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Supreme Court confirms limit to correcting transactions with unexpected tax consequences in Canada

Canada v. Collins, 2022 SCC 26

Six years ago, the Supreme Court of Canada ruled in Fairmont[1] and Jean Coutu[2] that transactions previously entered into could not be modified to achieve retroactive tax planning through judicial rectification. In Collins, it now confirms that the same principle applies to all other equitable relief against mistakes, including rescission.[3] Incomplete or erroneous legal documentation can still be corrected after the fact, provided compelling evidence as to the parties’ original intent can be presented.[4]

For Canadian tax purposes, it is well established that the legal substance of transactions freely agreed upon prevails.[5] Absent a sham, agreements validly entered into have to be respected, even if they lack economic substance.[6] Here, the Supreme Court emphasized that consequently, taxpayers must also support the tax consequences resulting from their decisions, even if they appear ill-considered in hindsight.[7] Equitable relief turns on what the taxpayer can prove that it agreed to do, not on whether the taxpayer or the Canada Revenue Agency (“CRA”) has obtained a “windfall”.[8]

Facts and Decision

The transactions in issue were designed to take advantage of subsection 75(2),[9] an anti-avoidance provision targeting income splitting through a trust. It operates by attributing the trust’s income from a property back to its original transferor, notably in circumstances where that property can revert to the transferor. In such context, the expected tax consequence was that dividends paid to the trust be included in the income of the transferor of those shares, another Canadian corporation which was also a beneficiary of the trust. It would then have been entitled to claim a full deduction in respect of the attributed inter-corporate dividends pursuant to subsection 112(1).

The parties’ expectations as to the applicable tax consequences were based on guidelines issued by the CRA. At the time, its position was that subsection 75(2) could attribute property income back to the transferor, whether the property in question was gifted or sold at its fair market value to the trust. Following the decision in Sommerer, whereby it was decided that transfers at fair market value were outside of the ambit of subsection 75(2),[10] the CRA changed its administrative position.[11]

Although the taxpayer (and the CRA) did not anticipate the impact Sommerer would have on susbsection 75(2)’s ambit and the transactions undertaken, the majority found that there is nothing unfair about the tax authorities administering the law as it stands.[12] Equitable remedies are not available to prevent its ordinary application to agreements freely agreed upon.[13]

In her dissent, Justice Côté emphasized that the very purpose of rescission is to relieve from all types of mistakes (but not from mere ignorance or misprediction).[14] The taxpayer did not assume that the CRA may change retroactively its position and in that respect, made a mistake which does not amount to a legal misinterpretation.[15]

When Can Mistakes Be Corrected?

In light of the recent Supreme Court decisions, no equitable remedy is available to relieve taxpayers from the unexpected application of Canadian tax laws. The same conclusion applies, regardless of whether the relevant regime was overlooked or misinterpreted. The correction of mistakes remains available where the parties are in a position to prove the existence of a definite and ascertainable agreement, which is not accurately reflected in their documentation:[16]

[…] The point, again, is that rectification corrects the recording in an instrument of an agreement (here, to redeem shares). Rectification does not operate simply because an agreement failed to achieve an intended effect (here, tax neutrality) – irrespective of whether the intention to achieve that effect was “common” and “continuing”.[17]

Such agreement could arguably relate to a specific tax component that was correctly anticipated,[18] but clearly not to a general goal to achieve tax neutrality.

It will be interesting to monitor whether Canadian courts will be deferential in respect of rectification or rescission validly completed under foreign laws. Recently, the Supreme Court of British Columbia stated that there is no obvious reason why an annulment, valid and enforceable under foreign law, would not be respected by a Canadian Court.[19] Although such foreign equitable remedies do not necessarily bind the Canadian tax authorities, the Federal Court of Appeal has also previously indicated that their grant would represent a relevant fact that would have to be considered in a Canadian tax litigation context.[20]



[1]Canada v. Fairmont Hotels, 2016 SCC 56 (“Fairmont”).

[2]Canada v. Jean Coutu Group, 2016 SCC 5 (“Jean Coutu”).

[3]Canada v. Collins, 2022 SCC 26, para. 22 (“Collins”).

[4]Collins, para. 16, referring to Fairmont (see paras. 14, 24 and 38), and Jean Coutu (see paras. 41, 44 and 48).

[5]Shell Canada Limited v. Her Majesty the Queen, [1999] 3 S.C.R. 622, para. 39.

[6]Stubart Investments Ltd. v. Her Majesty the Queen, [1984] 1 S.C.R. 536, pp. 540 and 575-576.

[7]Collins, para. 13.

[8]Collins, para. 14.

[9] All references to legislative provisions in the present text are to the Income Tax Act (Canada).

[10]Her Majesty the Queen v. Sommerer, 2012 FCA 207, paras. 47-49 and 57 (“Sommerer”).

[11] CRA Views 2013-0480351C6, “STEP CRA Roundtable Q9”, June 11, 2013 and CRA Views 2013-0495721C6, “APFF 2013 – Round Table Question 7”, October 11, 2013.

[12]Collins, para. 7.

[13]Collins, para. 22.

[14]Collins, paras. 49 and 56.

[15]Collins, paras. 71-72, 80 and 93.

[16]Fairmont, para. 38, Jean Coutu, paras. 23-24 and Quebec (Agence du revenu) v. Services Environnementaux AES Inc., 2013 SCC 65, paras. 53-54.

[17]Fairmont, para. 30.

[18] For example, the specific intent that the transfer of a property be realized at an amount corresponding to its cost, or to distribute precisely the outstanding balance of an available tax pool.

[19]Kraft Heinz Canada ULC v. Canada, 2022 BCSC 796, paras. 20-21 (“Heinz”).

[20]Canadian Forest Navigation Co. v. Her Majesty the Queen, 2017 FCA 39, paras. 15 and 19-20. See also Heinz, para. 42.



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