Collins Family Trust – Supreme Court of Canada finds that courts cannot exercise their equitable jurisdiction to cure unintended tax consequences

A plan for the tax-free distribution of funds of family companies to family trusts entailed transactions that were intended to cause s. 75(2) to attribute substantial dividends, paid by the family companies to the trusts, to family holding companies so that the s. 112(1) intercorporate dividend deduction applied. However, Sommerer unexpectedly found that s. 75(2) did not apply to sales of property for their FMV (an element of the plan). CRA assessed the trusts on the basis that they had received taxable distributions from the operating companies.

Before allowing the appeal and dismissing the trusts’ petition, and in finding that the principle in Fairmont Hotels and Jean Coutu - that a “court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” - was not limited to situations of requested rectification and applied as well to the equitable remedy of rescission, Brown J stated:

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. … 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.

Neal Armstrong. Summaries of Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26 under General Concepts – Rectification and Rescission, and s. 220(1).