Correcting Tax Mistakes: Rescission Reborn
In the first Canadian appellate court rescission case decided after
Fairmont (
2016 SCC 56) and
Jean Coutu (PJC) (
2016 SCC 55), the BCCA in
Collins Family Trust (
2020 BCCA 196; aff'g
2019 BCSC 1030) dismissed the Crown's appeal and upheld the BCSC's rescission order. In doing so, the BCCA affirmed
Re Pallen Trust (
2015 BCCA 222)—a leading rescission case decided before
Fairmont and
Jean Coutu—and gave new life to rescission as an equitable remedy in tax cases.
As discussed in our August 2019
Canadian Tax Focus article on the BCSC's decision in
Collins (see "
Correcting Tax Mistakes: Will Rescission Supplant Rectification?"), the BCSC considered that granting rescission would infringe principles established in
Fairmont and
Jean Coutu, but granted rescission nevertheless because the court considered itself bound by
Pallen. The BCSC all but invited the Crown to appeal its decision.
On appeal, the BCCA in
Collins held that
Fairmont and
Jean Coutu do not undermine
Pallen
and that rescission remains an available remedy in tax cases where all
the conditions for granting the remedy are satisfied, even if rescinding
a transaction results in a tax advantage. The BCCA reiterated that, in
the context of a voluntary transfer of property, rescission is available
where a mistake of sufficient causative gravity has occurred regarding
- the legal character or nature of a transaction, or
- some matter of fact or law that is basic to the transaction
that it would be unconscionable, unjust, or unfair to leave the mistake uncorrected.
The BCCA recognized in
Collins that aggressive tax planning is a
factor to consider when determining whether to grant rescission. That
is, when a tax plan is aggressive, it is more difficult to argue that it
would be unconscionable, unjust, or unfair to leave a mistake
uncorrected. Interestingly, the BCCA in
Collins did not consider the tax plan at issue to be aggressive, despite the fact that the FCA ruled in
Fiducie financière Satoma (
2018 FCA 74)
that GAAR applied to a very similar tax plan designed to take advantage
of the interaction between subsections 75(2) and 112(1) to have a trust
receive tax-free dividends from a corporation. The fact that a tax plan
found to be GAARable on one set of facts was not found to be
"aggressive" on a similar fact pattern might be explained by the trial
judge's finding in
Collins of a significant non-tax motivation
(creditor proofing). However, given that the plan, had it worked,
involved stripping surplus out of the corporate regime without paying
any shareholder-level tax, it is surprising that this was not found to
be aggressive.
With its decision in
Collins, the BCCA has become the first Canadian appellate court to grant an order for rescission in the tax context after
Fairmont and
Jean Coutu. The BCCA was also the first Canadian appellate court to grant an order for rectification in the tax context after
Fairmont and
Jean Coutu when it granted rectification in
5551928 Manitoba Ltd. (
2019 BCCA 376).
While these cases are not binding on courts outside British Columbia,
and may indicate a more liberal approach taken in that province to the
application of equitable remedies in tax cases, these cases are
persuasive in all Canadian courts and rely on principles and remedies
common to courts in all Canadian jurisdictions. Accordingly, taxpayers
and their representatives should be encouraged by the outcome in
Collins and the position that
Pallen remains good law after
Fairmont and
Jean Coutu.
Marshall Haughey and Wade Ritchie
Bennett Jones LLP, Calgary
HaugheyM@bennettjones.com
RitchieW@bennettjones.com