Insurance Journal – Page 14

Claims against the legal title to a cabin, cottage, camp or ranch

At issue

Summertime … and the livin’ is easy – or at least that was the hope when the family vacation property was acquired.

Whether it’s the cabin, cottage, camp or ranch, there is emotion tied up in such places. And as usage rolls through to the next generation and beyond, conflicts can arise, feelings of entitlement can grow, and ultimately property claims may be asserted.

One such type of claim is the doctrine of proprietary estoppel, which could apply to any real estate, though it seems to play out more prominently with vacation properties in the case law. Someone who has made a financial contribution and emotional commitment claims to have rights to the property, despite not being on the legal title.

Willmott v. Barber (1880), 15 Ch. D. 96

The doctrine of proprietary estoppel was recognized in British courts as early as 1866, and by 1880 a formal test had developed. Assuming a male claimant against a female titleholder for illustration, the “five probanda” would have to be proven:

he mistakenly thought he had a legal right,
he spent money on the property based on that belief,
she knew the extent of her own rights,
she knew of his mistaken belief, and
she encouraged or acquiesced to the expenditure.

The test has been applied in Canada many times in the century and a half since.

Schwark v. Cutting, 2010 ONCA 61

This Ontario case involved owners of “lakeview cottages” claiming the right to pass across and use the land of a beachfront property owner. The parties had a running dispute over 20 years or more, though the beachfront owner had for a time granted access in exchange for his own family’s use of stairs constructed by the lakeview owners to reach the beach.

For our purposes, the important development is that the Ontario court somewhat simplified the test for proprietary estoppel (as UK courts had done about 30 years back), requiring only that there be:

encouragement of the plaintiffs by the defendant owner,
detrimental reliance by the plaintiffs to the knowledge of the defendant owner, and
the defendant owner now taking unconscionable advantage of the plaintiff.

In the result, the lakeview owners’ claims failed, as they were not under any mistaken belief as to their legal rights. The beachfront owner had granted permission for a time, but there was nothing unconscionable about an owner withdrawing permission.

Clarke v. Johnson, 2014 ONCA 237

Whereas Schwark and Cutting were arm’s length parties, this most recent case involves a single property with family connections among the litigants.

1n 1971, William and Martha Johnson purchased an island on Lake Panage near Sudbury, Ontario, which was termed ‘the camp’. In 1979, title was transferred to be held as one-third tenants-in-common with William’s two siblings. After William’s death in 2009, Martha continued as sole owner of a one-third interest.

Donald Clarke was married to the Johnsons’ daughter Victoria when, beginning in 1974, he built a dwelling and later added other buildings and improvements. The couple had two children, Misty in 1976 and Westley in 1977. Donald and Victoria separated in 1991, but Donald continued to use and manage the camp.

Donald’s son Westley returned from western Canada in 2009, desiring to make use of the camp. After some confrontation, Donald prohibited Westley from the property, following which Martha prohibited Donald from the property.

Supported by the other two legal owner families, Donald successfully claimed proprietary estoppel. The court determined that he would have succeeded whether using the formalistic historical test or the simplified test in Schwark v Cutting. Donald was granted a constructive trust to “regulate use during his lifetime or until he could no longer attend at the camp.”

Practice points

Though the executor may have broad authority pursuant to provincial law, this is not absolute in nature. There remain a number of obligations under common law that an executor must bear in mind when exercising the authority, the nuances of which can be discussed with a lawyer if problems appear to be arising:

Legal title is important, but it should not be assumed to be all encompassing.
While the more formal test expressed in Willmott may not be required in Ontario, even the streamlined test presents a significant hurdle to a would-be claimant. On quick review of case law, it appears that other provinces may also be backing away from the more stringent test, as may be confirmed with one’s own legal advisor.
Legal disputes can be costly. In the appeal phase alone, $21,800 costs were assessed against the appellant, which would be in addition to her own legal bill.

Gross negligence penalties for wilful blindness in filing taxes

At issue

Our tax system depends to a large extent upon the diligence and honesty of taxpayers to self-assess and self-report all necessary information to determine appropriate taxes due. Clearly there is a significant element of trust in our relationship with the Canada Revenue Agency (CRA).

Of course, errors and omissions can occur, most often (we would hope) attributable to innocent mistakes. Other times, the taxpayer’s conduct may be considered negligent. In either such case, the tax record will need to be corrected, interest would generally apply on overdue amounts, and some penalties may also be assessed.

In the most egregious situations, there could be a finding of gross negligence against a taxpayer. Our Income Tax Act and courts are not tolerant of such blatant transgressors, and very harsh penalties are likely to follow.

Section 163(2) of the Income Tax Act (ITA)

A taxpayer who is found to have made a false statement or omission in a tax return that amounts to gross negligence, is liable to a penalty of the greater of $100 and 50% of the tax payable on the understated income.

Panini v Canada 2006 FCA 224

The concept of wilful blindness is well developed in criminal law. Rather than inquire into a suspicion in order to find certainty, a defendant shuts his eyes to the fact. Not wishing to know the truth, he prefers to remain ignorant.

Gross negligence may be established through proof of wilful blindness.

These concepts also apply in tax cases. Basically, “the law will impute knowledge to a taxpayer who, in circumstances that dictate or strongly suggest that an inquiry should be made … refuses or fails to commence such an inquiry.”

Torres v. The Queen, 2013 TCC 380

The judgment begins, “This is a sad and sorry tale of taxpayers … who were led down a garden path, with the carrot at the end of the garden being significant tax refunds. The tax refunds were the result of claiming fictitious business losses.” CRA denied the losses and assessed penalties for gross negligence.

These seven appeals as to the gross negligence penalty assessments were heard together. All of the taxpayers had used the services of “Fiscal Arbitrators” (FA) to prepare their tax returns. As can be inferred from the judge’s comments, these cases are just the tip of the iceberg of FA clients whose loss claims have been denied by CRA, and who may similarly be facing gross negligence penalties.

The factual summaries are replete with actions and assertions from FA that push beyond the boundaries of common sense. The core activity though is fairly straightforward: Representatives of FA prepared the taxpayers’ returns, all of which included false expense claims for non-existent businesses. The taxpayers then filed the returns, leading to substantial tax refunds. Not only were none of taxpayers actually in business in any manner; the expense claims were way out of proportion to their actual income, sometimes many multiples of it.

As to the taxpayers’ culpability, the judge summarized circumstances that would indicate a need for an inquiry prior to filing, what he termed “flashing red lights”, including:

the magnitude of the advantage or omission;
the blatantness of the false statement and how readily detectable it is;
the lack of acknowledgment by the tax preparer who prepared the return in the return itself;
unusual requests made by the tax preparer;
the tax preparer being previously unknown to the taxpayer;
incomprehensible explanations by the tax preparer;
whether others engaged the tax preparer or warned against doing so, or the taxpayer himself or herself expresses concern about telling others.

In the end, the judge had little sympathy for these appellant taxpayers. Gross negligence penalties were upheld.

Practice points

In the conclusion of the Torres case, the judge repeats the old adage that if it’s too good to be true then it most likely is.
The CRA warns on its website against tax scams of the nature perpetrated by Fiscal Arbitrators.
Engaging a tax preparer does not absolve a taxpayer from being diligent in filing a tax return. Even if unintentional errors occur, the properly due tax will have to be paid, generally accompanied by interest. Where a taxpayer participates in or is wilfully blind to false or questionable claims, gross negligence penalties can add to the pain.

Executor’s power and constraints in disposing human remains

At issue

A Will enables a person to name an executor to carry out the Will’s terms. The executor becomes legal owner of the property for the purpose of maintaining and eventually distributing assets to the estate beneficiaries.

Generally, the executor also has the authority and obligation to deal with the body or ‘human remains’ of the deceased. However, this is not the same as ownership interest over property, and depending on province, the executor’s powers may be affected by the deceased’s statements or actions prior to death. Here are some examples.

Trillium Gift of Life Network Act, RSO 1990, c H.20

In Ontario, a person may give consent to the use of his or her body after death for “therapeutic purposes, medical education or scientific research”. The person must be at least 16 years of age to give consent. The consent must either be in writing, or have been uttered in the presence of two witnesses at the time of the person’s last illness.

Upon the person’s death the consent is binding, though there can be an exception if it is there is reason to believe that the consent was withdrawn. By implication, the withdrawal of consent can only come from that person.

Cremation, Interment and Funeral Services Act, SBC 2004, c 35, s. 6

In British Columbia, an executor will be bound by instructions that a deceased person has given with respect to disposition of human remains or cremated remains, so long as:

“(a) the preference is stated in a will or pre-need cemetery or funeral services contract,

(b) compliance with the preference is consistent with the Human Tissue Gift Act, and

Civil Code of Québec, LRQ, c C-1991, article 42

Quebec allows a person to provide direction as to both funeral and final remains. In fact, even a minor may do so. Per article 42 of the Civil Code (produced in part here),

“A person of full age may determine the nature of his funeral and the disposal of his body; a minor may also do so with the written consent of the person having parental authority or his tutor.”

In Re: Estate of Freddy Todd Loucks, 451 MDA 2013

Of interest, this Pennsylvania case shows the extent to which some people may go to maintain control over human remains.

Fred Loucks died in a vehicle crash at age 43. His son Cameron was named estate administrator. Disputes with the father’s “paramour” Monica Miller brought the estate to the courts a number of times. This included claims to the deceased’s ashes, with Ms. Miller eventually being ordered to deliver the urn to the funeral home to be divided in half.

It was later suspected and confirmed that the contents were not human ashes. Ms. Miller was found in contempt of court, and imprisoned for six months.

Practice points

Disposal of the remains must be in a dignified manner. Generally burial or cremation would satisfy this requirement, despite that some religions may be against cremation.
Funeral/memorial services and disposition of the remains should take into consideration the deceased’s station in life, and consider the proportionality to the estate assets, particularly where this materially affects estate creditor claims.
The executor is expected to provide reasonable information about these matters to next of kin, and to do so in a timely manner.