Rescission Decision Lacks Precision

• Published date: 29 September 2021
• Subject Matter: Government, Public Sector, Litigation, Mediation & Arbitration, Tax, Government Contracts, Procurement & PPP, Trials & Appeals & Compensation, Tax Authorities
• Law Firm: Gowling WLG
• Author: Mr John Sorensen

The remedies of rescission and rectification were unavailable to the taxpayers in the Alberta application RJ McLeod Investments Inc. v McLeod.¹ The McLeod judgment includes common themes and highlights ongoing problems in these kinds of matters:

1. rescission or rectification are carefully guarded and discretionary judicial remedies, and the outcome of an application is fact-driven;
2. applications typically flounder when a Court concludes that a taxpayer is seeking to engage in retroactive tax planning;
3. as a remedy granted in the Provincial Superior Courts rescission is not applied harmoniously across Canada; and
4. Courts continue to be bewitched and bewildered by the potential impact of adequate alternative legal remedies on whether rescission should be granted.

Facts

As noted above, rescission applications are fact-specific. The facts in McLeod are summarized as follows:

• RJ McLeod Investments Inc. ("RJM") is an investment holding company incorporated under the laws of Alberta;
• Mr. McLeod is the president, sole director and sole shareholder of RJM, and is a lawyer specializing in real property law;
• McLeod and RJM has changed tax advisors in 2009 and again in August 2014;
• according to McLeod, he was advised by his (former) accountants in August, 2013 that RJM had a capital dividend account ("CDA") balance of $564,027, so therefore RJM could elect tax-free treatment of dividends to the extent of that CDA balance;
• allegedly, the accountants as of 2013 failed to recognize that RJM had paid a capital dividend of $641,649 to McLeod in 2007 (when he was advised by a previous firm), thus RJM did not have the CDA balance McLeod thought was available when RJM declared dividends in September, 2013 ($200,000 paid in cash), March, 2013 ($200,000 paid in cash) and September, 2014 ($150,000 for which he took back a note) (collectively, the "Dividends"); and
• McLeod asserted that he
  • did not actually need the funds from the Dividends, and that they were co-mingled and invested together with his personal funds;
  • would not have authorized the Dividends had he known that RJM had no CDA balance;
  • did not accept responsibility for the mistaken calculation of the CDA balance and that he relied on the advice of his then-accountants that the Dividends would be tax-free;
  • prepared the necessary resolutions using language recommended by his then-accountants, and accepted no responsibility for the resolutions' wording; and
  • did not understand the wording of the resolutions including among other things, a term that if a dividend in excess of the CDA balance was declared, that RJM intended the excess portion to be an eligible dividend and, if necessary, a non-eligible dividend, as the case may be.

In January, 2015, the Canada Revenue Agency ("CRA") informed RJM that it had made excessive capital dividend elections, so the Dividends would be subject to punitive Part III tax unless RJM elected to treat the Dividends as taxable. In June, 2017, McLeod and RJM sued their former accounting advisors (Messrs. Luna and MacFarlane) in connection with "alleged breaches of duty and negligence" relating to the CDA matter. The two accountants filed their statements of defense in 2018 and 2019. There was predictable...