0741508 B.C. Ltd. and 0768723 B.C. Ltd. (Re), 2014 BCSC 1791

In 2011, the petitioners conveyed undeveloped B.C. lands to a limited partnership. In 2013, CRA assessed the petitioners for their failure to charge HST, as the exemption under s. 221(2) from the obligation of the petitioners to charge HST was not available, given that the partnership had not been registered.

Before rescinding the transfer, Loo J noted that because of BC's abolition of HST before the discovery of the problem in 2013, the partnership could only recover, under ETA s. 171(1), the federal (5%) portion of the HST payable by it to the petitioners (assuming no rescission and upon registration), as the "basic tax content" of the lands excluded the provincial HST.

In 2011, the petitioners conveyed undeveloped B.C. lands to a limited partnership with an affiliated general partner. Due to failed communications, the partnership had not been registered for HST purposes, so that the exemption under ETA s. 221(2) from the obligation of the petitioners to charge HST was not available. The partnership then issued LP units to 163 outside investors and commenced developing the lands. In 2013, CRA assessed the petitioners for their failure to charge HST. The petitioners then entered into a fresh agreement to convey the lands to the partnership (which now was registered) subject to a condition that the previous conveyance be judicially rescinded.

After noting that Solle v. Butcher, [1950] 1 K.B. 671 (C.A.), which established the doctrine of equitable mistake, had been reversed in Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd., [2002] EWCA Civ 1407, [2002] 4 All E.R. 689 (C.A.), Loo J stated (at para. 73) that here "the CRA does not argue that the equitable doctrine of mistake is not available."

She rescinded the transfer. First, there was no adequate legal remedy. Because of BC's abolition of HST before the discovery of the problem in 2013, the partnership could only recover, under ETA s. 171(1), the federal (5%) portion of the HST payable by it to the petitioners (assuming no rescission), as the "basic tax content" of the lands excluded the provincial HST.

Second, the mistake went to the legal effect of the transactions rather than merely their consequences: "Here, the intention of the petitioners from the very outset and throughout was that the Partnership would be registered under the ETA and there would be no net HST/GST payable" (para. 99).

Third, the petitioners had "clean hands," notwithstanding that their failure to timely file HST returns meant their non-registration was not identified before the adverse B.C. change of law. As per Hongkong Bank of Canada v. Wheeler Holdings Ltd., [1993] 1 S.C.R. 167, at 188, the clean hands doctrine only applies when "the dirt in question on the hand, has an immediate and necessary relationship to the equity sued for."