiary, to ultimately take the property. There is a 25 year limit with a provision that it “may” be renewed. There is an incomplete and unspecified transfer.

With respect to the 25 year limit, Mr. Justice McEwan also wrote that this provision was inconsistent with a transfer the beneficial interest in the land to Mr. Rudolf’s sister. He wrote at paragraphs 14 and 15:

[14] The trust instrument in this case offends these principles in giving the purported “use and benefit” of the property over to Ms. Kukuckova and then depriving her of it 25 years later.

[15] On the facts it is evident that nothing changed with the registration of the trust. The property continues to be Mr. Rudolf’s residence, and Ms. Kukuckova has never exercised anything that could be described as “use and benefit” except to visit occasionally.

In the result, Mr. Rudolf lost the argument that he had validly transferred the land to a trust for the benefit of his sister. Mr. Justice McEwan did leave open the possibility that his sister might have a claim to an interest in the land if she can show that she contributed funds to the purchase of the land.

A British Columbia lawyer with experience in trust law could have created a binding trust for Mr. Rudolf, which would have shielded the land from Canada Revenue Agency-- provided that it was not done for the improper purpose of defrauding creditors. Mr. Rudolf would still owe the taxes, but the land would have been protected.

This case illustrates what can go wrong when people try to create trusts without using a lawyer.

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