Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26 – Taxation — Income tax — Equity

On appeal from the British Columbia Court of Appeal (2020 BCCA 196) affirming a decision of Giaschi J. (2019 BCSC 1030).

Two companies implemented a plan to protect corporate assets from creditors without incurring income tax liability. The plan was based in part on interpretations published by the Canada Revenue Agency (“CRA”) of the attribution rules in s. 75(2) and the inter‑corporate dividend deduction in s. 112(1) of the Income Tax Act. It involved the creation of family trusts, to which dividends were paid. After the plans were implemented, the Tax Court of Canada, in another matter, interpreted s. 75(2) differently than was commonly accepted by tax professionals and CRA. CRA reassessed the trusts’ returns and imposed unanticipated tax liability. The trusts petitioned for the equitable remedy of rescission of the transactions leading to and including the payment of dividends. The chambers judge considered himself bound to follow the Court of Appeal for British Columbia’s decision in Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499, which had applied the test for equitable rescission stated in Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108, to similar transactions, and he allowed the petitions. The Court of Appeal dismissed the Attorney General’s appeals.

Held (8-1): The appeal should be allowed, the judgments of the Court of Appeal and of the chambers judge set aside and the petitions dismissed.

Per Wagner C.J. and Moldaver, Karakatsanis, Brown, Rowe, Martin, Kasirer and Jamal JJ.:

Taxpayers should be taxed based on what they actually agreed to do and did, and not on what they could have done or later wished they had done. A determination that equity can relieve a tax mistake is barred by a limiting principle of equity and by principles of tax law stated in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720, and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670. Accordingly, the trusts are barred from obtaining rescission of the transactions.

A court of equity may grant relief where it would be unconscionable or unfair to allow the common law to operate in favour of the party seeking enforcement of the transaction. However, it is a limiting principle and a fundamental premise of equity that it developed to alleviate results under the common law that call for relief as a matter of conscience and greater fairness. Transactions that do not call for relief as a matter of conscience or fairness are properly outside equity’s domain. There is nothing unconscionable or unfair in the ordinary operation of tax statutes to transactions freely agreed upon. If there is to be a remedy, it lies with Parliament, not a court of equity.

Furthermore, the principles of tax law and the prohibition against retroactive tax planning stated in Fairmont Hotels and Jean Coutu preclude any equitable remedy. Unless a statute says otherwise, taxpayers are to be taxed in accordance with the applicable tax statute’s ordinary operation. Taxpayers may structure their affairs so as to reduce their tax liability but may also be taken as having structured their affairs in such a way that increased their tax liability. Tax consequences do not flow from parties’ motivations or objectives. Rather, they flow from their freely chosen legal relationships, as established by their transactions. A taxpayer should neither be denied nor judicially accorded a benefit based solely on what they would have done had they known better. The proper inquiry is into what the taxpayer agreed to do and not into whether there is a windfall for the public treasury or a taxpayer. A court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability. These principles are of general application and are not confined to cases where rectification is sought. There is no room for distinguishing Fairmont Hotels or Jean Coutu based upon the particular remedy sought. A taxpayer is barred from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute.

The principles stated in Fairmont Hotels and Jean Coutu are irreconcilable with the conclusion in Pitt v. Holt that equity can relieve a tax mistake. This conclusion contradicts these principles by maintaining that tax consequences are relevant to deciding whether a party to a voluntary disposition can satisfy the test for rescission. The lower courts therefore erred in relying upon Pitt v. Holt. Further, the constraint imposed by Parliament upon the Minister to assess a taxpayer in accordance with the facts and the law required CRA to reassess the trusts in light of the Tax Court’s decision. The Minister was bound to apply Parliament’s direction in the Income Tax Act, as interpreted by a court of law, unless and until that interpretation is judged to be incorrect by a higher court. No unfairness lies in holding the trusts to the consequent tax liabilities of the ordinary operation of the Income Tax Act respecting transactions freely undertaken.

Per Côté J. (dissenting):

The appeal should be dismissed. Rescission is, in strictly limited circumstances, an available remedy 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. There is disagreement with the majority that Fairmont Hotels and Jean Coutu are dispositive of the case at bar. Although those cases affirmed certain principles of tax law, such as the principle that taxpayers should be taxed based on what they did, not what they wish they had done, and the principle that retroactive tax planning is impermissible, they are not determinative of the availability of rescission in the tax context. Neither Fairmont Hotels nor Jean Coutu generally precludes the availability of equitable remedies in a tax context. Both clarified the test for rectification. Fairmont Hotels and Jean Coutu stand for the following propositions: if a taxpayer does not meet the test for an equitable remedy, then a court has no discretion to grant that remedy, even if the taxpayer may have to pay taxes unexpectedly; if, however, a taxpayer meets the test for an equitable remedy, then the court may grant it, even if doing so would effectively relieve the taxpayer from payment of the unexpected taxes; and a common intention to limit or avoid tax liability is insufficiently precise to evince an existing prior agreement with definite and ascertainable terms.

Rescission and rectification are different remedies with different objectives and, depending on the nature of the case, one may justify a relief where the other cannot. Rectification requires a valid antecedent decision that was incorrectly transcribed on paper and it ensures that the written instrument accurately reflects the parties’ agreement. Rescission requires a transaction that was entered into based on a mistaken assumption about the facts or the law. It enables a court to retroactively cancel the transaction, thereby restoring the parties to their original position.

Rescission on the ground of mistake is available in a tax context, but should be granted only in rare circumstances. The test developed in Pitt v. Holt, the leading case on equitable rescission of unilateral transactions for mistake, is compatible with Canadian law and should be endorsed. A court may rescind a voluntary disposition when there is a clear causative mistake of sufficient gravity that demands the intervention of equity. Only a mistake can warrant rescission, as opposed to mere ignorance or misprediction. The test for rescission is fact‑specific and objectively assessed. Still, some types of mistake should not attract relief, for example when the taxpayer accepted the risk that a scheme might be ineffective, or when it would be against public policy to grant relief. Equity will not intervene to relieve a taxpayer from the consequences of a risk that was knowingly or recklessly accepted. Additionally, the fact that a transaction would have constituted abusive tax avoidance but for the mistake might preclude rescission because when a tax plan is aggressive, the taxpayer accepts the risk that it may not operate as intended. However, the purported morality of a plan remains irrelevant and what constitutes an aggressive tax plan akin to abusive tax avoidance should be strictly interpreted. Taxpayers should not engage in bold tax planning on the assumption that it will be possible to rescind their transactions should that planning fail.

Rescission is a discretionary remedy. Appellate intervention is only warranted if a decision to grant rescission is manifestly unjust. There is no basis to intervene in the instant case. The taxpayers’ erroneous belief about s. 75(2) was a mistake of law, not a misprediction in relation to a change in the law. Rescission relieves against mistakes concerning the situation that existed at the time of the transaction. Injustice stemmed from the CRA’s change of position on the interpretation of s. 75(2) after the Tax Court rendered its decision, but while it was still arguing in the Federal Court of Appeal that the Tax Court had erred in law. CRA’s discretionary decision to reassess the trusts in these circumstances takes this case into the zone of unfairness that allows equity to intervene, and neither policy reasons nor assumption of risk bars rescission in this case.

The taxpayers’ plan did not constitute abusive tax avoidance. The primary goal of the plan was not to avoid payment of any tax. The purpose of the plan was to shield assets from creditors and to do so in a manner that did not attract tax liability, with both aspects having equal importance. The plan was also not aggressive at the time it was undertaken, because CRA was unlikely to have contested the taxpayers’ position prior to the Tax Court’s decision. Deference is also owed to the chambers judge’s conclusion that the trusts never assumed the risk that CRA would reverse its interpretation of the attribution rules. The only risk they assumed was that the general anti-avoidance rule might apply.

Because rescission is a remedy of last resort, it can only be granted if no alternative remedies are available. It is not sufficient for an alternative remedy to merely exist, the alternative remedy must be practical and adequate. No alternative remedies preclude rescission in this case. Applying to the Minister for a remission of tax is an extraordinary remedy granted in rare circumstances and it is highly unlikely that the Minister would recommend it in the instant case. A claim by the trusts against their tax advisers would also not be an adequate remedy because the tax advice was correct at the time it was given and so it is unlikely that a negligence claim would have any chance of success.

Reasons for judgment: Brown J. (Wagner C.J. and Moldaver, Karakatsanis, Rowe, Martin, Kasirer and Jamal JJ. concurring)

Dissenting Reasons: Côté J.

Neutral Citation: 2022 SCC 26

Docket Number: 39383