Tax Planning Gone Wrong: Supreme Court of Canada’s Decision In Canada (Attorney General) v. Collins Family Trust

Are you looking for tax-saving opportunities?

Have you implemented strategies in place to reduce your overall tax burden?

Perhaps you are curious to know about the Supreme Court of Canada’s latest ruling on tax avoidance strategies.

In the matter Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26, the Supreme Court of Canada determined that companies cannot reverse transactions that lead to unintended taxes in the future.?

Let’s look at the specifics of the case to understand this further.

Factual Background

The case Canada (Attorney General) v. Collins Family Trust is centered around two companies, Rite-Way Metals Ltd. and Harvard Industries Ltd., who were looking to reduce their tax burden by implementing legal tax avoidance strategies.?

In compliance with the guidelines published by the Canada Revenue Agency (CRA) relating to Section 75(2) of the Income Tax Act, a family trust was created allowing it to receive dividends without paying taxes.?

This tax avoidance strategy offered a legal method for companies to pay dividends to family trusts without the latter having to pay any taxes on the dividend income received.?

This setup allowed the parties involved to save substantial amounts in taxes.

For the sake of clarity, family trusts are legal structures that can legally hold assets.?

Once assets are transferred into the family trust, the transferor no longer owns the asset.?

Instead, the asset will be held by the trust and will be administered for the benefit of the trust’s beneficiaries, who are usually family members in the case of family trusts.

In this particular case, a family trust was created for the Collins and Cochran families so they could take advantage of tax loopholes on dividend payments.

At first, their tax avoidance strategy went as planned resulting in the expected tax savings.

However, a few years later, the Tax Court of Canada issued a decision that interpreted section 75(2) of the Income Tax Act differently than the guidelines that were published by the CRA.

Based on this new interpretation of the tax law, family trusts were required to pay taxes on dividends paid to them.?

No longer seeing the advantage of having the family trust receive dividends, the family trusts requested the cancellation of dividend payments made to them.?

The idea here was that if they knew that dividends paid to a family trust were to be taxed, they would not have implemented this tax strategy in the first place.

The Supreme Court of British Columbia ruled in favour of the family trusts allowing them to cancel the transactions in question.

However, the Attorney General of Canada, on behalf of the CRA, appealed this decision.

The British Columbia Court of Appeal dismissed the Attorney General of Canada’s appeal, thereby maintaining the trial judge’s ruling.

Ultimately, the Attorney General of Canada filed an appeal to the Supreme Court of Canada.

Supreme Court of Canada's Ruling

On June 17, 2022, the Supreme Court of Canada rendered a decision finally agreeing with the Attorney General of Canada’s position.

The Supreme Court of Canada concluded that the dividend payment transactions could not be canceled following the new interpretation of Section 72(2) of the Income Tax Act by the Tax Court of Canada.

Writing for the majority of the Supreme Court judges, Justice Russell Brown emphasized that “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”.

In other words, if you implement a tax avoidance strategy today while fully in compliance with the law, you cannot undo what you did before if the interpretation of the law changes in the future to your disadvantage.

The Supreme Court indicated that relief should only be given to those who suffer an unfair outcome.

In the case at bar, the court did not consider that paying standard taxes on dividends received would be considered an unfair outcome for the taxpayers.

Takeaways

In light of the case Canada (Attorney General) v. Collins Family Trust, the Supreme Court of Canada says that taxpayers must bear the responsibility for their tax planning strategies.?

If taxpayers can save on their taxes by adopting a legal strategy, they reap the benefit.?

However, if a taxpayer’s tax planning strategy ends up costing more in taxes at a future point in time, then the taxpayer must assume the consequences, even if it was unintended.?

The message to Canadian taxpayers is that the Supreme Court of Canada does not authorize “retroactive tax planning”.?

In case you are looking to implement a tax avoidance strategy, be sure to consult with a qualified attorney or professional to weigh the pros and cons of your strategy.

The Collins and Cochran families not only failed to materialize their tax “savings” but they likely lost a lot of time and money in dealing with this case going all the way to the Supreme Court of Canada.

Good luck!