March 29, 2021 | By Bill Innes, guest contributor
The Supreme Court of Canada’s (SCC) decision granting leave in Collins Family Trust has set up another battle on the limits of the doctrine of rectification.
In 2016, the high court’s rulings in Fairmont and Jean Coutu restricted the doctrine as a tax planning tool. The decisions limited rectification to where the documentation failed to reflect the parties’ manifest intentions, and not as a remedy for unintended tax consequences.
Many, however, viewed the British Columbia Court of Appeal’s 2020 judgment in Collins as an attempt to circumscribe the SCC’s clampdown.
The equitable doctrine of rectification had been an important weapon in tax planners’ arsenal since the Ontario Court of Appeal’s 2000 decision in Juliar. While Juliar dealt with a simple mistake by tax planners, practitioners soon latched onto it it to cobble up tax planning gone wrong. This started a pitched battle between tax practitioners and the Canada Revenue Agency (CRA), which culminated in Fairmont and Jean Coutu.
Collins’ facts are complex, but their essence is that the applicants sought to rescind dividends after new case law adversely affected their tax treatment. At first instance, Justice Christopher Giaschi of the British Columbia Supreme Court held that the transactions offended the principles laid down by the SCC.
The gist of his judgment is as follows:
Fairmont and Jean Coutu establish two related principles: (1) taxpayers should be taxed on what they actually did, not what they intended to do or, put differently, tax consequences flow from what a taxpayer did, not what it intended to do; and, (2) it is not permissible to retroactively alter a transaction to achieve an intended tax objective.
The petitions before me infringe both of these principles. The petitioners are asking this Court to unwind transactions they freely entered into because the tax consequences are not what they intended or hoped. This is clearly contrary to the first principle. Further, it was not until after the CRA audited the petitioners and issued notices of reassessment that the petitioners brought these petitions for equitable relief on the basis of mistake. Equitable relief in these circumstances is prohibited by the second principle.
Nevertheless, Giaschi felt bound by Re: Pallen Trust, a British Columbia Court of Appeal decision that pre-dated Fairmont and Jean Coutu. He allowed the application for rescission.
The Court of Appeal, however, ruled that the application did not offend SCC precedent even though rectification allowed the parties to achieve a tax advantage based on facts occurring after their original deal. The court applied Pallen and dismissed the Crown’s appeal.
In my view, however, it’s unlikely that the SCC granted leave to applaud the judicial rigour of the BCCA. It’s far more likely that the court wishes to entrench Fairmont and Jean Coutu — in other words, the BCCA may be in for a bit of a judicial haircut.
In any event, there’s little doubt that tax planners awaiting the decision will be on pins and needles for a while.
Bill Innes is Tax Litigation Counsel at William Innes Barrister in Toronto. A fuller version of this article is available on his blog.
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