No More Take-backs: Supreme Court Of Canada Restricts Equitable Remedies

• Law Firm: Miller Thomson LLP
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax
• Author: Ms Jacklynn Pivovar and Matteo Loconte
• Published date: 26 April 2023

Introduction

In 2016, the Supreme Court of Canada ("SCC") released their decision in Canada (Attorney General) v Fairmont Hotels Inc., 2016 SCC 56 ("Fairmont"), in which they restricted the availability of rectification, an equitable remedy whereby the court corrects error(s) in the written terms of an agreement. In Fairmont, the SCC held that rectification is not available to undo tax plans solely because the plans create unintended tax consequences.

More recently, in Canada (Attorney General) v Collins Family Trust, 2022 SCC 26 ("Collins"), the SCC upheld this ruling, finding that other equitable remedies, such as rescission, an equitable remedy whereby the court retroactively cancels a transaction or nullifies an agreement, is also not available to parties seeking to undo tax plans solely because the plans have created adverse tax consequences.

Rectification is typically used to rectify mistakes in written agreements when the intent of the parties was improperly drafted, whereas rescission is typically used to annul written agreements entirely.

Canada (Attorney General) v Collins Family Trust

In Collins, two parties had set up a tax plan to reduce their tax liability. These plans allowed the operating company to move large amounts of money into a holding company which was also the settlor and beneficiary of a newly created family trust (the "Plans").

The Plans were based upon a common interpretation of the Income Tax Act (the "ITA") at the time that the Plans were created, specifically that section 75(2) of the ITA could be used by corporations to avoid taxes on dividends if they were paid to a family trust. However, after the Plans were implemented, the Tax Court of Canada released their decision in Sommerer v. The Queen, 2011 TCC 212¹ aff'd on appeal 2012 FCA 207 ("Sommerer"), which employed an alternative interpretation of section 75(2), and found that the attribution rules in section 75(2) of the ITA don't apply when property is sold to the trust for fair market value, as opposed to being gifted to the trust.² As a result of the decision in Sommerer, tax plans which relied on the prior interpretation of section 75(2) no longer achieved their intended goals and the Canada Revenue Agency began to re-assess these transactions.

In Collins, the SCC adopted the interpretation of section 75(2) of the ITA from Sommerer and denied the request for recession, finding that taxpayers should be taxed on what they actually did, not what they wish they had done in...