The recent Supreme Court of Canada decision of Canada (Attorney General) v. Collins Family Trust involved two companies that were attempting to avoid unintended adverse tax consequences.  

The companies followed guidelines that were published by the Canada Revenue Agency (the “CRA”). These guidelines provided that, under subsection 75(2) of the Income Tax Act, companies could avoid taxes on dividends if paid to a family trust. In 2008, the companies’ assets were transferred to the Collins and Cochran family trusts. 

In the decision of Sommerer v. The Queen from 2011, however, the Tax Court of Canada applied a different interpretation of subsection 75(2). The effect of that interpretation was that family trusts owed taxes on dividends.  

As a result of this decision, the Collins and Cochran family trusts applied to the Supreme Court of British Columbia to cancel the transactions that led to the dividends. The Court agreed to cancel the transactions. Thereafter, the Court of Appeal dismissed the Attorney General of Canada’s (on behalf of the CRA’s) appeal, and the Attorney General applied to the Supreme Court of Canada.  

Ultimately, the Supreme Court agreed with the CRA’s interpretation of the law and allowed the appeal. The transactions could not be cancelled and retroactive tax planning was not allowed.  

Justice Brown, writing for the majority of the Supreme Court, emphasized that principles of equity and tax law prevented the companies from reversing their transactions. According to Justice Brown, “Taxpayers should be taxed based on what they actually agreed to do and did, and not on what they could have done or later wished they had done” (at para. 1). A court only grants relief when it would be unfair to enforce transactions, and the Court noted that there was nothing unfair about the ordinary application of tax laws for freely-taken transactions. Any changes to be made would be up to Parliament and not the Courts. 

The Supreme Court ultimately affirmed its previously stated position that retroactive tax planning is not allowed. In practice, this means that people cannot change their tax affairs later on to prevent unintended consequences. Even if taxpayers arranged their finances to reduce their taxes and the opposite outcome is achieved, they will have to bear the consequences of that outcome.  

Enjoy the rest of your day, 

Suzana Popovic-Montag & Jillian Barlow