Canada (Attorney General) v. Collins Family Trust, 2020 BCCA 1962022 SCC 26 (39383)

“Two companies implemented a plan to protect corporate assets from creditors without incurring income tax liability. The plan was based in part on interpretations published by the Canada Revenue Agency (“CRA”) of the attribution rules in s. 75(2) and the inter‑corporate dividend deduction in s. 112(1) of the Income Tax Act. It involved the creation of family trusts, to which dividends were paid. After the plans were implemented, the Tax Court of Canada, in another matter, interpreted s. 75(2) differently than was commonly accepted by tax professionals and CRA. CRA reassessed the trusts’ returns and imposed unanticipated tax liability. The trusts petitioned for the equitable remedy of rescission of the transactions leading to and including the payment of dividends. The chambers judge considered himself bound to follow the Court of Appeal for British Columbia’s decision in Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499, which had applied the test for equitable rescission stated in Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108, to similar transactions, and he allowed the petitions. The Court of Appeal dismissed the Attorney General’s appeals.”

The SCC (8:1) allowed the appeal, set aside the judgments of the Court of Appeal and the chambers judge, and dismissed the petitions. 

Justice Brown wrote as follows (at paras. 1, 6-7, 16, 27):

“This Court has barred access to rectification where sought to achieve retroactive tax planning (Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720, at para. 3). Taxpayers should be taxed based on what they actually agreed to do and did, and not on what they could have done or later wished they had done (Fairmont Hotels, at paras. 23‑24, citing Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 45). At issue in this appeal is whether taxpayers are also barred from obtaining other equitable relief ⸺ here, rescission of a series of transactions ⸺ sought to avoid unanticipated adverse tax consequences arising from the ordinary operation thereon of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). As I explain below, they are.


 

The Attorney General of Canada raises two principal grounds of appeal: first, that the courts below erred in adopting the test for equitable rescission stated in Pitt v. Holt; and secondly (and alternatively), if Pitt v. Holt governs, then they erred in applying it.

It suffices to dispose of this matter by allowing the appeal on the first ground. For the reasons that follow, a limiting principle of equity and, relatedly, principles of tax law stated in Fairmont Hotels and Jean Coutu are irreconcilable with the conclusion in Pitt v. Holt. Equity has no place here, there being nothing unconscionable or otherwise unfair about the operation of a tax statute on transactions freely undertaken. It follows that the prohibition against retroactive tax planning, as stated in Fairmont Hotels and Jean Coutu, should be understood broadly, precluding any equitable remedy by which it might be achieved, including rescission.


 

From Fairmont Hotels and Jean Coutu, taken together, I draw the following interrelated principles relevant to deciding this appeal:

  • (a) Tax consequences do not flow from contracting parties’ motivations or objectives. Rather, they flow from the freely chosen legal relationships, as established by their transactions (Jean Coutu, at para. 41; Fairmont Hotels, at para. 24).
  • (b)  While a taxpayer should not be denied a sought‑after fiscal objective which they should achieve on the ordinary operation of a tax statute, this proposition also cuts the other way: taxpayers should not be judicially accorded a benefit denied by that same ordinary statutory operation, based solely on what they would have done had they known better (Fairmont Hotels, at para. 23, citing Shell Canada, at para. 45; Jean Coutu, at para. 41).
  • (c)  The proper inquiry is no more into the “windfall” for the public treasury when a taxpayer loses a benefit than it is into the “windfall” for a taxpayer when it secures a benefit. The inquiry, rather, is into what the taxpayer agreed to do (Fairmont Hotels, at para. 24).
  • (d)  A court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability (Fairmont Hotels, at para. 3; Jean Coutu, at para. 41).



In short, the “unfairness” the respondents complain of was the direct result of the ordinary operation of the Act respecting transactions freely undertaken. And, as already discussed, no unfairness lies in holding the respondents to the consequent tax liabilities.”