Focus On

FEDERAL INCOME TAX - Administration and enforcement

Wednesday, August 19, 2020 @ 8:52 AM  


Lexis Advance® Quicklaw®
Appeal by the Attorney General of Canada from an order granting the respondent Trusts rescission of a declaration and payment of dividends to a discretionary trust based on mistake in a tax context. The chambers judge granted the order based on this court’s decision in Pallen Trust, despite his opinion that the subsequent decisions by the Supreme Court of Canada in Fairmont Hotels and Jean Coutu Group had undermined its precedential value. The appellant argued that the principles set out in Fairmont and Jean Coutu undermined Pallen Trust. The transactions in issue in Pallen Trust were the same as the transactions in issue in this appeal. Based on tax advice received, the corporations in each case relied on the attribution rule in the Income Tax Act to avoid paying tax on the dividends. The dividend income received by the trusts from the operating companies would be attributed to the holding companies which, in turn, could claim a deduction in respect of those dividends. The intended net result was the movement of cash or retained earnings from the operating companies to the trusts, without any income tax being paid. While the tax advice was correct at the time it was received, the Revenue Agency later held that the dividends were to be included in the income of the trusts. The appellant argued that Fairmont and Jean Coutu established principles of general application regarding the availability of equitable remedies in a tax context, and more particularly that the court had signalled that retroactive tax planning through a court’s equitable jurisdiction was impermissible.

HELD: Appeal dismissed. Neither Fairmont nor Jean Coutu undermined the principles expressed and applied in Pallen Trust regarding the availability of rescission on the facts of that case. While both rectification, as sought in Fairmont, and rescission, as sought in Pallen Trust, were equitable remedies, each had its own legal test, and each applied in a non-tax as well as a tax context. The chambers judge did not err in his interpretation of Pallen Trust so far as it was applicable to the cases before him, or in his exercise of discretion in assessing the availability of alternative remedies. The chambers judge was not required to conduct a GAAR analysis in assessing the purpose of the transactions here. There was no basis for this court to interfere with the chambers judge’s conclusion in this case that the availability of an alternative remedy under s. 23 of the Financial Administration Act did not change the result. An application to government for remission of tax was not a practical alternative. Considering the CRA’s position on the trusts, it was highly unlikely that the minister would recommend a remission of tax.

Collins Family Trust v. Canada (Attorney General), [2020] B.C.J. No. 1110, British Columbia Court of Appeal, B. Fisher, S.A. Griffin and J. DeWitt-Van Oosten JJ.A., July 10, 2020. Digest No. TLD-August172020006