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Clean hands and who gets the cottage?

Albert was always a bully and Dad loved him best. Judy became a successful doctor and, in part to get away from her dysfunctional family, she moved to Montreal. When Dad died, Judy was happy to see that her father left his $1-million estate equally to both his children. But Albert had other ideas.

Albert went to court and claimed that 20 years ago he bought a cottage, which was now in their father’s name. That cottage, now worth $400,000, was transferred to Dad 20 years ago because Albert was being investigated by the Canada Revenue Agency for failing to pay taxes for five years. Albert feared that the Canada Revenue Agency would take the cottage away so he transferred the property to his father for $50,000 except Dad never paid Albert a dime. Albert claimed that his father had held the cottage in a resulting trust for him and it now had to be transferred back to Albert. With the evidence presented there could be no doubt that Albert paid for the cottage, maintained the property and that the father participated in the scheme to protect the asset from the Canada Revenue Agency.

In our fictional scenario Albert could argue that in Ontario there is a legal presumption that people make bargains and not gifts. Accordingly, if Albert paid for everything the court should presume that he has a beneficial interest in the cottage. This is the basis of his resulting trust claim.

Judy might argue that even if Albert’s story was true he still does not deserve to get the cottage when the whole thing was based on a scheme by Albert to cheat Revenue Canada. As Professor Waters stated in his text Waters’ Law of Trusts in Canada, “The basic principle is that a person may not have the assistance of equity if the person does not come with clean hands.”

Arguably, if Albert tried to cheat on his taxes he did not have clean hands and should not benefit from the equitable remedy of a resulting trust. How could it be fair for Albert to have it both ways? To the Canada Revenue Agency Albert said the cottage belonged to Dad and now to Judy he is saying it belonged to him. Given his intention to cheat Canada Revenue Agency does Albert deserve the benefit of an equitable remedy?

In Holland v Holland Justice Reilly of the Ontario Superior Court of Justice faced a similar question. A husband transferred a cottage into his wife’s name in exchange for $15,000. No money changed hands and the whole thing was a plan to avoid having an asset that would be seized for unpaid taxes.

When the couple split up the husband claimed to have a beneficial interest in the cottage. This is an excerpt of the judge’s decision: “…a declaration of resulting trust is an equitable remedy. In order to obtain such remedy, the applicant must approach the court with clean hands. In this case, Mr. Holland did not do so.… It is for Mr. Holland to persuade the court that he is entitled to an equitable remedy and I conclude he has failed to do so.”

Would this reasoning in a family law dispute apply to an estate litigation matter? Maybe. Having dealt with these types of cases I can only repeat that these are very complicated matters and some courts have taken the view that despite the improper intention, if no one was in fact defrauded (for example, if it turned out that Albert never really owed Canada Revenue any money) then he might get the cottage back.

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Toronto Estate Litigator - Charles Wagner

The author of this blog is Charles B. Wagner. Charles is a Certified Specialist in Estates and Trusts and partner at Wagner Sidlofsky LLP.

This Toronto office is a boutique litigation law firm whose practice is focused on estate and commercial litigation.

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