The classic statement of law relating to the process of tracing assets is found in the decision of the Ontario High Court of Justice in McTaggart v Boffo (1976) 10 OR (2d) 733 at 749-750:
“The general principle for the tracing of trust funds is found in Pettit, Equity and the Law of Trusts :
Whenever there is an initial fiduciary relationship, the beneficial owner of an equitable proprietary interest in property can trace it into the hands of anyone holding the property, except a bona fide purchaser for value without notice who is title is as usual inviable
Tracing is only possible so long as the fund can be followed in a true sense ie so long as, whether mixture and mix, it can be located and identified. It presupposes the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by the means of such a fun. Simply put, two things will absolutely prevent the tracing of trust monies:
a) If, on the fact of an individual case, such continued existence of the identifiable trust fund is not established, equity is helpless to trace it;
b) The chain for tracing is also broken with the trust fund either in its initial form or converted form has found its way into the hands of a third person purchaser for value without notice.
This statement has been cited with approval in the decision of the British Columbia Court of Appeal in Tracy v Instaloons Financial Solutions Centres (BC) ltd 2010 BCCA 357 at para. 42.
The ability to trace assets can only be a matter of consequence with a wrongdoer is unable to meet his obligations are worthy asset that is the subject matter of the legal proceedings is of personal importance to the victim.
The decision in McTaggart v Boffo identifies two categories of litigants that are adverse and interest to a claimant:
1. The wrongdoers creditors, who otherwise have the right to share in the proceeds of the wrongdoers assets, hence the need to determine whether the acid can be said to be truly the property of the victim;
2. third-party purchasers at arms length in good faith of acquired the asset from the wrongdoer without notice that the acid in truth belongs to another person.
The decision in McTaggart refers to the tracing of trust funds because the fundamental concept underlying this remedy is that it is aimed at achieving a return of funds /assets wrongfully converted.
If a person steals/converts an item of personal property that person may then be compelled to return it to its rightful owner; and that circumstance, equity need not intervene through tracing since the court merely recognizes and declares the victims property right.
However if the wrongdoer converts an asset and then sells or assigns it to another person in exchange for valuable consideration, tracing then becomes available assuming that this consideration can be followed in a true sense because it can be located and identified.
Treat the tracing process is often complicated by circumstances such as co-mingling into blended funds that may fall into the following broad categories:
1. Co-mingled funds comprised of funds/assets belonging to both the trustee/wrongdoer and to the victim;
2. co-mingled funds comprised of funds obtained from two or more victims as in the case of investment schemes
3. co-mingled funds comprised of funds obtained from two or more victims blended with the wrongdoers own funds.
The requirement that the converted asset can be followed in a true sense because it can be located and identified astringent, even in the context of an equitable and discretionary remedy, because of the injustice be following up on the wrongdoers other creditors were this cannot be proven.
Tracy v Instaloons made the point that the right to trace is not in itself a discretionary remedy. That case involved victims of a criminal scheme of charging interested a criminal rate, and the victim sought to recover the legal charges they had actually paid to the defendant. The Court of Appeal confirmed that once an equitable proprietary right has been established, the holder of that proprietary right can then traced the subject matter of the right farther up the transactional chain and even into commingled accounts.
The court stated that it may be difficult to identify the funds or other property and to which the claim charges of being transformed or with which they have been mingled; and the process will come to a halt in certain conditions, including were the balance in an account is fallen below the amount being traced.