Principal Issues:
a) Whether the CRA would accept that a transaction be modified with retroactive effect when it was implemented based on the application of subsection 75(2) as this provision was understood before the Sommerer decision?
b) In other words, for the pre-Sommerer transactions, would CRA accept a similar result to that determined in the Pallen Trust decision?
Position: None.
Reasons: The Pallen Trust is currently under appeal. Therefore, we are unable to provide comments at this time as to the specifics of that case.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 6
Application of subsection 75 (2) following Sommerer
In Pallen Trust (footnote 1), the British Columbia Supreme Court overturned the dividend declarations in favor of Pallen Trust under the common law doctrine of "rescission". In this case, a plan was implemented in 2007 to extract dividends from a tax-free corporation in favor of Pallen Trust, based on the application of subsection 75(2), as understood by the tax community at that moment.
Following Canada v. Sommerer (footnote 2), the CRA issued a notice of reassessment to Pallen Trust on the basis that subsection 75(2) did not apply to Pallen Trust as the shares to which the dividend had been paid had been sold at their fair market value by the corporation to Pallen Trust. Consequently, Pallen Trust should be taxed on this dividend at the maximum marginal tax rate.
The Supreme Court of British Columbia based its decision, inter alia, on the fact that prior to Sommerer, the understanding of the tax community in Canada was that subsection 75(2) applies where a property was sold to a trust by a beneficiary at fair market value and therefore the CRA would not have issued a notice of reassessment to Pallen Trust prior to Sommerer. The Court therefore concluded that this was a material error, that it gave an unfair result and that, since no third party was prejudiced, it canceled the dividends paid to Pallen Trust.
In Quebec, the Quebec Court of Appeal, in B.E.A. Holdings Inc. v. Trafsys Inc. (Footnote 3), recognized that a transaction can be reversed with retroactive effect when the parties implement the transaction on the basis of an error on the primary consideration.
Questions to the CRA
a) Would the CRA be prepared to accept the amendment of a transaction with retroactive effect when it was implemented based on the application of subsection 75(2) as understood before the Sommerer decision?
b) In other words, would the CRA be inclined to accept a result similar to the Pallen Trust decision for pre-Sommerer transactions?
CRA response
The decision of the Supreme Court of British Columbia in Pallen Trust was appealed to the British Columbia Court of Appeal. Therefore we cannot comment on that at this time.
Danielle Bouffard
(613) 957-2747
October 10, 2014
2014-053825
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2014 BCSC 305.
2 2012 FCA 207.
3 2004 CanLII 73069.