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

  1. the legal character or nature of a transaction, or
  2. 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

Canadian Tax Focus
Volume 10, Number 4, November 2020
©2020, Canadian Tax Foundation