If it is Not a Gift, is it Always an Investment?

In a recent case called Nishi v. Rascal Trucking Ltd., the Supreme Court of Canada turned its focus to a long-established legal concept known as the “purchase money resulting trust”, which aims to provide clear rules in situations where money is transferred from one person to a second, who then uses it to buy real estate or other property.

In such money-transfer scenarios there is usually one of two outcomes: 1) the money is an outright gift from one person to the other; or 2) the person giving the money intends to take title to the property and essentially invest in it. But for “grey area” situations involving unrelated individuals (i.e. not family members), if the money is neither clearly a gift nor clearly an investment then the purchase money resulting trust concept steps in to make a presumption that the person advancing the money intended to take title and therefore a “beneficial interest”, unless the evidence shows otherwise. In those cases a legal trust is imposed on the money, with the person who received it being deemed to hold it on behalf of the person who transferred it. The Supreme Court described the concept this way:

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

In Nishi, the particular money transfer under contention fell into that “grey area”: at the time it was made, the parties’ respective intentions and expectations were not clear. The court was therefore asked to consider whether a purchase money resulting trust arose.

The background facts were a little complex: Rascal Trucking Ltd. (“Rascal”) leased a two-acre property from the eventual seller, and used the land to operate a topsoil-processing facility. After the noise and dust sparked complaints from neighbours, the City declared the facility a nuisance and removed the topsoil. It then added the $110,679.74 in clean-up costs to the seller’s property’s tax bill, which was already in arrears. Rascal never reimbursed the seller directly for the topsoil removal costs.

The seller, meanwhile, ran into financial difficulties. In light of its existing mortgage obligations and the newly-increased tax arrears amount, it decided that there was no equity left in the property. It stopped making mortgage payments, which in turn triggered foreclosure proceedings. The mortgagee ended up having to pay the tax arrears.

Rascal’s principal then made several unsuccessful overtures to buy the property himself. Eventually, a third party named Nishi bought it for about $240,000, but Rascal contributed $110,679.74 toward the purchase price – which was the exact amount, to the penny, of increase in the tax arrears imposed by the City for cleanup. Rascal sent various proposals to Nishi, detailing the precise legal effect and intent behind this financial contribution, but the parties did not really come to terms. In the end, Nishi took sole title to the property notwithstanding Rascal’s financial outlay.

Not surprisingly, a dispute arose as to the true nature of Rascal’s contribution to the purchase price. Rascal claimed a 50 percent undivided interest; the trial judge dismissed that claim but it was overturned on later appeal.

The Supreme Court of Canada agreed with the trial judge, and held that Rascal had no legally-established interest in the property; Nishi remained the sole title-holder.

In this scenario the law presumed that Rascal, as a party unrelated to Nishi, had contributed the funds with the intention of obtaining a beneficial interest in the property, in proportion to the monetary contribution made. That legal presumption could be rebutted by Nishi; normally that was accomplished by proving on the balance of probabilities that at the time of the funds transfer, Rascal intended the money to be a gift to Nishi.

That was not exactly the case here, though. While it could not be said that Rascal intended to forgo any beneficial interest, it was also true that the transfer of the $110,679.74 was motivated by Rascal’s desire to make good on its original obligation to the seller for the clean-up costs on the tax bill. Correspondence between the parties showed that the transfer was made without conditions. Overall, Rascal’s advance of funds was not inconsistent with a legal gift, which was enough to rebut the presumption of purchase money resulting trust, leaving Rascal without a claim to a legal beneficial interest in the land. Nishi v. Rascal Trucking Ltd., 2013 (SCC).