Canada's Top Court Decides Against Equitable Rescission In Collins Family Trust

• Published date: 22 June 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Tax, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation, Income Tax, Tax Authorities
• Law Firm: Davies Ward Phillips & Vineberg
• Author: Mr Michael Lubetsky, Marie-France Dompierre, Stephen Ruby and Connor Hasegawa

"Equity has no place here," held the Supreme Court of Canada in its 8-1 decision in Canada (Attorney General) v Collins Family Trust (Collins), 2022 SCC 26, on June 17. Reversing the decisions of the British Columbia courts below, Collins holds that the equitable remedy of rescission - whereby a court declares a contract, gift or other act null because it was entered into under a material misapprehension by one or more of the parties - is not available when the misapprehension relates to its tax consequences. Rather, Collins stands for the principle that in every circumstance "taxpayers should be taxed...on what they actually agreed to do and did, and not what they could have done or later wished they had done."

This decision means that Canadian taxpayers in the common law provinces have lost a long-standing and important remedy against having to pay unnecessary and unfairly onerous taxes due to misunderstandings in the way the increasingly complex and often incomprehensible provisions of the Income Tax Act (ITA) apply. Collins has also created a stark rift between the common law provinces and Québec, whose Civil Code of Québec allows a court, on the application of a party, to "annul" a contract based on an "error," including a misunderstanding of its tax consequences - a procedure that the Supreme Court of Canada endorsed in Quebec (Agence du revenu) v Services Environnementaux AES inc. (AES), 2013 SCC 65, and has not repudiated since.

As a result of Collins, taxpayers engaging in transactions need to be extra vigilant to ensure that their tax planning is executed thoroughly and that its implementation conforms exactly to the tax planning. Last-minute changes to transactions - even if seemingly innocuous - can precipitate significant adverse consequences and should be reviewed carefully before being put into effect.

The brief majority decision in Collins also contains broad, categorical statements about how the Minister of National Revenue lacks any discretion in administering and enforcing the ITA. Given that the ITA expressly confers a great deal of discretion upon the Minister, these statements are inexact as general propositions and, if taken literally, could call into question the power of the Minister to enter into binding settlement agreements with taxpayers regarding their fiscal obligations - a power that has been recognized as essential to the proper functioning of the tax system. One can only hope that the obiter dictum in Collins is read in its context and not given a life of its own.

Background

In Collins, two separate companies retained an accounting firm to advise on two similar plans to protect corporate assets from future creditors without creating additional tax liability. Each plan involved the creation of a family trust and the incorporation of a holding company as the trust's beneficiary. The holding company lent funds to the trust to purchase the shares of the operating company at fair market value, after which the operating company paid dividends to the trust.

According to the Canada Revenue Agency's (CRA's) published guidance at the time, as well as the general understanding among tax practitioners, subsection 75(2) of the ITA (to which all sections referred to in this bulletin apply) would attribute the dividends paid to the trust to the holding company. As intercorporate dividends, no tax...