Two operating companies each implemented a plan, suggested by a tax advisor, to protect their assets from creditors. 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 lent 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), with the holding companies, in turn, claiming the intercorporate dividend deduction under s. 112(1). The effect was to move significant sums from the two operating companies to the two family trusts fees of tax. However, Sommerer unexpectedly found that s. 75(2) did not apply to sales of property. CRA assessed the trusts on the basis that distributions from the operating companies were taxable, thereby imposing an unexpected tax liability. The trusts’ petition for the equitable remedy of rescission of the transactions was granted by the chambers judge, whose decision was affirmed in the B.C. Court of Appeal.
Before allowing the appeal and dismissing the trusts’ petition, and in finding that the principle in Fairmont Hotels and Jean Coutu, that a “court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” (para. 16(d)) was not limited to situations of requested rectification and applied as well to the equitable remedy of rescission, Brown J stated (at para. 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. … 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.