• by Ainsley Doell
Originally published in the OFLM 2024-03 edition
Overview
In Sarafova v. Sarafov (2024 ONSC 733), Justice Sharma addresses the law of resulting trust and unjust enrichment as it relates to the parties’ matrimonial home. This article will discuss the legal scheme that applies where one spouse is claiming that a property is being held for their benefit, and consider different questions that arise in this context.
Introduction
A resulting trust may occur where there is a mismatch between the legal and beneficial ownership of a property, as evidenced by the transfer of that property from one party to another for no consideration.
Situations often arise, in family law and elsewhere, where this arrangement results in a dispute over who rightfully has an interest in the property.
This article will first look at the recent case of Sarafova v. Sarafova, as an introduction into the topic of the presumption of resulting trust. Justice Sharma’s decision is clear cut, but there are some interesting peripheral questions that arise around this topic that are not fully discussed.
As will be discussed, the actual intention of the transferor of a property is what governs the finding of a resulting trust.
But, what about when that intention is fraudulent or designed to defeat creditors? And, what happens to all of the expenses that one party has paid thinking that the property is their own? Using Sarafova as a starting point, these questions will be explored looking at other case law from Ontario.
Sarafova v. Sarafov: Overview
The Applicant wife and the Respondent husband separated in 2010 after an approximately 21-year marriage. A number of issues remained outstanding in these proceedings, but this article will focus on the Applicant’s resulting trust claim relating to the matrimonial home.
The matrimonial home was sold in 2022, 12 years after the parties’ separation. Despite the fact that title was held solely by the husband, he vacated after separation and the wife and their two children continued to live there for the next 11 years. It becomes relevant that the husband did nothing during this period to try to assert his ownership or right of possession over the property: The home was treated as the wife’s.
It was the wife’s position that title to the matrimonial home was taken only in her husband’s name in order to limit her potential liability, as she had recently purchased a dentistry practice. She did so at the advice of her accountant.
Her evidence was that she had provided the down payment and made all other payments relating to the home (including mortgage, maintenance, utility bills, etc.) from the time of purchase to Fall 2021, when she no longer had the means to do so. There was no evidence that the husband had financially contributed to the purchase or maintenance of the home.
The law of resulting trust
Justice Sharma’s analysis in Sarafova begins with section 14 of the Family Law Act (R.S.O. 1990, c. F.3), affirming that the presumption of resulting trust “continues to apply to questions of ownership property between spouses” (at para. 18).
At the heart of the law of resulting trust is the adage “equity presumes bargains, not gifts” (Pecore v. Pecore, 2007 SCC 17 at para. 24). Where there is a dispute over the characterization of an allegedly gratuitous transfer, the relevant inquiry is into the “actual intention of the transferor at the time of the transfer” (Pecore at paras. 4-5).
This idea was applied to common law spouses in Kerr v. Baranow (2011 SCC 10), wherein Justice Cromwell looks at the law of unjust enrichment in the context of a resulting trust claim. He notes that the principle of resulting trust operates to return interest in a property to its rightful owner (at para. 16).
Due to the distinction between “legal” and “beneficial” ownership of property, the fact that title to property is held in one party’s name is not necessarily determinative of ownership. While legal title may be held by one person, equity may operate to recognize that the title is held for the benefit of another. Otherwise, the party with legal title may be unjustly enriched, depending on the circumstances.
In the case of Sarafova, this means that in order to determine whether the matrimonial home was properly characterized as belonging to the wife, the question was what was the wife’s intention when she purchased the home and registered title in her husband’s name?
As stated above, the wife’s position was that title was in the husband’s name to protect it from potential claims against her dentistry practice. However, as the onus for demonstrating that the transfer was a gift lies on the person claiming that it was gratuitous (Kerr at para. 19), it was up to the husband to demonstrate that a gift was intended, and he failed to do so.
If the husband advanced an argument attempting to rebut the presumption of resulting trust, this is not shared in the Sarafova decision. Presumably, he was relying on the fact that title was in his name. Justice Sharma does note repeatedly, however, that there was no evidence before the court that rebutted this presumption.
Further, Justice Sharma notes that finding that the matrimonial home properly belonged to the husband would result in unjust enrichment: he did not contribute to the purchase or maintenance of the property. The wife had made all payments relating to the home both during marriage and after separation.
Brief note: treatment of the matrimonial home
As we know, the treatment of the matrimonial home in family law is distinct from the treatment of other property. When it was found in Sarafova that the wife was the beneficial owner of the matrimonial home, this did not disentitle the husband from sharing in the increase in the value of the matrimonial home during the marriage (see section 4(2) of the Family Law Act). Rather, this finding confirmed that the wife was entitled to 100% of the increase in the property’s value from the date of separation until the property’s sale (which, being approximately 12 years, would likely have been considerable). This is confirmed by Justice Sharma at paragraph 23.
Intention matters, but does the intention have to be ‘good’?
An interesting question that did not get a lot of attention in Sarafova is whether it should be relevant that the intention of the transfer was to protect the property from potential creditors.
Generally, courts want to see that a person seeking equitable relief is coming with “clean hands”, which may not be the case if a property transfer occurred with fraudulent intention.
Justice Sharma deals with this question swiftly, stating that the wife provided a “sensible reason” for why title was put in the husband’s name, and that “the purpose was not to defeat existing or real creditors”, as “there were no creditors, just the potential of future creditors” (at para. 21).
At paragraph 21, Justice Sharma indicates that the facts of Sarafova closely align with the decision in Nussbaum v. Nussbaum (2004 CanLII 23086). In Nussbaum, Justice Karakatsanis, then at the Ontario Superior Court of Justice, took a closer look at this question.
Justice Karakatsanis noted that there is case law that highlights a specific intention to evade creditors as depriving a party of their entitlement to beneficial ownership, as “courts appear reluctant to allow the claimant to have it both ways” (at para. 32). Otherwise, the court would be allowing a party to deny having an interest in the property when creditors may be involved, while allowing them to claim that same interest in a family law context.
Importantly, however, having this intention to evade creditors does not itself rebut the presumption of resulting trust. Nussbaum suggests that the court must look at the totality of the evidence, and assess whether the party who transferred the property intended to deprive themselves of beneficial ownership:
While evidence that someone intended to fully evade creditors can be evidence that they intended to gift their entire interest in the property, the intention of the parties is a question of fact to be determined from all the evidence (see paras. 32-33).
It is noted by Karakatsanis J. that there is case law that states that “the intention to truly evade creditors was necessarily an intention to gift all interest in the property” (at para. 31, emphasis added).
While the case law may be clear that an intention to evade creditors does not rebut the presumption of resulting trust on its own, London-Shiffman v. Shiffman (2020 ONSC 8006) confirms that it can certainly be a relevant consideration. This case helpfully lays out all of the evidence that was reviewed by an arbitrator in correctly finding that it was a party’s intention to gift his interest in property to his wife (see para. 33).
The arbitrator had found that based on the cross-examination of the husband, he was “well aware” that, in order to protect the matrimonial home from creditors, “he needed to transfer both the beneficial and legal title” (at para. 34). In this case, the creditors were also hypothetical rather than real, but the court upheld the arbitrator’s decision.
Impact of resulting trust on liability for post-separation expenses
The wife in Sarafova had an alternative argument that if a finding of resulting trust was not made, the husband would owe her a post-separation adjustment for half of the expenses related to the upkeep of the matrimonial home from the date of separation until its sale (see para. 26).
Because a finding of resulting trust was made, it was not necessary for Justice Sharma to assess this claim. However, a similar question was addressed by the Ontario Court of Appeal in Korman v. Korman (2015 ONSC 578).
In Korman, the court of appeal found that a husband did in fact have a 50% interest in the matrimonial home which was placed solely in the wife’s name, with the intention of protecting it against potential creditors. However, since separation, the husband had not contributed to the “upkeep” of the home, and was therefore liable for 50% of these expenses (at para. 78).
Post-separation adjustments are not uncommon, but it is good to keep in mind that a party’s entitlement may depend on the outcome of a resulting trust claim.
Conclusion
The presumption of resulting trust can operate in a family law context to return legal interest in a matrimonial home to a spouse who transferred it to another spouse for no consideration. The relevant inquiry is the actual intention of the spouse who transferred the property, contemporaneous with the transfer, and the onus is on the spouse claiming the gift to demonstrate gratuitous intent.
If the intention of the spouse seeking to rely on the presumption of resulting trust was to defeat creditors, it is worth taking a closer look at the case law in this area, beginning with Nussbaum. While it seems clear that an intention to evade creditors is not an absolute bar on this kind of claim, there are cases supporting this intention as evidence of an intention to gift all interest in a matrimonial home.
When bringing a claim for resulting trust, it is also worth taking a look at who has been paying the expenses for the upkeep of the asset (matrimonial home or otherwise). At the end of the day, whoever is found to have an interest in the home may be on the hook for some or all of these expenses.