Kraft Heinz – BC Supreme Court accepts that a self-help Dutch-law annulment declaration retroactively voided a s. 212.3(10)(b) contribution

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:

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:

[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.”

Although, in form, the requested relief was denied, this appears like a substantive success.

Neal Armstrong. Summary of Kraft Heinz Canada ULC v. Canada (Attorney General), 2022 BCSC 796 under General Concepts – Rectification & Rescission.