In a prior blog, we had suggested that rectification, rescission, and other equitable remedies would likely no longer be available to correct most tax mistakes. This conclusion stemmed from the Supreme Court of Canada (SCC) decision in Canada (Attorney General) v. Fairmont Hotels Inc. (2016 SCC 56) (“Fairmont”) and the subsequent Ontario Court of Appeal decision in Canada Life Insurance Company of Canada v. Canada (Attorney General) (2018 ONCA 562) (“Canada Life”). Both of these decisions highlighted the Courts’ concerns with taxpayers using equitable remedies to effect what might be considered “retroactive tax planning”.
However, in a recent decision, the British Columbia Court of Appeal (BCCA) has kept a window open for rescission in tax matters!
In Collins Family Trust v Canada (Attorney General) (2020 BCCA 196, affirming 2019 BCSC 1030) (“Collins”), the BCCA considered a case under the Income Tax Act (“ITA”), involving a tax plan that was entered into to protect certain business assets from future creditors, without having to pay any income taxes.
Broadly, the plan operated as follows: (1) a holding company (“HoldCo”) was incorporated; (2) a family trust was created, with HoldCo as a beneficiary; and (3) shares of the operating company (“OpCo”) were sold to the trust. The trust would receive dividend income from OpCo, and through the application of subsection 75(2) of the ITA, it was intended that the dividend income would be attributed to HoldCo rather than the trust. HoldCo would then receive an equivalent deduction for the dividend income under subsection 112(1) of the ITA, resulting in zero tax. However, the CRA took the position that subsection 75(2) did not apply in this scenario, and assessed the trust for income tax on the dividends.
Notably, the facts in Collins were near-identical to the facts in a prior BCCA case, Re: Pallen Trust (2015 BCCA 222) (“Pallen”), where the BCCA allowed rescission. However, the year after that decision, the SCC decided Fairmont above, and concluded that the similar rectification remedy was only available in the narrow circumstance where an agreement was incorrectly recorded. In the SCC’s view, rectification was not be available in a situation where the intent was to achieve a particular tax advantage, but the underlying transactions – though being properly entered into – ended up achieving a different and unintended result. The SCC held that tax consequences flow from the intended legal arrangements, not from the intended tax consequences of those arrangements. Any departure from that standard would constitute impermissible retroactive tax planning.
Although Fairmont dealt only with rectification, later cases (including Canada Life) applied the SCC’s Fairmont principles to conclude that rescission was also not available to relieve from unintended tax consequences.
Back to Collins. The BCCA had to consider whether the lower court’s decision – which allowed rescission – was correct. The BCCA first observed that the lower court felt bound by the BCCA’s own prior decision in Pallen – although not without spending a considerable amount of time suggesting that Pallen was likely incorrect, and perhaps leaving it to the BCCA to overrule itself. Ultimately, the BCCA declined to overrule Pallen, and held that Fairmont did not automatically require a rejection of rescission in the tax context. In the BCCA’s view, Fairmont did not “stand for the broad proposition that the granting of any equitable remedy in a tax context will result in ‘impermissible retroactive tax planning’”, and that rescission and rectification are different remedies that may have different results.
The result of these cases, it seems, is that while there is a glimmer of hope for the use of the rescission remedy in tax matters (where things have gone amuck), the takeaway remains that equitable remedies will likely be difficult to obtain in most tax contexts, thus putting a premium on getting good tax planning done right the first time!
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