Here’s the final word from the Supreme Court on rectification and rescission. Shorter SCC: Don’t send us tax-related cases; we don’t like them.
Canada (Attorney General) v Collins Family Trust, 2022 SCC 26
On appeal from the BCCA, were the respondents’ entitled to rescission for a series of transactions that relied on an interpretation of 75(2) that was later “overturned” by the Tax Court such that the tax effect sought for the series was frustrated?
Facts
In 2008, the two taxpayer trusts before the SCC undertook materially identical series transactions for “creditor-proofing purposes.” Each trust was formed with a holdco as a beneficiary. The holdco purchased shares of opco, which the holdco then sold to the trust. Opco paid a dividend to the trust, which was supposed to be attributed to the holdco under 75(2). Holdco deducted the dividend under 112(2) so that the trust received the dividend tax-free.
Sommerer, 2011 TCC 212, aff’d 2012 FCA 207, held that 75(2) did not apply to property that had been sold to a trust. As a result, the CRA reassessed the trusts to include in their income the dividends they had received from Opco. The trusts sought rescission of the transactions in question, which the BCSC allowed and the BCCA affirmed.
Issue
Were the trusts entitled to rescission of the transactions described above?
Held
The appeal was allowed and rescission denied.
Ratio
Fairmont Hotels, 2016 SCC 56, applies to rescission too. Equitable relief is not available for “retroactive tax planning”. Taxpayers should be taxed on what they did and not on what they wish they had done. ¶7: “It follows that the prohibition against retroactive tax planning, as stated in Fairmont Hotels and Jean Coutu, should be understood broadly, precluding any equitable remedy by which it might be achieved, including rescission.”
Reasoning
Equity is about protecting against fraud, undue influence, unconscionable transactions and unjust enrichment.
It is a fundamental principle of tax law that a taxpayer should be taxed based on what it did, not what it could have done. In Shell, 1999 CanLII 647, [1999] 3 SCR 622, this principle assisted the taxpayer “but the principle operates the other way, too” (¶13).
¶16: Summary of principles from Fairmont and Jean Coutu, 2016 SCC 55.
¶17ff. Do these principles apply only to rectification? Ontario and Alberta have said ‘no’: they are more broadly applicable. ¶18 Canada Life, 2018 ONCA 562.
¶22:
To be clear: they are of general application, precluding equitable relief altogether when sought to avoid an unintended tax liability that has arisen by the ordinary application of tax statutes to freely agreed upon transactions. There is no room for distinguishing Fairmont Hotels or Jean Coutu based upon the particular remedy sought. While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.
¶26: There is nothing unfair about the CRA applying the Act as interpreted by the courts. “Equity is the conscience of the common law, not of Parliament.”
Cote J, in lone dissent, at ¶30: “As I will explain below, rescission is, in strictly limited circumstances, an available remedy in Canadian law that can be used to unwind transactions that were undertaken on the basis of a mistaken assumption, even if permitting it would effectively relieve the taxpayer from payment of unexpected taxes.”
