15 minute read 8 Oct. 2020
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TaxMatters@EY – October 2020

By EY Canada

Multidisciplinary professional services organization

15 minute read 8 Oct. 2020
TaxMatters@EY is a monthly Canadian summary to help you get up to date on recent tax news, case developments, publications and more. From personal and corporate tax issues to topical developments in legislation and jurisprudence, we bring you timely information to help you stay in the know.

How can tax help you seize the upside of disruption?

Tax issues affect everybody.  We’ve compiled news and information on timely tax topics to help you stay in the know.
In this issue, we explore:


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Chapter 1

Additional T4 reporting requirements for employers


Yves Plante, Maureen De Lisser and Iain Glass, Toronto

During 2020, the federal government announced various programs in response to the COVID-19 crisis, including the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB). For details on these programs, refer to the May and June issues of TaxMatters@EY and EY Tax Alerts 2020-29, 30, 34, and 42 (CEWS), EY Tax Alerts 45 (CERB), and the CRA website (CESB).

The amount of CEWS an employer is eligible to receive in respect of an employee is based on the amount of eligible employment income paid to that employee in respect of a defined four-week qualifying relief period. Furthermore, eligibility for the CERB and CESB is based in part on the condition that the individual not earn more than $1,000 of employment income (or self-employment income) in respect of the defined relief period (or, in the case of the first CERB four-week relief period, for 14 or more consecutive days within that relief period). Accordingly, on August 26, 2020, the CRA announced that four new codes will be added to the T4, Statement of Remuneration Paid, for the 2020 taxation year to help the CRA validate payments under the CEWS, CERB and CESB.

Employers are generally required to report income paid to their employees as outlined in CRA Guide RC4120, Employers’ Guide- Filing the T4 Slip and Summary. Specifically, this announcement adds an additional requirement: all employers will be required to report employment income and retroactive payments made during each of the following four COVID-19 relief periods. The new codes will be:

  • Code 57: Employment income – March 15 to May 9, 2020
  • Code 58: Employment income – May 10 to July 4, 2020
  • Code 59: Employment income – July 5 to August 29, 2020
  • Code 60: Employment income – August 30 to September 26, 2020

The amounts reported in these new “Other information” codes will continue to be reported in existing box 14 (or code 71 for Indians’ exempt employment income). For example, employment income for the period April 25 to May 8, 2020 that was paid on May 14, 2020 will be reported as part of box 14 (or code 71) and in code 58.

More comments on this matter may be provided by the CRA at a later date. In the meantime, employers can consult the CRA website.

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Chapter 2

British Columbia Court of Appeal affirms rescission order granted on the basis of a mistake in respect of a tax plan

Collins Family Trust v. Canada (Attorney General), 2020 BCCA 196

Winnie Szeto and Daniel Sandler, Toronto

In this appeal, the British Columbia Court of Appeal (BCCA) affirmed the lower court’s decision to grant an order of rescission “on the basis of mistake” in respect of a tax plan.1

Rescission is an equitable remedy that serves to retroactively cancel, annul or set aside a transaction in situations where a mistake was made that was so serious that it would be unconscionable, unjust or unfair to leave the mistake uncorrected. An order of rescission has the effect of cancelling or unwinding the transaction and restoring the parties to their pre-contractual positions. In certain circumstances, rescission may be a useful tool for undoing transactions that lead to unintended or undesirable tax consequences.2


Mr. A was a principal of ACo, a British Columbia-based company engaged in the business of metal cladding, metal roofing and envelope solutions. Mr. A hired an accounting firm to devise a plan for the protection of ACo’s assets from creditors without incurring an income tax liability; both goals were of equal importance.

The accounting firm designed the plan so as to take advantage of the attribution rules in subsection 75(2) of the Income Tax Act3 (the Act) and the inter-corporate dividend deduction in subsection 112(1). As part of the plan, a new holding company and family trust were formed, with the holding company becoming the beneficiary of the family trust.

The holding company first purchased the shares of the operating company, ACo, and then sold the shares to the family trust. The family trust subsequently received dividends from the operating company. The dividend income was reported as being attributed to the holding company by virtue of subsection 75(2), and a deduction was claimed in respect of those dividends pursuant to subsection 112(1). As a result, cash or retained earnings was moved from the operating company to the trust without any income tax being paid.

At the time of the plan, it was commonly understood by many tax accountants and lawyers and by the Canada Revenue Agency (CRA) that the attribution rule in subsection 75(2) applied if the trust owned the shares of the operating company, and the method of transfer of the shares to the trust — whether by sale or gift — was irrelevant for tax purposes. The accounting firm advised Mr. A that the plan was partially based on the CRA’s administrative practices at the time but it was unable to guarantee that the CRA’s interpretation of the relevant provisions would remain the same. The accounting firm also advised that there was a risk, albeit small, that the general anti-avoidance rule (GAAR) could apply to the transactions.

During the 2008 and 2009 taxation years, ACo paid dividends to the family trust in the amounts of $400,000 and $110,000. As contemplated in the plan, the dividends were declared as income by the holding company, pursuant to subsection 75(2), and were subsequently deducted from its tax returns, pursuant to subsection 112(1). As a result, no tax was paid on any of the dividends (and the funds could potentially be distributed to the beneficiaries of the family trust without tax).

A few years later, the Tax Court of Canada (TCC) adopted a narrower interpretation of subsection 75(2) in Sommerer v The Queen4 and, as a result, found that the attribution rule did not apply where the property in question was sold to a trust, as opposed to gifted to, or settled on, the trust. Sommerer5 was affirmed by the Federal Court of Appeal in July 2012. The interpretation of subsection 75(2) adopted in Sommerer was contrary to the longstanding position of the CRA.

Following the decision in Sommerer, the CRA reassessed the family trust’s 2008 and 2009 tax returns on the basis that the dividends paid by ACo to the family trust should have been included in the trust’s income because subsection 75(2) did not apply to attribute the dividends to ACo.

The CRA also raised an alternative position – that the GAAR should apply to include the dividends in the trust’s income because the transactions enabled the trust to withdraw surplus from ACo without paying tax and were contrary to the overall scheme of the Act. The family trust objected to the reassessments but was unsuccessful. As a result, the family trust petitioned the British Columbia Supreme Court (BCSC) for an order to rescind the transactions leading up to and including the payment of the dividends to the family trust, on the basis that a mistake was made.

BCSC decision6

At the BCSC, the chambers judge first considered the facts of the Pallen Trust7 case to be “virtually identical” to the facts in the current case. The Pallen Trust case involved the same accounting firm and the same tax plan as the current case. Justice Masuhara who was the judge in the first instance in Pallen Trust granted rescission on the basis of a mistake, concluding that:

[57] In my view, the circumstances warrant the relief sought by the petitioners. The tax implications were basic to the transaction, there was clearly a causative mistake, the gravity of the mistake was significant and there is no prejudice to a third party affected by the Plan. The monies remain within the entities and remain subject to taxation. A key determinant in this case is the common general understanding as to the operation of s. 75(2) by income tax professionals and CRA as well as my finding that [the] CRA would not have sought to reassess the Trust prior to Sommerer. This aspect of the case in my view is what takes the case into the zone of unfairness. While there was an aspect of risk in the Plan, given the common understanding as to the operation of s. 75(2), I do not see the assumption of risk in this case as a sufficient factor to refuse the relief sought. Had the understanding been less certain, the assumption of risk taking would have negatively affected the question of fairness. [emphasis added]

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.

BCCA decision

On appeal, the BCCA focused on the following three issues:

  1. Did Fairmont and Jean Coutu undermine Pallen Trust?
  2. 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?
  3. 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.

Lessons learned

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.

  • Article references

    1. This case consists of two separate appeals that have virtually the same facts. In the court below and at the BCCA, the parties agreed to focus on the facts as they relate to the first appeal, with the intention that the decision with respect to the first appeal will apply equally to the second appeal. As a result, the facts as they relate to the second appeal will not be discussed in this commentary.
    2. Editor’s note: Because rescission and rectification are remedies that are granted by a Court, legal advice should be sought when considering whether to apply for either remedy.
    3. R.S.C. 1985, c. 1 (5th Supp.), as amended.
    4. 2011 TCC 212.
    5. 2012 FCA 207.
    6. Collins Family Trust v. Canada (Attorney General) 2019 BCSC 1030.
    7. Re Pallen Trust, 2014 BCSC 305, aff’d 2015 BCCA 222.
    8. 2016 SCC 56.
    9. 2016 SCC 55.
    10. S.Q. 1991, c. 64.
    11. 2017 CCI 84.
    12. R.S.C., 1985, c. F-11.
    13. Stare decisis is the legal doctrine that requires lower courts to follow the precedent of higher courts when making their decisions. In this case, the chambers judge was bound to follow the Pallen Trust decision despite concerns that the SCC decisions in Fairmont and Jean Coutu undermined the precedential value of Pallen Trust.


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Chapter 3

Recent Tax Alerts – Canada

Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues.

Tax Alerts – Canada

Tax Alert 2020 No. 44 – Alberta announces Innovation Employment Grant
On July 22, 2020, Alberta Premier Jason Kenney announced the launch of the Innovation Employment Grant (IEG) set to come into effect on January 1, 2021. The IEG will provide grants worth up to 20% of a company’s research and development costs incurred in Alberta.

Tax Alert 2020 No. 45 – Transition plan from the CERB announced
On August 20, 2020, the federal government announced its $37b plan to transition from the Canada Emergency Response Benefit (CERB) into a simplified and enhanced Employment Insurance (EI) program or new benefits.

Tax Alert No. 46 – British Columbia announces tax incentives as part of its economic recovery plan
On 17 September 2020, the government of British Columbia released Stronger BC for Everyone: BC's Economic Recovery Plan, outlining a number of measures to address the economic impact of COVID-19.

Tax Alert No. 47 –Newfoundland and Labrador budget

Tax Alert 2020 No. 48 – Distributed Investment Plans required to request certain investor information by 15 October 2020
A A Distributed Investment Plan (DIP) that is a selected listed financial institution is required to make a written request to obtain certain information from its investors by 15 October 2020.


For more information on EY’s tax services, visit us at https://www.ey.com/en_ca/tax. For questions or comments about this newsletter, email Tax.Matters@ca.ey.com.

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By EY Canada

Multidisciplinary professional services organization