Pallen Trust, Re, 2015 BCCA 222

• Judge: Newbury, Saunders and Savage, JJ.A.
• Court: Court of Appeal (British Columbia)
• Case Date: April 27, 2015
• Jurisdiction: British Columbia
• Citations: 2015 BCCA 222;(2015), 373 B.C.A.C. 37 (CA)

Pallen Trust, Re (2015), 373 B.C.A.C. 37 (CA);

    641 W.A.C. 37

MLB headnote and full text

Temp. Cite: [2015] B.C.A.C. TBEd. MY.046

Re Pallen Trust

Her Majesty the Queen in Right of Canada (appellant/respondent) v. The Pallen Trust (respondent/petitioner)

(CA41693; 2015 BCCA 222)

Indexed As: Pallen Trust, Re

British Columbia Court of Appeal

Newbury, Saunders and Savage, JJ.A.

May 20, 2015.

Summary:

A declaration and payment of two dividends totalling $1,750,000 by a corporation ("New Integrated") to the Pallen Trust in 2008 represented the final step in a plan of reorganization carried out by various corporations controlled by Mr. Pallen, the trustee and the shareholder of a beneficiary of the Pallen Trust. At the time of the reorganization, the understanding of the trustee of the Pallen Trust and that of its advisors was that the mode of transfer of the property to the Trust, whether by sale or gift, was irrelevant for tax purposes, i.e., that as long as the trust "held" the property s. 75(2) of the Income Tax Act applied. However, in 2012 the Federal Court of Appeal in Canada v. Sommerer adopted a restrictive view, ruling that s. 75(2) could not have been intended to apply where the property in question was sold to a trust, as opposed to gifted to, or settled on, the trust. In 2012, relying on Sommerer, CRA notified the Pallen Trust that it proposed to re-assess its 2008 tax return. CRA asserted that since s. 75(2) was not now applicable (the Trust having purchased for $100, the shares on which the dividends were paid) the dividends paid by New Integrated were taxable in the hands of the Pallen Trust rather than attributed to the transferor corporation. The re-assessment would result in tax payable by the Pallen Trust in the amount of some $552,000. The Pallen Trust filed a petition seeking rescission of the two dividends it received.

The British Columbia Supreme Court, in a decision reported at [2014] B.C.T.C. Uned. 305, granted rescission on the basis of mistake, relying in large part on the 2013 decision of the Supreme Court of the United Kingdom in Pitt v. Holt. The mistake asserted by the Pallen Trust was that its trustee (as well as the corporations involved in the reorganization and their advisors) had relied on a particular understanding of s. 75(2) of the ITA. The chambers judge found that on an application of Pitt v. Holt, a causative mistake of sufficient gravity had been shown, and that the equities of the case supported granting rescission. CRA appealed on the grounds that: 1. the chambers judge failed to correctly apply the test for equitable rescission of a voluntary disposition made as part of an artificial tax avoidance plan; 2. the chambers judge erred by concluding that the Minister would not have challenged the Plan prior to Sommerer; and 3. the chambers judge further erred by ordering the dividends rescinded ab initio as the court's equitable jurisdiction did not extend to retroactively invalidating an otherwise valid transaction.

The British Columbia Court of Appeal dismissed the appeal.

Equity - Topic 1005

Equitable relief - Mistake of law - See paragraphs 37 to 58.

Equity - Topic 1009

Equitable relief - General - Rescission - See paragraphs 37 to 62.

Income Tax - Topic 5461

Trusts - Liability for tax - General - See paragraphs 37 to 58.

Mistake - Topic 201

Mistake of law - General - See paragraphs 37 to 58.

Mistake - Topic 4005

Relief - Circumstances when granted - See paragraphs 37 to 58.

Cases Noticed:

Futter et al. v. United Kingdom (Her Majesty's Revenue and Customs) (2013), 445 N.R. 200; [2013] UKSC 26, consd. [para. 2].

Gibbon v. Mitchell, [1990] 1 W.L.R. 1304 (Ch. Div.), refd to. [para. 2].

McClurg v. Minister of National Revenue, [1990] 3 S.C.R. 1020; 119 N.R. 101, refd to. [para. 4].

Sommerer v. Minister of National Revenue, 2011 TCC 212, affd. (2012), 434 N.R. 130; 2012 FCA 207, consd. [para. 6].

Ogilvie v. Littleboy (1897), 13 T.L.R. 399 (C.A.), refd to. [para. 29].

Hastings-Bass, Re, [1975] Ch. 25, refd to. [para. 29].

Mettoy Pension Trustees Ltd. v. Evans, [1990] 1 W.L.R. 1587 (C.A.), refd to. [para. 29].

Anker Petersen v. Christensen, [2002] W.T.L.R. 313 (Ch.), refd to. [para. 29].

Wolff v. Wolff, [2004] S.T.C. 1633, refd to. [para. 29].

Sieff v. Fox, [2005] E.W.H.C. 1312 (Ch.), refd to. [para. 29].

Racal Group Services v. Ashmore, [1995] S.T.C. 1151, refd to. [para. 34].

771225 Ontario Inc. et al. v. Bramco Holdings Co. et al. (1995), 77 O.A.C. 75; 21 O.R.(3d) 739 (C.A.), consd. [para. 42].

JAFT Corp. v. Jones et al. (2014), 304 Man.R.(2d) 86; 2014 MBQB 59, refd to. [para. 44].

Agence du Revenu du Québec v. Services Environnementaux AES inc. et al. (2013), 453 N.R. 119; 2013 SCC 65, consd. [para. 45].

Canadian Imperial Bank of Commerce v. Minister of National Revenue (2013), 444 N.R. 376; 2013 FCA 122, refd to. [para. 51].

65302 British Columbia Ltd. v. Minister of National Revenue, [1999] 3 S.C.R. 804; 248 N.R. 216, refd to. [para. 51].

Minister of National Revenue v. Eldridge, [1964] C.T.C. 545 (Exch.), refd to. [para. 51].

Signalisation de Montréal Inc. v. Services de Béton Universels ltée et al., [1993] 1 F.C. 341; 147 N.R. 241 (F.C.A.), refd to. [para. 53].

Kennedy v. Kennedy, [2014] E.W.H.C. 4129 (Ch. Div.), refd to. [para. 53].

Winsor v. Minister of National Revenue, 91 B.T.C. 1170 (T.C.C.), refd to. [para. 60].

Allnutt v. Wilding, 2009 EWCA Civ. 912, refd to. [para. 61].

Varevic Enterprises Ltd. v. Mack (1985), 66 B.C.L.R. 211 (C.A.), refd to. [para. 61].

Johnson et al. v. Agnew, [1979] All E.R. 833 (H.L.), refd to. [para. 61].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 75(2) [para. 5].

Authors and Works Noticed:

Bhandari, Monica, Undoing Transactions for Tax Purposes: The Hastings-Bass Principle, in Elliott, S., Häcker, B., and Mitchell, C., Restitution of Overpaid Tax, p. 158 [para. 29].

Lewin on Trusts (18th Ed. 2007), pp. 54 to 58 [para. 29].

Lewin on Trusts (19th Ed. 2015), § 4-061 [para. 61].

Li, J., and Hwong, T., GAAR in Action: An Empirical Exploration of Tax Court of Canada Cases (1997-2009) and Judicial Decision-Making (2013), 61:2 Canadian Tax Journal 321, p. 330 [para. 37].

O'Sullivan, D., Elliot, S., and Zakrzewski, R., The Law of Rescission (2nd Ed. 2015), c. VII [para. 4]; § 1.14 to 1.15 [para. 61].

Waters' Law of Trusts in Canada (4th Ed. 2012), p. 622-3 [para. 8].

Counsel:

M. Taylor, S. Sit and Z. Froese, for the appellant;

J. Nitikman, for the respondent.

This appeal was heard at Vancouver, B.C., on April 27, 2015, before Newbury, Saunders and Savage, JJ.A., of the British Columbia Court of Appeal. The following judgment of the Court of Appeal was delivered by Newbury, J.A., on May 20, 2015.