While the equitable remedy of rectification is often sought as a
means to address unintended tax consequences, rescission is also an
available remedy in the appropriate cases. The British Columbia
Supreme Court's decision in Re 0741508 BC Ltd and 0768723
BC Ltd, 2014 BCSC 1791, is an example of one case in
which rescission was used to avoid unintended tax consequences.
In this case, the Court considered whether rescission could be
granted in respect of two real estate transactions in which the
applicant corporations had transferred several parcels of land to a
In undertaking the transaction, the parties intended that there
would be net GST/HST payable on the land transfers due to the input
tax credit. Unfortunately, the partnership was not registered for
GST/HST purposes under the Excise Tax Act, and thus, not
eligible for the input tax credit. As a result, the CRA reassessed
the applicants about $6 million in GST/HST and penalties. The
Applicants sought rescission of the transfers, which would put the
land back into the hands of the selling corporations and eliminate
the GST/HST liability. The CRA opposed the application, arguing
that rescission should not be available in this case because the
mistake in question was not related to the purpose of the
transaction but only its consequences.
Rescission will be granted where a mistake goes to the legal
effect of the transaction itself and not just to its consequences,
and there must be no adequate legal remedy available. Thus, where
the common law of mistake is not available to render a transaction
void from the outset, the equitable remedy of rescission may
operate in the alternative. Equity will operate where there is a
mistake as to the promise or some material term of the contract,
which mistake was made honestly, and for which it would be unfair
not to correct. Thus, like rectification, rescission requires there
to be a stated intention that was mistakenly not carried out
properly. In order to obtain rescission, an applicant must show the
mistake was of "sufficient gravity" to the legal
character of the transaction or some matter of fact or law that is
basic to the transaction.
In this case, the Court found that the intentions of the parties
was always that the partnership be registered under the Act so that
no net GST/HST would be payable. There was a specific intention to
minimize the applicable tax. The Court held that it would be unfair
and unjust in this case not to grant rescission due to a mistake in
not registering the partnership under the Act. As no adequate legal
remedy was available to the Applicants, the Court granted
rescission and the transaction was set aside.
The Take Away
Like the equitable remedy of rectification, rescission will be
available to remedy unintended tax consequences where certain tax
implications formed part of the parties original intention in
entering into the transaction. Where there is sufficient evidence
that a specific tax consequence was intended by the parties at the
outset of the transaction and a mistake was made in carrying out
that intention, rescission may be available to unwind the
transaction to avoid the unintended tax consequences. Where no such
intention existed, rescission will not be granted, as it is not a
tool for retroactive tax planning.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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