Court File and Parties

COURT FILE NO.: CV-16-5573-00 DATE: 20190109 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Ronald Syrnyk, Plaintiff – and – Richard Syrnyk, Defendant

Counsel: Chris Tonks, for the Plaintiff Kiran Gill, for the Defendant

HEARD: July 5, 2018

REASONS FOR JUDGEMENT

PETERSEN J.

OVERVIEW

Introduction and Parties’ Pleadings

[1] The parties are brothers embroiled in a dispute over a residential property located in Wasaga Beach. Title to the property is registered in the defendant Richard’s name. The plaintiff Ronald asserts beneficial ownership of the property by virtue of a resulting trust. Ronald lives with his common law spouse at the property. It has been his principal residence since November 2009.

[2] Ronald registered a Certificate of Pending Litigation (CPL) against title to the property. He is suing Richard for breach of trust. He claims that Richard breached his fiduciary obligations as trustee of the property and alleges that Richard acted in bad faith.

[3] Ronald is seeking to have title to the property transferred to him. He asks for an accounting and repayment of equity removed from the property by Richard in or about 2011. He is also seeking an order of punitive damages in the amount of $25,000. He acknowledges that he owes Richard reimbursement of money paid toward the mortgage, property taxes and home insurance, as well as reimbursement of any reasonable expenses incurred in good faith as trustee, but Ronald asserts that the amounts he owes to Richard are offset by the amounts Richard owes him (including punitive damages).

[4] Richard disputes the existence of a trust. In the alternative, he asserts that he acted reasonably and in good faith at all times. He submits that he fulfilled any fiduciary obligations he may have had as trustee of the property.

[5] Richard counterclaims for damages in the amount of $40,000, based on Ronald’s alleged breaches of their agreement. He also seeks an order for reimbursement of all amounts paid by him for property taxes, home owner’s insurance and the mortgage on the property. He seeks a declaration that he is the legal and beneficial owner of the property and, as such, is entitled to proceed with a sale of the property. He asks the court to remove the CPL registered on title. He also seeks an order that Ronald reimburse him for any capital gains tax liability that may arise as a result of any sale of the property (whether to a third party or to Ronald).

[6] In his defence to Richard’s counterclaims, Ronald disputes that he ever consented to Richard using the Wasaga home as an investment property. Ronald denies that there was any agreement between them for him to reimburse Richard for capital gains taxes.

Motions before the Court

[7] There are two motions before me.

[8] First, the defendant Richard is seeking:

i. an order to discharge the CPL; ii. an order for the property to be sold and for all decisions regarding the sale to be in his sole discretion; iii. an order that Ronald cooperate with the listing and sale and that he give vacant possession of the property within 2 weeks; iv. an order that he (Richard) be reimbursed for mortgage payments, property taxes and insurance premiums he has paid to date and until the closing of the sale (in excess of $30,000), and that the reimbursement be made from the net proceeds of sale of the property; v. an order that the remaining proceeds of sale be paid into court pending further court order or settlement; vi. an order that he is entitled to reimbursement of all out-of-pocket expenses he incurred with respect to the property; vii. an order that Ronald indemnify him for any tax liability that may accrue to him as a result of his having ownership of the property, including any capital gains taxes that may need to be paid to the Canada Revenue Agency; and viii. costs of the motion, paid from the net proceeds of sale of the property.

[9] The plaintiff Ronald has brought a countermotion for summary judgement. Specifically, he seeks the following orders:

i. that title to the property be transferred to him within 90 days; ii. that he be required to secure Richard’s release from liability for the mortgage that is registered on the property, either by assuming the mortgage or by discharging the mortgage; and iii. that any amounts owed by him to Richard for mortgage, property tax and insurance premium payments be offset against any amounts ordered by the court against Richard for punitive damages and costs.

[10] The defendant Richard takes the position that this is not an appropriate case for summary judgement. He argues that a number of issues require a trial and cannot fairly be resolved on a summary basis. He submits that partial summary judgement would not be appropriate in the context of the litigation as a whole.

[11] I will deal with the plaintiff’s summary judgement motion first.

PLAINTIFF’S SUMMARY JUDGEMENT MOTION

Is this an appropriate case for summary judgement?

[12] I am of the view that this is an appropriate case for partial summary judgement. There are no issues that require a trial: Rules of Civil Procedure, R.R.O. 1990, Reg. 194, r. 20.04(2).

[13] Although the parties are entrenched in diametrically opposed positions on virtually all of the issues, there are few material facts in dispute. The motion record is substantial. It includes affidavits, transcribed examinations, answers to undertakings and an abundance of documentary evidence. Credibility is not a central issue. Where credibility arises, it can be assessed based on the record without further viva voce evidence.

[14] I am confident that the motion record is sufficient for me to make the necessary findings of fact and apply the relevant legal principles in order to adjudicate the issues in a fair manner: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at paras. 33, 51 and 57. The interests of justice will be served by the summary judgement process because it is the most proportionate, efficient and cost-effective way to arrive at a just resolution of the dispute: Hryniak, at paras. 4, 56, 58, 60, 66 and 67.

Does Richard hold title to the property in trust for Ronald?

[15] There is no written trust agreement between the parties, but a trust does not necessarily require an agreement in writing. Indeed, a resulting trust is presumed to arise in certain circumstances, including where title to a property is gratuitously transferred from one person to another without any consideration given or where a person supplies the entire purchase price for the property, but title is taken in another person’s name: Pecore v. Pecore, 2007 SCC 17, [2007] 1 S.C.R. 795, at paras. 20 and 24; and Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R. 269, at paras. 17-18.

[16] In this case, Ronald entered into an agreement to purchase the Wasaga property from a builder pre-construction in 2005. The purchase price was $237,500. He paid a $6,000 deposit to the builder. He was unable to obtain mortgage financing to close the deal. Richard agreed to assist him to complete the real estate transaction so that he would not lose his deposit.

[17] The evidence of both parties establishes that they reached a verbal agreement. They agreed that Richard would obtain a mortgage in his name, but Ronald would be responsible for all mortgage payments. They agreed that Richard would hold title to the property, but Ronald would be responsible to pay home owner’s insurance and property taxes, as well as utilities and any other expenses associated with maintaining the property. They also agreed that Richard would advance the money for the down-payment required to close the deal.

[18] Richard paid the builder $22,900 upon closing in or about August 2006. In the motions before me, he argues that this payment constituted a financial contribution toward the purchase of the property. He submits that he therefore did not receive title to the property “gratuitously”, which is a precondition to a resulting trust.

[19] The evidence in the record does not support Richard’s submissions on this issue. It is clear from both parties’ evidence and from the documentary record that the $22,900 payment constituted a loan from Richard to Ronald. There is disagreement between the parties over the precise terms of the loan, but that dispute need not be resolved because both parties agree that the loan was fully repaid in 2009 from the proceeds of sale of another property in Barrie in which Ronald had an interest.

[20] Richard therefore made no financial contribution to the purchase of the Wasaga property. He acquired title to the property through a Direction executed by Ronald on August 10, 2006. Richard gave no consideration for this Direction. In these circumstances, a presumption of resulting trust arose when Ronald gratuitously directed that the title deed be made out in Richard’s name: Pecore, at para. 25.

[21] It is incumbent upon Richard to displace the presumption of resulting trust by demonstrating, on a balance of probabilities, that a gift of the property was intended: Pecore, at paras. 25 and 43. It is Ronald’s actual intention (as grantor) that is the governing consideration: Kerr, at paras. 18-19. The relevant time for ascertaining Ronald’s intention is the point at which he signed the Direction to register the property in Richard’s name: Pecore, at para. 5. Evidence about how Ronald treated the property before and after its acquisition may, however, be relevant to this issue: Pecore, at paras. 57-59.

[22] The evidence establishes that Ronald acted as the property purchaser and property owner throughout. He signed the Agreement of Purchase and Sale. He dealt with the builder. He was actively involved in making decisions about pre-construction changes to the home. After the closing, he took possession of the property. He acted as the landlord, renting the house to tenants. After four months, he evicted the tenants for failure to pay rent. Thereafter, his spouse began living in the house, and he personally occupied the house on a part-time basis. He rented rooms to boarders on a short-term basis. Although he was occasionally late paying the mortgage and required a loan from Richard to make some of the payments in 2007 and 2008, he was responsible for the mortgage payments, as well as the property taxes and home owner’s insurance premiums. When the Barrie property was sold in November 2009, he moved into the Wasaga house and has since lived there full-time with his spouse. His mother also lived with them from 2009 to 2014.

[23] The manner in which Ronald treated the Wasaga property is consistent with ownership and is inconsistent with an intention to give it to Richard. Richard does not even argue that Ronald gifted him the property. His position, which I have rejected, is that there was no gratuitous transfer of the property into his name. Richard led no evidence to support a finding that Ronald intended a gift. He has not rebutted the presumption of resulting trust.

[24] Moreover, the evidence in the record establishes that it was the parties’ mutual intention and understanding that Richard would hold title in trust for Ronald’s benefit. It was agreed that Richard would transfer title to Ronald once Ronald sorted out his credit problems and could assume the mortgage.

[25] For all of the above reasons, I conclude that Richard holds legal title to the property as a trustee for Ronald’s benefit. Richard is therefore under an obligation to return the property to Ronald: Pecore, at para. 20.

[26] At the motion hearing, Ronald’s counsel acknowledged that if Ronald is unable to obtain sufficient financing to assume the mortgage and reimburse Richard for expenses owed to him, then a sale of the property will be required to terminate the trust arrangement and generate proceeds of sale from which Richard can be compensated. I will address this potential eventuality when I set out my remedial orders in detail at the end of this judgement.

Background Facts Giving Rise to the Litigation

[27] Before addressing the remaining issues in dispute, I need to review the evidence and summarize my findings regarding additional background facts. This will provide the necessary factual context for my conclusions and reasons below.

[28] The parties agree that the arrangement they entered into in August 2006 was intended to be temporary and to last just until Ronald’s financial circumstances improved. Although they disagree over whether the $22,900 loan was supposed to be repaid in two years or three years, they agree that Ronald was expected to repay Richard in the short term. There is a dispute about how long Richard was to hold title to the Wasaga property. There is no evidence that they ever agreed upon a fixed term, but both parties acknowledge that it was supposed to be short term. Correspondence in the record supports Richard’s testimony (during his examination) that the arrangement was originally expected to last for only one to two years. At that point, Ronald was supposed to assume Richard’s mortgage or arrange another mortgage in order to release Richard and obtain title.

[29] More than a dozen years have passed, the mortgage has been renewed twice by Richard and title to the property is still registered in Richard’s name. These circumstances were not within the parties’ contemplation when they first entered into the arrangement in 2006.

[30] Although they verbally agreed at the outset that Ronald would be solely responsible for all carrying costs associated with the property, Richard ended up loaning Ronald money to pay the mortgage in January and February 2007. The tenants to whom Ronald had leased the property defaulted on their rent payments, which caused Ronald to default on mortgage payments. Richard felt compelled to loan Ronald the money to make up the arrears in order to protect his own credit.

[31] There were other financial dealings between the parties relating to the Barrie property, which I will only briefly summarize because they have limited relevance to the issues in dispute. Ronald’s spouse held title to the Barrie property, but Ronald was paying a portion of the mortgage and had a beneficial ownership interest in the property. His spouse made an assignment into bankruptcy. The Trustee in Bankruptcy wanted to sell the property. Ronald thought the Trustee was undervaluing the property. He feared that his equity in the property would be jeopardized by a sale. He sought Richard’s assistance. Richard paid a sum of money to acquire title to the Barrie property from the Trustee, but Ronald continued to be responsible for the mortgage. Shortly thereafter, Ronald asked to borrow an additional $5,500 from Richard for unpaid mortgage debts and late fees relating to the Barrie property. In order to avoid foreclosure, Richard ended up lending Ronald more money.

[32] Richard understandably became frustrated and worried. He wanted to extricate himself from all of his financial dealings with Ronald. He feared that his credit would be ruined by what he perceived as Ronald’s “financial train wreck”. He became even more upset when he found out that Ronald had made a deposit on another property in Wasaga.

[33] Beginning in the fall of 2006, Richard tried to impose financial terms and conditions on Ronald, including a demand for payment of “fees” for holding the mortgages on the Wasaga and Barrie properties. In a letter to Ronald dated October 17, 2006, Richard characterized these fees as “an ‘aspirin’ for the headache all this [is] giving me”, as well as “payback” for some historical dealings between them (a car loan that Richard co-signed for Ronald and upon which Ronald apparently defaulted). Richard originally proposed a fee of $15,000 for both properties, but he reduced his demand to $12,000 ($6,000 for each of the two properties), which he said he would “revisit” if the arrangements continued for more than a year.

[34] During his examination, Richard acknowledged that, prior to Ronald signing the Direction for title to be registered in his name, there was no agreement between them that Ronald would pay him any fees in connection with the Wasaga property. Indeed, Richard testified that there was “no mention” of fees during their discussions about the arrangement. Richard sought to impose the fees unilaterally, after the Direction was executed by Ronald. Richard acknowledged during his examination that Ronald never agreed to pay him any compensation, despite his repeated requests for Ronald to do so from October 2006 onward.

[35] Correspondence in the record establishes that Richard also sought to impose a condition that Ronald would indemnify him for any capital gains tax liability that he might incur when he transferred title to Ronald. Richard acknowledged (during his examination) that this had not been discussed prior to the Direction for title to be registered in his name. He further acknowledged that Ronald never agreed to provide this requested indemnification, despite his repeated requests for Ronald to do so.

[36] In April and May 2008, Ronald was unable to make the mortgage payments for the Wasaga property. He asked Richard to cover the payments for him. Richard begrudgingly agreed, further adding to Ronald’s indebtedness.

[37] In November 2009, Richard sold the Barrie property and retained all of the proceeds of sale. Ronald remains angry to this day about the manner in which that sale was carried out. I mention this only because it is an additional source of friction in their relationship. The details relating to the sale of the Barrie property are not relevant to the case before me, except for the important fact that, as a result of the sale, Richard was repaid all monies borrowed by Ronald in respect of both properties. This crucial fact is not in dispute.

[38] From that point onward, Ronald lived full-time at the Wasaga property. He made regular and timely mortgage payments and continued to pay the property taxes and home insurance premiums, while Richard held the mortgage and remained the registered owner on title – per the terms of their verbal agreement. Richard testified during his examination that after the Barrie property was sold (which created significant family conflict), he “begrudgingly decided to do nothing” about the prolonged arrangement concerning the Wasaga property, which had continued beyond the two years that the parties had originally discussed. I find that he effectively acquiesced to an indefinite extension of the trust arrangement regarding the Wasaga property.

[39] In 2011, the mortgage on the Wasaga property came up for renewal. The documentary record establishes that an amount of approximately $191,000 was outstanding on Richard’s mortgage loan. Ronald was not able to obtain financing to discharge Richard’s mortgage and assume title. Negotiations ensued about further extending their arrangement. They discussed the possibility of a one-year extension, but ultimately agreed to a five-year extension. The documentary record shows that Richard wanted Ronald to agree to a $20,000 increase in the principal amount of the mortgage to be paid to Richard as compensation. Ronald deposed that he was angered by this proposal because he had been making regular mortgage and property tax payments since 2009, plus all amounts borrowed from Richard had been repaid (with interest) from the sale of the Barrie property.

[40] Richard ultimately renewed the mortgage for another five-year term. He increased the principal amount by almost $10,000, the net amount of which he kept for himself. Richard acknowledged in an affidavit that this was done without Ronald’s consent. He deposed that it caused further tensions between him and Ronald. He attempted to justify his actions by stating that the property had appreciated in value by an estimated $75,000. He explained, “I was shocked and dismayed to see that Ron refused to recognize or appreciate both the opportunity he had been given with my financial backing to advance his financial interests (enabling him to own an investment property which he could not otherwise own) and the detriment it has caused me in terms of lost opportunities for myself.” During his examination, he added that he renewed the mortgage in 2011 on terms that Ronald wanted (i.e., a variable interest rate and 30 year amortization period), so from his perspective, the $10,000 payment was “the cost of business”.

[41] The parties agree that the mortgage was renewed with the shared understanding that Ronald would continue to pay all bills on time (i.e., property taxes, mortgage payments, home insurance and utilities). An email from Richard to Ronald dated November 26, 2011, suggests that Richard only expected to continue to hold title to the property for another one or two years until Ronald got his credit difficulties sorted out. However, Ronald deposed that they agreed he would assume title when the mortgage expired in 2016, and Richard did not contest this during his examination.

[42] Tensions in the relationship heightened in 2013 when Ronald asked Richard to increase the principal of the mortgage so that he (Ronald) could have $25,000 to renovate the basement of the house. Richard refused. They had a heated argument over the phone in the spring of 2013, during which Richard said that he would not transfer the property to Ronald or to Ronald’s children in the event of his death. During his examination, Richard testified that he made that statement in anger. Ronald deposed that it greatly upset him. In his Statement of Claim, Ronald pleaded that he stopped paying the property taxes “in retaliation”. He deposed that he did this “in the hopes of trying to get [Richard] to transfer the Wasaga Property back to me”.

[43] Richard suspects that Ronald was financially broke and was simply unable to make further tax payments. He believes that Ronald used their telephone argument as a pretext for why he stopped paying taxes. I find that this is likely true, for the following reasons. First, the record establishes that Ronald made a property tax payment in the amount of $2,688.75 on November 19, 2012, and made no tax payments in 2013. He then made two payments of $2,000 each on June 2 and June 23, 2014. He made no property tax payments thereafter. The timing of the payments suggests that the cessation was not related to the telephone argument in the spring of 2013. Moreover, at no time did Ronald advise Richard that he stopped paying the property taxes, so it is difficult to see how his actions could have been designed to exert pressure on Richard, who was unaware.

[44] In any event, the reason why Ronald defaulted on the property tax payments is immaterial. The fact is that he thereby breached the terms of their agreement, compromised Richard’s credit and risked a forced sale of the property for non-payment of taxes.

[45] Richard’s uncontested evidence is that he did not find out about Ronald’s default on the property taxes until 2016. He ended up paying approximately $9,440 in tax arrears and penalty fees to bring the account up-to-date. He did this to protect his own credit rating and to prevent a forced tax sale of the property. It is undisputed that Richard has continued to pay the property taxes since then.

[46] Richard has also been paying the home insurance premiums since mid-2013. He alleges that Ronald unilaterally stopped making the insurance payments because he failed to give Ronald a receipt for payment of previous years’ premiums. However, correspondence in the record shows that Ronald requested the insurer’s invoices from Richard on more than one occasion. [1] I accept Ronald’s evidence that he stopped paying the premiums because Richard did not send him the bills. Richard testified that he let it go, assuming that he would be repaid for insurance premiums when title to the property was transferred to Ronald upon expiry of the mortgage in 2016.

[47] The conflict in the parties’ relationship peaked in 2016, which ultimately led to the litigation. Richard retained a lawyer, who advised Ronald in February 2016 that he could “purchase the property at a fair price” or it would be sold. He threatened eviction proceedings if Ronald did not either buy or vacate the property. Ronald was advised that Richard would be willing to transfer the property for $40,000 net, after all expenses were paid by Ronald. Richard acknowledged during his examination that this $40,000 in compensation was not part of any prior agreement with Ronald.

[48] On May 10, 2016, Richard wrote to Ronald, confirming that the conditions previously outlined by his lawyer remained in effect. He asserted (among other things) that “you have made alterations to a house that you do not own without my permission (probably without a building permit also).” He claimed that these modifications to the home were illegal because they were made without his permission. He threatened to call the township regarding building permits.

[49] Both parties wanted to terminate the arrangement. Negotiations ensued, during which Richard reduced the amount of compensation he was demanding, but no agreement was reached. Richard’s demand for indemnification of capital gains tax liability became a key stumbling block.

[50] In the summer of 2016, Ronald claimed to have approval for financing sufficient to discharge Richard’s mortgage, repay the property taxes and insurance arrears, and cover all transactional costs. Richard doubted the veracity of his claim and demanded proof of a commitment letter from a financial institution, which Ronald did not provide.

[51] Richard continued to demand compensation for the ten years that he had held the mortgage and title to the property, which would require Ronald to obtain greater mortgage financing. At that point, Richard was asking for $12,000 (down from $40,000). He testified that he “felt [he] deserved something for the backing” he had given his brother. The value of the house had increased by approximately $200,000. He stated that without his backing, “there would be no Wasaga” for Ronald. He had previously made the same remark directly to Ronald, including in his letter dated May 10, 2016.

[52] Ronald deposed that, in an effort to leverage the negotiations and exert pressure on Richard to back down, he stopped making mortgage payments in August 2016. Richard believes that the real reason why Ronald stopped paying the mortgage is because he could no longer afford to do so. Whatever the reason for Ronald’s cessation of payments, it is undisputed that Richard has carried the mortgage since September 2016. This constitutes another breach of their agreement by Ronald. (There is evidence in the record that Ronald offered to resume making the monthly mortgage and property tax payments on a going-forward basis in the late fall of 2017, but that did not occur because of ongoing disputes about past taxes and mortgage payments.)

[53] Richard obtained an extension on the mortgage in the fall of 2016. Negotiations continued between the parties. At that time, the outstanding balance on Richard’s mortgage loan was approximately $176,000. Ronald claimed to have approval for mortgage financing in the amount of $203,000, sufficient to discharge the mortgage and reimburse Richard’s expenses, as well as back taxes, missed mortgage payments and insurance premiums. However, Richard still wanted additional compensation and indemnification for capital gains taxes.

[54] In November and December 2016, Richard accused Ronald of lying about the size of the mortgage he was able to obtain. He demanded to know the precise terms of Ronald’s mortgage financing. He once again threatened to evict Ronald and sell the property on the market.

[55] Richard testified that the reason he asked for specifics regarding Ronald’s mortgage financing was because his accountant “needed numbers to figure out a deal”. He denied that he was trying to “somehow grind Ronnie for another $10,000 [or] $20,000”, but admitted that he “did ask for a slice of pie over and above all monies owed” to him.

[56] I find Richard’s explanation to be disingenuous and not credible. The record establishes that, although he had previously reduced his demand for compensation to $10,000, in November 2016, his demand increased again to $22,000. In an email message to his accountant dated November 17, 2016, Richard stated that he was “pissed off” because he suspected that Ronald had actually obtained mortgage financing in the amount of $237,000, yet was claiming to be unable to pay him any compensation “for his troubles”. On November 20, 2016, Richard wrote to his accountant again and stated, “I did ask for 22K as I think Ron got a mortgage for more than the 202 (sic [2]) he claims.” This evidence supports Ronald’s contention that Richard was trying to profit from the arrangement at Ronald’s expense.

[57] During his examination, Richard was asked the following question about the above emails to his accountant: “Doesn’t that suggest that you were using the amount of the mortgage that Ron was able to obtain to extract financial gain for yourself?” He responded, “It appears that way.” He then explained that he was “absolutely fed up” with Ronald. He said he was “on the hook” for the mortgage and Ronald had missed two mortgage payments. He added, “I know the house was worth in the order – and I get this from a realtor – approaching half a million dollars, okay? And the hoops I’m going through, yeah, I sort of thought I deserved something for my efforts.” He effectively admitted what he had previously denied, namely that he was “trying to grind” his brother for an additional $22,000.

[58] The other issue that has impeded a settlement of this dispute is Richard’s demand for indemnification for tax liability that he may incur as a result of a transfer of title to Ronald or sale of the property to a third party. To be clear, this issue is about indemnification, not reimbursement. It relates to possible capital gains tax liability that Richard might incur. His liability for these taxes has not been established and is speculative.

[59] Richard’s counsel submitted CRA publications that set out the rules regarding taxation of capital gains upon the sale or deemed sale of property that does not qualify as a principal residence. It would appear from these publications that the change in use of the Wasaga property from a rental property to Ronald’s principal residence ought to have been reported to CRA in 2009. There is no evidence as to whether or not that was done by either Ronald or Richard.

[60] The CRA publications underscore the potential liability that Richard may face but they do not constitute evidence that he will, in fact, owe any capital gains taxes if the property is transferred to Ronald. The primary reason for Richard’s exposure to tax liability is the manner in which he treated the property in his personal tax returns. Rather than declaring the property as a trust property, he declared it as an investment property.

[61] Richard testified that he has been declaring the Wasaga property as an investment property in his tax returns since either the first or second year of the trust arrangement (2006 or 2007). He stated that he declared rental income from the property and claimed expenses related to the property in each year since then. He deposed that:

Over the years, Ron was collecting rental income from the Property and it was my understanding that he was not declaring rental income on his income taxes. Given that we did not have a trust agreement in writing and given that rent was being collected by Ron, I was advised by my accountant that as the registered owner of the Property, Canada Revenue Agency can hold me liable for any rental income collected. Accordingly, my accountant advised me that I must declare that rental income is being collected on the Property, otherwise, I risk being liable to CRA. Accordingly, I reported rental income as per my accountant’s advice.

[62] Richard’s tax returns are not in the motion record, so I am unable to verify his claims. During his examination for discovery, he took under advisement a request to produce his tax returns, but he has not done so. If his claims are true, the CRA may treat him as the legal and beneficial owner of the property and may view the transfer of title to Ronald as a transaction involving a capital asset. The present day market value of the property is considerably higher than the purchase price for which it was acquired in 2006. If the CRA attributes fair market value to the property, the transfer of title to Ronald could result in a substantial capital gains tax burden for Richard. Similarly, if a sale to a third party becomes necessary, that transaction will occur at fair market value and there is a risk that it would attract capital gains taxes for Richard (assuming that his evidence about the tax treatment of the property is accurate). It is also possible that the CRA will do a reassessment of Richard’s previous taxes based on the change of use of the property in November 2009.

[63] Ronald refuses to provide indemnification to Richard for capital gains taxes on the basis that he never agreed that Richard could use the property as an investment property and never wanted Richard to declare the property as such on his tax returns.

[64] In his affidavit, Richard deposed that when they first entered into the arrangement in August 2006, they agreed that he would hold title to the property and the mortgage in his name, but Ronald would be responsible for managing the property (finding tenants, collecting rent, etc.) and for payment of the mortgage, property taxes, insurance, utilities and any costs or expenses associated with the property. This is not disputed by Ronald. Richard further deposed that “Any financial obligation with respect to the Property was to be Ron’s including any tax liability that may arise as a result of having title in my name.” He thereby implied that Ronald agreed to pay for any capital gains taxes that might arise. This is disputed by Ronald on two counts: (1) he never agreed to be responsible for any tax liability incurred by Richard other than property taxes, and (2) the potential capital gains tax liability has arisen because of Richard’s improper treatment of the property as an investment property.

[65] Submissions were made by Richard’s counsel during the motion hearing to the effect that this is an issue that requires a trial. I disagree. It can be resolved summarily based on admissions made by Richard during his examination. Richard gave the following evidence:

(a) Ronald rented the Wasaga property for the first couple of years. After 2009, when Ronald was residing at the property, he received $500/month in rent from their mother. (The latter allegation is disputed by Ronald, but there is no dispute that Ronald collected rent from short-term tenants in 2006, 2007 and 2008). (b) He did not know whether or not Ronald was declaring the rental income on his tax returns. (c) His accountant told him that the CRA does not recognize “handshake trust agreements”. The accountant said that, if Ronald was not declaring the rental income on his tax returns, then the CRA would treat Richard as the owner of the property. For that reason, he started to declare the property as an investment property on his tax returns. (d) He and his accountant “tried to make it revenue neutral”. He said, “[T]here was no significant net income to me”. He added, “I wasn’t making money on this, and when I say that, there may have been $100 here, $200 there sort of thing per year. So there was no great amounts of money, significant amounts of money.” (e) With respect to his accountant preparing his taxes, he said, “I just give him a shoebox full of stuff and go plop, here, figure it out.” Asked whether he recalled declaring the property on his income taxes as a trust property, he said “I never even looked at my taxes. Once he [the accountant] filled it out, all I did was sign the bottom line…” (f) Asked whether he declared the money that Ronald was paying towards the mortgage as rental income on his tax return, he stated, “You know, I can’t honestly answer that question. The accountant did something and I don’t know what he did. I don’t know how he would handle that.” Richard provided an undertaking to obtain that information from his accountant and provide an answer in writing. (g) Ronald never wanted him to declare the Wasaga house as an investment property on his personal tax returns. He did so despite Ronald’s objection based on his accountant’s advice. (h) Ronald never agreed to be responsible for capital gains tax liability that might result from his tax treatment of the property. (i) In August 2007, he asked Ronald for receipts for utility bill payments and rent received. He obtained a statement of rental income but did not receive the expense receipts. He wanted to deduct the expenses on his tax return. He had no way of knowing exactly what the expenses were for the property, but he knew the amount of the mortgage and property taxes. He said “we took a guess at it”, meaning that he and his accountant estimated the property expenses. They then declared that the house brought in the same amount of rental income so that it would be revenue-neutral. (j) After the Barrie property sold in November 2009, he was aware that Ronald moved into the Wasaga house with Ronald’s spouse and their mother. He could not recall but did not think that he advised his accountant of this fact. (k) Ronald’s position throughout has been “I’m not responsible for your capital gains”.

[66] It is clear from Richard’s own testimony that there was no agreement between the parties that Ronald would be responsible for any capital gains tax liability incurred by Richard in connection with the Wasaga property.

[67] Richard did not file an affidavit from his accountant explaining how the property was treated for tax purposes and/or confirming the advice he claims to have received from his accountant. Nor did he submit copies of his tax returns. There is little or no evidence of how much rental income was declared by him, the amount of expenses he claimed, or how those amounts were calculated by his accountant. There is no documentary evidence to substantiate his assertion that he gained only nominal tax advantage from the property.

[68] The record does contain an answer provided by Richard to the undertaking given during his examination, namely, “to contact the accountant and advise in writing how the amount determined for rental income was determined for income tax purposes and how the monies paid by Ronald were declared.” The answer confirms that Ronald did not provide Richard with any written statement of rental income or expenses after 2007. It claims Richard obtained some information about rental income and expenses verbally from Ronald in the years after 2007, up until Ronald moved into the property. It identifies 2011 as the year that Ronald moved into the property, which is incorrect. It also includes the following information:

From the year 2012 onwards, when Ronald moved into the property, the accountant estimated the revenue at $1,000.00 per month ($12,000 annual) as this was reflected by the deposits made to pay the mortgage and other expenses. The interest expense was obtained from the bank. Expenses for the property taxes were from the municipality, insurance from the invoice and the utilities and repairs were estimated based on previous years.

The reasons Richard continued to declare rent revenue after Ronald moved into the property are as follows:

1. If the property was converted from a rental property to a property for personal use, it could possibly trigger a deemed disposition in the CRA’s opinion and that may trigger a capital gain and subsequent taxation; and
2. It was hoped and anticipated by Richard that Ronald would agree, on reasonable terms, to take over ownership of the property without anyone having to pay capital gains.

After Ronald stopped making payments the accountant reported revenue of $12,000.00 per year and estimated the expenses that could not be verified. The net income is very low or negative in all of the recent years (losses of $2,500.00 over 4 years).

[69] I note that the answer to the undertaking does not mention the net income declared by Richard in the earlier years of the arrangement. I am inclined to infer that net income losses were more substantial prior to 2012, since they were expressly left out of the answer. Based on Richard’s vague responses to questions during his examination and his failure to submit corroborating evidence that is readily available to him (namely his tax returns and an affidavit from his accountant), I am prepared to draw an adverse inference that Richard has enjoyed a significant tax advantage from the property over the years. I also conclude, based on an adverse inference, that Richard never declared the property as a trust property on his taxes. He represented to CRA that he was the owner of the property so that he could benefit from the tax advantage of declaring a net income loss from renting the property. He declared fictional rental income and claimed non-existent expenses, right up until the date of the hearing in this matter.

Did Richard commit a breach of trust?

[70] As trustee, Richard owes a fiduciary duty to Ronald, for whose benefit he holds title to the Wasaga property. He has a duty to deal with the property in manner that is consistent with Ronald’s best interests. He is not required to satisfy an elevated standard of care commensurate with a professional, but he is obligated to act in good faith, with proper motives and a minimum of good judgement. He is obligated to act with the standard of care of a reasonable and prudent person administering their own affairs: McConnell v. LeBlanc, 2008 NBQB 335, 337 N.B.R. (2d) 318, at paras. 14-15; and Eve v. Brook, 2016 ONSC 1496, at paras. 96-99.

[71] The evidence establishes that Richard started trying to extract “fees” from Ronald within weeks of title to the property being registered in his name. He did this despite the fact that, in August 2006, he agreed to hold title to the property for Ronald’s benefit. It was understood that there would be no cost to him, but there was no agreement that he would be compensated in any way.

[72] It was a generous thing for Richard to do. It seems that he almost immediately regretted his generosity. He felt abused by Ronald, particularly when he learned that Ronald had put a deposit on a third property, all while requesting to borrow more money to pay mortgage arrears on the Barrie property and to make the mortgage payments on the Wasaga property. Richard regretted his decision not to invest his money for his own benefit, so he started to treat the Wasaga property like an investment. This was contrary to his duties as trustee to hold the property for Ronald’s benefit.

[73] While I can appreciate Richard’s frustration with Ronald’s financial mismanagement, it did not give him the right to resort to self-help by withdrawing roughly $10,000 of equity from the property for his own benefit when he renewed the mortgage in 2011. In doing so, he acted in his own self-interest rather than in Ronald’s best interest. He thereby committed a breach of trust.

[74] Richard demonstrated poor judgement when he failed to declare the property as a trust property on his tax returns. It was imprudent and unreasonable for him to treat the home as an investment property and to claim rental income and expenses without foundation. It was improper for him to do so against Ronald’s wishes, since he held title to the property for Ronald’s benefit. Although he claims that his tax treatment of the property was revenue-neutral, I have found that he obtained significant tax advantage from the property, which is contrary to his fiduciary duties as trustee. The full extent to which he benefitted from the tax treatment of the property cannot be assessed because he failed to disclose his income tax returns, but I am entitled to draw an adverse inference that the tax treatment was more beneficial to him than he admits. Regardless of the extent of the tax advantage, it is established that he acted in his own self-interest, contrary to his duty as trustee to act in Ronald’s best interest.

[75] Richard claims that he followed his accountant’s advice, yet he did not submit an affidavit from the accountant or any evidence to support this contention. I am not persuaded that the accountant provided the advice in question, or that the accountant was fully informed by Richard of the circumstances prior to providing advice.

[76] Richard’s testimony that he signed his tax returns without even reviewing them strikes me as a dishonest attempt to evade responsibility for his actions and transfer blame to his accountant. Even if I accepted his testimony as credible, it is not consistent with the reasonable and prudent behaviour required of a trustee.

[77] When Richard accused Ronald of acting illegally by making modifications to the property without his permission as the “owner”, he ignored the fundamental principle that there is a distinction between legal and beneficial ownership of property. Ronald, as the beneficial owner, is the “real owner” of the property, even though it is registered in Richard’s name: Csak v. Aumon (1990), 69 D.L.R. (4th) 567 (Ont. H.C.), at p. 570, cited in Pecore, at para. 4.

[78] As the beneficial owner of the property, Ronald alone is entitled to the increased value in the property. Richard did not make a financial investment in the property. There was never an agreement that he and his brother would share in the equity resulting from any increase in value. The purpose of the arrangement was to assist Ronald in acquiring an investment property that would presumably increase in value, enabling Ronald to extricate himself from his difficult financial circumstances.

[79] Granted, the original arrangement was only supposed to last for a couple of years. Neither party anticipated in August 2006 that Richard would still be on title in 2019. However, Richard acquiesced to prolonging the trust arrangement in 2009 and then he agreed to a further five-year extension in 2011. These extensions were not done on condition that Richard would receive compensation or would share in any profit resulting from the increase in market value. Ronald did not agree to any such terms. Richard’s attempts to impose these terms unilaterally were contrary to his fiduciary obligations as trustee.

[80] I can appreciate why Richard became exasperated. It is not difficult to comprehend why Ronald’s financial irresponsibility caused Richard to regret his decision to assist Ronald. Richard quickly realized that he had made an unwise decision. Ronald took advantage of his generosity. The arrangement, which was meant to be temporary and cost-free for Richard, ended up being an unanticipated financial burden and a “headache” for him for over a decade. Starting in 2013-2014, Ronald failed to uphold his obligations under the trust agreement when he stopped paying the insurance premiums and property taxes. Ronald’s breach of the agreement became more serious when he stopped making mortgage payments in September 2016. These circumstances do not, however, entitle Richard to profit from the arrangement or to demand fees from Ronald, when none were agreed to at the time that they entered into the trust arrangement or at the time that they extended the duration of the trust arrangement. Nor do the circumstances entitle Richard to reimbursement of any expenses that were not properly incurred in carrying out the trust: Trustee Act, R.S.O. 1990, c. T.23, s. 23.1.

Did Richard act in bad faith? Is Ronald entitled to punitive damages?

[81] Richard’s initial motivation was a simple desire to assist his brother, but he became improperly motivated by self-interest and a desire to profit from the trust arrangement because he felt his brother had exploited his generosity. His conduct constituted a breach of his fiduciary obligations. The evidence does not, however, support a finding that his misconduct was so egregious as to amount to bad faith.

[82] It is noteworthy that Richard incurred personal expenses, on more than one occasion, which spared Ronald the loss of the property (e.g., by loaning Richard more money to make mortgage payments, paying back taxes and making up arrears in mortgage payments). In that respect, he was acting in Ronald’s best interest, as well as his own.

[83] Even if I were to conclude that Richard acted in bad faith, this is not a case in which punitive damages would be warranted. Punitive damages are an exceptional remedy. They are awarded only in cases of such reprehensible conduct that they are necessary in order to accomplish the goals of denunciation and deterrence. Awards of punitive damages are limited to misconduct that represents a marked departure from ordinary standards of decent behaviour: see Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130, at para. 196; and Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 36.

[84] The parties’ communications since the fall of 2006 have been tense and emotionally charged, likely because of their filial bond. There were multiple occasions when both of them said harsh things in anger. Richard’s conduct at times bordered on the deployment of high-handed tactics, but in the circumstances of this case, it cannot reasonably be characterized as oppressive, malicious, vindictive or otherwise reprehensible.

[85] The decency of Richard’s conduct must be assessed in the full context of all of the circumstances. Ronald does not come to this case with clean hands. He violated the terms of their agreement by ceasing to pay the home insurance, property taxes and eventually the mortgage. He took advantage of Richard’s generosity. He compromised Richard’s credit rating. His actions provoked much of Richard’s inappropriate conduct. In these circumstances, Richard’s behaviour does not constitute a marked departure from common decency.

DEFENDANT’S MOTION

[86] In light of my findings above, the issues raised by the defendant’s motion are rendered moot. I have concluded that Richard is not the beneficial owner of the property. He is therefore not entitled to much of the relief that he sought on that basis.

[87] He is, however, entitled to compensation for Ronald’s breaches of their agreement and for expenses properly incurred as trustee of the property.

What compensation is Richard entitled to?

[88] As trustee, Richard is entitled to recover from the trust property any out-of-pocket expenses that he properly incurred in carrying out the trust: Trustee Act, s. 23.1. This includes, for example, costs reasonably incurred in renewing the mortgage on the property.

[89] Richard is entitled to indemnification for any transactional costs associated with the transfer of title to Ronald (or, in the event that a sale to a third party becomes necessary, transactional costs associated with such a sale). This may include legal fees and disbursements associated with the transfer/sale. It does not, however, include legal costs of this proceeding, which will be determined in accordance with r. 57 of the Rules of Civil Procedure.

[90] Richard is also entitled to compensation for all mortgage payments, property tax payments and home insurance premiums that he paid, as well as any interest payments or late penalty fees that he was required to pay as a result of Ronald’s non-payment of these expenses.

[91] In his affidavit, Richard deposed that,

I have been paying for the property taxes and insurance for 4 years and for the mortgage since August 2016. I have paid in excess of $29,801.47 over the last 4 years, all of which were Ron’s obligations … which he has not been honouring. Four years of financial default by Ron has put a strain on my finances as I have had to dip into my savings, borrow funds, and pay interest on same in order to be able to fund the mortgage and expenses for the Property. I continue to pay for the monthly obligations of the Property and this continues to put a strain on me emotionally and financially.

[92] Upon providing a full accounting of any interest payments incurred by him as a direct result of Ronald’s default on his obligations (with supporting documentation), Richard is entitled to compensation for same.

[93] Richard is not entitled to compensation for lost opportunities (e.g. for profits he claims he could have made by investing his money in the Vancouver real estate market or stock market instead of tying it up in the equity of the Wasaga property for his brother’s benefit).

[94] Richard is not entitled to be paid any fees or compensation for the inconvenience, aggravation and “emotional strain” that he has experienced.

[95] Richard is not entitled to be indemnified for potential capital gains tax liability (or any other income tax liability) that he might incur when the property is transferred/sold. He is, however, entitled to indemnification for any land transfer taxes that may be incurred or adjustments for property taxes that may be owing.

ORDERS

[96] Both motions are granted in part and dismissed in part.

[97] Based on the reasons set out above, I make the following orders:

(a) Ronald shall immediately resume responsibility for paying the monthly mortgage payments, property taxes and home owner’s insurance premiums on a going-forward basis. Richard shall forthwith provide Ronald with information relating to any payments that are due. Ronald will make the payments in a timely way (by the deadlines imposed by the bank, municipality and insurer). Ronald will provide Richard with written proof of payment within seven (7) days of any payment made. (b) Richard shall, no later than ten (10) days after the date of this decision, provide Ronald with documentation setting out the amount outstanding on the mortgage for the property and any fees that may be required to discharge the mortgage. (c) Richard shall provide Ronald, within twenty (20) days of the date of this decision, with an accounting of any out-of-pocket expenses that he incurred in connection with the proper administration of the trust (such as fees incurred to renew the mortgage). (d) Richard shall provide Ronald, within twenty (20) days of the date of this decision, with a detailed accounting of all amounts paid by him from 2013 to present in respect of home insurance, property taxes and mortgage payments, including any late penalty fees or interest charges paid. This will include a calculation of prejudgement interest (in accordance with the Courts of Justice Act, R.S.O. 1990, c. C-43) on amounts paid by Richard for the mortgage and property taxes (not for home insurance). (e) Richard shall provide Ronald, within twenty (20) days of the date of this decision, with a full accounting (with supporting documentation) of any interest payments he incurred as a result of borrowing money in order to make the mortgage, property or insurance payments set out in subparagraph (b) above. (f) Richard shall provide Ronald, within twenty (20) days of the date of this decision, with a full accounting of the equity that was removed from the property when he increased the principal amount of the mortgage upon renewal in 2011. (g) Ronald shall, within sixty (60) days of the date of this decision, either assume the mortgage on the property and secure Richard’s release from any obligations under the mortgage or discharge the current mortgage on title to the property by securing another mortgage. Ronald shall be responsible for all transactional costs associated with assuming or discharging the mortgage. (h) Ronald shall, within sixty (60) days of the date of this decision, reimburse Richard for the amounts accounted for in subparagraphs (c), (d) and (e) above, and for any costs that may be awarded to Richard, subject to a set off of the amount accounted for in subparagraph (f) above and any costs that may be awarded in Ronald’s favour. (i) Ronald shall, within forty (40) days of the date of this decision, provide Richard with proof (i.e., a commitment letter from a financial institution) that he has secured the necessary financing to satisfy the orders in subparagraphs (g) and (h) above. (j) Richard shall transfer title to the property to Ronald upon satisfaction of subparagraphs (g) and (h) above. Ronald shall be responsible for all transactional costs associated with the transfer of title. (k) If Ronald does not provide proof of financing per subparagraph (i) above, the CPL registered on title to the property will be discharged and the property will be listed for sale within sixty (90) days of the date of this decision. Richard shall retain a real estate agent to conduct the sale. He shall consult Ronald with respect to the listing price and any offers received. Richard shall make final decisions regarding the sale of the property, but all decisions will be made in accordance with his fiduciary obligations as trustee. Ronald shall cooperate with the sale. (l) In the event that the property must be listed for sale, Ronald shall vacate the property within seventy five (75) days of the date of this decision. (m) In the event that the property is sold to a third party, Richard shall be compensated from the net proceeds of sale for the amounts accounted for in subparagraphs (c), (d) and (e) above and for any costs that may be awarded in Richard’s favour, subject to a set off of the amount accounted for in subparagraph (f) above and any costs that may be awarded in Ronald’s favour. The remaining proceeds of sale shall be disbursed to Ronald. (n) Either party may apply to the court for such direction or interpretation of any of the above orders. I shall remain seized in respect of any such requests for direction or interpretation.

COSTS

[98] Both parties submitted costs outlines after the motions hearing. Although the motion materials include correspondence that was part of the parties’ ongoing negotiations to try to resolve their dispute, I do not know whether any formal settlement offers were made that affect costs. I am therefore unable to decide costs without further submissions from the parties.

[99] If the parties are unable to settle the issue of costs, they may make brief (two pages, excluding any settlement offers) written submissions. Ronald shall serve and file his costs submissions within 20 days of the date of this decision and Richard shall serve and file his responding costs submissions within 10 days after receiving Ronald’s submissions. There will be no reply submission under requested by me.

Petersen J. Released: January 9, 2019

Footnotes:

[1] See, for example, Ronald’s emails to Richard dated November 28, 2012 at 8:04 AM and April 7, 2014 at 9:44 AM.

[2] This “202” seems to be a typographical error. The evidence in the record establishes that Ronald claimed to have approval for $203,000, not $202,000.