Constructive and Resulting Trusts: Challenging Tax Boundaries · 2019. 2. 9. · constructive trust has arisen most frequently in cases of matrimonial break-down and regardless of

(1997), Vol. 45, No. 4 / no 4 659

Constructive and Resulting Trusts:Challenging Tax Boundaries

Catherine Brown and Cindy L. Rajan*

PRÉCISAu cours des dernières années, un nombre croissant de demandesd’allégement fiscal ont été présentées fondées sur l’existence supposéed’une fiducie judiciaire ou d’une fiducie par déduction. Les décisions dufisc à l’égard des fiducies judiciaires traduisent l’incertitude doctrinaleentourant les fiducies judiciaires à titre de mesure corrective ou de droitfondamental. La fiducie découlant de la loi, bien qu’elle ne fasse pasl’objet du même débat doctrinal, doit être prouvée par une intentioncommune évidente.

Un examen de la jurisprudence dans ce domaine permet dedécouvrir plusieurs questions récurrentes. La compétence de la Courcanadienne de l’impôt à établir l’existence d’une fiducie judiciairecorrective constitue une de ces questions. La Cour canadienne del’impôt a également été appelée à se prononcer sur le traitement fiscalapproprié aux parties lorsqu’une fiducie judiciaire a été établie par untribunal supérieur compétent. Une autre question récurrente est lemoment de l’établissement d’une fiducie judiciaire : s’agit-il du momentde l’enrichissement sans cause ou de l’acte préjudiciable, lorsquel’obligation de restitution survient, ou d’un autre moment déterminé parle tribunal? Cette question du moment de la création de la fiducie estétroitement liée au débat doctrinal sur la nature de la fiducie judiciare.Enfin, la question fondamentale de savoir si les fiducies judiciaires et lesfiducies par déduction devraient être admises pour l’application de laLoi de l’impôt a été soulevée à maintes reprises, mais aucune réponsedécisive n’a été donnée.

Bien qu’un certain nombre de solutions à ces questions aient étéproposées dans la jurisprudence, il faudra peut-être finalement s’enremettre à l’intervention du législateur pour résoudre le problème. Dessuggestions de modifications législatives sont apportées en conclusionde 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 researchassistance and officers of Revenue Canada, Calgary District Office, for their insightfulcomments.

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ABSTRACTIn recent years, an increasing number of claims have been made for taxrelief based on the presumed existence of a constructive or resultingtrust. The tax decisions in respect of constructive trusts reflect thedoctrinal uncertainty surrounding the constructive trust as a remedy or asubstantive right. The resulting trust, while not plagued by the samedoctrinal debate, requires a clear finding of common intention.

A review of the tax jurisprudence in this area reveals several recurringissues. One issue is the jurisdiction of the Tax Court of Canada todetermine the existence of a remedial constructive trust. The Tax Courtalso has been called upon to determine the proper tax treatment of theparties in situations in which a constructive trust has been found by acompetent superior court acting within its jurisdiction. Another recurringissue is the point in time at which a constructive trust arises: is it the timeof the unjust enrichment or wrongdoing, when the duty to makerestitution arises, or some other time determined by the court? Thistiming issue is closely tied to the doctrinal debate as to the nature of theconstructive trust. Finally, the fundamental issue of whether constructiveand resulting trusts should be recognized at all for purposes of theIncome Tax Act has been raised on numerous occasions, but notconclusively determined.

While a number of solutions to these issues have been advanced inthe case law, their resolution may ultimately rely on legislativeintervention. The article concludes with some suggestions for suchlegislative amendment.

INTRODUCTIONSince 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 taxpayersfor 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 ondeath,4 or to gain a more favourable overall tax result on the dispositionof property.5 These claims raise interesting issues about the proper taxtreatment of the parties while the constructive or resulting trust is inexistence, 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).

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the more general question of whether the statutory regime in subdivision kof the Income Tax Act,6 otherwise applicable to express trusts, is intendedto apply to constructive and resulting trusts. These issues and some sug-gestions for their resolution are the subject of this article.

Under current Canadian law, a constructive trust may arise in twosituations: first, as a substantive right, particularly in cases of misconductby a fiduciary (non-remedial constructive trust); and second, looking torecent Canadian trends, as a remedy for unjust enrichment (remedial con-structive trust). As discussed further below, a remedial constructive trustis a remedy granted by a court of equity in its discretion. As a remedy, theconstructive trust has arisen most frequently in cases of matrimonial break-down and regardless of the intention of the parties; however, it is clearthat the constructive trust is an evolving concept that extends far beyondmatrimonial cases.

The resulting trust also is often considered in the matrimonial context.Unlike the finding of a remedial constructive trust, the finding of a result-ing trust does not require the court to exercise its equitable discretion.Resulting trusts arise by operation of law in three situations: first, wherea trustee holds property under an express trust that fails; second, when Apurchases property and title is taken in the name of B; and, finally, whenA voluntarily transfers property into the name of B or into the name of Aand B jointly. Common to each of these resulting trusts, and differingfrom the constructive trust, is the notion that the parties intended that theproperty be held in trust.

Tax issues arising out of the existence of a resulting or constructivetrust may arrive before a court in one of two ways. First, a hopefultaxpayer may claim for relief based on a finding by the Tax Court that aconstructive or resulting trust was in existence, with consequences forbeneficial ownership and taxable income. Such claims may raise jurisdic-tional issues in respect of remedial constructive trusts which do not arisein respect of non-remedial constructive trusts or resulting trusts, particu-larly if the matter is heard in the Tax Court. Alternatively, a dispute maycome before the Tax Court if another court of competent jurisdiction hasmade a finding of a constructive or resulting trust, and the taxpayer andthe minister of national revenue (“the minister”) disagree on the specifictax consequences that should follow.

In the absence of specific direction in the Act, the starting point inanalyzing the proper tax treatment of the parties alleging or otherwisegoverned by a relationship of constructive or resulting trust is found inthe rules of private law. As will be seen, determination of the proper taxtreatment of the parties is further complicated by the position in Canadiantax law that the trust, or at least a trust for purposes of subdivision k, is aseparate 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”). Unlessotherwise stated, statutory references in this article are to the Act.


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recognized for all purposes of the Act, this will result in a new taxableentity that must be factored into the overall tax treatment of the partieswhen such a trust is found.

CONSTRUCTIVE TRUSTSHistorical BackgroundThe Canadian position on constructive trusts has been set out by theSupreme Court of Canada in a number of decisions, including Pettkus,Sorochan,7 Rawluk,8 and Beblow.9 Its complex history can be summarizedby 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 traditionalEnglish law, constructive trust was regarded as a substantive institutionsimilar to an express trust, i.e. requiring a finding of an actual or presumedintention, without making a distinction between implied, resulting or con-structive trusts. In the United States, on the other hand, the constructivetrust had long been recognized, not as an institution, but as a broadrestitutory device. According to Mr. Justice Cory, Mr. Justice Laskin’s rea-sons in Murdoch v. Murdoch indicate that he was closely aligned to theAmerican approach, and Mr. Justice Dickson’s reasons in Pettkus v. Becker“clearly demonstrate the broad and equitable nature of the remedial con-structive trust and its applicability to any property dispute.” Until Pettkus,constructive trust was viewed largely in terms of law of trusts, hence theneed for the existence of an actual fiduciary relationship. In Pettkus, theCourt moved to an approach more in line with restitutory principles byexplicitly recognizing constructive trust as one of the remedies for unjustenrichment. According to Mr. Justice Cory:

These cases show that in Canada the doctrine of remedial construc-tive trust has been accepted for almost a decade as an importantremedial device whose prime function is to remedy situations of unjustenrichment.10

The constructive trust established under the Pettkus test was essen-tially a response to the need to find an equitable method of dividingproperty in cases of matrimonial dispute. It is commonly referred to as aremedial constructive trust since its purpose is to prevent unjust enrich-ment, 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 remedyingunjust enrichment. They also noted that other remedies were available such as monetarydamages which in some instances might be a more appropriate remedy.”


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the remedy. Under the Pettkus test, three requirements must be satisfiedas a condition to a finding of unjust enrichment:11 an enrichment, a corre-sponding deprivation, and the absence of any juristic reason for theenrichment, such as a contract or a gift. In Canada, this form of remedialconstructive trust has evolved beyond the matrimonial context.12

The history of the constructive trust has created uncertainty about itscurrent doctrinal basis.13 Although it has been argued that the currentposition in Canada is that the constructive trust is to be regarded as aremedy and not a substantive institution,14 it is not clear that a courtwould refuse to impose a non-remedial constructive trust on the basis ofthe British institutional notion of the trust as a cause of action in appro-priate circumstances.15 As will be seen, the specific nature of theconstructive trust may have important tax consequences since at least oneTax Court decision appears to have distinguished between the remedialand non-remedial constructive trust when providing tax relief.16

Notwithstanding decisions of the Supreme Court of Canada that focuson 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, suprafootnote 8, by Dickson J (as he then was), with Laskin CJ (as he then was) and Spence Jconcurring.

12 See, for example, Syncrude, supra footnote 8; Lac Minerals Ltd. v. Int’l CoronaResources (1989), 61 DLR (4th) 14 (SCC); and Sarchuk J’s comments in Karavos, suprafootnote 10.

13 For a discussion of the evolution of the nature of the constructive trust as a substan-tive right or a remedy, see John L. Dewar, “The Development of the Remedial ConstructiveTrust” (February 1984), 6 Estates and Trusts Quarterly 312-65; and D.W.M. Waters, “TheConstructive Trust in Evolution: Substantive and Remedial” (June 1991), 10 Estates andTrusts 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 onunjust 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 Englishapproach. We also know that the constructive trust as a remedial device has been acceptedby Canadian courts.” Also see Dewar and Waters, supra footnote 13.

16 For example, see Fletcher, supra footnote 3, where the court found that the construc-tive trust was a trust for purposes of subdivision k. McLachlin J discussed the remedialnature 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 thetrial judge awarded—title to the matrimonial home—is justified on the principlesgoverning the action for unjust enrichment. Two remedies are possible: an award ofmoney on the basis of the value of the services rendered, i.e., quantum meruit; andthe 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 mustestablish a direct link to the property which is subject to the trust by reason of theplaintiff ’s contribution. This is the notion underlying the constructive trust in Pettkusv. Bekker, supra, and Sorochan v. Sorochan, supra, as I understand those cases. Itwas 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 beena clean break. Although the remedial constructive trust is clearly part ofour common law, the non-remedial constructive trust also appears to remain.

Tax CasesThe nature of the constructive trust for tax purposes is important for tworeasons. First, if the constructive trust is an equitable remedy ordered bya court in its discretion, the question arises whether the Tax Court ofCanada, as a court of first instance, has jurisdiction to find, or even toconsider the existence of, a constructive trust. Second, whether the con-structive trust is a remedy imposed by a court of competent jurisdictionor whether it is a substantive right raises the issue of timing surroundingthe creation of the trust, an issue about which there appears to be somedisagreement.17

Claims for tax relief on the grounds of a resulting or constructive trustbegan in earnest in Canada in the 1990s18 after the decision in Fletcher.19

Previously, few cases considered the resulting or constructive trust rela-tionship, although early claims indicated some promise that such arelationship might be recognized between the parties for tax purposes.20

A number of the recent resulting and constructive trust cases involvespouses, including Nelson,21 Holizki,22 and Collins.23 Unlike the 1980swhen spouses attempted to split income from work activities on the basisof a partnership, the 1990s mark the advent of attempts by taxpayers tosplit proceeds from the disposition of property, which they argue is ben-eficially owned by both. The argument, particularly in the case ofconstructive 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 unjustenrichment arose? See Waters, supra footnote 13, and the discussion below under theheading “When Does the Trust Arise?”

18 Until recently, attempts to split income, particularly between spouses, were based onpartnership or more rarely on the existence of a constructive trust as an alternative to aclaim 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 wassuccessful); 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 thatsince he lived in Quebec, a province that had a community of property regime, half hissalary and rental income should be taxed to his wife. The Supreme Court of Canada heldthat income from the property was under the control of Mr. Sura, that he received thebenefit 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 viewof the range of circumstances in which the taxpayer will argue, or the TaxCourt will find, a constructive trust. In Fletcher, the constructive trusteewas a wrongdoer. In Forest Oil,25 the Federal Court—Trial Division founda constructive trust as a remedy for unjust enrichment by the Crown. InSavoie,26 a constructive trust was found to limit tax liability of a taxpay-er’s spouse under section 160. In Funk,27 the court found a constructivetrust to enable a taxpayer, as beneficial owner of the equitable estate in adevelopment property, to deduct certain construction expenses.

Throughout this broad spectrum of circumstances in which a construc-tive trust may arise, there is evidence that the two historical categories inwhich such trusts have been found for tax purposes—cases of misconduct(the British approach) and a remedy for unjust enrichment (the US andcurrent 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 argumentthat a constructive or a resulting trust exists. Each of these categories willbe dealt with in turn.

Cases of MisconductThe ground-breaking decision in the recognition of a constructive trustfor tax purposes was Fletcher. In that case, the taxpayer, a non-residentof Canada, gave the wrongdoer, Mr. Hyman, power of attorney to sell hishome. Mr. Hyman used the sale proceeds to acquire a second mortgageon a piece of tarsands property in which he was personally involved. Thevalue of the tarsands property fell, and the second mortgage became worth-less. The taxpayer sought to claim a capital loss under section 115 on thedisposition of his capital interest in a Canadian trust. The taxpayer’sargument based on the existence of an express trust failed. Tax plannerswere then startled to learn that not only was a constructive trust to berecognized for tax purposes, or at least for purposes of section 115, but inaddition, the constructive trust was to be recognized as arising at a datesome five years before the date of the actual judgment.28 In fact, the

view of the ownership of the property upon Mr. Sura’s death and confirmed that his wifewould be the co-owner of the community property with respect to succession duties andestate tax. Unfortunately, the logic in Sura may apply only if the parties have ended thecommunity of property regime by death or divorce. Constructive and resulting trusts maytherefore 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 trustfor tax purposes in response to a question that referred to the Fletcher decision: “It is our

24 Continued . . .



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constructive trust was deemed to have arisen at the time of the misappro-priation 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 byFletcher in the fiduciary. This relationship existed at the time that the“misappropriation” by Hyman took place. Furthermore that “misappropria-tion” occurred while Hyman was acting within the general scope of hisfiduciary duty. It is my understanding of the various decisions includingPettkus v. Becker that equity imposes express trust obligations upon the fidu-ciary who abuses that trust and confidence. Applying these principles to theevidence in the present appeal the existence of a constructive trust is obviousand the fiduciary, Hyman, in these circumstances was a constructive trustee.30

Sarchuk J’s finding of a constructive trust in Fletcher is consistent withthe reasoning of the British courts that a non-remedial constructive trustis imposed in cases where a fiduciary is guilty of wrongdoing.31

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

view that a constructive trust will be a trust that is subject to the application of all relevantprovisions of the Act. In these trusts, the constructive trustee usually has control of thetrust property within the meaning of subsection 104(1) of the Act. Such a trust would bedeemed to have been created at the time the property or control thereof is acquired by theultimate constructive trustee, or later on, as the circumstances may require. Normally, thetime of the court judgment would not be relevant to this determination. In our opinion, aconstructive trust would be a personal trust within the meaning of the definition containedin subsection 248(1) of the Act.”

29 It may be of some significance that in Fletcher, Sarchuk J considered a prior civilproceeding with respect to the property. The language used by the judge in the civil matterimplied that a constructive trust relationship arose between the parties at the time of themisappropriation. Sarchuk J stated, supra footnote 3, at 628; 2347: “While the learned trialjudge did not specifically state that a constructive trust had been created that conclusion isimplicit in his reasoning. Although I am not bound by the judgment it is relevant to theissues 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 aloss on the disposition of his capital interest under section 115.

32 Forest Oil, supra footnote 3.

28 Continued . . .


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VolunteersInitial attempts to rely on the doctrine of unjust enrichment enunciated inPettkus have met with little success in the Tax Court where taxpayershave “volunteered” their constructive trust relationship. In fact, attemptsto split income on the basis of a constructive trust in harmonious familysituations have generally been met with considerable skepticism by the TaxCourt 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 de-vice the primary purpose of which is to remedy situations of unjustenrichment and which has more recently been utilized particularly in mari-tal property disputes. In such cases it is fair to say that the parties “have ateach other with considerable gusto” and the assertions of unjust enrichmentare thoroughly and methodically canvassed. That is not the norm in appealsunder the Income Tax Act such as this.33

Sarchuk J reached a similar conclusion in Karavos, where both thehusband and the wife reported in their income tax returns one-half of theproceeds from the sale of a restaurant held in Mr. Karavos’s name. Infinding that no constructive trust existed, Sarchuk J stated unequivocallythat to make the inquiry necessary over the “totality of a marital relation-ship . . . is inappropriate in an income tax context.”34

Attempts to split income by virtue of a constructive trust were alsodefeated by Bowman J in Collins. In that case, the taxpayer and his wifeowned the shares of their respective corporations in such a manner as toavoid the associated corporations provisions in the Act. Shares of one ofthe corporations, Sherkston Resorts Inc. (“Sherkston”), were sold at aprofit. Mr. Collins, the registered owner of the Sherkston shares, arguedthe existence of a constructive trust in an attempt to split the gain thereonwith his wife. Bowman J made short work of the taxpayer’s assertion. Hefound that even if unjust enrichment and corresponding detriment could befound, there was no absence of juristic reason for the enrichment and depri-vation. In fact, according to Bowman J, the juristic reason for Mr. Collins’sownership 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 trustshave met with better results for the taxpayer. In Anderson Estate36 andSavoie, both involving family situations, the Tax Court found sufficientevidence of contribution to support a claim of beneficial ownership in theproperty.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.


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trust, according to Mogan J, since the property had already been trans-ferred to the beneficial owner pursuant to minutes of settlement. The onlyissue to be resolved was whether the claimant had a beneficial interest inthe property before the taxpayer’s death.38 If so, subsection 70(5) couldnot apply in respect of the transferred property on the death of the testa-tor and legal title holder, since it was already beneficially owned by theclaimant before the testator’s death.39 That beneficial interest was foundon the evidence. Savoie involved the beneficial ownership of land by ataxpayer who had been married to her husband for over 30 years and withwhom she had raised eight children. Bowman J found both a constructiveand a resulting trust.40 Therefore, a sufficient interest in the subject prop-erty was held by the transferee to avoid liability under subsection 160(1)for the tax liability of the transferor/constructive trustee.

RESULTING TRUSTSThe Resulting Trust at Common LawResulting trusts, like constructive trusts, arise by operation of law. How-ever, a key element of the resulting trust is the inferred or presumedintention to create a trust.41

The circumstances under which a resulting trust will arise can be tracedto two House of Lords decisions, Pettitt 42 and Gissing,43 neither of whichproduced 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 haveimposed 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’ssister for almost 50 years. In issue was whether this care entitled the latter to part ofAnderson’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 supportthe 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 contribu-tion evidencing an agreement; it has also been explained as a constructiveagreement. . . . All of this is settled law. . . . The courts are looking for a commonintention manifested by acts or words that property is acquired as a trustee. . . .

The difficulty experienced in the cases is the situation where no agreement orcommon intention is evidenced, and the contribution of the spouse without title canbe characterized as performance of the usual duties growing out of matrimony.There are many examples of this. . . . Some of these situations may be analyzed asagreement or common intention situations. Such intention is generally presumedfrom a financial contribution. The doctrine of resulting trusts applies. In others acommon intention is clearly lacking and cannot be presumed. The doctrine of re-sulting trust then cannot apply. It is here that we must turn to the doctrine ofconstructive trust.42 Pettitt v. Pettitt, [1970] AC 777 (HL).43 Gissing v. Gissing, [1971] AC 886 (HL).


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a common intention must be found, and such intention cannot be found orimputed if it is not supported by the evidence.44

While the resulting trust is not plagued by the same doctrinal debate asthe constructive trust as to whether it is a remedy or a substantive right, itis not without its difficulties since the requisite element of intention mustbe found to establish the trust relationship.

Tax CasesTax cases in which resulting trusts are considered rely in large measureon the tests set out in Pettkus and in Rathwell. For example, in describingthe resulting trust in Karavos, Sarchuk J referred to the reasoning of theSupreme Court in Rathwell:

In Rathwell v. Rathwell, the Supreme Court of Canada confirmed that aresulting trust may arise in circumstances where the parties have a “com-mon intention” that the beneficial interest should not belong solely to theperson holding legal title but is to be shared between such persons. Suchcommon intention can be ascertained by examining whether evidence existsof an express declaration of common intention that the non-titled party wasto have a beneficial interest in the property. The Supreme Court also notedthat it is appropriate for a court to consider whether a “common intention”existed by examining the facts and circumstances surrounding the acqui-sition of the property. If the person without title has contributed to acquisi-tion or improvement of the property the doctrine of resulting trust may beengaged.45

In recent years, a number of tax decisions have grappled with theresulting trust, most commonly in situations where tax relief is beingsought by the taxpayer. These cases have met with mixed results and havecreated additional confusion about the facts necessary to support either aconstructive or a resulting trust. In general, however, those tax cases inwhich a resulting trust has been found have expressly relied on a findingof intention by the parties, which either has been directly communicatedor can clearly be inferred from the evidence.

44 The inherent difficulties with the test of common intention were summarized inPettkus, supra footnote 1, by Dickson J (as he then was) at 842-43; 270: “In Murdoch, itwas held that there was no evidence of common intention. In Rathwell, supra, commonintention was held to exist. Although the notion of common intention was endorsed inMurdoch and in Rathwell, many difficulties, chronicled in the cases and in the legalliterature on the subject, inhered in the application of the doctrine in matrimonial propertydisputes. The sought-for ‘common intention’ is rarely, if ever, express; the courts mustglean ‘phantom intent’ from the conduct of the parties. The most relevant conduct is thatpertaining to the financial arrangements in the acquisition of property. Failing evidence ofdirect 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 mort-gage loan over a period of years.”

45 Karavos, supra footnote 10, at 1004; 2211-12.


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Cases Where Common Intention Was FoundFortunately, the news is not all bad in the quest for tax relief on the basisof a resulting trust. In Holizki, Rothstein J found that there was no attri-bution to the taxpayer of income arising on the sale of shares which wasincluded in the wife’s income since the wife was the beneficial owner ofthe shares under a resulting trust. A common thread in the finding ofintent in this decision was that the parties were unsophisticated and hadbeen following the advice of their accountant with respect to ownershipmatters.46 Both spouses contributed to the business, and both spousesundertook liabilities. Both spouses also asserted that at all times they hadintended to share the property of the business equally. It was thereforereasonable to conclude, according to Rothstein J, that there was a com-mon intention for the appellant to hold a portion of the property of thebusiness on a resulting trust for his wife.

Most recently, in Cooray,47 resulting trusts were found in circumstanceswhere a parcel of land was purchased by a group of people for the pur-pose of building family homes. The family homes were not built, and theland was sold eight years later at a substantial profit. One issue before thecourt was whether the spouses of the purchasers had a beneficial interestin the land and a corresponding entitlement to share in the profits arisingfrom the sale of the land. Bowie J referred to the decision in Rathwell andconcluded that there was a resulting trust in favour of the wives.

Bowie J found that the evidence supported the common intention of allthe appellants and their wives to be equal owners of the tenancies incommon. In particular, he referred to the fact that the appellants and theirwives had all worked continuously since immigrating to Canada and con-tributed their earnings to joint bank accounts, which funds were used tosatisfy both joint needs and individual needs. Although there was somedisparity in the amounts earned by the husbands and the wives, Bowie Jhad no difficulty inferring that the intention of each couple was to shareequally in the proceeds of their efforts. Similarly, Bowie J was satisfiedthat each couple had a common intention to share equally the ownershipof their particular parcel of land, the payments in respect of which weremade from the joint bank accounts.

As discussed previously, Bowman J also found the necessary intentionfor a resulting trust in Savoie. Although Mr. Savoie was deceased at thedate of the trial, Bowman J found the necessary intent in Mrs. Savoie’sevidence 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, suprafootnote 18, where the taxpayer’s lack of sophistication seems to be directly related to afavourable 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 yetreported].


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their family assets as common assets. Bowman J also noted that the par-ties were both uneducated, although it is unclear whether this factorinfluenced his finding of intent. The matter may be moot, however, sinceBowman J also stated that the facts supported the finding of a construc-tive trust.

Cases Where Common Intention Was Not FoundIn 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 theimportation of intention is impossible or unreasonable” were referred towith approval. Such was the case in Nelson.

In Nelson, the taxpayer sold farmland, which was registered in hisname alone. The farmland had been held by the taxpayer’s parents injoint ownership before being transferred by his mother to the taxpayer injoint ownership with her after his father’s death. The taxpayer farmed theland with his mother and subsequently with his brother. Ultimately, thetaxpayer acquired all the relevant farmland. When the taxpayer disposedof the farm, he realized a substantial capital gain, one-half of which heincluded in his income and the other half of which his wife included inher income. The minister included the full amount of the capital gain inthe taxpayer’s income. The taxpayer appealed to the Tax Court on thebasis that he held a one-half interest in the relevant property for his wifeon either a resulting trust or a constructive trust. The taxpayer’s appealwas dismissed on both arguments.48

In respect of the resulting trust, the court concluded that there was nosubstantive evidence to establish that Mrs. Nelson and her husband hadalways viewed the beneficial ownership of the farm as joint and that shehad 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 hisconclusion, Sarchuk J focused on the fact that the farmland had alwaysbeen in Mr. Nelson’s family and, despite various intrafamily transfersover the years, there was never any express desire or intention other thanto ultimately transfer the land to Mr. Nelson and not into the joint namesof Mr. and Mrs. Nelson. Further, there was no evidence that Mrs. Nelsonhad ever paid part of the purchase price for the farm properties, nor washer involvement over the years in the farming operations such that itconstituted a contribution in kind to the purchase price.

Sarchuk J then referred to Pettkus and concluded that there was littleor no evidence consistent with the existence of expressed or impliedintention and resulting trust. Sarchuk J also concluded that there was noconstructive 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 find-ing of a resulting trust in Karavos. Half the proceeds from the sale of arestaurant held in Mr. Karavos’s name were included in his wife’s in-come. The minister sought to attribute the entire sale proceeds to Mr.Karavos under subsection 74.1(1). Sarchuk J did not find an express dec-laration of common intention and noted a lack of evidence relating to theacquisition of the property from which a common intention might prop-erly be inferred:

In my opinion it would be most inappropriate to imply [sic] a commonintention where the [parties’] conduct before and after the acquisition ofthe property is “wholly ambiguous” or its association with the allegedagreement 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 Jrefused to find a resulting trust, again referring to Pettkus and the com-ments therein that a resulting trust is not available where the imputationof intent is impossible or unreasonable. In Wong, the taxpayer claimed aloss on the disposition of shares he claimed were held on a resulting trustby his brother. Teskey J found that the resulting trust relationship was notproven and there was no reasonable explanation for why the shares wereheld in his brother’s name.

RECURRING ISSUESRegardless of the court’s findings in decisions involving constructive andresulting trusts, a number of recurring issues have emerged.

Constructive Trusts and Jurisdiction of the Tax CourtDoes the Tax Court of Canada Have Jurisdiction To Determinethe Existence of a Remedial Constructive Trust?In Nelson, the minister argued that the doctrine of constructive trust wasessentially an equitable remedy and that its application required an orderof a court of competent jurisdiction such as the superior court of a prov-ince; the Tax Court of Canada, as a statutory court, clearly lacked thatequitable jurisdiction. Notwithstanding, Sarchuk J concluded for purposesof the appeal, and without deciding the issue, that the right existed in theTax Court of Canada to apply a remedial constructive trust in exercisingits powers pursuant to section 171. This type of remedial constructivetrust is the type alluded to in Pettkus, which was intended to preventunjust enrichment.

In 1993, three years after Nelson, the minister again argued in Savoiethat the Tax Court of Canada did not have jurisdiction to impose a con-structive trust. Bowman J shared none of Sarchuk J’s seeming reluctance

50 Karavos, supra footnote 10, at 1004; 2212.51 Supra footnote 5.


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about addressing the issue. He responded to the minister’s argument byspecifically referring to Nelson and Sarchuk J’s decision to leave thematter 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 neces-sary to support both a resulting trust and a constructive trust of a 50 percentinterest in the property are present and I must therefore answer the ques-tion which my brother Sarchuk, J.T.C.C. left open. I do not think that thedoctrine can be invoked only by a court having jurisdiction to make adeclaration as between two conflicting spouses. It is a substantive doctrinethat goes to a determination of the true ownership of the property—a mat-ter that is germane in an income tax appeal where the Minister of NationalRevenue seeks in effect, to cause a spouse’s liability for tax to followproperty that he says was owned by the husband and transferred to hiswife. This court has an obligation in such a dispute to determine the trueownership.52

The matter was not to end there. Two years later, in Karavos, theminister again argued before Sarchuk J that the constructive trust was anequitable remedy which the Tax Court of Canada did not have authorityto invoke in the exercise of its jurisdiction under section 171.53 The min-ister urged Sarchuk J to “not make assumptions in the context of aparticular tax appeal as to whether the equitable remedy of constructivetrust would be granted by a court having jurisdiction to do so” or “retro-actively impose a declaration of a restitutory nature on financialtransactions which occurred several years ago.”54 Sarchuk J again respondedwith concern, this time about the appropriateness of the imposition of aremedial constructive trust in a tax context:

A constructive trust is a mechanism by virtue of which a court with equita-ble jurisdiction can grant redress to an unjustly deprived person. Indetermining whether unjust enrichment exists and restitution through theinvocation of a constructive trust is appropriate a court may take into ac-count the deprived person’s actual financial contributions, (which mayproperly include the contribution of earnings towards household bills andmaintenance), all work performed in relation to the property, both physicaland otherwise, and other factors as the performance of housekeeping du-ties, the raising of children[,] etc. The result is that effectively a court isrequired to embark on an examination of the totality of a marital relation-ship extending over a period of 30 years to determine whether an unjustenrichment occurred and whether it would be appropriately remedied by adeclaratory order vesting the claimant with title to property or by grantinga monetary award. In my view such an inquiry is inappropriate in an in-come 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 restitu-

tion, which may be imposed by courts having equitable jurisdiction to do so as one ofseveral possible alternative remedies in the face of unjust enrichment.” Karavos, suprafootnote 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 necessaryto meet the duties of the Tax Court:

The use of a restitutory device to remedy situations of unjust enrichmentshould not be equated with the determination of a collateral issue necessaryin order for this Court to carry out its statutory function, that is, to dismissor 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 isto determine a collateral issue (for example, the beneficial ownership ofthe property), not to impose a remedy currently used by Canadian courtsin cases of unjust enrichment.

The latest word on the role of the remedial constructive trust in the TaxCourt of Canada is from Bowman J.57 In Collins, decided some 20 daysafter Karavos, Bowman J specifically raised the question of the jurisdic-tion of the Tax Court of Canada to consider whether a constructive trustexisted. He stated his conclusions as follows:

The problem in this court is whether I am entitled even to entertain anargument that the elements that would, in the Ontario Court, give rise to afinding of constructive trust exist. In other words may this court, which hasno jurisdiction to make a finding of unjust enrichment and a declarationthat a constructive trust exists in respect of the Sherkston shares that wouldbe binding as between the spouses, even consider the question. . . ?

If this court is to exercise the jurisdiction that it has to determine theexistence of legal rights that are relevant to the determination of tax liabil-ity 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 Jwent on to add:

I do not think that this court is barred from considering whether the ingre-dients exist that would permit the application of a remedy arising out of aconstructive trust by a court having jurisdiction to do so. If the Tax Courtof Canada concludes that they are present it can then go on to determine apoint in issue in an appeal under the Income Tax Act.59

In the final analysis, the most recent positions of these two judges maynot be as far apart as they might appear to be with respect to the role ofthe Tax Court in considering the existence of a remedial constructivetrust. 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 toapply equitable principles as a remedy. Mogan J avoided the issue and concluded that hewas not required to address the question since the matter of property distribution wasalready settled. In Forest Oil, supra footnote 3, Gibson J had no difficulty concluding thatit was open to the Federal Court—Trial Division to find a constructive trust by reason ofunjust enrichment against the minister for the amount of a refund not repaid to the tax-payer 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 thecourt is not barred from considering whether the ingredients exist thatwould permit the application of a remedy arising out of a constructivetrust to determine a point in issue in an income tax appeal, may lead tothe same result. In neither case will the equitable remedy of specificperformance or monetary damages be awarded by the court, but the nec-essary tax consequences will nonetheless follow.

Whether or not either judge is correct about jurisdiction may also be amoot point. Given its historic origins, it is clear that the Tax Court ofCanada lacks equitable jurisdiction to find a remedial constructive trust.60

However, it appears that as a practical matter, judges of the Tax Court ofCanada will continue to assume jurisdiction.61 This arguably provides thefairest overall result since it would be manifestly unjust if a taxpayerwere precluded at the court of first instance from arguing a claim basedon a remedy that is clearly available in equity. In consequence, it seemsthat the Tax Court of Canada should, at a minimum, be able to considerthe underlying issue of beneficial ownership in the context of the reme-dial constructive trust. This is particularly so since the Federal Court—TrialDivision has equitable jurisdiction,62 and Gibson J had no difficulty con-cluding that it was open to this court to find a constructive trust by reasonof unjust enrichment in Forest Oil.

60 The Tax Court of Canada is a statutory creation with one purpose of the legislationbeing the improvement of public perception of decisions of the prior Tax Appeal Boardand 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 administrativeboards, 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 TaxReview 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 givenjurisdiction or powers broader than those of its predecessors. The Honourable MarkMacGuigan (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 thefederal 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 hearCharter-based argument: “In my view, indeed, the Tax Court of Canada has the jurisdictionto hear all contentions of any appellant related to the computation of his net income, histaxable 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: Canthe 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 ofjustice, the Honourable John N. Turner, the point was raised that the new Federal Courtwas “the son of the Exchequer Court Act” but with “the flexibility of provincial supremecourts [and] the ability to move about the country and exercise jurisdiction in certainfields” (Canada, House of Commons, Debates, March 25, 1970, 5475 (Mr. McCleave)).Any equitable jurisdiction would have to have origins in the Exchequer Court Act, RSC1927, c. 34, the Act creating the former court. Amendments to that Act (SC 1928, c. 23)



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Constructive Trusts Found by Other CourtsIn addition to resolving issues of recognition and timing for constructivetrusts within its own jurisdiction, the Tax Court has been and will con-tinue to be called upon to determine the proper tax treatment of theparties in situations in which a constructive trust has been found by acompetent 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 forconstructive trust as a result of the breakdown of their relationship. CountHassanali 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 for1989. The minister disallowed Count Hassanali’s deduction. The taxpayerappealed. The minister brought an application pursuant to section 174 toadd Ms Georg as a third party. The matter of the proper tax treatment ofthe constructive trustee and the beneficial owner was never resolved. MsGeorg declared personal bankruptcy, and the minister did not pursue thematter. The issue remains, therefore, as to how the matter should havebeen resolved by the Tax Court given that a superior court had confirmedthe existence of the constructive trust.

Some guidance on the question on the proper tax treatment of con-structive trustees and beneficial owners may be drawn from the Australiancourts.64 In two decisions involving constructive trusts, the court held thatthe beneficial owner of the property, and not the constructive trustee, wastaxable with respect to the income. The first decision65 involved a small-time tax evader who was reassessed when profits were understated in hisbusiness tax return. The taxpayer argued in his defence that his wife wasbeneficially entitled to half the income and, since equity would decree aresulting 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 thatit was “fiscally inefficacious until relief was actually granted.”66 The Fed-eral Court disagreed and determined that the commissioner must assess

included the intention to expand the jurisdiction of the Exchequer Court to include com-mon law remedies to patent and trademark issues. As stated by the Honourable ErnestLapointe (then minister of justice), “[I]n relations between the crown and the subject whenthe crown is plaintiff or petitioner, it is specifically stated that the court has jurisdiction atcommon law or in equity, but in relations between subject and subject the court has nosuch jurisdiction. This is to give the exchequer court the same jurisdiction as the othercourts 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 theequitable 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.

62 Continued . . .


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the parties according to their position at general law, that being that thebusiness income had been derived equally by Mr. MacFarlane and hiswife. It was not necessary at general law for a court order to first confirmthe existence of a constructive trust since equity regards as done whatought to be done. It therefore followed that the commissioner’s assess-ment of the husband for all of the business income was incorrect.

In a somewhat surprising decision,67 the Australian Federal Court alsofound that a thief, who had stolen funds from his employer and thenclaimed and paid tax on the interest earned thereon, was not liable for thetax, given that the theft was acknowledged and the funds returned. Thejudge reasoned that since the constructive trust took effect from the timeat which the conduct that gave rise to its imposition arose, the interestearned was a gain of the owner and not of the thief.68

The logic of these decisions, at least with respect to the tax treatmentof the beneficial owner for tax purposes, is consistent with that applied inCanada in Stockman.69 In that case, the taxpayer and her former spouse,Mr. Bucci, were divorced in 1989. In 1990 and 1991, rental losses wereincurred in connection with four condominium apartments acquired in1987 from joint funds and from money jointly borrowed from the bank.Mr. Bucci claimed 100 percent of the losses incurred with respect to theproperties in 1990 and 1991.70 On April 10, 1992, the taxpayer obtainedan order of the Ontario Court General Division which had the effect ofgranting her a 50 percent constructive trust interest in the properties. Atissue was whether the taxpayer was entitled to deduct 50 percent of therental losses incurred in 1990 and 1991 with respect to those properties.The court held that at the time the rental losses were incurred, the tax-payer was the beneficial owner of 50 percent of the properties. Thetaxpayer was therefore entitled to deduct 50 percent of the losses.

It is clear from these decisions that, whether or not the Tax Court ofCanada should or will undergo the analysis necessary to determine if atax result should be based on its finding that the ingredients for a con-structive trust exist at common law, the Tax Court will be called upon torespond to the finding of a constructive trust by a court of competentjurisdiction. Issues will therefore remain as to how this type of trustshould 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 bythe corporation were on the account of Mr. Bucci.

71 See the discussion below under the heading “Should Constructive and ResultingTrusts Be Recognized for Purposes of the Act?”


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When Does the Trust Arise?Common LawThe time when a constructive trust arises also appears to be in disputeboth within and outside the tax arena. Again, the confusion appears to befocused largely on the character of the constructive trust in the Canadiancontext. As previously discussed, under traditional English law the con-structive trust was regarded as a substantive institution similar to an expresstrust. In contrast, in the United States the constructive trust is viewed notas an institution, but as a broad restitutory device. It has been argued thatin Canada a constructive trust is to be regarded as a remedy and not asubstantive institution.72

In Rawluk, the Supreme Court of Canada, in a split 4:3 decision, deter-mined the matter of the remedial constructive trust by addressing thequestion of when the constructive trust arises. Cory J, for the majority,held that the constructive trust remedy arose as of the date of the unjustenrichment, 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 thecourt exercised its discretion to determine that the trust was the appropri-ate restitutionary remedy.

If the constructive trust is a remedy, it is argued, the claimant’s prop-erty interest under the constructive trust becomes effective “at the timethe remedy is raised from an unjust enrichment, instance of unconscion-ability, or other generative circumstance.”73 There are, nonetheless, otherswho have suggested that the remedial constructive trust does not ariseuntil the date of the court decree.74 Still others suggest that the trust takeseffect from the time at which the conduct that gave rise to its impositionarose.75 This seems to be more in keeping with the British institutionalapproach. It has also been suggested that courts should have the discre-tion to move the operative date of a constructive trust to “meet thecircumstances of the case.”76 The effect of most of these suggestions isthat 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 theImposition of a Constructive Trust,” in Equity and Contemporary Legal Developments427, at 433. See also section 160 of the American Law Institute’s Restatement of the Lawof 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, at1709; 2385.

75 For example, see Fletcher as discussed below.76 Glover, supra footnote 64, at 328.


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Tax CasesThe tax decisions that address the issue of when a constructive trustarises also provide an array of answers. Such cases may be divided intoseveral distinct camps. First is the Fletcher situation, in which a wronghas been done. In that case, the court found that the trust arose at the timeof 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 thatstate that the constructive trust is generally considered to arise when theduty to make restitution arises.77 In addition, Mogan J added the follow-ing analysis:

It seems to me that a beneficiary of a constructive trust can have an interestin property prior to the imposition of such a trust by a court and withoutregard to whether the constructive trust is only a remedy.78

Sarchuk J took a totally different tack in Karavos. He cited with ap-proval the following comments of Christie ACJ (as he then was) inErickson:

Differing views have been expressed regarding the true nature of a con-structive trust. In J.G. Riddall’s The Law of Trusts, 3rd (1987) ed. at page359 the question in debate is put thus:

Should a constructive trust be regarded not as a substantive institu-tion—a thing with its own existence—but rather as a remedy grantedby the court, just as an injunction is not an institution, but merely aremedy?

If the correct view is that it is a remedy it follows, in my opinion, thatit does not come into existence until it is granted by a court havingjurisdiction.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 theCourt so declares in the course of, for example, an action by the benefici-ary against the trustee. There is nothing in Pettkus v. Becker (supra) whichsupports such a conclusion.80

Hamlyn J, in Stockman, also addressed the question of when a con-structive trust arose when he sought to determine whether the nowestranged spouse was entitled to a claim of half the losses that had arisenin respect of property that her husband was found to have held as con-structive trustee on her behalf. He cited with approval the Supreme Courtof Canada decision in Rawluk that a constructive trust comes into exist-ence “not when the trust is judicially declared but from the time when theunjust 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 questionfor tax purposes. Unfortunately, Hamlyn J then concluded, not that theconstructive trust arose when the property was acquired by the husbandwith jointly held funds,82 but rather that “this property was in a construc-tive trust from the date of separation.”83

The third camp of cases on the question of when a constructive trustarises for tax purposes is reflected in Funk, where the right to deductexpenses was at issue. Hamlyn J held that in the case of a valid contractfor sale, “the constructive trust comes into existence . . . when the lawimposes upon a party an obligation to hold specific property for another.”84

Tax cases dealing with resulting trusts do not offer much more guid-ance as to when the trust arose than those that deal with constructivetrusts. In Holizki, Rothstein J found that the resulting trust dated back tothe commencement of the Holizkis’ sole proprietorship in 1973. In Savoie,unfortunately Bowman J did not specifically identify when the resultingtrust arose, instead simply finding that it existed at some point before thetransfer of the property for purposes of liability under section 160.

The only conclusion that can be drawn from all of these decisions isthat there is no apparent consensus about when a constructive or resultingtrust begins for either tax or other purposes, a view that seems to beshared by Revenue Canada.85

Should Constructive and Resulting Trusts Be Recognizedfor Purposes of the Act?Closely related to the question of whether the Tax Court of Canada canfind or even consider the potential existence of a constructive trust is amore fundamental question that applies to both constructive and resultingtrusts. Are these trusts for purposes of the Act86 and, if so, what is theproper tax treatment of the parties and the trust property? Judicial re-sponse to these questions in the Tax Court again reflects the underlyingdoctrinal uncertainty currently plaguing the constructive trust in Canada.

In Fletcher, counsel for the respondent essentially advanced a purposiveapproach 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 resultingtrust 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 legalrepresentative having ownership or control of the trust property.”

87 For a review of recent Canadian case law on the proper approach to statutory inter-pretation 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.


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submitted that the remedial nature of the constructive trust put it in adifferent category than, and was inconsistent with, the notion of a trustcontained 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 opera-tion of law. It did not arise out of some implied intention but must beviewed strictly as a remedy for unjust enrichment.88

Sarchuk J disagreed with these submissions and took a plain meaningapproach to interpreting the relevant provisions of the Act:

This subparagraph falls within Division D and as far as I can discern thelegislators did not choose to qualify the word “trust” or to limit its meaningin any way other than by excluding unit trusts. If the legislators had in-tended to exclude constructive trusts and resulting trusts from the operationof 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 Band D of the Income Tax Act and the fact that the legislators chose not todefine the term “trust” for the purposes of Division D, or to exclude aconstructive trust or a resulting trust, can only be taken to mean that for thepurposes of subparagraph 115(1)(b)(vi) the term “trust” encompasses allforms of trusts.90

What should be readily apparent from the facts in Fletcher is that thistrust falls within the notion of the non-remedial constructive trust—thatis, as a substantive right to correct a wrong, and not as a remedy designedto prevent unjust enrichment. This may explain Sarchuk J’s apparent about-face in Karavos on the question of whether a remedial constructive trustis a trust for tax purposes.91 In Karavos, Sarchuk J identified potentialramifications of applying a remedial restitutory device in an income taxcontext. In particular, he was concerned with whether interpreting thetrust provisions of the Act to include constructive trusts had the effect ofdefeating the specific legislative intention of other provisions of the Actand 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 inthe Canadian context in situations other than Fletcher. On the other hand, Sarchuk J maynot really have been changing his mind. Instead, he might just have been responding tosituations where the constructive trust was being employed simply as a remedy to preventunjust enrichment. Sarchuk J may have concluded that such a remedial trust raises differ-ent 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 ofrecognizing constructive trusts as trusts for tax purposes.92 Ellen Zweibelhas commented as follows:

Similarly, the inconvenient and absurd results would occur in the contextof a marital property constructive trust. Unless we assume that the con-structive trust does not arise until the court declares it, we may have tounravel the relationship for tax purposes. These cases are based on unjustenrichment and require some demonstrable contribution in money or mon-ey’s worth to the acquisition or maintenance of the property sought. Doesthe beneficiary therefore have a capital cost in the trust capital equal to thefair market value of his or her financial contribution? Under some circum-stances the financial contribution might be construed as a transfer givingrise to income attribution. What is the tax position of the parties pendingan appeal from a trial court finding of constructive trust?93

Whether a plain meaning approach or a purposive approach is ad-vanced to determine the issue of the application of the provisions of theAct 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 notraised the question of whether a resulting trust, once found, should berecognized for purposes of the Act other than the specific matter underappeal.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 theincome? If we assume that the beneficial owner should pay the tax, thelimitation periods may have expired. Even if the reassessment period is

92 See, for example, Maurice C. Cullity, “General Concepts and Types of Trusts for TaxPurposes,” 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 andthe Income Tax Act: A Mismatch of Concepts” (April 1988), 2 Canadian Current Tax LawJ79-83; 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 thetime the trust was created. It seems logical that there would be no disposition of propertyin the case of a resulting trust, since beneficial ownership of the property has not changedbut has simply been recognized. With respect to income splitting, if retroactive incomesplitting is not proposed by the resulting trustee and the income is taxed in his or herhands, the matter may be of some indifference to the minister. However, if subsections 104through 108 do apply and income splitting is attempted by the taxpayer, it appears that theminister could reassess, at least for the non-statute-barred years, on the basis that theincome had been taxed to the wrong taxpayer. The result may give rise to tax in the trustat the top marginal tax rates applicable to inter vivos trusts on any income not actuallydistributed by the resulting trustee and taxed in the beneficiary’s hands. In addition, hadthe resulting trusts in Savoie, supra footnote 20, or Holizki, supra footnote 22, been inexistence for long enough, the issue of the commencement date for purposes of the 21-year deemed disposition rule may have arisen.


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not statute-barred,95 the beneficial owner may argue that during the sub-ject period he or she did not have access to or control over funds claimedby the holder of the legal title and should not be required to pay tax onthe income now.96 The constructive trustee will, of course, argue thatbeneficial ownership was not hers but rather that of the beneficial owner,thus attempting to exonerate herself from the obligation to pay tax. Inthis situation, the only remaining taxpayer is the trust itself, which willpresumably be taxable at the top personal rate.97

Other issues in respect of constructive and resulting trusts include thefollowing:

• Is there a disposition98 at the time of the transfer of the property to thetrust?99

• Can taxpayers dispose of their income or capital interest in the trust?

• Are statute-barred assessments open for reassessment once a con-structive trust relationship has been found?100

• What is the tax result to the respective parties during years while thecase 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 ornegligence. Where a constructive trust is found by the courts, it appears that neither claimcould 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 arrangementmerely identifies what the relationship was with respect to beneficial ownership of theproperty all along. In short, there is no change in beneficial ownership when a constructivetrust exists. This approach suggests that the constructive trust arose much earlier than thedate at which the parties separated and, in fact, may date back to when the trust propertywas initially acquired by the constructive trustee, if such a date can be identified. One caneasily envision a Murdoch, supra footnote 8, or Anderson Estate, supra footnote 4, type ofsituation in which a right to the property was earned over time. Under those circum-stances, it would seem an almost insurmountable task to select the correct date for thecommencement of the constructive trust for tax purposes.

99 There are a number of potential disposition dates: first, the date on which the asset istransferred to the constructive or resulting trustee; second, the date selected by the courtwhen a finding of constructive or resulting trust is made; and, finally, the 21-year deemeddisposition 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 resolvedthe 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 theapplication of tax legislation to constructive trusts will be the tax liability of the parties instatute-barred periods.

101 Consider, for example, the tax results that may arise on the facts in Cooray, suprafootnote 47. In that case, the other issue decided by the Tax Court was that the particular



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

Case Law SolutionsAlthough many issues will continue to arise with respect to the proper taxtreatment of resulting and constructive trusts, two fundamental issues arein need of resolution: whether resulting and constructive trusts should berecognized for purposes of the Act (particularly subdivision k) and, if so,when such trusts arise for tax purposes. Once these two matters are re-solved, the tax consequences under the Act will flow from the particularfacts under consideration. While there is no easy resolution to either ofthese questions, various suggestions have been put forward in the caselaw. Following a discussion of these suggestions, some proposals forlegislative amendments are advanced.

Recognition for Purposes of the ActOne potential solution to the problem of recognizing constructive andresulting trusts for tax purposes may be found in Sarchuk J’s invitation inKaravos to consider the collateral issue rather than the restitutory remedy.This leaves open the opportunity for ignoring the constructive trust, andpresumably the resulting trust, altogether for tax purposes.103 For exam-ple, a determination of the collateral issue of what consideration had beenprovided for the transferred property by the spouse could have providedthe solution in Savoie where it was necessary to determine the extent ofthe spouses’ joint liability. In other words, it may not have been neces-sary to find or even consider a constructive trust in Savoie. A similarresult could have been reached by simply determining what considerationwas given by the transferee spouse for purposes of paragraph 160(1)(e).If the consideration for purposes of paragraph 160(1)(e) included therelinquishment of the taxpayer’s inchoate right to apply to a provincialsuperior court for a declaration that she held a 50 percent beneficialinterest in the property, that consideration arguably had a value equal to50 percent of the property. Her liability for her husband’s share of tax

transaction did not constitute an adventure in the nature of trade. However, if the TaxCourt had determined that the husbands’ gain on the sale of the property was to be onaccount of income, query whether, on the basis of a finding of secondary intention, thesame treatment would be appropriate for their spouses as beneficial owners of the propertyunder a resulting trust.

102 While it may be expected that on a particular set of facts the same conclusion as tothe existence of a resulting or constructive trust would be reached by a Tax Court as byany other court, at least some of the tax cases do not bear this out when income splittingis 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 astrusts for purposes of the Act. See Income Tax Technical News, no. 7, January 3, 1996 forthe 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.)

101 Continued . . .


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could thus not extend beyond the remaining 50 percent which he benefi-cially owned. A determination of who had beneficial ownership of theproperty also created the necessary result in Anderson Estate, when MoganJ neatly avoided the issue of whether the Tax Court could find a construc-tive trust and simply decided that subsection 70(5) could not apply on atransfer of property on death since the property was already beneficiallyowned by the recipient. Similarly, a finding of beneficial interest inErickson “in the sense of an enforceable right, in favour of the appellant’swife in respect of the assets of the business in an amount equal to or inexcess of the value of the alleged gift,”104 avoided the application of theindirect gift rule in paragraph 85(1)(e.2).105 Equally, it seems that thedetermination of who held beneficial ownership or interest in the prop-erty in Funk would be sufficient for the court to determine whetherexpenses could be deducted by Mr. Funk, notwithstanding that title to theproperty had not yet been transferred. That the purchaser had such ben-eficial ownership is beyond dispute since he had an action for breach ofcontract if the vendor failed to perform and an action for specific per-formance if he wanted specific performance rather than damages.

On the other hand, a consideration of the collateral issue alone maynot provide the appropriate tax relief in all cases. The constructive trustin Fletcher, which was recognized for purposes of subdivision k, wascritical to Mr. Fletcher’s ability to deduct the loss on the disposition ofhis capital interest in the trust under section 115.106 Although this deci-sion may be an anomaly, there may well be other situations where theappropriate tax result will follow only if the constructive trust is recog-nized for all purposes of the Act.

TimingA number of Tax Court judges have made recommendations with respectto timing. For example, Sarchuk J took the view in Karavos that theremedial constructive trust did not come into existence until it was grantedby a court having jurisdiction. However, Bowman J rejected this positionin Savoie. In Stockman, which dealt with the issue in a matrimonial con-text, Hamlyn J held that the constructive trust arose from the date ofseparation.

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 arisenbetween her and her husband regarding those assets and consequently she had institutedproceedings in the Saskatchewan Court of Queen’s Bench the evidence before me wouldauthorize a finding that there had been an unjust enrichment justifying the imposition ofthe 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 enrich-ment but rather a trust imposed to address a wrong committed by Mr. Hyman on themisappropriation of the taxpayer’s funds. It is perhaps of some interest to note that Sarchuk Jrelied on the comments of the judge in the prior civil trial with respect to the misappro-priation 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 timewhen the trust was created is arguably completely inconsistent with theunderlying equitable principles governing any notion of a constructivetrust.107 In its favour, the date selected offers the benefit of simplicity inanswering related questions—for example, when will the trust propertybe considered to have been disposed of, and when will attribution arise?The Stockman case also illustrates the practical problems, once a courtchooses a date, in tracking the potential tax results. For example, in Stock-man, which of the two taxpayers should be responsible for any accruedgain on a subsequent disposition of the property and on what adjustedcost base should the proceeds be based? If the trust arose when the prop-erty was initially acquired, both spouses would share in the tax liabilityarising from any subsequent proceeds of disposition calculated from theoriginal 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 thattime and step up the cost base of the property to the trust? If there is adisposition and no rollover is available, the brunt of any tax liability forthe increase in value of the property from the time of acquisition wouldbe borne by the constructive trustee to the benefit of the beneficial owner.

Problems also arise with respect to any attempt to deem a date foracquisition of the beneficial interest for purposes of the Act. Suppose, forexample, that the date of the order of a court is selected. If the Tax Courtis not the court of first instance, as in Fletcher, should the Tax Courtorder 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 courtorder if the trust property was disposed of in a prior year? How will theparties’ filing positions in prior tax years be affected if such positions arebased on a resulting or constructive trust that is yet to be recognized by acourt of competent jurisdiction?

Proposals for Legislative AmendmentThe volume of tax cases since the Fletcher decision highlights both theaccelerated rate at which claims for relief based on a finding of resultingor constructive trust are arising for tax purposes and the range of poten-tial tax issues when such claims are recognized. Tax decisions to datealso illustrate the difficulties in finding a consistent approach or workablesolution to the issues raised. This is not surprising. There is controversyand residual ambiguity surrounding the constructive trust, even in deci-sions of the Supreme Court of Canada. Nonetheless, a consistent andprincipled approach must be found. It is unfair to foist this uncertainty onTax Court judges and taxpayers. One potential solution may be found intax legislation.

107 If the remedy is based on unjust enrichment, the unjust enrichment likely occursover time, not on the date of separation, although there may be disagreement on thistiming issue.


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One obvious legislative solution would be a provision that would limitthe recognition of the constructive or resulting trust relationship for allpurposes of the Act. This is clearly not the approach taken by RevenueCanada,108 nor does it appear to be the direction that the court has takenin tax cases to date.109 Notwithstanding, it is not at all clear that construc-tive and resulting trusts were ever intended to come within the legislativeintention of the Act. Limiting the recognition of resulting and construc-tive trusts for purposes of the Act would eliminate the need to resolve thejurisdictional and timing issues discussed above, and it would offer aclear, simple, and consistent resolution for all resulting and constructivetrust cases that may come before the court. However, such a provisionwould have resulted in a different outcome in cases such as Fletcher andForest Oil, and perhaps in Savoie, Funk, and Cooray, where such trustswere found in the taxpayers’ favour.

Rather than a deeming provision for all purposes of the Act, the defini-tion of trust in subsection 104(1) could be amended to specify that, forpurposes of subdivision k, references to a trust shall not include construc-tive or resulting trusts. This would enable a court to apply other provisionsof the Act in appropriate circumstances, such as those relating to benefi-cial ownership, and to determine the tax consequences arising from afinding of constructive or resulting trust by a court of competent jurisdic-tion. Such an approach, however, still leaves unresolved matters ofjurisdiction and timing of recognition, particularly for remedial construc-tive trusts.

A single deeming rule as to the applicability of subdivision k alsowould fail to respond to the range of potential tax issues that may arise.For example, the distinction between the appropriate tax relief in thecircumstances of remedial versus non-remedial constructive trusts illus-trates the deficiencies of such an approach. The tax relief sought in thecase of a remedial constructive trust is generally based on income split-ting and can be provided through a determination of the beneficialownership of the property without the imposition of the express trustprovisions. In effect, the constructive trustee in this case could be treatedin 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 atrust for purposes of subdivision k could provide the relief sought inFletcher where a non-remedial constructive trust was found.

It might, however, prove workable to enact a deeming rule that re-quires automatic joinder110 of the parties in any case where a claim for

108 Revenue Canada has expressed its view, supra footnote 28, that the constructivetrust 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 oflaw, fact, or mixed law and fact will affect the tax liability of two or more taxpayers.


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relief is made based on a finding of constructive or resulting trust. Such adeeming provision would permit the Tax Court to consider all aspects ofa claim for relief based on the trust relationship, including potential li-ability of another taxpayer under section 160. Such a deeming provisioncould provide a solution for volunteers who assert a constructive trust orresulting trust during non-statute-barred years. Joinder might even be re-quired as a condition for relief in appropriate cases where relief is claimedfor statute-barred periods.111 In the joined action, tax issues arising out-side subdivision k, such as attribution, also could be addressed. In thealternative, the deeming provision might provide that relief on the basisof a constructive or resulting trust will not be provided for any periodthat is statute-barred other than when the court order is made by a courtother than the Tax Court. Given our self-assessment tax system, such aprovision is consistent with Canadian tax principles, and it would ensurethat taxpayers would not be able to take different filing positions for astatute-barred period. The same cannot be said where another court makesthe order that a constructive or resulting trust exists. In that case, how-ever, joinder should be required before the tax issues are addressed by theTax Court. Filings by both affected parties, similar to those currentlyrequired under subsection 74.5(3) to prevent attribution on a matrimonialbreakdown, could be required before income is reallocated for tax purposes.With time, such tax considerations might form part of the matrimonialproperty order, a precedent for which has already been set in the taxtreatment of alimony and maintenance payments.112

Some of the key tax issues surrounding non-remedial constructive trustsalso could be resolved through a deeming provision. Such trusts fre-quently arise where the complainant is an innocent third party and not avolunteer seeking income splitting as a form of tax relief based on thetrust relationship. Perhaps it would be easier in a joinder application forthe Tax Court to consider the full range of remedies available and, inparticular, the potential application of subdivision k in those cases.113

Since the non-remedial constructive trust as a cause of action is generallyimposed against the wrongdoer, whatever tax relief is necessary in re-spect of the wronged party could be provided, leaving any outstandingtax liability to fall on the shoulders of the wrongdoer. Again, this ap-proach is consistent with general Canadian tax principles, which providethat even wrongful income and gains are taxable under the Act.

111 The deeming provision might apply as a condition to the finding of a constructivetrust and would require a waiver by the parties for any tax liability arising out of thatspecific 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 trustsother than express trusts for purposes of the Act. For example, certain bare trusts, votingtrusts, and other family arrangements are often ignored for tax purposes. See generallyCullity, supra footnote 92.


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A statutory deeming provision requiring automatic joinder would clearlynot resolve all of the issues arising out of a finding of resulting or con-structive trust. However, such a provision would cause taxpayers,particularly volunteers, to carefully consider the potential impact of therelief they are claiming on all of the parties to the transaction, and itwould provide a clear avenue for Revenue Canada to fairly assess theparties and collect the appropriate tax revenue.

CONCLUSIONWhile an increasing number of tax cases in recent years have grappledwith constructive and resulting trusts, many recurring and unresolvedissues remain. Whatever solution is ultimately chosen to deal with suchtrusts, it is clear that one must be found. Tax cases in the area of resultingand 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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