Canada vs. Collins Family Trust – An Overview
The Supreme Court of Canada released its decision in Canada (Attorney General) v Collins Family Trust (Collins) on June 17, 2022. The Court held that companies cannot rely on equitable rescission and equitable remedies to cancel transactions that later result in unintended tax consequences.
As a result of this decision, Canadian taxpayers are now deprived of the vital remedy protecting them from having to pay unfair taxes stemming from misunderstandings of the highly complex provisions of the Income Tax Act (“ITA”). Due to Collins, taxpayers now more than ever need to be extremely vigilant and careful with the execution of their tax planning arrangements to ensure transactions are sheltered from adverse tax consequences.
To reduce tax liability uncertainty taxpayers should consider obtaining Advance Tax Rulings from the Canada Revenue Agency (“CRA”), though such rulings are not enforceable in court, they are however usually respected by the CRA. In Collins, a recurring theme in the Court’s questions during the oral hearing was the taxpayers’ failure to obtain tax advance rulings.
In Collins, two companies: Rite-Way Metals Ltd. and Harvard Industries Ltd. 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 CRA of the attribution rules in s. 75(2) and the inter-corporate dividend deduction in s. 112(1) of the ITA. The plan involved the implementation of a family trust as well as the incorporation of a holding company as the beneficiary for the trust. In this case, the trusts were established in 2008 and were for the Collins and Cochran families. The holding company loaned funds to the trusts to purchase shares in the operating company. The operating companies paid dividends to the trusts; these were attributed to the holding companies under s.75(2). Furthermore, based on the inter-corporate dividend deduction in s. 112(1) no tax would be owed. 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.
In 2011, however, The Tax Court of Canada in Sommerer v. The Queen, 2011 TCC 212, 2011 D.T.C. 1162, aff’d 2012 FCA 207,  1 F.C.R. 379, issued a decision with a different interpretation of section 75(2) of the ITA. The Tax Court of Canada held that the attribution rules in s. 75(2) are not applicable when the property in question is sold to a trust, as opposed to being gifted or settled. As a result of this 2011 decision, the CRA initiated an audit and reassessed the Collins and Cochran families returns, this led to the issuance of Notices of Reassessment, which retroactively prevented the attribution of the dividends to the holding company imposing the tax liability of the dividends upon the trusts.
The Collins and Cochran families trusts objected and applied to the Supreme Court of British Columbia to cancel the transactions that led to the dividends. They relied on the remedy of recession for the transactions leading to and including the payment of dividends. The British Columbia Supreme Court and the British Columbia Court of Appeal both granted rescission relying on the holding from an identical case, Re Pallen Trust, 2014 BCSC 305, affirmed 2015 BCCA 222. The Attorney General of Canada (on behalf of the CRA) appealed to the Supreme Court of Canada, and here the trusts were unsuccessful.
Supreme Court Holding: Companies cannot cancel Transactions resulting in unintended Tax Consequences
Justice Russell Brown writes for the majority stating that the principles of equity and tax law prevent the companies from reversing their transactions. “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.” It was also emphasized that relief to parties may be granted only when it would be unfair to enforce transactions. It was further stated that “there is nothing unconscionable or unfair in the ordinary operation of tax statutes to transactions freely agreed upon.”
Retroactive Tax Planning is Impermissible
The Supreme Court reaffirms that retroactive tax planning may not be relied upon by companies to later alter their tax arrangements to prevent unintended tax consequences. Taxpayers may arrange their finances to reduce their taxes, however their tax planning may also have an opposite effect, and if so, they must bear the consequences.
If you are thinking about putting together a tax plan, you need to be extremely careful that the results are as intended. If you have questions, contact us today to see how we can help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.