Kraft Heinz Canada ULC v. Canada (Attorney General), 2022 BCSC 796

The petitioners were a Dutch cooperative (“Heinz Co-op”) and a B.C. unlimited liability company (“KH Canada”) which was the sole member of Heinz Co-op and the subsidiary of a U.S.- resident corporation. Both were members of the Kraft Heinz group of companies.

For group accounting reasons, funds were transferred from KH Canada to Heinz Co-op in the form of a capital contribution. Although the contribution was intended to be tax-neutral, four months later, it was realized that it gave rise to a deemed dividend under s. 212.3 that was subject to Part XIII tax.

The petitioners entered into a formal declaration (was to be governed by and construed in accordance with the law of the Netherlands), entitled “Declaration of Annulment Capital Contribution Agreement” signed by August, 2021, stating that the capital contribution agreement was annulled with retroactive effect and the $66.49 million capital contribution “is returnable by the Contributee to the Contributor due to lack of title (titel) on the basis of the dutch legal concept of payment without obligation (onverschuldigde betaling)”. The contribution was returned pursuant to the declaration. The petitioners sought declarations that the capital contribution was void ab initio and, alternatively, an order rescinding the transaction.

Regarding the requested declaration, Gomery J first stated (at para. 4):

The transaction is governed by Dutch law and the evidence is that, pursuant to Dutch law and by virtue of the steps the petitioners have taken, the agreement for the capital contribution is deemed never to have existed, and the contribution has been repaid. There is nothing left to rescind. An order declaring the rescission effective in Canadian law would be purely declaratory… .

Accordingly, given that there was no “live controversy giving rise to a cognizable threat to the petitioners’ legal interests” (para. 3) as CRA had not audited or assessed KH Canada (para. 23) and given that “the courts do not answer hypothetical questions or give advisory opinions in the absence of a manifest dispute” (para. 22), declaratory relief was not available.

In further rejecting the request for rescission, he stated (at paras. 39-40):

[T]he capital contribution was governed by foreign (Dutch) law and has been completely nullified, “ab initio”, pursuant to Dutch law. An order for rescission would only repeat or reinforce that which has already occurred.

In my view, the petitioners have already obtained an adequate remedy through the annulment declaration.

Accordingly, it was unnecessary to address the issue that “[t]he availability of rescission for the avoidance of unexpected tax obligations is controversial” (para. 38).

A B.C. ULC made a cash capital contribution to a Dutch cooperative of which it was the sole member. It was realized four months later that this contribution gave rise under s. 212.3 to a deemed dividend by the B.C. ULC to its US parent that was subject to Part XIII tax. About a year after the contribution, the B.C. ULC and the co-op entered into a formal declaration, governed by Dutch law (and not reviewed by any Dutch court), declaring that the capital contribution agreement was annulled with retroactive effect and that the contribution was returnable to the B.C. ULC (which occurred). The petitioners sought declarations that the capital contribution was void ab initio and, alternatively, an order rescinding the transaction. The Attorney General opposed.

Regarding the requested declaration, Gomery J first stated (at para. 4):

The transaction is governed by Dutch law and the evidence is that, pursuant to Dutch law and by virtue of the steps the petitioners have taken, the agreement for the capital contribution is deemed never to have existed, and the contribution has been repaid. There is nothing left to rescind. An order declaring the rescission effective in Canadian law would be purely declaratory… .

Accordingly, since a declaration could only be granted where there was a “live controversy,” whereas here there was none (CRA had not audited the B.C. ULC, let alone, assessed it), the requested declaration should not be granted.

The request for rescission, was denied essentially for reasons of redundancy (at paras. 39-40):

[T]he capital contribution was governed by foreign (Dutch) law and has been completely nullified, “ab initio”, pursuant to Dutch law. An order for rescission would only repeat or reinforce that which has already occurred.

In my view, the petitioners have already obtained an adequate remedy through the annulment declaration.

Accordingly, it was unnecessary to address the issue that “[t]he availability of rescission for the avoidance of unexpected tax obligations is controversial” (para. 38).