Justice Masuhara’s decision to grant rescission was subsequently affirmed by the BCCA. Given the remarkable factual similarities between Pallen Trust and the current case, the chambers judge concluded that, on initial examination, Pallen Trust was applicable and binding on him.
However, the chambers judge then went on to consider whether Pallen Trust had been overruled by Canada (Attorney General) v Fairmont Hotels Inc.8 and Jean Coutu Group (PJC) Inc. v Canada (Attorney General),9 two Supreme Court of Canada (SCC) cases that were decided after Pallen Trust.
Fairmont was a case about the equitable remedy of rectification, while Jean Coutu was about a similar remedy available under the Québec Civil Code.10 Like rescission, rectification is also an equitable remedy. However, rectification seeks to correct mistakes in a written instrument so as to implement the parties’ true intentions. In Fairmont, the SCC clarified that rectification was only available to correct a written instrument that incorrectly recorded an agreement between parties, and it was not available where the parties’ agreement was accurately recorded, but the agreement led to an undesirable or otherwise unexpected result, such as an unanticipated tax liability. The SCC held similarly in Jean Coutu.
After reviewing Fairmont and Jean Coutu, the chambers judge was of the view that the two SCC cases were intended to apply to all tax cases generally, including the current case where rescission was sought. He was unable to reconcile why different equitable remedies should have dramatically different outcomes. As a result, he concluded that Fairmont and Jean Coutu had significantly undermined the precedential value of Pallen Trust.
The chambers judge also considered whether Fiducie Financière Satoma c. La Reine11 applied to the current case. Satoma, which was also decided after Pallen Trust, involved a similar tax plan that relied on subsections 75(2) and 112(1) of the Act. In that case, the TCC found that the tax plan constituted abusive tax avoidance and was subject to the GAAR. However, the chambers judge noted that the facts in Satoma can be distinguished from the facts in the current case in two important ways.
First, the shares in question in Satoma were purchased by the trust using funds that had been gifted and, as a result, Sommerer did not apply and the application of subsection 75(2) was unaffected. This can be contrasted with the current case where Sommerer did apply and the petitioners were reassessed on the basis that subsection 75(2) did not apply. The GAAR applied in Satoma because the taxpayer received a benefit that, “but for” the GAAR, the CRA was not able to challenge under any other provisions of the Act. However, in the current case, as well as in the Pallen Trust case, the CRA successfully challenged the tax benefits under subsection 75(2). Hence, the transactions cannot be considered “avoidance transactions” because the “but for” test in paragraph 245(3)(a) was not satisfied.
Second, the purpose of the transactions in Satoma differed from the purpose of the transactions in the current case. In Satoma, the trial judge found that the primary purpose of the transactions was to avoid the payment of tax. However, the chambers judge found that the purpose of the transactions in the current case was twofold: to protect corporate assets from creditors while not attracting tax liability, with both aspects being of equal importance.
Finally, the chambers judge considered whether there was an adequate alternative remedy available to the petitioners such that rescission did not apply. To address the adverse tax consequences resulting from the mistake, the petitioners could have applied for a remission of tax under section 23 of the Financial Administration Act12 (FAA) or brought a legal action against the accounting firm. With respect to the former, the chambers judge was unable to determine whether it was a realistic alternative because he was not presented with sufficient evidence regarding the procedure or conditions for such application, or the position the CRA would likely take if such a remedy was pursued (i.e., would they have supported such an application?). While the chambers judge did not specifically comment on the latter alternative, he ultimately ascribed little weight to both, noting that their availability would not have changed his conclusion.
Based on the above, the chambers judge felt bound by the doctrine of stare decisis13 and, as a result, followed the decision in Pallen Trust and granted the order of rescission as requested by the petitioners. The Crown appealed the decision to the BCCA.
On appeal, the BCCA focused on the following three issues:
- Did Fairmont and Jean Coutu undermine Pallen Trust?
- If not, can Pallen Trust be distinguished from the current case given that a similar tax plan (in Satoma) was subsequently found to be abusive tax avoidance contrary to the GAAR?
- If Pallen Trust was not distinguishable from the current case, was there an adequate alternative remedy available?
First, contrary to the chambers judge’s position, the BCCA found that Fairmont and Jean Coutu did not undermine the principles expressed in Pallen Trust. In other words, Pallen Trust was still good law. The BCCA found that the chambers judge had interpreted the two SCC cases too broadly. Because rectification and rescission are distinct equitable remedies that serve different purposes and have different effects, the BCCA saw no reason why the two equitable remedies could not have different results. According to the BCCA, rectification was limited to a clear discrepancy between the words of a legal document and the intentions of the parties; it is not concerned with consequences. In contrast, rescission considers consequences to be relevant to the gravity of a mistake. While rectification places the parties in the position that they originally intended (i.e., the achievement of their tax plan), rescission places the parties back to their original position (i.e., their tax plan is abandoned).
Second, the BCCA agreed with the chambers judge that the current case can be distinguished from Satoma based on the two reasons discussed above — that the shares in Satoma were purchased by the trust using funds that had been gifted, and the primary purpose of the transactions in Satoma was to avoid the payment of tax. As a result, Pallen Trust cannot be distinguished from the current case despite Satoma.
Third, the BCCA did not find it appropriate to interfere with the chambers judge’s exercise of discretion on the issue of alternative remedies available. With respect to the remedy under section 23 of the FAA, the BCCA commented that in light of the CRA’s position on the trust, it was highly unlikely that the Minister of National Revenue would recommend a remission of tax. The BCCA further commented that because the accounting firm’s advice at the time it was given was correct, a negligence claim brought against them would likely not have succeeded.
Based on the above, the BCCA concluded that Pallen Trust was binding on the current case, on both the facts and the law, and therefore the appeal was dismissed.
Prior to this case, it appeared that Fairmont and Jean Coutu had all but closed the door on taxpayers for using rectification as a tool for undoing transactions that lead to unintended or undesirable tax consequences. With the decision of the BCCA in Collins Trust, it appears that when one door closes, another has opened for taxpayers to potentially undo tax planning mistakes, at least under certain circumstances, by seeking the equitable remedy of rescission.