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 partnership.
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.