Canada (Attorney General) v. Collins Family Trust

Canada (Attorney General) v. Collins Family Trust
Collection
Supreme Court Judgments
Date
2022-06-17
Neutral citation
2022 SCC 26
Case number
39383
Judges
Wagner, Richard; Moldaver, Michael J.; Karakatsanis, Andromache; Côté, Suzanne; Brown, Russell; Rowe, Malcolm; Martin, Sheilah; Kasirer, Nicholas; Jamal, Mahmud
On appeal from
British Columbia
Subjects
Taxation
Notes
Case in Brief
SCC Case Information
Decision Content
SUPREME COURT OF CANADA
Citation: Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26
Appeal Heard: January 11, 2022 Judgment Rendered: June 17, 2022 Docket: 39383
Between:
Attorney General of Canada Appellant
and
Collins Family Trust Respondent
And Between:
Attorney General of Canada Appellant
and
Cochran Family Trust Respondent
Coram: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin, Kasirer and Jamal JJ.
Reasons for Judgment: (paras. 1 to 28)
Brown J. (Wagner C.J. and Moldaver, Karakatsanis, Rowe, Martin, Kasirer and Jamal JJ. concurring)
Dissenting Reasons: (paras. 29 to 100)
Côté J.
Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.
Attorney General of Canada Appellant
v.
Collins Family Trust Respondent
‑ and ‑
Attorney General of Canada Appellant
v.
Cochran Family Trust Respondent
Indexed as: Canada (Attorney General) v. Collins Family Trust
2022 SCC 26
File No.: 39383.
2022: January 11; 2022: June 17.
Present: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin, Kasirer and Jamal JJ.
on appeal from the court of appeal for british columbia
Taxation — Income tax — Equity — Remedies — Rescission — Taxpayers mistaken about income tax consequences of transactions freely agreed upon — Taxpayers petitioning for rescission of transactions — Whether equitable remedy of rescission available.
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.
Held (Côté J. dissenting): The appeal should be allowed, the judgments of the Court of Appeal and of the chambers judge set aside and the petitions dismissed.
Per Wagner C.J. and Moldaver, Karakatsanis, Brown, Rowe, Martin, Kasirer and Jamal JJ.: 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. A determination that equity can relieve a tax mistake is barred by a limiting principle of equity and by principles of tax law stated in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720, and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670. Accordingly, the trusts are barred from obtaining rescission of the transactions.
A court of equity may grant relief where it would be unconscionable or unfair to allow the common law to operate in favour of the party seeking enforcement of the transaction. However, it is a limiting principle and a fundamental premise of equity that it developed to alleviate results under the common law that call for relief as a matter of conscience and greater fairness. Transactions that do not call for relief as a matter of conscience or fairness are properly outside equity’s domain. There is nothing unconscionable or unfair in the ordinary operation of tax statutes to transactions freely agreed upon. If there is to be a remedy, it lies with Parliament, not a court of equity.
Furthermore, the principles of tax law and the prohibition against retroactive tax planning stated in Fairmont Hotels and Jean Coutu preclude any equitable remedy. Unless a statute says otherwise, taxpayers are to be taxed in accordance with the applicable tax statute’s ordinary operation. Taxpayers may structure their affairs so as to reduce their tax liability but may also be taken as having structured their affairs in such a way that increased their tax liability. Tax consequences do not flow from parties’ motivations or objectives. Rather, they flow from their freely chosen legal relationships, as established by their transactions. A taxpayer should neither be denied nor judicially accorded a benefit based solely on what they would have done had they known better. The proper inquiry is into what the taxpayer agreed to do and not into whether there is a windfall for the public treasury or a taxpayer. A court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability. These principles are of general application and are not confined to cases where rectification is sought. There is no room for distinguishing Fairmont Hotels or Jean Coutu based upon the particular remedy sought. A taxpayer is barred from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute.
The principles stated in Fairmont Hotels and Jean Coutu are irreconcilable with the conclusion in Pitt v. Holt that equity can relieve a tax mistake. This conclusion contradicts these principles by maintaining that tax consequences are relevant to deciding whether a party to a voluntary disposition can satisfy the test for rescission. The lower courts therefore erred in relying upon Pitt v. Holt. Further, the constraint imposed by Parliament upon the Minister to assess a taxpayer in accordance with the facts and the law required CRA to reassess the trusts in light of the Tax Court’s decision. The Minister was bound to apply Parliament’s direction in the Income Tax Act , as interpreted by a court of law, unless and until that interpretation is judged to be incorrect by a higher court. No unfairness lies in holding the trusts to the consequent tax liabilities of the ordinary operation of the Income Tax Act respecting transactions freely undertaken.
Per Côté J. (dissenting): The appeal should be dismissed. Rescission is, in strictly limited circumstances, an available remedy that can be used to unwind transactions that were undertaken on the basis of a mistaken assumption, even if permitting it would effectively relieve the taxpayer from payment of unexpected taxes. There is disagreement with the majority that Fairmont Hotels and Jean Coutu are dispositive of the case at bar. Although those cases affirmed certain principles of tax law, such as the principle that taxpayers should be taxed based on what they did, not what they wish they had done, and the principle that retroactive tax planning is impermissible, they are not determinative of the availability of rescission in the tax context. Neither Fairmont Hotels nor Jean Coutu generally precludes the availability of equitable remedies in a tax context. Both clarified the test for rectification. Fairmont Hotels and Jean Coutu stand for the following propositions: if a taxpayer does not meet the test for an equitable remedy, then a court has no discretion to grant that remedy, even if the taxpayer may have to pay taxes unexpectedly; if, however, a taxpayer meets the test for an equitable remedy, then the court may grant it, even if doing so would effectively relieve the taxpayer from payment of the unexpected taxes; and a common intention to limit or avoid tax liability is insufficiently precise to evince an existing prior agreement with definite and ascertainable terms.
Rescission and rectification are different remedies with different objectives and, depending on the nature of the case, one may justify a relief where the other cannot. Rectification requires a valid antecedent decision that was incorrectly transcribed on paper and it ensures that the written instrument accurately reflects the parties’ agreement. Rescission requires a transaction that was entered into based on a mistaken assumption about the facts or the law. It enables a court to retroactively cancel the transaction, thereby restoring the parties to their original position.
Rescission on the ground of mistake is available in a tax context, but should be granted only in rare circumstances. The test developed in Pitt v. Holt, the leading case on equitable rescission of unilateral transactions for mistake, is compatible with Canadian law and should be endorsed. A court may rescind a voluntary disposition when there is a clear causative mistake of sufficient gravity that demands the intervention of equity. Only a mistake can warrant rescission, as opposed to mere ignorance or misprediction. The test for rescission is fact‑specific and objectively assessed. Still, some types of mistake should not attract relief, for example when the taxpayer accepted the risk that a scheme might be ineffective, or when it would be against public policy to grant relief. Equity will not intervene to relieve a taxpayer from the consequences of a risk that was knowingly or recklessly accepted. Additionally, the fact that a transaction would have constituted abusive tax avoidance but for the mistake might preclude rescission because when a tax plan is aggressive, the taxpayer accepts the risk that it may not operate as intended. However, the purported morality of a plan remains irrelevant and what constitutes an aggressive tax plan akin to abusive tax avoidance should be strictly interpreted. Taxpayers should not engage in bold tax planning on the assumption that it will be possible to rescind their transactions should that planning fail.
Rescission is a discretionary remedy. Appellate intervention is only warranted if a decision to grant rescission is manifestly unjust. There is no basis to intervene in the instant case. The taxpayers’ erroneous belief about s. 75(2) was a mistake of law, not a misprediction in relation to a change in the law. Rescission relieves against mistakes concerning the situation that existed at the time of the transaction. Injustice stemmed from the CRA’s change of position on the interpretation of s. 75(2) after the Tax Court rendered its decision, but while it was still arguing in the Federal Court of Appeal that the Tax Court had erred in law. CRA’s discretionary decision to reassess the trusts in these circumstances takes this case into the zone of unfairness that allows equity to intervene, and neither policy reasons nor assumption of risk bars rescission in this case.
The taxpayers’ plan did not constitute abusive tax avoidance. The primary goal of the plan was not to avoid payment of any tax. The purpose of the plan was to shield assets from creditors and to do so in a manner that did not attract tax liability, with both aspects having equal importance. The plan was also not aggressive at the time it was undertaken, because CRA was unlikely to have contested the taxpayers’ position prior to the Tax Court’s decision. Deference is also owed to the chambers judge’s conclusion that the trusts never assumed the risk that CRA would reverse its interpretation of the attribution rules. The only risk they assumed was that the general anti-avoidance rule might apply.
Because rescission is a remedy of last resort, it can only be granted if no alternative remedies are available. It is not sufficient for an alternative remedy to merely exist, the alternative remedy must be practical and adequate. No alternative remedies preclude rescission in this case. Applying to the Minister for a remission of tax is an extraordinary remedy granted in rare circumstances and it is highly unlikely that the Minister would recommend it in the instant case. A claim by the trusts against their tax advisers would also not be an adequate remedy because the tax advice was correct at the time it was given and so it is unlikely that a negligence claim would have any chance of success.
Cases Cited
By Brown J.
Applied: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720; Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670; Canada Life Insurance Co. of Canada v. Canada (Attorney General), 2018 ONCA 562, 141 O.R. (3d) 321; not followed: Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499; Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108; considered: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162, aff’d 2012 FCA 207, [2014] 1 F.C.R. 379; Harvest Operations Corp. v. Attorney General of Canada, 2017 ABCA 393, 61 Alta. L.R. (6th) 1; 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739; referred to: Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601; Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1; Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49; Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795; Neuman v. M.N.R., [1998] 1 S.C.R. 770; Re Slocock’s Will Trusts, [1979] 1 All E.R. 358; Harris v. Canada, [2000] 4 F.C. 37; Ludmer v. Canada, [1995] 2 F.C. 3; Longley v. Minister of National Revenue (1992), 66 B.C.L.R. (2d) 238; CIBC World Markets Inc. v. Minister of National Revenue, 2012 FCA 3, 426 N.R. 182; Galway v. Minister of National Revenue, [1974] 1 F.C. 600; Canada v. 984274 Alberta Inc., 2020 FCA 125, [2020] 4 F.C.R. 384.
By Côté J. (dissenting)
Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720; Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670; Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108; Canada (Attorney General) v. Juliar (2000), 50 O.R. (3d) 728; Re Slocock’s Will Trusts, [1979] 1 All E.R. 358; Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423; Abram Steamship Co. v. Westville Shipping Co., [1923] A.C. 773; Neville v. National Foundation for Christian Leadership, 2013 BCSC 183, aff’d 2014 BCCA 38, 350 B.C.A.C. 7; Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49; Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Canada Life Insurance Co. of Canada v. Canada (Attorney General), 2018 ONCA 562, 141 O.R. (3d) 321; 5551928 Manitoba Ltd. v. Canada (Attorney General), 2019 BCCA 376, 439 D.L.R. (4th) 483, aff’g 2018 BCSC 1482, [2018] 6 C.T.C. 186; Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037; Canada (Attorney General) v. Fontaine, 2017 SCC 47, [2017] 2 S.C.R. 205; Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162; Sommerer v. Canada, 2012 FCA 207, [2014] 1 F.C.R. 379; Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499; 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739; Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175; Fiducie Financière Satoma v. The Queen, 2018 FCA 74, 2018 D.T.C. 5052; Fiducie Financière Satoma v. The Queen, 2017 TCC 84, 2018 D.T.C. 1031; Re Pallen Trust, 2014 BCSC 305, [2014] 4 C.T.C. 129; Fink v. Canada (Attorney General), 2019 FCA 276, 2019 D.T.C. 5127; Escape Trailer Industries Inc. v. Canada (Attorney General), 2020 FCA 54, 86 Admin. L.R. (6th) 1; Meleca v. Canada (Attorney General), 2020 FC 1159, 2021 D.T.C. 5012.
Statutes and Regulations Cited
Financial Administration Act , R.S.C. 1985, c. F‑11, s. 23 .
Income Tax Act , R.S.C. 1985, c. 1 (5th Supp .), ss. 12(1) (j), 75(2) , 112(1) , 220(1) .
Authors Cited
Agioritis, T. John. “Is Rectification Still a Remedy? A Practical Overview”, in Canadian Tax Foundation, 2017 Prairie Provinces Tax Conference & Live Webcast. Toronto: Canadian Tax Foundation, 2017.
Berryman, Jeffrey. The Law of Equitable Remedies, 2nd ed. Toronto: Irwin Law, 2013.
Canada Revenue Agency. CRA Remission Guide — A Guide for the Remission of Income Tax, GST/HST, Excise Tax, Excise Duties or FST under the Financial Administration Act, October 2014 (online: https://v3.taxnetpro.com/).
Canada Revenue Agency. Interpretation Bulletin IT‑369R(SR), “Attribution of Trust Income to Settlor”, June 24, 1994.
Davies, Paul S., and Simon Douglas. “Tax Mistakes Post‑Pitt v Holt” (2018), 32 T.L.I. 3.
Fitzsimmons, Timothy, and Elie S. Roth. “Rectification, Rescission, and Other Equitable Remedies After Fairmont Hotels Inc.”, in Canadian Tax Foundation, Report of Proceedings of the Sixty‑Ninth Tax Conference. Toronto: Canadian Tax Foundation, 2018, 30:1.
Fridman, G. H. L. The Law of Contract in Canada, 6th ed. Toronto: Carswell, 2011.
McInnes, Mitchell. The Canadian Law of Unjust Enrichment and Restitution. Markham, Ont.: LexisNexis, 2014.
Oosterhoff, Albert H. “Causative Mistake of Sufficient Gravity, or Retroactive Tax Planning? A Comment on Re Pallen Trust” (2016), 35 E.T.P.J. 135.
Pandher, Rami, and Britta Graversen. “Does Fairmont Hotels Eliminate All Equitable Remedies in the Tax Context?” (2018), 66 Can. Tax J. 931.
Seah, Weeliem. “Mispredictions, Mistakes and the Law of Unjust Enrichment” (2007), 15 R.L.R. 93.
Snell’s Equity, 34th ed., by John McGhee and Steven Elliott. London: Sweet & Maxwell, 2020.
Sorensen, John, and Anita Yuk. “Equitable Rescission for Tax Mistakes: It’s Not Over (Until it’s Over)” (2020), 68 Can. Tax J. 1149.
Spry, I. C. F. The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages, 9th ed. Pyrmont, N.S.W.: Lawbook Co., 2014.
Swan, Angela, Jakub Adamski and Annie Y. Na. Canadian Contract Law, 4th ed. Toronto: LexisNexis, 2018.
Templeton, Saul. “A Defence of the Principled Approach to Tax Settlements” (2015), 38 Dal. L.J. 29.
APPEAL from judgment of the British Columbia Court of Appeal (Fisher, Griffin and DeWitt‑Van Oosten JJ.A.), 2020 BCCA 196, [2021] 1 C.T.C. 153, 6 B.L.R. (6th) 170, 2020 D.T.C. 5062, 59 E.T.R. (4th) 1, 38 B.C.L.R. (6th) 1, 450 D.L.R. (4th) 447, [2021] 3 W.W.R. 377, [2020] B.C.J. No. 1110 (QL), 2020 CarswellBC 1700 (WL), affirming a decision of Giaschi J., 2019 BCSC 1030, [2020] 1 C.T.C. 26, 94 B.L.R. (5th) 303, 2019 D.T.C. 5085, 48 E.T.R. (4th) 101, [2019] B.C.J. No. 1185 (QL), 2019 CarswellBC 1826 (WL). Appeal allowed.
Michael Taylor and Dayna Anderson, for the appellant.
Joel A. Nitikman, Q.C., and Jessica Fabbro, for the respondents.
The judgment of Wagner C.J. and Moldaver, Karakatsanis, Brown, Rowe, Martin, Kasirer and Jamal JJ. was delivered by
Brown J. —
I. Introduction and Background
[1] 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.
[2] In 2008, Todd Collins, principal of Rite‑Way Metals Ltd., and Floyd Cochran, principal of Harvard Industries Ltd., each retained the same tax advisor to propose a plan to protect corporate assets from creditors without incurring income tax liability. The resulting plans took advantage of the attribution rules in s. 75(2) and the inter‑corporate dividend deduction in s. 112(1) of the Act. In each case, a holding company was incorporated to purchase shares in an operating company, a family trust was created with the holding company as a beneficiary, and funds were loaned to the trust to purchase shares in the operating company. The operating companies paid dividends to the trusts, which were attributed to the holding companies under s. 75(2). They, in turn, claimed a deduction in respect of those dividends under s. 112(1) . The effect was to move $510,000 from Rite‑Way to the Collins family trust, and $2,085,000 from Harvard to the Cochran family trust, without income tax being paid.
[3] The proposals were based in part on the interpretation of the provisions published by the Canada Revenue Agency (“CRA”) at the time.
[4] In 2011, however, in Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162, aff’d 2012 FCA 207, [2014] 1 F.C.R. 379, the Tax Court of Canada held that the attribution rules in s. 75(2) are inapplicable where the property in question was sold to a trust, as opposed to gifted or settled. Subsequently, the CRA reassessed the respondents’ returns, leading in turn to the issuance of notices of reassessment imposing tax liability upon the respondents in respect of the dividends. The respondents objected, were unsuccessful, then sued for rescission of the transactions leading to and including the payment of dividends.
[5] The chambers judge granted rescission, relying on Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499, wherein the Court of Appeal for British Columbia, applying the English test for equitable rescission stated in Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108, upheld an order rescinding the same types of transactions on the basis of a mistake about their tax consequences (2019 BCSC 1030, [2020] 1 C.T.C. 26). While expressing concern that Re Pallen Trust had been significantly undermined by the decisions of this Court in Fairmont Hotels and its companion case, Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670, the chambers judge considered himself bound by it. The Court of Appeal affirmed, holding that the chambers judge did not err in applying Re Pallen Trust or in exercising his equitable discretion (2020 BCCA 196, [2021] 1 C.T.C. 153). Fairmont Hotels and Jean Coutu, it said, applied narrowly to preclude rectification; neither stands for the broad preclusion of any equitable remedy in these circumstances, or undermines the authority of Pitt v. Holt.
[6] 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.
[7] 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.
II. Analysis
A. Rescission
[8] Respectfully, the Court of Appeal erred by importing reasoning from Pitt v. Holt. Its determination that equity can relieve a tax mistake is incompatible with domestic law, being barred by a limiting principle of equity and by principles of tax law.
[9] I turn first to a limiting principle of equity ⸺ indeed, the most fundamental premise of that domain, found in its origins. Equity developed to alleviate results under “an unyielding common law” that called for the relief as a matter of “conscience” and “greater fairness” (J. Berryman, The Law of Equitable Remedies (2nd ed. 2013), at p. 2). Equitable principles “have above all a distinctive ethical quality, reflecting as they do the prevention of unconscionable conduct” (I. C. F. Spry, The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages (9th ed. 2014), at p. 1).
[10] This broad scope for courts of equity to give relief also defines its own limits (hence a “limiting” principle): transactions that do not call for relief as a matter of conscience or fairness are properly outside equity’s domain. This is reflected in some of equity’s maxims, including that a person who comes to equity must come with “clean hands” and “he who seeks equity must do equity” (Spry, at pp. 5-6; Berryman, at pp. 16 and 18; Snell’s Equity (34th ed. 2020), by J. McGhee and S. Elliott, at paras. 5‑009 to 5‑010).
[11] The jurisdiction of equity to protect against fraud, undue influence, and unconscionable transactions is well settled (McGhee and Elliott, at para. 8‑001; see also G. H. L. Fridman, The Law of Contract in Canada (6th ed. 2011), at p. 762; M. McInnes, The Canadian Law of Unjust Enrichment and Restitution (2014), at p. 1402). Generally speaking, a court of equity may grant relief where it would be unconscionable or unfair to allow the common law to operate in favour of the party seeking enforcement of the transaction. But there is nothing unconscionable or unfair in the ordinary operation of tax statutes to transactions freely agreed upon. As the Court of Appeal for Ontario recognized in Canada Life Insurance Co. of Canada v. Canada (Attorney General), 2018 ONCA 562, 141 O.R. (3d) 321, at para. 93, “[t]here is nothing inequitable about [Canada Life] being taxed on ‘what it did’ rather than on what it intended to achieve.” If there is to be a remedy, it lies with Parliament, not a court of equity. On this ground alone, Pitt v. Holt and Re Pallen Trust cannot, in my respectful view, be taken as stating the law of British Columbia.
[12] Turning to principles of tax law, the Canadian tax system is based on the Duke of Westminster principle that “taxpayers are entitled to arrange their affairs to minimize the amount of tax payable” (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 11, citing Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.), quoted in Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, at para. 29; see also Shell Canada, at para. 46). In Shell Canada, McLachlin J. (as she then was) explained that a court’s role is “to apply an unambiguous provision of the Act to a taxpayer’s transaction” and not to “recharacterize a taxpayer’s bona fide legal relationships” (paras. 39‑40). Courts “do not have the constitutional legitimacy and resources to be tax policy makers” (Alta Energy Luxembourg, at para. 96, citing Canada Trustco, at para. 41). Unless, therefore, a statute says otherwise, taxpayers are to be taxed, in accordance with the applicable tax statute’s ordinary operation, based on what they actually agreed to do, and not on what they could have done (Shell Canada, at para. 45, citing Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, at para. 88; Neuman v. M.N.R., [1998] 1 S.C.R. 770, at para. 63).
[13] This principle operated in Shell Canada to the taxpayer’s favour, by allowing it to deduct from its taxable income interest at the rate that it had actually paid for borrowing New Zealand dollars under debenture agreements, rather than at the lower rate it would have paid had it instead borrowed US dollars. Absent a “sham” arrangement, “the taxpayer’s legal relationships must be respected in tax cases” (Shell Canada, at para. 39). But the principle operates the other way, too. And so, this Court applied the principle from Shell Canada in Fairmont Hotels and Jean Coutu in concluding that the instruments at issue in those cases could not be rectified (in Fairmont Hotels) or interpreted or retroactively amended (in Jean Coutu) in order to avoid an unanticipated, adverse tax consequence. Again, legal relationships were to be respected even if they appear ill‑considered in hindsight. If, after all, taxpayers may structure their affairs so as to reduce their tax liability, they may also be taken as having structured their affairs in such a way that increased their tax liability.
[14] This Court made precisely that point in Fairmont Hotels. “Tax consequences”, it held, “flow from freely chosen legal arrangements, not from the intended or unintended effects of those arrangements, whether upon the taxpayer or upon the public treasury” (para. 24). The inquiry, the Court added, is into what the taxpayer agreed to do, and not into whether the taxpayer or the CRA has obtained a “windfall”.
[15] The point was made with even greater force in Jean Coutu. While that appeal was decided under art. 1425 of the Civil Code of Québec, the reasons for decision were broadly expressed, stating generally applicable tax law principles that militate against retroactive amendment of agreements when unforeseen tax consequences result:
First, accepting PJC Canada’s position would require this Court to ignore the legal relationships that it and PJC USA originally agreed to create, and actually created, in favour of the tax consequences they sought to achieve. It would thus undermine one of the fundamental principles of our tax system: that tax consequences flow from the legal relationships or transactions established by taxpayers. . . . For instance, in Shell Canada, this Court unanimously stated the following, at para. 45:
Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done, and certainly not based on what a less sophisticated taxpayer might have done. [Emphasis in Wagner J.’s reasons.]
Equally, if taxpayers agree to and execute an agreement that produce unintended tax consequences, they must still be taxed on the basis of that agreement and not on the basis of what they “could have done” to achieve their intended tax consequences, had they been better informed. Tax consequences do not flow from contracting parties’ motivations or tax objectives.
Second, I believe that allowing the amendment of the written documents in the instant appeal would amount to retroactive tax planning. [Emphasis added; paras. 41-42.]
[16] 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).
[17] At issue here is whether these principles are of general application, or whether they are confined to denying pleas of rectification. While the Court of Appeal confined them to cases where rectification was sought, appellate judgments in Ontario and Alberta have viewed them as more broadly applicable.
[18] In Canada Life, the respondent Canada Life and its affiliates undertook a series of transactions to realize a tax loss, so as to offset unrealized foreign exchange gains accrued in the same year. The CRA disallowed the claimed loss, and Canada Life sought rectification (or, in the alternative, an exercise of “inherent jurisdiction to relieve parties retroactively from the effects of their mistakes”) to undo the transactions (para. 16). The application judge granted rectification. On appeal, the parties agreed that the order could not stand following the decision in Fairmont Hotels, which was released after the application judge’s ruling. Canada Life cross‑appealed to seek rescission, relying on Pitt v. Holt and Re Pallen Trust as “authority that the remedy of equitable rescission of voluntary dispositions is available, even when the objective is to avoid unintended adverse tax consequences” (para. 36).
[19] “What [Canada Life] is seeking”, said the Court of Appeal in allowing the appeal and dismissing the cross‑appeal, “is the same type of intervention, by a different name, that the Supreme Court considered in Fairmont Hotels and Jean Coutu” (para. 43), and rejected (para. 7). Fairmont Hotels, it said, “was concerned not only with the availability of rectification”, but with “impermissible retroactive tax planning” (para. 67) in the form of a “‘rewriting of history’ . . . to correct an error leading to an unforeseen tax liability” (para. 75). Nothing, therefore, turns on whether the relief sought involved the alteration of the agreements themselves, or to undo a “‘mistake’ . . . in the structure of the transaction” (Canada Life, at paras. 74‑75).
[20] Canada Life relied upon two appellate judgments in support, the first being that of the Court of Appeal of Alberta in Harvest Operations Corp. v. Attorney General of Canada, 2017 ABCA 393, 61 Alta. L.R. (6th) 1 (paras. 80‑82). There, the Court of Appeal, citing Fairmont Hotels, first affirmed the application judge’s decision to deny rectification of documents recording share acquisition and reorganization transactions that had led to an unanticipated tax liability. The appellant had also pleaded in the alternative that “superior courts have equitable jurisdiction to relieve persons from the effect of their mistakes” (para. 73). This the Court of Appeal rejected as also having been caught by the precedent of Fairmont Hotels (paras. 74‑75).
[21] Canada Life also relied on 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739, where the Ontario Court of Appeal had declined to relieve a taxpayer of a mistake that left her company liable for a land transfer tax, saying: “. . . courts do not look with favour upon attempts to rewrite history in order to obtain more favourable tax treatment” (p. 742). This conclusion flowed from the principle that tax liability is based on what was actually agreed upon and done, not on what, in retrospect, a taxpayer should have done or wished it had done.
[22] I agree with the conclusion in Canada Life that Fairmont Hotels and Jean Coutu bar a taxpayer from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute. The statements of principle in those judgments ⸺ that tax consequences flow from legal relationships, that taxpayers’ liabilities should be governed by the ordinary operation of tax statutes and on what the taxpayer agreed to do, and that legal instruments cannot be modified merely because they generated an adverse tax liability ⸺ are categorical, and not restricted to cases where rectification is sought. To be clear: they are of general application, precluding equitable relief altogether when sought to avoid an unintended tax liability that has arisen by the ordinary application of tax statutes to freely agreed upon transactions. There is no room for distinguishing Fairmont Hotels or Jean Coutu based upon the particular remedy sought. While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.
[23] The foregoing ⸺ and, in particular, the statement that legal instruments cannot be undone or otherwise modified to avoid a tax liability arising from the ordinary operation of a tax statute ⸺ answers my colleague Côté J.’s objection at paras. 35-39 of her reasons. She says that Fairmont Hotels’ endorsement of the result in Re Slocock’s Will Trusts, [1979] 1 All E.R. 358 (Ch. D.), “generally [confirms] the availability of equitable remedies in a tax context” (para. 39). As this Court explained in Fairmont Hotels, however, rectification in Re Slocock’s Will Trusts was granted not to avoid a tax liability, but because “the deed as recorded . . . fail[ed] to record fully the terms of the parties’ original agreement” (para. 21). As a result, the plaintiff in Re Slocock’s Will Trusts was taxed on the basis of what she had freely agreed to do ⸺ the selfsame basis on which I say the respondents ought also to be taxed.
B. Pitt v. Holt
[24] From the foregoing, it follows that the Court of Appeal erred in relying upon the conclusion in Pitt v. Holt that equity can relieve a tax mistake. That contradicts the principles outlined above, by maintaining that tax consequences are relevant to deciding whether a party to a voluntary disposition can satisfy the test for rescission ⸺ which in turn requires “a causative mistake of sufficient gravity . . . either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction” (para. 122; see also para. 132). This divergence is unsurprising, given that English law lacks the prohibition against retroactive tax planning stated in Fairmont Hotels and Jean Coutu, and operates under a different legislative framework.
[25] Nor does Pitt v. Holt’s conclusion on this point account for our law that, in this case, required the Minister of National Revenue to apply the Act to the transactions. By s. 220(1) of the Act, Parliament has imposed upon the Minister a duty (“[t]he Minister shall”) to “administer and enforce” the Act. No discretion is afforded the Minister or the Minister’s agents: “They are required to follow [the Act] absolutely, just as taxpayers are also required to obey it as it stands” (Harris v. Canada (C.A.), [2000] 4 F.C. 37 (C.A.), at para. 36, citing Ludmer v. Canada, [1995] 2 F.C. 3 (C.A.); see also Longley v. Minister of National Revenue (1992), 66 B.C.L.R. (2d) 238 (C.A.), at para. 19). Quite apart from undermining Parliament’s direction, inconsistent exercises of discretion by the Minister or the Minister’s agents create inequity among taxpayers (S. Templeton, “A Defence of the Principled Approach to Tax Settlements” (2015), 38 Dal. L.J. 29, at p. 32). In a self‑assessing tax system such as that provided for in the Act, taxpayers should have confidence that the Minister is administering and enforcing the same tax laws in the same way for everyone (pp. 33-34 and 68).
[26] Practically, this constrains the Minister to assess a taxpayer in accordance with the facts of the matter ⸺ here, the transactions ⸺ and the law (CIBC World Markets Inc. v. Minister of National Revenue, 2012 FCA 3, 426 N.R. 182, at paras. 16 and 20‑21, per Stratas J.A.; Galway v. Minister of National Revenue, [1974] 1 F.C. 600 (C.A.), at p. 602; Canada v