Introduction
The Supreme Court of Canada
(“SCC“)’s recent decision in Canada (Attorney General) v. Collins Family
Trust, 2022 SCC
26(“Collins“) has seemingly
closed the loop on the (lack of) availability of equitable remedies
in cases involving income tax.
Many taxpayers and tax practitioners are aware that one of the
Canada Revenue Agency (“CRA“)’s
responsibilities is to administer the Income Tax Act 1
(the, “Act“). In doing so, the CRA often
provides their interpretive views on various provisions of the Act,
which generally is helpful and appreciated. What is important for
all to understand, however, is that the CRA is not an authority
when it comes to interpreting the Act. Many tax cases at various
levels of the courts have affirmed this time and time again
2. Perhaps Justice D.G.H. Bowman said it best:
“The appellant argues with great conviction that he
should be entitled to rely on advice given by the CCRA and relied
upon by him in good faith. I agree that the result may
seem a little shocking to taxpayers who seek guidance from
government officials whom they expect to be able to give correct
advice. Unfortunately such officials are not infallible and the
court cannot be bound by erroneous departmental
interpretations. 3”
Is it really fair or reasonable that a taxpayer relying on a
long-standing interpretation published by the CRA must suffer
adverse tax consequences when a court later determines that this
interpretation was incorrect? That is precisely what occurred in
Collins. That case is the latest and, ostensibly, final
judicial decision on whether there are other avenues a taxpayer can
take to seek relief from adverse tax consequences of having
completed a transaction in reliance upon a CRA-approved
interpretation of the Act that is incorrect.
The SCC denied Collins Family Trust (the
“Trust“) the ability to undo a
transaction that had been completed in reliance on an
interpretation of the Act that had long been accepted as correct by
both the tax community and, explicitly, by the CRA. The main issue
in Collins revolves around whether the equitable remedy of
“rescission” of a series of transactions (which, if
granted, would have cancelled the transactions altogether and
returned the parties to their respective original pre-transaction
positions) should be available to the Trust, in the context of an
asset protection plan involving tax planning. The asset protection
and avoidance of tax liabilities objectives of the plan were of
equal importance (i.e., this plan was not primarily tax
motivated).
The Collins decision is another step in furthering the
burden put on taxpayers to understand, interpret and comply with
the myriad of complex provisions of the Income Tax Act. Even basic
tax planning transactions frequently have very complex technical
elements, all of which must be followed, and honest mistakes will
occur. Equitable remedies used to be available to correct these
mistakes, but this is no longer the case. Now more than ever it is
essential for taxpayers to have obtained professional tax planning
advice from technically competent firms prior to completing
transactions.
Background
To provide greater context of the legal environment leading up
to the Collins decision, a timeline may be
appropriate:
- 2008: The Trust was involved in a series of transactions
pursuant to which it purchased shares of a corporation
(“Opco“) from another corporation
(“Holdco“) at fair market value. Opco
subsequently declared dividends on its outstanding shares that were
owned by the Trust (which dividends were expected to be attributed
to Holdco pursuant to subsection 75(2), based on the CRA’s
long-standing published interpretations 4). The expected
result was that Holdco would include the dividends in its income
(claiming an offsetting deduction pursuant to subsection 112(1))
and the majority of the cash or assets resulting from the
Trust’s receipt of those dividends would remain with the Trust
(thereby protecting that cash or assets from claims that could be
brought by creditors of Opco).
- 2011: The Tax Court of Canada ruled in an unrelated case
(Sommerer 5) that the long-standing CRA
interpretation was incorrect, and that the subsection 75(2)
attribution provision does not apply to property that is
sold to a trust at fair market value by a person other than the
settlor of the trust. The CRA was in the process of
appealing the Sommerer decision at the same time as
it was reassessing the Trust on the basis that the
Sommerer decision was correct! The reassessment issued by
the CRA to the Trust required that the dividends paid to the Trust
be included in its income for income tax purposes, which would be
subject to tax at the highest marginal personal tax rates.
- 2012: The Federal Court of Appeal upheld the
Sommerer
- 2015: The British Columbia Court of Appeal
(“BCCA“) granted rescission in the
Pallen 6 case, which had substantially the same
facts and transactions as Collins. The BCCA upheld the
decision that the taxpayer should be able to rescind the dividends
and place the parties back to their original position. The Court in
the Pallen case determined that to subject the taxpayer to
the CRA’s reassessment only after the Sommerer
decision was unfair:
“What took this case “into the zone of
unfairness” in the chambers judge’s mind was the existence
of the “common general understanding” regarding the
operation of s. 75(2). Had the understanding been less certain, he
said, the assumption of risk-taking on the part of the trustee
would likely have led him to the opposite conclusion.”
7
- 2016: The SCC, in the Fairmont Hotels 8 and
Jean Coutu 9 cases, found that the equitable
remedy of rectification (amending a transaction to reflect the
parties’ intentions) is not available where the intended tax
result was not achieved. In Fairmont Hotels, the taxpayers
intended that certain transactions be carried out in a tax neutral
manner, however, the transactions entered into resulted in the
taxpayers incurring tax. The SCC determined that rectification
should be available to “correct” a transaction only where
the transaction was not implemented as agreed upon, and that
rectification should not be available to correct a transaction in
order to achieve the intended result. Following the
SCC’s decisions in the Fairmont Hotels and Jean
Coutu cases, many tax practitioners were hopeful that the
denial of the equitable remedy of rectification in those cases
would not preclude a grant of the different equitable remedy of
rescission from continuing to be available in the case of
transactions that were entered into under a mistaken assumption
about the facts or the law.
- 2019: The British Columbia Supreme Court granted rescission in
the Collins case based on the BCCA’s decision in
Pallen, which the Court felt bound to follow (otherwise it
appears rescission may not have been granted).
- 2020: The BCCA decided that rescission should be available in
the Collins case and that the Fairmont Hotels
case should be interpreted narrowly, as to apply to rectification
only and not to all types of equitable remedies.
- 2022: The SCC reversed the BCCA Collins decision,
finding that rescission should not be available to annul the
transactions and that the Trust should be subject to tax on the
dividends paid to it. In the majority decision, the SCC held:
. the Minister was bound to apply
Parliament’s direction in the
Act, as interpreted by a court of law, unless and
until that interpretation is judged to be incorrect by a higher
court. Unless a statute gives the
Minister the power to deviate from that direction,
the Minister may not
deviate; nor may
a court undermine that direction by resort to equity,
since there is nothing unconscionable or unfair about the
Minister administering the Act
as Parliament directs. Equity
is the conscience of the common law, not
of Parliament. 10
The one dissenting Justice disagreed, however, stating:
“In my view, what takes this case into the zone of
unfairness is not the application of the law, but rather the
CRA’s discretionary decision to reassess the taxpayers based on
a retroactive approach to s. 75(2). Unfairness results when the CRA
reverses a longstanding interpretation and then seeks to reassess a
taxpayer retroactively.” 11
Debating the merits of the dissenting Justice’s position may
be appealing, however any such discussion would be purely academic
as the majority of the SCC found in favour of the Crown and the law
of the land is now that Fairmont Hotels should be
interpreted broadly as to be applicable to all types of equitable
remedies.
Takeaway
Taxpayers and tax advisors need to be aware that there are four
main principles that should be applied to determine whether any
equitable remedy is available to a taxpayer:
- Tax consequences do not result from a taxpayer’s
motivations or objectives. Rather, the tax consequences result from
the freely chosen legal relationships, as established by their
transactions;
- Taxpayers should not be denied the benefit of minimizing their
tax liability, which would be achieved based on the ordinary
operation of the Act, however, this also cuts the other way:
taxpayers should not be afforded relief from an increased tax
liability by that same ordinary statutory operation, based solely
on what they would have done had they known better;
- It is not a question of whether the Crown or the taxpayer would
receive a benefit; rather, the question is what did the taxpayer
agree to do, and that alone is what will dictate the tax
consequences; and
- A court may not modify an agreement (or other instrument)
merely because a party discovers that it results in an adverse and
unplanned tax liability.
The key takeaway is that it will be nearly impossible to obtain
any equitable relief in the tax context unless the high bar set-out
in Fairmont Hotels is met, whereby mistakes may be
corrected only where:
- it can be established to a court’s satisfaction that a
document does not accurately record an agreement, or
- a party can show that another party knew or ought to have known
about a mistake and derived a benefit from the mistake (amounting
to fraud).
These restrictions are very limiting and will likely not be
applicable in the vast majority of cases. What this means for
taxpayers is that they need to be aware and have a thorough
understanding of the consequences of any tax planning transactions,
“eyes wide open” so to speak. Furthermore, it is
imperative to understand that CRA published interpretations should
not invariably be relied upon; while they often are helpful and
welcomed, they could be incorrect. The advice of skilled tax
professionals definitely should be obtained in both planning and
implementing a transaction.
For tax practitioners, consider adding a caution to engagement
agreements regarding the risk of relying on CRA published opinions
regardless of how long-standing they may be, and have conversations
with clients emphasizing that the CRA’s published
interpretations are neither law nor binding on the CRA. It is also
of paramount importance that any tax planning transaction be
implemented precisely as intended and be rigorously reviewed.
A Word about Advance Tax Rulings
Advance tax rulings provided by the CRA still have a purpose in
the tax arena as they allow taxpayers the ability to have the CRA
provide its view on whether a proposed transaction will provide the
result the taxpayer is expecting. Technically speaking, advance tax
rulings have always been non-binding on the CRA, however their past
practice has been to honour the rulings provided with certain
reasonable caveats. The use of advance tax rulings may reduce the
risk of having a transaction be reassessed by the CRA, however,
even the dissenting opinion in Collins provided “But
even if the respondents had asked for an advance ruling, the
CRA’s advance rulings do not constitute law and are not binding
on the courts” 12. Advance tax rulings may provide
insight into how the CRA currently views a transaction; they do not
afford protection from the CRA’s misinterpretations of tax
law.
End of the Road?
The SCC ruling, in the wake of the Collins decision,
has effectively shut the door to any equitable remedies to alter
the tax consequences of “mistakes”. However, one ray of
hope remains. In his reasons for judgment, Justice Brown stated:
“If there is to be a remedy, it lies with Parliament, not a
court of equity” 13. It is open to provincial
legislatures to take measures to statutorily empower their
respective provincial courts to issue orders of rectification,
rescission and other equitable remedies where the context of a
transaction can be taken into account and discretion used by a
court to decide whether to correct a mistake where it would be
unfair to leave it uncorrected, or to hold taxpayers accountable
where the facts support a finding that “retroactive tax
planning” is sought.
Provincial courts could be handed these tools and many in the
tax community (including our Firm) are reaching out to their
respective provinces to make the case to provide the courts with
these tools. However, until such time, Collins and
Fairmont Hotels are law in Canada so taxpayers will be
required to bear the tax burdens of their transactions regardless
of the circumstances surrounding them.
Footnotes
1. The Income Tax Act, RSC 1985, c.1 (5th Supp.), as
amended.
2. Moulton v. R., 2002 CarswellNat 262, (2002) 2
C.T.C. 2395, 2002 D.T.C. 3848(TCC).
Goldstein v. R., (1995) 2 C.T.C. 2036, 1995 CarswellNat
438 (TCC);
Watanabe v. R., 1999 CarswellNat 459, (1999) 2 C.T.C.
2962, 99 D.T.C. 822 (TCC);
Michaud v. R., 2011 CarswellNat 5422, 2011 TCC 573, 2012
D.T.C. 1048 (TCC); and
Wellington v. R. (2004), 2004 TCC 313, 2004 CarswellNat
1107, (2004) 3 C.T.C. 2402, 2004 CarswellNat 5802 (TCC) to name a
few.
3. Moulton v. R., 2002 CarswellNat 262, (2002) 2
C.T.C. 2395, 2002 D.T.C. 3848 (TCC) at para 11
4. E.g., Technical Interpretation Bulletin IT-369R, CRA
Views 9332575, CRA Views 2002-0118255, CRA Views 2004-0086941C6,
and CRA Views 2001-0116045.
5. Sommerer v. R. (2011), 2011 CarswellNat 1157,
2011 CarswellNat 4026, 204 A.C.W.S. (3d) 674, (2011) 4 C.T.C. 2068,
2011 D.T.C. 1162 (Eng.), 2011 TCC 212, 2011 CCI 212
((T.C.C.)).
6. Pallen Trust, Re, CarswellBC 1326, 2015 BCCA
222.
7. Ibid at para 56.
8. Canada (Attorney General) v. Fairmont Hotels
Inc., 2016 CarswellOnt 19252, 2016 SCC 56.
9. Jean Coutu Group (PJC) Inc. v. Canada (Attorney
General), 2016 CarswellQue 11182, 2016 SCC 55.
10. Collins at para 26.
11. Ibid at para 80.
12. Collins at para 89.
13. Ibid at para 11.
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