In Re 0741508 BC Ltd and 0768723 BC Ltd (2014 BCSC 1791), the British Columbia Supreme Court ("BCSC") considered whether rescission should be granted in respect of two real estate transactions in which the applicant corporations had transferred several parcels of land to a partnership.
The transactions were undertaken as part of a proposed commercial development of the land. The parties intended – in accordance with industry practice – that there would be no net GST/HST payable on the land transfers (i.e., the GST/HST payable would be offset by an input tax credit).
However, the partnership was not registered for GST/HST purposes under the Excise Tax Act ("ETA") and accordingly the input tax credit was not available. The CRA audited members of the corporate group and reassessed nearly $6 million in GST/HST and penalties.
The parties brought an application to the BCSC for rescission of the transfers (i.e., to effectively put the property back in the hands of the selling corporations).
The application was opposed only by the CRA, which argued that rescission should not be available as the mistake in question was not related to the purpose of the transaction but only its consequences. In Gibbon v Mitchell ( 1 W.L.R. 1304 (Ch.), a U.K. court held that rescission would be granted for a mistake where "the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it". Similar reasoning was followed by the Ontario court in 771225 Ontario Inc. v Bramco Holdings Co Ltd. ( 17 O.R. (3d) 571 (Gen. Div.)), which held that an assessed land transfer tax "was a consequence of the transaction, rather than its purpose, and therefore the case did not fall within the strict confines of the rule for granting relief."
In considering whether to exercise its discretion to order equitable rescission, the BCSC cited McMaster University v Wilchar Construction Ltd. ( 3 O.R. 801 (H.C.)):
In equity, to admit of correction, mistake need not relate to the essential substance of the contract, and provided that there is mistake as to the promise or as to some material term of the contract, if the Court finds that there has been honest, even though inadvertent, mistake, it will afford relief in any case where it considers that it would be unfair, unjust or unconscionable not to correct it.
In the present case, the BCSC noted that, in Re: Pallen Trust (2014 BCSC 305) the court had rejected Gibbon and instead relied on the test adopted in the U.K. Supreme Court decision in Pitt v Commissioners for Her Majesty's Revenue and Customs ( UKSC 26) to determine whether to rescind a voluntary transaction.
Equitable rescission, under Pallen, would be available where there was a "causative mistake of sufficient gravity" as to the "legal character or nature of the transaction, or as to some matter of fact or law which is basic to the transaction" such that it would be unconscionable, unjust or unfair not to correct the mistake.
The BCSC noted that, in the transactions at hand, the intention of the parties had always been that the partnership would be registered under the ETA so that no net GST/HST would be payable. This was distinguishable from Bramco, where there had never been a specific intention to minimize the applicable tax.
The BCSC reiterated the principle set out in McMaster and Pallen 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 and held that 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 Court did not explicitly consider whether the mistake met the threshold of being of sufficient gravity as to the legal character, nature of the transaction, or as to some matter of fact or law which is basic to the transaction. Presumably, the punitive and negative results of the transaction were sufficiently grave – that is, the mistake about the fact as to whether ETA registration had been completed was sufficiently grave – that the Court found rescission should be granted.
Pallen has been appealed to the B.C. Court of Appeal. It will be interesting to see if the present case is appealed as well. Either way, the equitable doctrine of rescission continues to develop in the context of unintended tax consequences.
For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com
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