Supreme Court of Canada **Appeal Heard:** January 11, 2022

Judgment Rendered: June 17, 2022 Docket: 39383 --- ## Parties Between: Attorney General of Canada — Appellant and Collins Family Trust — Respondent ‑ and ‑ Between: Attorney General of Canada — Appellant and 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 --- ## Subject Matter 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. --- ## Headnote 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, [2021] 3 S.C.R. 590; 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, [2021] 3 S.C.R. 590; 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, aff'd 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, aff'g 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, Côté J. dissenting. Michael Taylor and Dayna Anderson, for the appellant. Joel A. Nitikman, Q.C., and Jessica Fabbro, for the respondents. --- ## Reasons for Judgment 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, [2021] 3 S.C.R. 590, 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 is sufficient to dispose of this appeal. --- #### B. Pitt v. Holt [ 24 ] From the foregoing analysis, I further conclude that 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. [ 25 ] Nor does Pitt v. Holt represent a statement of the law of Ontario (see Canada Life, at paras. 86‑102), Alberta (see Harvest Operations, at paras. 70‑75), or, as will follow from this judgment, British Columbia. [ 26 ] Practically, this resolves the issues raised in this appeal. As noted, I need not address whether the courts below erred in applying Pitt v. Holt, given that it should not have been applied at all. [ 27 ] In short, 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. --- ### III. Conclusion [ 28 ] I would allow the appeal, set aside the judgments of the Court of Appeal and of the chambers judge, and dismiss the petitions, with costs throughout. --- ## Dissenting Reasons The following are the reasons delivered by Côté J. — ### I. Overview [ 29 ] I have had the benefit of reading the reasons of my colleague Brown J., and I agree with his statement of the facts. [ 30 ] However, I am unable to agree with his conclusion that the appeal should be allowed. In my view, for the reasons that follow, rescission is available to the respondents in the circumstances of this case, and I would dismiss the appeal. --- ### II. Analysis #### A. In Canadian Tax Law, Fairmont and Jean Coutu Do Not Preclude Rescission for the Purpose of Unwinding Transactions That Have Been Entered Into Freely and Voluntarily [ 31 ] I will begin by discussing whether Fairmont Hotels and Jean Coutu preclude the availability of the equitable remedy of rescission in a tax law context. [ 32 ] In 2016, this Court released two important decisions regarding equitable remedies in a tax context: 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. [ 33 ] In Fairmont Hotels, this Court reversed the Quebec Court of Appeal's decision and dismissed an application for rectification of corporate minutes that had resulted in unanticipated tax consequences. In Jean Coutu, this Court reversed the Quebec Court of Appeal's decision and dismissed an application to retroactively amend agreements that had resulted in unanticipated tax consequences. [ 34 ] As was explained in Fairmont Hotels, at para. 3, rectification "is a remedy available in equity to parties who, intending to reduce a pre-existing legal obligation to writing, failed to accurately do so, resulting in a document that does not accord with their prior consensus." The remedy "is not available . . . where parties seek to rewrite history by obtaining a court order changing written agreements to accord not with a prior consensus, but with what they would have agreed to had they known better." [ 35 ] The majority in Fairmont Hotels specified clearly that it was narrowing the scope of the remedy of rectification in a tax context in order to comply with the principle that taxpayers must be taxed based on what they did, rather than what they intended to do (para. 23). Fairmont Hotels must be read in the context of the remedy being sought — rectification — and the principle underlying that remedy. [ 36 ] As for Jean Coutu, that decision was decided under art. 1425 of the Civil Code of Québec, which is the civil law provision on contractual interpretation. The majority confirmed that while a taxpayer has a right to structure their affairs so as to reduce their tax liability, art. 1425 cannot be used to accomplish retroactive tax planning. [ 37 ] With great respect, I disagree with my colleague Brown J.'s assertion that Fairmont Hotels and Jean Coutu preclude the availability of all equitable remedies in a tax law context. The Court of Appeal for British Columbia was correct when it stated that these decisions: > are consistent with the direction in Shell Canada, as well as earlier authorities such as Re Slocock's Will Trusts, [1979] 1 All E.R. 358 (Eng. Ch. D.) . . . . These earlier authorities confirmed (2020 BCCA 196, [2021] 1 C.T.C. 153, at para. 50) [ 38 ] Lest there be any doubt, academic commentators have also noted that Fairmont Hotels and Jean Coutu did not specifically address the remedy of rescission (T. Fitzsimmons and E. 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 (2018), 30:1): > [t]he majority of the Supreme Court of Canada in Fairmont made no reference to rescission and did not determine (or even comment on) the circumstances in which the remedy of rescission can or should be granted in a tax context. ("Rectification, Rescission, and Other Equitable Remedies After Fairmont Hotels Inc.", in Canadian Tax Foundation, Report of Proceedings of the Sixty‑Ninth Tax Conference (2018), 30:1, at p. 30:34; see also R. Pandher and B. Graversen"Does Fairmont Hotels Eliminate All Equitable Remedies in the Tax Context?" (2018), 66 Can. Tax J. 931, at pp. 943-44.) [ 39 ] Thus, neither Fairmont Hotels nor Jean Coutu generally precludes the availability of equitable remedies in a tax context. [ 40 ] Moreover, when looking at the specific propositions established by Fairmont Hotels and Jean Coutu, it is clear that these decisions did not stand for the proposition that all equitable remedies are unavailable in a tax context. [ 41 ] Rescission and rectification are different remedies with different objectives. 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, by contrast, 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. [ 42 ] Rectification corrects the written instrument to accord with the prior consensus, without disturbing the underlying arrangement. Rescission undoes the entire transaction — it creates no new arrangement, only restores the prior one. The effect of rectification is to alter a legal relationship. The effect of rescission is to restore a prior situation. [ 43 ] In sum, Fairmont Hotels and Jean Coutu stand for the following propositions: (a) 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 through no fault of its own (Fairmont Hotels, at para. 3, citing Shell Canada, at para. 45; Jean Coutu, at paras. 41-42). (b) If the 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 (Fairmont Hotels, at paras. 39‑40; Jean Coutu, at para. 41). (c) A common intention to limit or avoid tax liability is insufficiently precise to evince an existing prior agreement with definite and ascertainable terms (Fairmont Hotels, at paras. 39‑40; Jean Coutu, at para. 47). Contrary to my colleague's conclusion, Fairmont and Jean Coutu cannot be read as precluding all equitable remedies from potentially applying in a tax law context. --- #### B. Rescission for Mistake in the Case of a Voluntary Disposition of Property [ 44 ] The leading case on equitable rescission for mistake is Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108. In that decision, Lord Walker proposed a test for the remedy of rescission in cases of voluntary disposition of property. The Pitt v. Holt test has been widely adopted by Canadian courts (see Re Pallen Trust; Canada Life; 5551928 Manitoba Ltd. v. Canada (Attorney General), 2019 BCCA 376, 439 D.L.R. (4th) 483). [ 45 ] According to Pitt v. Holt, the purpose of rescission is to relieve a mistake of sufficient gravity where it would be unconscionable to leave uncorrected. ##### (1) Test for Rescission for Mistake in the Case of a Voluntary Disposition of Property [ 46 ] A court may rescind a voluntary disposition when there is a clear causative mistake of sufficient gravity that it would be unconscionable for the donor to be bound by the transaction. The test is objective (para. 122). [ 47 ] The test for rescission from Pitt v. Holt requires that: > The evaluation of what is or would be unconscionable must be objective. . . .

The gravity of the mistake must be assessed by a close examination of the facts, whether or not they are tested by cross-examination, including the circumstances of the mistake and its consequences for the person who made the voluntary disposition.

The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an intense focus . . . on the facts of the particular case. . . .

. . . The court cannot decide the issue of what is unconscionable by an elaborate set of rules. It must consider in the round the existence of a distinct mistake (as compared with total ignorance or disappointed expectations), its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or not, to leave the mistake uncorrected. [ 48 ] Nevertheless, Lord Walker stated in Pitt v. Holt, and I agree, that "there are some types of mistake about tax consequences that should not, as a matter of legal policy, attract the equitable jurisdiction to rescind, even when the mistake is serious enough" (para. 135). [ 49 ] I pause here to note that only a mistake can warrant rescission, as opposed to mere ignorance or "misprediction" (W. Seah"Mispredictions, Mistakes and the Law of Unjust Enrichment" (2007), 15 R.L.R. 93; see also Abram Steamship Co. v. Westville Shipping Co., [1923] A.C. 773 (H.L.) (Lord Atkinson), at p. 781; Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, at para. 44). A mistake is an erroneous belief about the current state of the law or the facts. By contrast, misprediction is an erroneous belief about the future state of the law or the facts. In other words, rescission relieves against mistakes concerning the situation that existed at the time of the transaction, but not against mispredictions — that is, risks that did not materialize. Any risk that a transaction might produce undesirable results in the future (including a change in the law or a change in the CRA's position) is a misprediction, rather than a mistake, and will not ground a claim for rescission. [ 50 ] Ultimately, equity will not intervene to relieve a taxpayer from the consequences of a risk that was knowingly or recklessly accepted (P. S. Davies and S. Douglas"Tax Mistakes Post‑Pitt v Holt" (2018), 32 T.L.I. 3, at p. 10; A. H. Oosterhoff"Causative Mistake of Sufficient Gravity, or Retroactive Tax Planning? A Comment on Re Pallen Trust" (2016), 35 E.T.P.J. 135, at p. 136). [ 51 ] For example, in Neville v. National Foundation for Christian Leadership, 2013 BCSC 183, aff'd 2014 BCCA 38, 350 B.C.A.C. 7, the taxpayer was denied rescission because of a finding that, in reality, the individual knew that the donation would have tax consequences and was just not happy with the particular tax consequences. In that case, there was no mistake: the individual simply accepted the risk that the tax consequences would be favourable. [ 52 ] Additionally, a transaction that would have constituted abusive tax avoidance but for a mistake might be a consideration that would bar rescission on public policy grounds (see Pitt v. Holt, at para. 135). Taxpayers should not engage in bold tax planning on the assumption that it will always be possible to rescind their transactions should that planning fail. As such, when a tax plan is aggressive, the taxpayer accepts the risk that it may not operate as intended. [ 53 ] However, the purported morality of a plan remains irrelevant. As this Court recently reiterated in Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, [2021] 3 S.C.R. 590, at para. 2"[t]he law of Canada permits taxpayers to organize their affairs in order to minimize the amount of tax owed." Courts may not "recharacterize the transaction" because they dislike the tax consequence that the transaction achieves (Shell Canada, at para. 40). [ 54 ] It can be difficult to establish what constitutes an "aggressive" tax plan akin to abusive tax avoidance. Consequently, this limit to rescission should be interpreted narrowly: > While a court may be reluctant to grant rescission to provide a taxpayer with relief from its own "aggressive" tax planning, that limitation should be narrowly interpreted. Courts may be expected to recognize the longstanding principle that taxpayers can structure their affairs to mitigate their tax burdens. (J. Sorensen and A. Yuk"Equitable Rescission for Tax Mistakes: It's Not Over (Until it's Over)" (2020), 68 Can. Tax J. 1149, at p. 1156) [ 55 ] In sum, for rescission to be granted, the mistake needs to be sufficiently serious. Rescission will be available only rarely, and courts must be vigilant to ensure that the remedy is not used as a vehicle for retroactive tax planning. [ 56 ] In accordance with this Court's approach in Fairmont and Jean Coutu, rescission on the ground of mistake is an available remedy in the tax context. With respect, the majority's approach would allow the Crown to benefit from a windfall that can only be attributed to the CRA's own decision to change its longstanding and consistently applied position on the interpretation of s. 75(2). While the majority states that "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" (para. 16(c)), I would note that this statement was made in the context of discussing the remedy of rectification, not rescission. [ 57 ] Similarly, in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 45, this Court recognized that a taxpayer must be taxed in accordance with what it "actually did". In the context of rescission, what a taxpayer "actually did" means — and in fact requires — that the transaction be rescinded to restore the taxpayer to the position it was in before it took those actions. --- ##### (2) Alternative Remedies [ 58 ] Finally, rescission is a remedy of "last resort": even if a party meets the test for rescission, it can be granted only if no alternative remedies are available. However, what makes an alternative remedy adequate is disputed. [ 59 ] There are two competing approaches to the assessment of the availability of alternative remedies. In Canada Life, the Court of Appeal held that the mere existence of any alternative remedy, even an impractical one, would preclude rescission (paras. 89-102). In contrast, the Court of Appeal in the case at bar adopted an approach under which the alternative remedy must be "practical and adequate" (2020 BCCA 196, [2021] 1 C.T.C. 153, at para. 74; see also 5551928 Manitoba Ltd., at para. 100). [ 60 ] The second approach should be endorsed. The mere theoretical possibility of an alternative remedy where there is none in practice should not preclude equitable intervention. It is not sufficient for an alternative remedy to merely exist. The alternative remedy must be practical and adequate. --- #### C. Further Remarks [ 61 ] Before applying the test for rescission to the facts of this case, I wish to discuss three matters that arise in this case. ##### (1) Standard of Review [ 62 ] Rescission is an equitable remedy that can be granted on a discretionary basis. It is trite law that deference is owed to a judge's exercise of equitable discretion. Appellate courts should not interfere with the grant of a discretionary remedy unless the judge committed an error in principle, took into account irrelevant factors, failed to take into account relevant factors, or made a decision that was manifestly unjust (Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037, at para. 11; Canada (Attorney General) v. Fontaine, 2017 SCC 47, [2017] 2 S.C.R. 205, at paras. 36-38). ##### (2) Sommerer v. The Queen [ 63 ] In 2012, the Federal Court of Appeal affirmed the Tax Court of Canada's decision in Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162, aff'd 2012 FCA 207, [2014] 1 F.C.R. 379, which held that s. 75(2) does not apply where the trust acquired property by way of sale, as opposed to a gift or settlement. It is crucial to understand what this decision actually held, and what it did not hold. [ 64 ] Section 75(2) of the ITA reads as follows: > 75 (2) If a trust, that is resident in Canada and that was created in any manner whatever since 1934, holds property on condition

(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person"), or

(ii) pass to persons to be determined by the person at a time subsequent to the creation of the trust, or

(b) that, during the existence of the person, the property shall not be disposed of except with the person's consent or in accordance with the person's direction,

any income or loss from the property or from property substituted for the property, and any taxable capital gain or allowable capital loss from the disposition of the property or of property substituted for the property, shall, during the existence of the person while the person is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the person. [ 65 ] Before Sommerer, there was a general understanding in the tax community, which the CRA shared, that s. 75(2) would apply in situations where the trust acquired property from the settlor by way of purchase. This was the understanding that the respondents relied on when they devised their tax plans, and the respondents' tax plans were based on the pre-Sommerer understanding of s. 75(2). [ 66 ] However, the Federal Court of Appeal upheld Miller J.'s decision, holding that the "person" as defined in s. 75(2) must be the person "from whom the property . . . was directly or indirectly received" by the trust, and that when a trust receives property by way of sale and not as a gift or settlement, the attribution rule in s. 75(2) should not apply. --- ##### (3) Re Pallen Trust [ 67 ] In 2015, the British Columbia Court of Appeal rendered its decision in Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499. In that case, the British Columbia Court of Appeal endorsed the Pitt v. Holt test for equitable rescission and upheld the lower court's decision to grant rescission of transactions that were identical to those in the case at bar. [ 68 ] In Pallen, the Court of Appeal considered precedents — such as 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739 — that are analogous to Fairmont Hotels and Jean Coutu, and nonetheless concluded that rescission was available. The Court of Appeal concluded that these cases were about imposing tax based on what a taxpayer "actually did" and not what they "wished they had done", and that they therefore did not preclude rescission. [ 69 ] In light of the reasons set out above, one fact stands: Fairmont and Jean Coutu did not cause the result in Pallen to be incorrect. The Court of Appeal was right to uphold the chambers judge's exercise of equitable discretion. --- ### III. Application [ 70 ] As I will explain, the chambers judge in this case did not err in granting rescission, and the Court of Appeal was correct to dismiss the Attorney General's appeal. #### A. The Respondents Made a Mistake, Not a Misprediction [ 71 ] I explained above that rescission cures only a mistake of law, not mere ignorance or a misprediction. Thus, the key question is whether the respondents made a mistake or a misprediction. [ 72 ] Given that s. 75(2) had never been analyzed by a court when the Tax Court of Canada released its decision in Sommerer, and that tax professionals — including those at the CRA — shared a general understanding that s. 75(2) applied to trusts that had acquired property by way of sale, the respondents' erroneous belief about s. 75(2) was a mistake of law, not a misprediction in relation to a change in the law. [ 73 ] As I explained in discussing Pitt v. Holt, rescission relieves only against mistakes concerning the situation that existed at the time of the transaction, but not against mispredictions — that is, risks that did not materialize. What allows equity to intervene in this case is the particular way in which the CRA chose to reassess the respondents. The CRA reassessed the trusts after the Tax Court issued its decision in Sommerer, but before the Federal Court of Appeal had issued its decision in the same case, and while the CRA was still arguing in the Federal Court of Appeal that the Tax Court had erred in law. #### B. The Respondents Meet the Pitt v. Holt Test for Rescission [ 74 ] Rescission requires an inquiry that is focused on the specific facts of the case in question. Every minor fact could potentially make a different case. That said, the chambers judge noted that the facts of the case at bar were virtually identical to those in Re Pallen Trust. [ 75 ] The chambers judge noted that, in Pallen, the facts the Court of Appeal had had before it when it upheld the order of rescission included the following: a) The purposes of the plans were substantially the same; b) The material steps in the various plans were virtually identical; c) The plans were devised by the same accounting firm within approximately ten months of each other; d) There was a risk of GAAR applying to all of the plans and the accounting firm MNP advised of this risk; e) All matters concern the 2008 tax year (although the matters [here] also concern the 2009 tax year); f) The tax environment was the same (i.e. there was a general understanding, including by CRA, that s. 75(2) of the ITA applied to a sale of shares to a trust at fair market value); g) The effectiveness of the plans depended on the application of s. 75(2) of the ITA to deem the dividend income as being received by the holding company; h) The Sommerer decision thwarted all of the plans; i) All of the trusts were re-assessed after the Sommerer decision and by the same auditor; and j) The reason for the reassessments was the Sommerer decision. [ 76 ] In both Pallen and the case at bar, the lower courts reasoned that the 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. [ 77 ] It was only after the Tax Court had rendered its decision in Sommerer in April 2011, but before the Federal Court of Appeal had issued its decision in Sommerer in August 2012, that the CRA decided to reassess the trusts and to issue notices of reassessment. At the time the CRA decided to reassess the trusts, it was still arguing in the Federal Court of Appeal that the Tax Court had erred in its interpretation of s. 75(2). In December 2011, the CRA, while still appealing the Sommerer decision, decided to reassess the trusts in accordance with the Tax Court's decision. [ 78 ] In December 2012, after the Federal Court of Appeal had upheld the Tax Court's decision in Sommerer, the CRA notified the respondents that it had decided not to further apply s. 75(2) in the manner it had previously. [ 79 ] With respect, my colleague misapprehends what takes this case into the zone of unfairness. He explains that the constraint imposed by Parliament upon the Minister to assess a taxpayer in accordance with the facts and the law required the CRA to reassess the trusts in light of the Tax Court's decision (para. 27). He says that "[n]o unfairness lies in holding the trusts to the consequent tax liabilities of the ordinary operation of the Income Tax Act respecting transactions freely undertaken" (para. 27). [ 80 ] In my view, what takes this case into the zone of unfairness is not the application of the law, but rather the CRA's deliberate decision to reassess the respondents while it was still arguing in the Federal Court of Appeal that the Tax Court's decision was incorrect. #### (1) Neither Policy Reasons Nor Assumption of Risk Bars Rescission in This Case ##### (a) The Respondents' Plan Was Not an Abusive Tax Avoidance Scheme [ 81 ] The appellant submits that the chambers judge erred in exercising his discretion by failing to consider that the respondents' tax planning in the instant case was analogous to the tax planning in Fiducie Financière Satoma v. The Queen, 2018 FCA 74, 2018 D.T.C. 5052, aff'g 2017 TCC 84, 2018 D.T.C. 1031, and that it therefore should have been considered "bold" or aggressive tax planning, which bars rescission on the grounds of public policy. [ 82 ] My understanding is that the appellant is suggesting that the result reached in Satoma should also have been reached in the instant case. [ 83 ] Although there are some similarities between this case and Satoma, the courts below were right to distinguish the two cases. In Satoma, the underlying planning was more aggressive — it not only gave rise to the tax consequences here at play, but also gave rise to a deemed capital dividend that was paid out to individual shareholders, tax free. [ 84 ] In Satoma, the Associate Chief Justice of the Tax Court had found that the primary purpose of the transaction was to extract funds from the corporation tax-free, not to protect assets from creditors. In the case at bar, the primary goal of the plan was not to avoid payment of any tax. Rather, 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. [ 85 ] The appellant submits that the purpose of asset protection could have been attained solely by means of a holding company, without creating a family trust. However, this suggests that the family trust was only created to achieve the fiscal benefit of s. 75(2), which would make the plan tax-driven. The evidence supports the contrary conclusion: the primary purpose of the family trust was to protect assets. [ 86 ] As in Pallen, the facts of this case are unusual and, in my view, did not involve aggressive tax planning. Weighing the relevant factors, I conclude that the respondents' plan did not constitute abusive tax avoidance. ##### (b) Assumption of Risks [ 87 ] While it may be risky to base an entire tax scheme on a provision that has yet to be interpreted by the courts, I agree with the courts below that the risk assumed by the respondents — that the CRA would adopt the reasoning of the Tax Court in Sommerer while still appealing the decision to the Federal Court of Appeal — was not among the risks they accepted. [ 88 ] I agree with the appellant that taxpayers and their advisors bargain to allocate risks of mistake and errors. But this bargaining process cannot be used to force a taxpayer to assume risks that are unlikely to materialize. In the circumstances of this case, these risks were indeed unlikely to materialize. [ 89 ] The appellant also argues that the respondents assumed the risks by not asking for an advance tax ruling. In my view, this argument must be rejected, as the risk that the CRA would reassess the trusts while still arguing in the Federal Court of Appeal that the Tax Court's interpretation of s. 75(2) was erroneous cannot be considered a risk that should have been foreseen. [ 90 ] In my opinion, the only risk the respondents assumed was that the GAAR could potentially apply. The risks communicated to the respondents in MNP's proposal were: > This proposal is based upon our understanding and interpretation of the existing provisions of the ITA, the ITR [the Income Tax Regulations] and the current administrative practices of the CRA.

The opinions expressed herein represent our views as Chartered Accountants experienced in income tax matters. None of the opinions are or should be construed to be legal opinions.

It should be noted that no application has been made for an advance tax ruling with respect to this proposal nor is it intended that any application be made. Accordingly, no assurance can be given that the tax (or valuation) considerations discussed herein will not differ from the interpretation ultimately adopted by the CRA or the courts.

In preparing this proposal, we have, of course, proposed transactions which are designed to meet with your client's planning objectives while, at the same time, minimizing the income and other tax implications associated with those objectives.

Effective for transactions entered into after September 12, 1988, a broad GAAR can be used to eliminate any form of tax advantage resulting from one transaction or a series of transactions . . .

Arguably, the transactions contained herein do not include an avoidance transaction since there are bona fide purposes for undertaking each transaction which is asset protection (other than to obtain the perceived tax benefit). As well, even if it is found that the primary purpose of one or more of the transactions is to obtain a tax benefit, it is unlikely, in our view, that the transactions constitute a misuse or abuse of the applicable provisions of the ITA, the ITR or any other Canadian statute. (chambers judge's reasons, at paras. 17‑18) [ 91 ] MNP specified that the proposal was "based upon the current tax environment" (A.R., vol. I, at p. 124). Although MNP noted that there was no assurance that the CRA or the courts would not differ in their interpretation, this warning did not encompass the specific risk that materialized — that the CRA would choose to reassess the respondents while it was still arguing in the Federal Court of Appeal that the Tax Court had erred in its interpretation of s. 75(2). [ 92 ] The chambers judge ultimately agreed with the chambers judge in Re Pallen Trust, 2014 BCSC 305, [2014] 4 C.T.C. 129, who had concluded, at para. 65: > 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 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 which equity addresses. [ 93 ] I agree with the chambers judge. In my opinion, the respondents did not assume the risk that the CRA would retroactively change its position on the interpretation of s. 75(2). The CRA's decision to reassess the respondents while it was still arguing in the Federal Court of Appeal that the Tax Court had erred in its interpretation of s. 75(2) takes this case into the zone of unfairness that allows equity to intervene. --- #### (2) Alternative Remedies [ 94 ] Lastly, there are no alternative remedies that would preclude rescission in this case. The appellant submits that applying to the Minister for a remission of tax under s. 23 of the Financial Administration Act and filing a claim against MNP for negligent tax advice would constitute available alternative remedies. [ 95 ] First, a remission order pursuant to s. 23 of the Financial Administration Act is an extraordinary remedy to be used in "unusual" or "extreme" circumstances (CRA, 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 at https://v3.taxnetpro.com/). It is highly unlikely that the Minister would grant such an extraordinary remedy in the instant case, particularly given the CRA's conduct in changing its position while it was still arguing in the Federal Court of Appeal that the Tax Court's interpretation of s. 75(2) was erroneous. Remission is not a practical or adequate remedy. [ 96 ] A taxpayer can mitigate their risk by asking for an advance tax ruling. In its Remission Guide, the CRA explains that a taxpayer cannot normally argue that "the income tax was incorrectly assessed and the taxpayer was unable to challenge the assessment" if no advance ruling was sought. However, as I noted above, the respondents could not have been expected to request an advance ruling to protect themselves against the risk that materialized. [ 97 ] I find no error in the chambers judge's reasoning that there was "no evidence whatsoever regarding the procedure, the nature or frequency of remissions in circumstances similar to this case" (A.R., vol. I, at p. 185). I also find no error in his conclusion that there was little chance that a remission application would have succeeded in the instant case. [ 98 ] Second, a claim against MNP would not be an adequate remedy. In Jean Coutu, the majority of this Court explained that: > when taxpayers agree to certain transactions and later claim that their advisors made mistakes by failing to properly advise them that the transactions they agreed to would produce unintended tax consequences, the appropriate avenue to recoup their ensuing losses is not through the retroactive amendment of agreements, but rather through professional liability claims against their advisors. [ 99 ] MNP duly advised the respondents about their plan. As Fisher J.A. concluded, MNP's advice was correct at the time it was given. Accordingly, it is unlikely that a negligence claim against MNP would have any chance of success. --- ### IV. Disposition [ 100 ] For the foregoing reasons, I would dismiss the appeal. --- Appeal allowed with costs throughout, Côté J. dissenting. Solicitor for the appellant: Attorney General of Canada, Vancouver. Solicitors for the respondents: Dentons Canada, Vancouver.