Attorney General of Canada, et al. v. Collins Family Trust: Rectification in Tax Matters Revisited
https://www.canlii.org/en/ca/scc-l/doc/2021/2021canlii22787/2021canlii22787.html
Attorney General of Canada, et al. v. Collins Family Trust, et al., 2021 CanLII 22787 (SCC). (Leave to Appeal Granted.)
Précis: For those who thought that the application of recission in tax matters was resolved by the Supreme Court of Canada in 2016 it’s time to think again. On March 25, 2021 the Supreme Court granted leave in another case where the British Columbia Court of Appeal ordered recission revoking dividends paid in 2008 and 2009 that became taxable as a result of a subsequent change in case law. We live in interesting times for tax planners.
Decision: The 2000 decision of the Ontario Court of Appeal in Juliar[1]ushered in an era where the somewhat obscure equitable doctrine of rectification became an important weapon in the arsenal of tax planners. While Juliar dealt with a simple mistake by tax planners, practitioners soon latched upon it to cobble up aggressive tax planning gone wrong. This started a sort of pitched battle between tax practitioners and CRA which culminated in the 2016 decisions of the Supreme Court of Canada in Fairmont Hotels[2] and Jean Coutu Group[3]which were widely perceived as limiting the use of rectification in tax matters to situations where the documentation clearly failed to reflect the manifest intention of the parties not as a remedy for unintended tax consequences.
The recent decision of the British Columbia Court of Appeal in Collins Family Trust[4] is seen by many as an attempt to circumscribe the ambit of the Fairmont and Jean Coutu decisions.
While the facts are complex essentially the applicants sought to rescind dividends paid in 2008 and 2009 as a result of a subsequent change in the case law applying to those dividends. Giaschi J., the judge at first instance, held that the transactions offended the principles in Fairmont Hotels and Jean Coutu:[5]
[93] Fairmont and Jean Coutu establish two related principles: (1) tax payers should be taxed on what they actually did, not what they intended to do or, put differently, tax consequences flow from what a tax payer did not what it intended to do; and, (2) it is not permissible to retroactively alter a transaction to achieve an intended tax objective.
[94] The petitions before me infringe both of these principles. The petitioners are asking this Court to unwind transactions they freely entered into because the tax consequences are not what they intended or hoped. This is clearly contrary to the first principle. Further, it was not until after the CRA audited the petitioners and issued notices of reassessment that the petitioners brought these petitions for equitable relief on the basis of mistake. Equitable relief in these circumstances is prohibited by the second principle.
Nevertheless he found that he was bound by a decision of the British Columbia Court of Appeal that pre-dated Fairmont Hotels and Jean Coutu, Re: Pallen Trust.[6]
The Court of Appeal found that the application did not offend the principles in Fairmont Hotels and Jean Coutu:[7]
[53] In my view, neither Fairmont nor Jean Coutu stand for the broad proposition that the granting of any equitable remedy in a tax context will result in “impermissible retroactive tax planning”. Rather, they confirm that retroactive tax planning cannot be achieved by rectification (or amendment) of an instrument that correctly records an antecedent agreement, simply because the effect of that instrument produces an unexpected tax consequence. As Justice Brown stated in Fairmont at para. 24, Juliar allowed for “impermissible retroactive tax planning” because it erroneously departed from the principle that the inquiry is into what the taxpayer agreed to do. Similarly, Justice Wagner noted in Jean Coutu (at para. 42) that allowing the amendment of written documents where there is no discrepancy with the true agreement of the parties would amount to “retroactive tax planning”.
[54] The corollary of this is that the remedy of rectification will be available if all of the conditions for granting rectification are met, even if a tax advantage is achieved, as was the situation in Re Slocock’s Will Trusts and 5551928 Manitoba Ltd.
On March 25 the Supreme Court of Canada granted the Crown leave to appeal the Collins Family Trust decision. In my view it’s unlikely that the Supreme Court granted leave for the purpose of applauding the judicial rigour of the BC Court of Appeal. I think it’s far more likely that the Supreme Court wishes to retrench the position they staked out in Fairmont Hotels and Jean Coutu, i.e., I think that the BC Court of Appeal may well be in for a bit of a judicial haircut in the Collins Family Trust appeal. In any event tax planners across Canada will be on pins and needles for several months waiting the results of this appeal.
TAGS: Common Law, Mistake of Law, Rectification, Tax Litigation
CATEGORIES: Income Tax Act, Tax Litigation, Rectification, Common Law
[1] 50 O.R. (3d) 728
[2] [2016] 2 SCR 720
[3] [2016] 2 SCR 670
[4] 2020 BCCA 196
[5] 2019 BCSC 1030
[6] 2015 BCCA 222
[7] 2020 BCCA 196