Collins Family Trust

• Published date: 21 July 2022
• Subject Matter: Tax, Family and Matrimonial, Income Tax, Tax Authorities, Wills/ Intestacy/ Estate Planning
• Law Firm: Goldman Sloan Nash & Haber LLP
• Author: Brian Nichols

Background

Many years ago, there were two types of courts - courts of law and courts of equity - in England. Courts of equity developed to provide remedies, which lawyers call "equitable remedies", where the decisions of courts of law would produce results that were unconscionable or otherwise unfair. Later, law and equity were fused into one system which was administered by one set of courts. The common law provinces of Canada adopted this system. Equitable remedies were available in the common law provinces long before there was an Income Tax Act. Equitable remedies have been and still are used to resolve disputes between two or more persons who deal at arm's length with each other where taxes are not the primary concern or perhaps are not a concern at all.

Taxpayers have used two equitable remedies, rectification and rescission to obtain tax relief. Each of these equitable remedies has a number of technical requirements; each of these equitable remedies is discretionary. Rectification applies when the written documents in respect of an agreement do not correspond to the actual agreement made by the parties. It corrects the written documents so that they do correspond with the actual agreement. Rescission applies in certain situations where mistakes have been made. It cancels a transaction and restores parties to the position they were before the transaction.

The CRA has been concerned that taxpayers have ben using equitable remedies to conduct retroactive tax planning and has challenged the use of them in a number of court cases. This culminated in Canada (Attorney General) v. Fairmont Hotels Inc., [2016] 2S.C.R.720 ("Fairmont") with respect to rectification.¹ In Fairmont, the Supreme Court of Canada restricted the availability of rectification so that it could not be used for retroactive tax planning but left it available to correct written documents where they did not reflect the actual agreement of the parties. I have had a number of successful rectifications after Fairmont.

The Facts

In Canada (Attorney General v. Collins Family Trust, 2022 SCC 26, the taxpayer sought to use rescission to deal with the tax problem. The CRA considered this to be retroactive tax planning. The majority of the Supreme Court of Canada (the "Majority") described the facts as follows in paragraphs 2 to 4 of the decision.

[2] In 2008, Todd Collins, principal of Rite-Way Metals Ltd., and Floyd Cochran, principal of Harvard Industries Ltd., each retained the same tax advisor...