Rescission Remedy Takes A Step Sideways In JAFT

On Aug. 20, 2015, the Manitoba Court of Appeal ("MCA") dismissed the appeal in the JAFT Corp v, Jones et al.1 rescission case. The application judge declined to exercise jurisdiction on the basis of parallel proceedings in the Tax Court of Canada ("TCC") and her alternative position that rescission was not available in any case. The appellants, JAFT Corporation ("JAFT") and two individuals who were directors, shareholders and employees, unsuccessfully appealed to the MCA. A third employee was a respondent who did not oppose. The Attorney General of Canada intervened, opposed, and was successful in the application and on appeal.

The TCC appeals concerned CRA third party assessments for source deductions. The rescission application sought to have employment contracts and compensation rescinded for 2005 and 2006. The three employees worked for JAFT between 2003 and 2006. They agreed in 2004 that they would be paid if/when their work met the requirements of the SR&ED program. It was agreed that if a claim was denied, their compensation was to be repaid to JAFT. The 2003 and 2004 SR&ED claims included salaries that were payable but unpaid which would be paid out when the SR&ED funds were received. The CRA audited those SR&ED filings and took the position that contingent salaries could not be part of a claim. Consequently, to address this concern, JAFT paid salaries in 2005 and 2006. However, JAFT was not able to pay salaries in 2005 and 2006. Therefore the salaries were paid without source withholdings and immediately loaned back to JAFT. The expectation was that source deductions could be remitted when the SR&ED tax credits were received. However, JAFT's 2005 and 2006 SR&ED claims were denied, leading to notices of objection being filed with the CRA. The notices of objection were not appealed, but third party assessments for source deductions were appealed to the TCC.

In 2007, the loans to JAFT were repaid, the employees refunded their compensation, and the company sought to amend T4s to eliminate the salaries paid out. The CRA assessed JAFT and two directors for source deductions and refused to accept amended T4s. Further, personal deductions for repaid salaries were denied. The rescission application was commenced on the basis that the tax liabilities were unexpected, unforeseen and unintended, since the parties believed they would receive SR&ED tax credits for 2005 and 2006 and that unremitted source deductions would have been covered by...