Pallen Trust: dividend payment rescinded due to a mistake as to the tax consequences
In Re Pallen Trust, 2015 BCCA 222, a corporation paid a dividend to a discretionary trust on the assumption that subsection 75(2) of the Income Tax Act would attribute the income to the corporation. At the time, the general understanding in the tax community was that s. 75(2) applied in these circumstances. It was subsequently held in R. v. Sommerer, 2012 FCA 207 that s. 75(2) does not apply where the trust’s property was purchased in a genuine sale. Since the trust in this case had purchased its shares for fair market value, the CRA reassessed the trust on the basis that there was no attribution.
The BC Court of Appeal upheld the BC Supreme Court’s decision allowing equitable rescission of the dividend payment on the basis of mistake. A mistake as to the tax consequences of a transaction will not always justify rescission; it must be in the interests of justice to correct the mistake. It was significant in this case that there was a genuine mistake as opposed to an aggressive tax plan.