CRA’s Attempt to Grab $6 million Denied

The British Columbia Supreme Court (BCSC) recently made a ruling that was not only favourable to the taxpayer, but also set a welcome precedent for future taxpayers that enter into transactions with unintended tax consequences.

In 0741508 B.C. Ltd. and 0768723 B.C. Ltd. (Re) (2014) BCSC 1791, the Canada Revenue Agency (CRA) intervened in a taxpayer’s attempt to rescind a real estate transaction that had unintended tax consequences. The CRA alleged that the contract should not be cancelled because it was entitled to $6 million in taxes. However, the Court disagreed and granted the taxpayer the relief sought.  Here’s what happened:

In two real estate transactions of a proposed commercial development in the area of Kelowna, B.C., the CRA assessed nearly $6 million in taxes and gross negligence penalties as a result of one of the parties to the transactions not being registered under the Excise Tax Act (ETA) and thus failing to collect HST.

It is common industry practice, and the parties to the agreement intended, that there would be no net GST/HST payable on the land transfers because the GST/HST payable would be offset by input tax credits. Older cases held that when large unanticipated tax consequences flow from a transaction and that is the reason for requesting rescission of the agreement, the remedy should not be granted because it was the consequence rather than the purpose of the transaction that was unintended.

The BCSC rejected the line of cases argued by the CRA and reiterated the principles set out in cases such as McMaster¹ and Pallen² that “if there has been an honest, even though inadvertent mistake, equity will afford relief in any case that the court considers that it would be unfair, unjust, or unconscionable not to correct it” and held that it would be unfair and unjust for either Canada and/or the Province to gain over $6 million plus accruing interest solely because of a mistake in not registering under the ETA.

The BCSC granted the rescission because, as was stated at paragraph 109, there was “no adequate legal remedy available, the petitioners are not seeking to carry out retroactive tax planning, and there is no prejudice to third parties.”

The result of this case was clearly positive for the taxpayers at hand, but all Canadians have the potential to benefit from this precedent setting decision. The fact that the older principles of equitable rescission that the CRA attempted to rely on have been set aside is something that can be celebrated. It is now clear that the CRA cannot intervene in order to attempt to keep a contract alive, in order to collect taxes that would be owing if the contract was performed.

¹McMaster University v. Wilchar Construction Ltd. ([1971] 3 O.R. 801 (H.C.))
²Re: Pallen Trust (2014 BCSC 305)