SCC Limits The Availability Of Rescission For Tax-Planning Mistakes

• Published date: 05 July 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax, Tax Authorities
• Law Firm: MLT Aikins LLP
• Author: John Agioritis, Kurt Wintermute and Nicholas Horlick

This article was drafted with the assistance of summer law student Eric Turcotte.

In the recent decision of Canada (Attorney General) v Collins Family Trust, 2022 SCC 26 [Collins Trust], the Supreme Court of Canada rejected the use of equitable remedies such as rescission to undo or alter transactions that resulted in unintended tax liability. The decision means taxpayers will have more difficulty finding relief from the consequences of tax-planning mistakes.

Facts: Undesirable Tax Consequences

Collins Trust concerned two different taxpayers who engaged the same tax advisor in 2008 to devise a plan to protect their assets from creditors without incurring income tax liability. The tax plan used a related operating company, holding company and family trust in such a way that the dividend payments from the operating companies to the trusts would be tax free.

The plan relied on the attribution rules in s. 75(2) and the inter-corporate dividend deduction in s. 112(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp). At the time, the tax-neutral basis of this plan was generally consistent with how tax practitioners and the Canada Revenue Agency (CRA) interpreted the relevant provisions. However, the Tax Court of Canada later held in Sommerer v The Queen, 2011 TCC 212, aff'd 2012 FCA 207 that this type of plan incurred tax liability. Facing reassessments from the CRA, both taxpayers sought the equitable remedy of rescission, which would permit them to undo the transactions and dividend payments.

Recent Changes in the Availability of Equitable Remedies for Tax Liabilities

Underlying the ruling in Collins Trust is the 2016 decisions of Fairmont Hotels Inc v Canada, 2016 SCC 56 [Fairmont] and Jean Coutu Group (PJC) Inc v Canada, 2016 SCC 55 [Jean Coutu] where the Supreme Court similarly limited the use of rectification to correct tax mistakes. (MLT Aikins previously wrote a blog summarizing Fairmont.)

While rescission allows taxpayers to undo transactions as if they never happened, rectification allows a taxpayer to amend its transactions. Before Fairmont, taxpayers used rectification to amend or replace their chosen transaction method to avoid any unexpected or unwanted tax consequences that subsequently arose. In Fairmont, the Supreme Court returned rectification to its historical use of correcting errors in written instruments (generally, a contract) that did not accord with their underlying agreements (generally, oral). The Supreme Court held that rectification...