In January 2022, the Supreme Court of Canada heard oral arguments in the Collins Family Trust matter (an appeal of 2020 BCCA 196) which deals with recission in a tax context. A comprehensive overview of the case and the issues is beyond the scope of this article. Rather this article will focus on advance tax rulings and how they were discussed during oral argument. The SCC has not released its reasons at the time of writing. However, the discussion during oral argument raised a concern that they could decide the matter on a basis which creates an expectation that taxpayers and their advisors will seek advance tax rulings in many situations where that would not be ordinary practice today.
Background on Advance Tax Rulings
Advance tax rulings are an administrative mechanism whereby a taxpayer may request that the CRA provides a ruling on their view of the application of the law in the particular scenario subject to the request. The CRA will generally respect rulings with regard to the taxpayer who received the ruling. However, the courts have held that they are not binding if they are subsequently determined to be incorrect (e.g. Woon v. M.N.R. (1950), 50 D.T.C. 871 (Can. Ex. Ct.), at para. 27)
The following quote represents the view often taken by the courts with respect to advance rulings:
The moving party recognizes that, as a matter of policy, the Department will respect an advance tax ruling. However, the Department’s advance rulings and technical interpretations have no binding legal effect and the Department would not be estopped by its ruling. A taxpayer must prove that it meets the requirements of the legislation on its own terms; the Minister’s tax treatment of its competitors cannot assist it.
The advance ruling does not grant or deny a right, nor does it have any legal consequences. It does not have the legal effect of settling the matter or purport to do so. It is at the most a non-binding opinion…
Rothmans, Benson & Hedges Inc. v. M.N.R. [1998] 148 F.T.R. 3, at paras. 27-28 citations omitted
There are various requirements for requesting a ruling. For instance, rulings must be requested in advance of the transactions to which they would apply.
Importantly, there is also a cost associated with a ruling request. There is a financial cost because the taxpayer must pay for the request. The cost is based on an hourly rate and so the total depends on the amount of time the CRA spends responding to the request. In addition to the financial cost, requesting a ruling also takes time. In particular, it can take over a year to obtain a final response to a ruling request from the CRA. That delay can be an important barrier to requesting a ruling because many commercial transactions are completed within a much shorter timeframe.
Due to the time and money involved in requesting a ruling, such requests have typically occurred in certain circumstances. In particular, they have typically been used in situations involving uncertainty or to confirm that the CRA agrees the proposed transactions fit within the particular framework the taxpayer intended them to. Examples of areas that have been the subject of a relatively large number of rulings include pipelines and butterflies. The details of those types of transactions are beyond the scope of this article.
Discussion of Advance Tax Rulings in Oral Arguments in Collins Family Trust
Collins Family Trust involves a request for equitable recission. When granted, equitable rescission undoes a transaction. The taxpayer is taxed as if the transaction never occurred. In Collins Family Trust, the taxpayer structured a transaction to take advantage of the long standing CRA position that the reversionary trust rules in subsection 75(2) of the Income Tax Act applied when property is sold to a trust. However, it turned out that subsection 75(2) did not apply due to the decision in Sommerer v. The Queen, 2012 FCA 207. The taxpayer applied to court to rescind the transaction. The taxpayer was successful at the first two levels of court, and the SCC granted the Department of Justice leave to appeal.
The role of advance tax rulings came up during oral argument before the SCC. It appears that some members of the court were not familiar with the role of advance tax rulings in the tax system. There were questions referring to the fact that the advisors had apparently identified the possibility of an advance tax ruling and the taxpayer decided not to proceed. One Justice of the SCC described rulings as a “built-in feature” of the tax system and a “perfect answer” for addressing areas of concern that is not available in other areas of law such as matters involving the Highway Traffic Act. The Justice also suggested that in a situation like the one that occurred, where the CRA’s likely answer was subsequently found to be incorrect by the courts, a ruling would permit the taxpayer to obtain relief from the courts based on the theory of officially induced error. The Justice of the SCC misunderstood the basis for advance rulings. In particular, that Justice indicated that advance tax rulings are part of the Income Tax Act itself. That Justice was wrong. There is no statutory basis for advance tax rulings. Advance tax rulings were developed on an administrative basis by the CRA. They do not legally bind the CRA.
When Counsel for the taxpayer asked if taxpayers would be expected to obtain a ruling in every situation, the SCC Justice said no and that taxpayers need apply for an advance tax ruling only where there is uncertainty. However, in the case at bar the relevant issue was not thought to be uncertain. This would suggest that the taxpayer should not have been expected to seek a ruling under the test proposed by the SCC Justice.
There appears to be some inconsistency. The SCC Justice questioned whether equitable rescission should be denied in this particular case because the taxpayer had not obtained an advance tax ruling. Yet, this was a situation where tax practitioners were of the view that there was no uncertainty. Counsel sought to explain that rulings are not typically used in situations where there is no uncertainty and that a ruling is not necessarily binding. However, the SCC Justice, when replying to that explanation, suggested that relying on a longstanding CRA position may not be treated the same way as relying on a ruling. That may in part be due to the SCC Justice’s misunderstandings regarding the role of advance tax rulings in terms of their origin and what they actually provide a taxpayer.
The thought underlying the questions of the SCC Justice seems to have been that taxpayers should request rulings much more routinely than has been the case in the past and that taxpayers are in some way accepting the risk of being wrong if they do not request a ruling. If the decision which is ultimately released by the SCC is consistent with that view, there appear to be two options.
One option is that taxpayers continue to proceed without advance tax rulings due to the costs involved, even though the risk of doing so would have increased. Taxpayers who proceed in that manner may not be able to access remedies such as recission or perhaps rectification should they become necessary.
The other option would be for taxpayers to seek rulings in a broader range of situations than they would have previously. That could include situations which may have been the subject of prior CRA pronouncements, but which have not been addressed by the courts. This would come at a cost for taxpayers. The severity of the delay aspect of that cost and the possible implications for the CRA itself would depend on how many taxpayers took this approach.
The CRA has limited resources to address ruling requests and so an increased volume of requests would likely overwhelm their capacity. The length of time needed to obtain a ruling would likely increase even further. Taxpayers who have decided to seek a ruling could see their transactions grind to a halt. If significant numbers of taxpayers seek advance rulings, the resulting delays in transactions would be detrimental to the economy.
Due to these negative consequences, it is to be hoped that the line of thought suggested by the questions at oral argument does not find its way into the court’s ultimate decision.