CITATION: Krates Keswick Inc. v. Crate, 2017 ONSC 6195
COURT FILE NO.: CV-15-10830-00CL
DATE: 20171017
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
KRATES KESWICK INC.
Applicant
– and –
STEVEN L. CRATE, ROBIN ANN CRATE a.k.a. ROBIN PRICE, GREGORY J. CRATE, LYNN J. MARKO and RYAN G. CRATE
Respondents
Mark Dunn and K. Cohen, counsel for the Applicant
Gregory M. Sidlofsky, counsel for the Respondents
HEARD: October 8 and 9, 2017
f.l. mYERS j.
The Proceeding and Outcome
[1] The applicant stands in the shoes of Crate Marine Sales Inc. The applicant claims that the respondents hold four pieces of land in trust for Crate Marine and therefore for the applicant. Title to the four pieces of property is registered in the respondents’ names as detailed below. The applicant argues that the respondents hold the land in trust for Crate Marine under the doctrine of resulting trust. Alternatively, it argues that the court should impose a constructive trust over the land in favour of the applicant to remedy unjust enrichment. The respondents say that the land was bought and paid for by them personally and it belongs to them.
[2] For the reasons set out below, I find that beneficial title to the land known as 200 and 292 Wynhurst, 176 Wynhurst, and 274 the Queensway is held by the respondents on resulting trust for Crate Marine and therefore for the applicant.
The Background
[3] The Crate family owned Crate Marine for decades starting with the respondents’ grandparents. The complete shareholdings of the corporation are not before me. I do not know whether Steven Crate, Gregory Crate, and their sister Lynn Marko were the owners of 100% of the common shares of the corporation at the relevant times.
[4] The principal businesses of the corporation were operating a marina on Lake Simcoe and buying and selling boats. The corporation owns substantial land on the lake from which it operated the business.
[5] In December, 2014, the Crate Marine was placed in receivership and then bankruptcy due to its inability to meet its obligations to its creditors.
[6] The applicant is a corporation owned or controlled by the major creditor(s) of Crate Marine. It purchased Crate Marine’s rights against the respondents such as they may be.
[7] The issues in this case involve land and accounting transactions that occurred in the main long before the creditors had interests in Crate Marine. The applicant therefore has little independent evidence to illuminate the issues. Rather, nearly all of the evidence comes from the Crate family and from the books and records of Crate Marine.
Process
[8] This matter came on for hearing on a written record on June 26, 2017. Out-of-court cross-examinations had been held of Steven Crate and Lynn Marko. The transcripts were available and disclosed significant inconsistencies in the testimony given by those witnesses. The judge hearing the application determined that because the credibility of the Crate’ testimony was in issue, the matter should proceed to a hybrid trial.
[9] At the trial, Steven Crate and Lynn Marko took the witness stand relying on their existing affidavits as their evidence-in-chief. The trial therefore consisted of Mr. Dunn essentially repeating the cross-examinations that he had previously conducted. Not surprisingly, with the evidence-in-chief staying the same despite the problems already uncovered in the earlier cross-examinations, the Crate’s evidence fared no better on the repeat of the cross-examinations in court.
[10] The overriding issues in the proceeding are whether Crate Marine intended to own beneficially the properties at 200 and 292 Wynhurst when title was put in Lynn Marko’s name and whether it intended to own 274 The Queensway and 176 Wynhurst beneficially when title was put in Steven Crate’ name.[^1] All of the properties are contiguous to the land owned by Crate Marine from which it operated its business. There are a number of other properties owned by other members of the family or other family corporations that are also contiguous to the land owned by Crate Marine. Those properties are not in issue before me. The issue is whether land was assembled for Crate Marine with title put into others’ names to avoid subdivision control issues down the road or whether title to each of the four pieces of property that are in issue truly represents beneficial ownership by the titled family members.
[11] Of course in 2017 Lynn Marko and Steven Crate testified that it was always their intention and the corporation’s intention that they own personally each of the four pieces of land that are in their names. There is no support for that evidence in the corporate records except minimally with respect to 176 Wynhurst. For the other three pieces of land, the corporate records provide compelling evidence that they were owned beneficially by the corporation throughout. The corporation paid for all three, paid annual upkeep and taxes, received the rent (if any), and listed the land as assets on its financial statements. As discussed below, the facts for 176 Wynhurst are similar although not identical.
[12] Interestingly, the respondents did not assert that the corporate records were wrong or were confused. To the contrary, Lynn Marko was in charge of accounting and positively swore that while Crate Marine paid for the land, the transactions were booked as shareholder loans to evidence the personal use of the corporation’s funds. Her affidavit evidence includes:
I was advised that when money was taken out of the company for personal reasons, other than for salary, those monies should be recorded as shareholder loans. This is what I did. [Emphasis added.]
It is from these monies, which were intended for the family’s personal use that the properties were purchased…
I obtained the funds to purchase the properties from Crate Marine Sales Limited, which funds were used to reduce amounts owning to me by the company as set out in my shareholders account with the company.
[13] None of this evidence is correct however. A review of the accounts kept by Ms. Marko reveal clearly that for 200 and 292 Wynhurst, the two properties in her name, before fiscal 2012, none of the funds used to buy those two properties, to pay mortgage payments, to pay upkeep, or taxes, was ever charged to her shareholder loan account. After certain book entries were posted in fiscal 2012, supposedly to evidence the respondents’ ownership of the land, Crate Marine continued to make all payments on the lands as before without recognizing any advances in the shareholder loan accounts. With a minor exception, the same is true for the two properties claimed by Steven Crate.
200 and 292 Wynhurst
[14] 200 and 292 Wynhurst were bought in 2002 and 2000 respectively. The cost of the properties was included in the fixed assets on the corporation’s balance sheet until the fiscal 2012 adjusting book entries discussed below.
[15] There is a shareholder loan account in the corporate ledger for Ms. Marko. As she injected and withdrew funds, Ms. Marko actively recorded additions and diminutions in her shareholder’s loan account over the years. The ledger includes a corporate fixed asset account recording the land purchases. The mortgages are duly recorded as a corporate liability account. Taxes were posted to a corporate expense account each year. Before fiscal 2012, none of the entries was recorded as a shareholder advance to Ms. Marko at all.
[16] During the trial cross-examination, Ms. Marko agreed that she understood before the year 2000 that money taken out of the company by shareholders for personal reasons was to be charged to their shareholder loan accounts. She agreed that when money was taken for personal purposes, it was shown in the shareholder accounts. She also agreed that the converse was true. When money was used for corporate purposes, it would not be posted in the shareholder loan account but she posted it to an asset or expense account.
[17] She then testified at the trial that the money used to buy 200 and 292 Wynhurst and to pay mortgage and taxes on the properties was drawn each month for her personal purposes. But it was never recorded in the shareholder loan accounts despite her evidence that she had recorded all funds taken for personal purposes in that way. In other words, the funds used by Crate Marine to buy 200 and 292 Wynhurst were corporate funds used for corporate purposes. They were not recorded as personal funds being advanced for shareholders as Ms. Marko testified she had done.
[18] In her out-of-court cross-examination, Ms. Marko was taken through the corporate ledger accounts. She agreed, for example, that she recorded taxes paid each year on the properties as a corporate expense:
290 Q. You’d agree with me that this was also never transferred into any shareholder account?
A. To me it would appear that the transactions are expensing the property taxes.
291 Q. Right. So this expense of property taxes on 200 and 292 Wynhurst, from an accounting perspective, is not treated any differently than, for example, salaries?
A. Right. But the purpose of this particular transaction was because the property is the size of a couple of football fields, and boats are stored on the edge of that property before they hit a ditch, if there was any storage, the company retained—any rentals of any boats and stuff that’s sitting on my land.
[19] Mr. Dunn’s discovery that there was revenue received by Crate Marine for boat storage on 200 or 292 Wynhurst was serendipitous. The key point is that despite her evidence that when the company gave money to the shareholders she recorded the advance in the books as a shareholder loan [“This is what I did.”] the property taxes were treated as a regular corporate expense and were not shown as shareholder advances.
[20] The same accounting treatment is provided for mortgage payments. They were paid by the company and were never recorded as shareholder advances. Revenue received went directly to the company and was not recorded as a shareholder advance to the company. And, as noted above, these properties were included in the value of fixed assets on the corporate balance sheet.
[21] In the midst of her cross-examination at trial, Ms. Marko tried on three new theories. First she said that the company added new shareholder loan accounts on the books. She tried to argue that the asset account recording the properties as fixed assets of the corporation was actually a shareholder loan account. Each account had a code and a name from which it was evident that this was not the case. Moreover, the financial statements distinguished assets held from loans owed. There is no evidence that the land listed in the fixed asset land account was included in the totals of the shareholder loan accounts. Nor would doing so have made sense.
[22] On being confronted with the foregoing logic, Ms. Marko changed her evidence. The fixed asset land account morphed from being a shareholder loan account back to an asset account. She said that, in her mind, the fixed asset land account recorded a receivable due from her to the corporation. Although she knew and swore repeatedly that shareholder advances were recorded in the shareholder loan accounts, she said she had set up this fixed asset land account for her two properties to keep track of her receivable to the company. Yet the receivable too was never visible in either her shareholder loan account or in the company’s aggregate receivables. There were accounts in the ledger that specifically recording receivables from related parties. Ms. Marko conceded that she knew how to set up a related party receivable in the ledger and that she did not do so for the two pieces of land. Finally, on being challenged on her clear understanding that funds used for personal purposes were recorded in the shareholder loan account, when being cross-examined about the treatment of her brother’s shareholder loans, Ms. Marko retreated to claiming that an unknown other bookkeeper had set up the accounting system for the land and she did not know why the corporation recorded the land the way it did.
[23] But she did know. She was perfectly clear in her affidavit and in both cross-examinations that corporate expenses and personal expenses were each recorded appropriately in the appropriate accounts. The accounts show clearly that she, as the person in charge of the accounts, was content to record every penny paid on 200 and 292 Wynhurst as corporate expenditures and not personal funds from 200 until fiscal 2012.
[24] In 2010, the CRA commenced audits against the Crates personally. It became clear early on that the CRA was going to tax any portion of the parties’ shareholder loan accounts that remained outstanding at the end of each fiscal year. The Crates did not know that shareholders are deemed to receive a benefit for shareholders’ loans that remain outstanding at year end. The benefit is treated as income and is taxable.
[25] The Crates argue that they had to pay tax on the funds paid by the company for their properties and this shows that the funds were indeed advanced to them for personal use. Ms. Marko did not have to pay any tax because she said that her shareholder loan to the company was less the value of the land costs that she owed to the company. She claimed that she received no net benefit from her shareholder advances received from the company due to her offsetting debt owing to the company for the land.
[26] The problem with the argument is that it conflates taxation with property ownership. Just because a shareholder has to pay tax on some amount that CRA deems her to have received as income, does not mean that there is any change to underlying ownership of the property involved. More fundamentally, though, the respondents’ argument is not supported by their evidence. They say that CRA taxed them on the funds used by the company on their properties as shown in the shareholder loan accounts. CRA was plainly just assessing tax on the balance of shareholder loans outstanding at the end of each year. But, as noted above, there were no funds related to the Wynhurst properties shown in the shareholder loan accounts for Ms. Marko at all.
[27] The few documents that the Ms. Marko produced concerning her personal tax situation refer to the review by CRA of outstanding shareholder loans expressly. Ms. Marko was not able to point to any evidence that the CRA had even seen or considered the accounting for the two properties in its assessment of the taxable benefits on her shareholder loan account. In the out-of-court cross-examination, the Ms. Marko testified
154 Q. …when the CRA did its audit all of the amounts related to 200 and 292 Wynhurst were not in your shareholder account, correct?
A. Correct.
155 Q. So the CRA never reviewed anything related to 200 and 292 Wynhurst?
A. That I don’t know.
[28] She repeated this evidence at trial.
[29] As alluded to above, after the audit was well underway, in fiscal 2012 Ms. Marko created a new shareholder loan account for herself in the ledger and she moved the purchase price of $347,000 that was paid by the company for 200 and 292 Wynhurst to her new shareholder loan account. Ostensibly this shows her owing $347,000 to the corporation. The land was then taken off the books of the company. But no amounts were moved to the new account to reflect mortgage, taxes or upkeep expenses paid by the company over the preceding decade. Moreover, on an ongoing basis thereafter the company continued to pay mortgage, taxes, and upkeep on the properties without recording those expenditure as shareholder advances to Ms. Marko.
[30] It is difficult to assess what the 2012 accounting treatment did. Ms. Marko says that the company owed her a balance on her shareholder loans so she recorded the land as an offset. Ms. Marko argues that if she had known that she did not own the land, she would have taken her shareholders’ loan out of the company before it failed. That argument makes no sense however in that if Ms. Marko believed that she always owed the price of the land to the company, then she never would have had a positive debt owing to her for her to consider offsetting. Instead it is apparent that in 2012, she looked around and partially moved the land cost to try to offset the balance owing to her on her shareholder loan account.
[31] One could argue that in fiscal 2012, the shareholders decided to convey the land to Ms. Marko at cost in payment of the amount due to her as a shareholder’s loan at that time. Whether insolvency was sufficiently in view to make such a transaction readily reviewable would be an issue. But Ms. Marko and the respondents were clear that the fiscal 2012 entries were not transfers of title from the company to the shareholders. Rather, they say that the entries were simply confirmatory reflections of the shareholders’ ownership of the land from the get go.
[32] The transactions recorded in 2012 in Ms. Marko’s new account:
a. did not involve shareholder loans that were proven to have been taxed by CRA;
b. did not record as advances to Ms. Marko prior property taxes, mortgage payments, and upkeep costs which were equally alleged to have been shareholder advances;
c. were not followed by future payments of mortgage, taxes, or upkeep being charged to Ms. Marko despite her alleged recognition of her personal ownership of the land. The company kept on paying all of the ongoing costs and none was recorded as a shareholder advance even after these entries were made.
[33] Therefore, it is apparent that the fiscal 2012 entries were made to assist Ms. Marko in the audit. They are not consistent with the land having being owned beneficially by Ms. Marko up to that point or subsequently.
[34] Ms. Marko confirmed that she did not record rent received from boat owners for storage on the two properties as her revenue. She did not charge the marina rent for the use of the property. She did not claim as her expenses property taxes paid supposedly on her personal behalf and supposedly charged to her by the corporation.
[35] She said that she did not have any net amount owing to the corporation after the property was credited to her shareholder account, but she conceded that on her accounting her brothers both owed net amounts to the company. Yet she then said that her brothers were not required to pay their shareholder loan balances to the company although the company was obliged to pay her the net amount due to her on her shareholder loan. Her evidence about the meaning and use of shareholder loans was self-serving and inconsistent.
[36] Then why was title taken in her name?
[37] At a meeting with their significant secured creditor in October 2014 after the company’s financial fortunes had begun to crumble, Steven Crate advised the creditor that title to the contiguous lands was taken in their personal names to avoid severability issues. Ms. Marko was in attendance. Mr. Crate said that the land had been assembled as part of a grander vision to one day sell it all to a developer. As contiguous pieces were bought, title was put into the names of others to avoid problems if they ever decided to sever individual pieces. If the land was truly beneficially owned by the titled owner, then severability would never have been an issue. Severance problems only arise where one owner merges title to contiguous land parcels. By raising a concern about severability, the Crates were representing to their creditor that Crate Marine owned its own land and the contiguous parcels i.e. that their title was held for Crate Marine. This is consistent with the accounting treatment that the corporation knowingly followed throughout.
[38] In cross-examination, Ms. Marko did not accept the truth of her brother’s statement although she did not disagree with him in front of the creditors. She gave evidence both that she did not accept that the land had been put in her name to protect the corporation from a future severance issue and that what Steven said to the creditor at the meeting was truthful. One of those two statements given on oath cannot be correct.
274 The Queensway and 176 Wynhurst
[39] Steven Crate’s evidence is that he owns the other two properties referred to as 274 The Queensway and 176 Wynhurst. His affidavit evidence is explicit in claiming that the properties were always bought for personal reasons. Steven Crate’s affidavit includes the following:
I made payments towards the deposits and the mortgages on the Properties using personal funds. I also used money that I had received from Crate marine that was accounted for in my shareholder account. [Emphasis added.]
[40] It is significant that Mr. Crate distinguished between paying some costs with his own funds and also paying others with funds drawn from the corporation that were charged to his shareholder account. He was clear at the trial that he intended references to his personal funds to mean funds that he drew from his personal bank accounts.
[41] However Mr. Crate’s evidence was not correct. Mr. Crate was not able to point to a single payment that he made personally prior to the receivership. All funds used to buy and carry both properties were paid by Crate Marine.
[42] For 274 The Queensway, like Ms. Marko’s properties, no payments were posted to Mr. Crate’s shareholder loan account before the fiscal 2012 adjusting entries.
[43] The purchase of 176 The Queensway is different. The agreement of purchase and sale records the purchaser being “Steven Crate in trust.” Crate Marine paid two deposits cheques totaling approximately $27,000 that were indeed charged to Mr. Crate’s shareholder loan account. In addition, it does not appear that the company included the costs of this piece of land in its fixed asset totals.
[44] Mr. Dunn rightly points out that it was only those two deposits that were charged to Mr. Crate. All other mortgage, tax, and carrying costs were charged to the company’s accounts. The company received the rental income on as well.
[45] Mr. Crate says that he paid all of these other costs, or at least the majority of them, himself at the time that he was re-assessed for tax purposes. Like Ms. Marko however, apart from the two entries totaling about $27,000, Mr. Crate was not able to point to any entries in his shareholder loan account on which he was re-assessed relating to the properties. He assumes that his shareholder loan included payments for the properties. But as Ms. Marko’s examination confirmed, no other property costs were charged to Mr. Crate’s shareholder loan account on which CRA re-assessed the outstanding annual balance.
[46] The documents that Mr. Crate produced from his CRA audit show the balance in his shareholder loan account each year on which he was taxed. The corporate ledger shows the detailed items that make up each year’s balance. Try as he might to claim that the shareholder loan balances were rolled over amounts from earlier payments on the two properties, the ledger shows that this is not the case. The shareholder loan account history is there in black and white from well before the two properties were purchased. No charges were posted to Mr. Crate’s shareholder loan account other than the two deposit cheques on the purchase of 176 The Queensway.
[47] Mr. Crate could not articulate any reason why it was proper for the corporation to pay all of the expenses on land for his sole benefit. Moreover, Mr. Crate’s evidence is that as the corporation began to suffer very substantial losses after 2011 and its slide toward bankruptcy commenced, it continued to pay the carrying costs on land in which it had no interest at a time when it was desperate for cash.
[48] There was no recognition of Steven Crate owning the properties apparent even after the adjusting entries in fiscal 2012. In Steven Crate’s case, in fiscal 2012, the principal portion of past mortgage payments was transferred into a new shareholder loan account established for Mr. Crate. There is no understanding why the true owner of property should pay only principal and not interest on his mortgage debt. Most of the costs incurred by the corporation on the two properties were left in the corporation’s expense accounts. If the idea was to reflect that Steven Crate had owned the properties throughout, then he ought to have been responsible for all costs and credited with all revenue. As was the case with Ms. Marko, after the adjusting entries had been recorded, the corporation went on making all payments and receiving all revenues on these two properties.
[49] When the company went into receivership, it stopped paying mortgage payments on 176 The Queensway. Mr. Crate made a few payments. But he has since stopped as well.
[50] Mr. Crate was unable to explain why he raised the issue of severance of contiguous properties with the lender at their meeting in 2014. He said that he did not want to tell the lender about his personal plans which were also among his reasons for putting the property in his own name. But the reference to severance was only consistent with the land being owned by Crate Marine.
Applicant’s Position
[51] Mr. Dunn argues that the elements of resulting trust are readily proved in this case. He argues that the respondents’ evidence as to the company’s intentions years ago is self-serving and should be accorded no weight. He argues that their evidence as to the flow of funds as between themselves and Crate Marine was proven untrue. Alternatively, Mr. Dunn argues that if the properties were indeed owned by the Crates personally, the corporation had no basis to pay all of the expenses and costs associated with the properties while receiving no upside. He argues that such a deprivation is recoverable through unjust enrichment and a proprietary constructive trust. The applicant is not looking for a money judgment as its aim is to reach the properties directly.
Respondents’ Position
[52] Mr. Sidlofsky argues that all of the title documents and land registers record the land in his clients’ names. That is the best evidence of the intention of the parties in his submission. But the registration particulars are ambiguous at best. The whole point of the split between legal and beneficial titles is the recognition that someone other than the registered legal owner may own the beneficial right to the use of property. The recording of a legal owner is equally consistent with that person being a trustee or the beneficial owner. In fact, as set out below, the trustee’s ownership of legal title is a requisite of a resulting trust. It says nothing about the intention of the buyer as to whether beneficial title will be split off from the legal title.
[53] Mr. Sidlofsky argues that the accounting entries in the corporation’s books and records, especially the fiscal 2012 adjusting entries, do not reflect the corporation’s intention at the earlier times when the properties were bought. He says that the adjusting entries in particular make no sense so that the company’s financial records should be ignored.
[54] Mr. Sidlofsky argues that when his clients swear that they were re-assessed on the funds advanced by the company in relation to the properties, they should be believed as they are the ones in a position to know their personal tax situations.
[55] Finally, Mr. Sidlofsky opposes any imposition of a constructive trust as unfair in light of the creditors’ expectations. He argues that the applicant has bought into an existing situation in which the shareholders of the company had lawfully dealt with affairs among the company and themselves as they wished. The company cannot complain now about lawful dealings with shareholders that have been ratified. Moreover, the creditors had no expectation to be able to access these four properties when they dealt with the company. The creditors took security on other properties and had no expectation of reaching the equity of the four properties in issue. He says that the lawful dealings of the shareholders with their company is a juristic reason for the transactions in which they engaged.
Analysis
[56] The applicable law is beyond controversy. In A.M.K. Investments Ltd. (Trustee of) v. Kraus, 1996 8268 (ON SC), http://canlii.ca/t/1wbv9, MacPherson J. (as he then was) succinctly recited the relevant legal test as follows:
[11] There are three requirements in establishing a purchase money resulting trust. The first, which is common to all resulting trusts, is that the trustee has title to the property. Second, the claimant must have “supplied the whole or part of the purchase price when the property was being bought from a third party and transferred into the alleged trustee’s name” (Waters, supra, at p. 302). Third, the claimant must prove that “he acted throughout as a purchaser” (Waters, supra, at p. 305).
[57] In Pecore v. Pecore, [2007] 1 SCR 795, 2007 SCC 17, http://canlii.ca/t/1r9pm, the Supreme Court of Canada confirmed that this remains good law. The Chief Justice of Canada discussed proof of a resulting trust as follows:
[24] The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers. When a transfer is challenged, the presumption allocates the legal burden of proof. Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended: see Waters’ Law of Trusts, at p. 375, and E. E. Gillese and M. Milczynski, The Law of Trusts (2nd ed. 2005), at p. 110. This is so because equity presumes bargains, not gifts.
[58] That is, once the applicant has proved that Crate Marine paid for the properties, the onus falls to the respondents to prove that the company intended to make a gift of the properties to them. Equity will presume otherwise.
[59] The use of evidence that arose subsequent to the transactions in issue must be approached with caution. In Pecore, Chief Justice McLachlin wrote at para. 59:
Similarly, I am of the view that the evidence of intention that arises subsequent to a transfer should not automatically be excluded if it does not comply with the Shephard v. Cartright rule. Such evidence, however, must be relevant to the intention of the transferor at the time of the transfer: Taylor v. Wallbridge (1879), 1879 1 (SCC), 2 S.C.R. 616. The trial judge must assess the reliability of this evidence and determine what weight it should be given, guarding against evidence that is self-serving or that tends to reflect a change in intention.
[60] All evidence of subsequent events therefore must be assessed only as it relates to the existence of non-existence of the intention to own or to gift the property at the time of its purchase. The Supreme Court expressly cautioned judges to be wary of retroactive expressions of intention on the witness stand as they may reflect a changed intention. That is precisely the case here. Even without assuming bad faith, human recollection being what it is, the inherent conflict of interest in such self-serving evidence can readily lead people to remember facts in their own light or best interests.
[61] Had the respondents’ evidence been that the corporate books did not reflect their intentions or those of the company, as argued by Mr. Sidlofsky, there may have been a reasonable basis to consider that outcome. There are reasons to question the reliability of the evidence of Ms. Marko and Mr. Crate. It is apparent that neither professes to have any clear understanding of corporate accounting. While one might be suspicious of such indications coming from people who ran a significant business, Ms. Marko had no education or background that prepared her to be responsible for corporate bookkeeping let alone corporate tax accounting. The mash up of tax and accounting by both witnesses demonstrated a lack of accounting sophistication. The fact that they were re-assessed for significant sums on attribution rules that were previously unknown to them does provide some objective support for these concerns.
[62] But it is important that rather than saying that the corporate books are wrong or that they did not really understand bookkeeping, both Mr. Crate and Ms. Marko swore to the contrary. They said they made payments personally. Mr. Crate was clear that he made payments from his personal pocket. Both said that the funds paid for them by the corporation were recorded as shareholder loans. Ms. Marko admitted a number of times in and out of court that she understood that personal expenses were to be recorded in the shareholder loan account and she did so. They doubled down by re-committing to the same facts at the opening of their cross-examinations at trial even armed with the knowledge that in their prior out-of-court cross-examinations, they had already admitted that all payments for all of the properties had been made by the corporation and, with the exception of the two cheques on 176 The Queensway, none was recorded in their shareholder loan accounts.
[63] I do not accept as truthful therefore the evidence of either witness. They swore and re-swore to facts that were demonstrably untrue. They doggedly held to the claims despite admitting that the books and records did not support their statements. As noted above, Ms. Marko tried on a few alternatives amid stream which were telling in that each failed under cross-examination and was ultimately jettisoned.
[64] There is no doubt that Crate Marine acted throughout as the owner of each piece of property. It paid all mortgage payments, property tax, and upkeep. It receive all revenue from tenants and boat owners. It declared the income and expense. For all but 176 Wynhurst, it recorded the asset cost on its financial statements. All of this was done knowingly, intentionally, and, in my view, truthfully. Ms. Marko recorded the situation as she understood it. She recorded personal expenses over the years – none of which included the expenses on the properties because they were not personal expenses. Neither Ms. Marko nor Mr. Crate recognized income or expenses personally throughout the actual times. If the properties were investments, the investors required no return. They incurred no costs of maintaining their investment properties. And they let tenants and boat owners have the use of their properties while paying Crate Marine instead of them. They did not act as owners. Even after they engaged in whatever corporate tax-driven objectives their fiscal 2012 adjusting entries were intended to have, they still did not act as owners. The company went on paying all ongoing mortgage, tax, and upkeep and kept all revenue after the audit had, in their minds allegedly, made them pay tax on funds related to their ownership of the land. That makes no common sense. Neither did Ms. Marko’s effort to say that she was entitled to be paid the net sum owing to her on her loan account while her brothers were not required to pay the net amounts owning to the corporation on their accounts. Neither loans nor ownership work in the way that they testified.
[65] In her May 4, 2017 affidavit, Ms. Marko testified that she obtained funds to buy the two Wynhurst properties and the funds were used to reduce her shareholder loan. At trial, despite this plainly not having been the case throughout, as disclosed in the accounts that she kept, she said that her affidavit remained true if one “looks in a certain light.” The court tries to illuminate the facts with light shone by the beacon of truth. Ms. Marko’s certain light is not on a wavelength that is visible on that spectrum.
[66] As to 176 Wynhurst, the property was purchased for $318,000. The agreement of purchase and sale required a deposit of $10,000. It is not clear why a further $17,000 deposit was paid. The fact that those two amounts were charged to Steven Crate’s account and the fact that the property is not shown on the company’s books go some distance toward showing an intention that the property was to belong to Steven. But from the purchase in 2007 until receivership in December of 2014, Steven paid precisely nothing on this property. He received nothing from the tenants who paid rent after the parents left.
[67] The issue is whether Steven Crate has proven that Crate Marine intended the land to be a gift to him. As it was Mr. Crate’s evidence that he actually paid the mortgage and other costs, he has no explanation as to why the costs were in fact paid by the company. Might there have been an agreement that Steven Crate was to get title but the company would pay for all costs and receive all revenue until the land was sold? A bargain could explain the situation. But the Crates’ evidence is that they paid so there is no room for a bargain requiring the company to pay. The land was initially purchased “in trust.” Steven Crate did not explain that. The fact that $27,000 was charged to him is in his favour. But the company paid roughly that amount annually for mortgage alone from 2008 to 2014. That subsequent fact is not consistent with the company intending that Steven Crate be the beneficial owner.
[68] Finally, Steven told the creditor in 2014 that the land was in his name for severability purposes. Crate Marine paid for appraisals of the land as part of a larger restructuring process that was then being considered with the creditor. The land was bought in trust, paid for by the company, and treated as belonging to the company. The accounting treatment for the two payments totaling $27,000 is anomalous. There is no credible explanation for Steven to pay just that and then to be credited with principal payments on the mortgage in the inexplicable fiscal 2012 accounting adjustments.
[69] On the facts as proven and discounting the self-serving evidence of Ms. Marko and Mr. Crate as to the intention of the company when the land was bought, I cannot find that the respondents have met the burden to prove that it is more likely than not that the company intended to gift any of the four pieces of land to them. To the contrary, I find that the land was banked as part of the company’s long term hope for a developer to buy the whole thing in one large home run vision that the Crates tried to sell to their creditors in 2014.
[70] Order to go declaring that the titled respondents hold the four pieces of land in issue in trust for the applicant.
[71] As a result, I do not need to deal with the claim for constructive trust.
[72] The applicant may deliver no more than three pages of costs submissions within ten days. The respondents may deliver no more than three pages of submissions in response within ten days of the receipt of the applicant’s submissions. Both sides shall submit costs outlines regardless of the position that each takes. In addition, the parties may submit any offers to settle on which they rely. The costs submissions and all enclosures shall be delivered in PDF searchable format as attachments to an email to my Assistant. No statutory material or case law is to be delivered. Rather, references to statutory material or case law, if any, shall be embedded as hyperlinks in the submissions.
[73] I wish to express my gratitude to counsel. The hybrid trial was presented efficiently with thorough and compelling arguments made by counsel on both sides.
F.L. Myers
Released: October 17, 2017
CITATION: Krates Keswick Inc. v. Crate, 2017 ONSC 6195
COURT FILE NO.: CV-15-10830-00CL
DATE: 20171017
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
KRATES KESWICK INC.
Applicant
– and –
STEVEN L. CRATE, ROBIN ANN CRATE a.k.a. ROBIN PRICE, GREGORY J. CRATE, LYNN J. MARKO and RYAN G. CRATE
Respondents
JUDGMENT
F.L. Myers J.
Released: October 17, 2017
[^1]: I note that Steven Crate’s spouse was also on title for 176 Wynhurst with him. The parties agreed that this did not change the analysis.