Summary

Keywords

Taxation - Equity, Remedy (s. 24), Remedies - Taxation - Equity - Remedies - Equitable rescission - Tax professionals devise plans to shelter corporations’ assets from potential future creditors - Corporations implement plan and each in part issues dividends to family trusts - Plans consistent with Canada Revenue Agency’s interpretation of s. 75(2) of Income Tax Act -Tax Court of Canada adopts narrower interpretation of s. 75(2) - Dividends to family trusts trigger unanticipated income tax liabilities - Whether equitable remedy of rescission available to unwind transactions - What is the test for equitable recission - Whether equitable relief should be granted when alternative remedies are available?.

Summary

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Two corporations implemented a plan devised by a tax professional to protect corporate assets from future creditors. The plans were intended not to incur income tax liability. In part, the plans involved each corporation issuing dividends to a newly-created family trust. The effectiveness of the plan depended on a widely-accepted interpretation of s. 75(2) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.). At the time the plans were implemented, the interpretation was shared by Canada Revenue Agency. Sommerer v. Canada, 2011 TCC 21, affirmed 2012 FCA 207, subsequently adopted a narrower interpretation of s. 75(2). Canada Revenue Agency issued notices of reassessment to each family trust for the taxation years in which dividends were paid. Objections to the reassessments were unsuccessful. The Supreme Court of British Columbia granted equitable recission of the payments of dividends. The Court of Appeal dismissed an appeal.