Supreme Court of Canada Reaffirms Purchase Money Resulting Trust

As set out by Mr. Justice Rothstein in Nishi v. RascalTrucking Ltd., 2013 SCC 33:

[1]                              A purchase money resulting trust arises when a person advances funds to contribute to the purchase price of property, but does not take legal title to that property. Where the person advancing the funds is unrelated to the person taking title, the law presumes that the parties intended for the person who advanced the funds to hold a beneficial interest in the property in proportion to that person’s contribution. This is called the presumption of resulting trust. 

 [2]                              The presumption can be rebutted by evidence that at the time of the contribution, the person making the contribution intended to make a gift to the person taking title. While rebutting the presumption requires evidence of the intention of the person who advanced the funds at the time of the advance, after the fact evidence can be admitted so long as the trier of fact is careful to consider the possibility of self-serving changes in intention over time

I should add that the presumption often applies to transfers among related persons as well, such as a parent to an adult child.

In Nishi, the transfer of funds was from a company, Rascal Trucking Ltd. which I will refer to as “Rascal” to Edward Nishi to assist Mr. Nishi in purchasing lands in Nanaimo, British Columbia, that Rascal were sold in a foreclosure proceeding.

Rascal had leased the lands from Kismet Enterprises Ltd. (“Kismet”), and operated a topsoil processing facility. After complaints, the City of Nanaimo removed the topsoil and added it to the tax account. The amount was $110,679.74. Although under the lease, Rascal was required to indemnify Kismet for the costs of removal but did not.

Kismet stopped paying its mortgage, and the lender started foreclosure proceedings. Mr. Nishi bought the land in those proceedings in 2001.

It is noteworthy that the principal of Rascal, Hans Heringa, and the principal of Kismet, Cidalia Plavetic, were friends. Mr. Nishi and Ms. Plavetic were in a common law relationship.

Before Rascal contributed funds to the purchase, Mr. Heringa sent a fax to Mr. Nishi offering $85,000 cash and payment on a mortgage of $25,000, and requesting a second mortgage on the lands, and that Rascal would have the use and eventual ownership of a portion of the lands. When that proposal was not accepted, Mr. Heringa sent another fax stating that he would provide $85,000 unconditionally. Ultimately, Rascal contributed $110,679.74 (the exact amount of the liability). Mr. Nishi purchased the lands for $237,500.

Years later, in 2008, Rascal sued Mr. Nishi claiming that Rascal was entitled to a half interest in the property. One of the arguments Rascal made was that there was an agreement that Rascal would receive an interest in the lands. Another argument was that it was entitled to an interest on the basis of its financial contributions, and that the doctrine of resulting trust applied. Finally, Rascal argued that Mr. Nishi would be unjustly enriched if he were entitled to retain Rascal’s contributions and the whole interest in the lands.

In the Supreme Court of British Columbia, the trial found that there was no contract, nor a resulting trust. Rascal did not intend to have a beneficial interest in the land when it advanced the funds. The trial judge also rejected the claim in unjust enrichment. Rascal had paid the same amount that it would have been required to pay to indemnify Kismet under the lease for the cost of removal of the top soil

The Court of Appeal reversed, and found that the resulting trust applied, and that Mr. Nishi had not met the burden of proving that the funds were a gift. This was based in part on the trial judge’s statement in his reasons for judgment that “there was no issue of a gift.”

In the Supreme Court of Canada, one of the arguments made on behalf of Mr. Nishi was that the purchase money resulting trust should be abandoned in favour of an unjust enrichment analysis. The argument is essentially that the purchase money resulting trust may be subsumed under unjust enrichment, but unjust enrichment is a more flexible doctrine. Mr. Justice Rothstein rejected Mr. Nishi’s argument that purchase money resulting trust should be abandoned. He wrote:

[28]                          Mr. Nishi’s third and fourth arguments can be considered together. In essence, Mr. Nishi argues that the doctrine of unjust enrichment is preferable because of its flexibility in terms of factors to be considered, overall focus on justice between the parties and broader remedial options. However, desire for flexibility does not constitute a compelling reason for departing from the unanimous decision of this Court in Kerr [v. Baranow, 2011 SCC 10] which was issued just two years ago. While flexibility is no doubt desirable in certain areas of the law, the purchase money resulting trust provides certainty and predictability because it relies on a clear rule for determining who holds the beneficial interest in a property. Absent strong dissenting opinions in this Court, contrary decisions in provincial appellate courts or significant negative academic commentary that would justify disturbing such a settled area of the law, there is no reason to abandon the purchase money resulting trust.

But the Supreme Court of Canada did agree with Mr. Nishi’s position that the trial judge was right in finding that the presumption of resulting trust had been rebutted. The trial judge found that when Rascal contributed the funds, Mr. Heringa did not intend for Rascal to have a beneficial interest in the lands. This is reflected in the second fax. In law, “the absence of intention to create a beneficial interest for the transferor” is the same thing as a gift.

The trial judge’s statement that “there was no issue of a gift,” was made in a different context. As explained by Mr. Justice Rothstein:

[39]                          The trial judge’s comment that the there was “no issue of a gift” was made in the context of reviewing Mr. Nishi and Ms. Plavetic’s perspective on the purpose of the payment:
 

In this case, there is no issue of a gift. Neither Mr. Nishi nor Ms. Plavetic considered the plaintiff’s contribution to be a gift. [para. 42]

 Mr. Nishi and Ms. Plavetic did not see the payment as a gift, because as the trial judge went on to describe, Rascal acknowledged its responsibility for a debt to Kismet related to the tax arrears arising from Rascal’s topsoil operation. However, it made no sense for Rascal to make that payment directly to Kismet since Kismet was subject to other liabilities and was essentially defunct. If Rascal had made the payment to Kismet, it would not have assisted Mr. Heringa’s friends to obtain title to the property. Making the contribution to the purchase price, therefore, enabled Rascal to live up to its moral commitment in a way that practically benefited Mr. Heringa’s friends. It also left open the possibility that in the future they might agree to a second mortgage or a transfer of a portion of the property to Rascal. 

 [40]                          Indeed, Mr. Heringa’s instructions to his staff on payment of his contribution towards the mortgage on the property refer to the amount of the tax arrears ($110,679.74) down to the penny. The necessary implication is that Mr. Heringa viewed the payments as connected with that moral obligation. If Mr. Heringa’s intention at that time was for Rascal to take a beneficial interest in the property, the moral obligation would not have been fulfilled since Rascal would have used the payment to obtain a corresponding interest in the land and not to make good on its moral obligation. In other words, for these parties, one payment cannot be used both to discharge the moral obligation and to obtain a beneficial interest in the land. The two intentions are incompatible.

In the result, Rascal is not entitled to a beneficial interest in the lands.