The equitable doctrine of rescission was relied upon recently in 0741508 BC Ltd and 0768723 BC Ltd (Re), 2014 BCSC 1791, a B.C. case involving a tax mistake. The Court granted the requested relief, and rescinded real property purchase and sale agreements that gave rise to unintended HST consequences.

In May 2011, 0741508 BC Ltd and 0768723 BC Ltd (collectively, “Numbercos”) transferred real properties to a partnership as part of a development project. Both Numbercos and the general partner were owned and controlled exclusively by Mark Consiglio. The partnership was mistakenly not an HST registrant and the CRA cumulatively assessed both Numbercos for approximately $6,000,000 in taxes, interest and penalties. The Numbercos sought an order than the agreements to convey the properties be rescinded under the doctrine of equitable mistake or declared ab initio due to common law mistake. The CRA opposed the application. 

At the relevant times, it was “common knowledge” within the real estate industry and understood by Mr. Consiglio that there would be no net HST payable on the sale of land to a partnership, because any HST would be offset by input tax credits (“ITCs”) and no timing difference would arise since the HST and ITC reporting would occur within the same tax return. However, the ability to claim ITCs was subject to the caveat that the purchaser/partnership was an HST registrant. The partnership paid land transfer tax, but ultimately did not pay any HST. The repeal of the HST in BC was noted in the judgment, with the Court commenting that it would be impossible to recover the ITCs if the partnership sold the property. Thus, the difference between the GST and HST would be unrecoverable. Mr. Consiglio’s evidence was that he left HST matters to his advisors. He proceeded with the transactions on the basis that HST would not be a net liability or a cash flow issue, having no idea that HST was payable and unrecoverable due to omitting to register the partnership. Evidence from Mr. Consiglio’s advisors suggested that there was a general understanding that HST and registrations had been dealt with appropriately.

The Court explained rescission at common law and equity. The Court first confirmed that at common law a fundamental mistake voids a contract ab initio, citing academic authority that such a mistake goes to a contract’s root and destroys the intent of the parties, thus invalidating any offer or acceptance. The Court also confirmed that while equity does not grant relief where there is a remedy at law, equity provides relief when none is available under more rigorous common law principles. Thus, if a contract is not void ab initio it may be rescinded. The availability of equitable rescission in some jurisdictions is an open question since Denning LJ’s judgment in Solle v Butcher, [1950] 1 KB 671 (CA) was overturned by Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd., [2002] 4 All ER 689 (CA). The BC court did not find a need to determine whether Great Peace should be followed to decide the Numbercos’ applications, while noting that other provinces such as Ontario and Alberta recognized equitable rescission after Great Peace. In particular, the Ontario Court of Appeal held that Great Peace should not be adopted in Canada, because that would limit the flexibility of the Courts. 

For further authority, the Court referenced Re Pallen Trust, 2014 BCSC 305, another BC tax rescission case from early 2014. In Pallen Trust, the Court relied on a 2013 UK case, Pitt v. Commissioners for Her Majesty’s Revenue and Customs, [2013] UKSC 26, for the proposition that the test for rescission is whether there is a “causative mistake of sufficient gravity” as to “the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction” and it would be “unconscionable, unjust, or unfair” to not correct the mistake. An example of unconscionable behaviour may be where a party seeks to take advantage of another party’s mistake.

In the Numbercos’ case, the underlying understanding and intention to not pay net HST was frustrated by mistake. The Court confirmed that where there has been an honest mistake, equity grants relief where it would be unfair, unjust or unconscionable not to correct the mistake. In this case, the mistake was clear and allowing the Crown to obtain approximately $6,000,000 plus accruing interest would not be fair or just. The Court concluded that there was no retroactive tax planning, no other available legal remedy and no prejudice to third parties. Thus, the Numbercos were entitled to the requested relief.