Joel A. Nitikman

Two family trusts petitioned for equitable rescission of transactions that had resulted in unanticipated income tax liability after the Canada Revenue Agency changed its interpretation of s. 75(2) of the Income Tax Act following the Tax Court's decision in Sommerer.

The majority held that a limiting principle of equity and the principles of tax law stated in Fairmont Hotels and Jean Coutu bar taxpayers from resorting to equity to undo freely agreed upon transactions in order to avoid unanticipated adverse tax consequences arising from the ordinary operation of a tax statute.

The prohibition against retroactive tax planning applies broadly to all equitable remedies, including rescission, not only rectification.

Côté J. dissented, holding that rescission is available in strictly limited circumstances where there is a clear causative mistake of sufficient gravity, and that neither Fairmont Hotels nor Jean Coutu generally precludes equitable remedies in a tax context.

The appellant credit union challenged tax reassessments following an amalgamation structured to avoid statutory flow-through of tax attributes.

The Court held the amalgamation met the statutory conditions for a qualifying amalgamation under the Income Tax Act because provincial amalgamation law vested all predecessor property and liabilities in the amalgamated entity by operation of law.

As a result, the appellant could not avoid flow-through treatment for capital cost allowance and preferred rate amount calculations.

Concurring reasons agreed in result based on legal continuity at amalgamation and cautioned against broader holdings on provincial corporate law.

The appeal was dismissed with costs.