Fairmont: SCC Raises Hurdle for Rectification

On December 9, 2016, the SCC released two highly anticipated judgments on rectification. The court dismissed the taxpayer's appeal in Jean Coutu Group (PJC) v. Canada (Attorney General) (2016 SCC 55; see "PJC: The SCC Restricts Rectification," above) and allowed the Crown's appeal in Canada (Attorney General) v. Fairmont Hotels Inc. (2016 SCC 56). The SCC held that a grant of rectification requires more than a general intention to pursue a transaction in a tax-neutral manner; a specific intention must be present and expressed in definite and ascertainable terms. The court specifically overruled Juliar v. Canada (Attorney General) (1999 CanLII 15097 (ONSC); aff'd. 2000 CanLII 16883 (ONCA)), which was found to be irreconcilable with the SCC's guidance in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. (2002 SCC 19).

In Fairmont, the taxpayer sought to unwind certain transactions in a tax-neutral manner. After a share redemption inadvertently triggered a foreign exchange gain, the taxpayer applied to change the redemption to a loan to avoid the unintended tax liability. Lower courts granted rectification on the basis that the taxpayer possessed a continuing intention that the transaction be tax-neutral (Fairmont Hotels Inc. et al. v. AG Canada, 2014 ONSC 7302; Fairmont Hotels Inc. v. Canada ­(Attorney General), 2015 ONCA 441).

Brown J, writing for the 7-2 majority, held that the application for rectification should have been dismissed because the taxpayer could not show that it had a prior agreement that was incorrectly recorded in the legal instrument; it sought rectification to amend the agreement itself. A common continuing intention was not sufficient in the absence of evidence identifying the terms either omitted or recorded incorrectly and which, correctly recorded, would have been sufficiently precise to constitute the terms of an enforceable agreement.

Writing for the dissent, Abella J found that this result unduly narrowed the scope of rectification in the common law as compared with civil law, and frustrated the purpose of the remedy. In her view, the civil-law and common-law approaches to rectification in the tax context were based on analogous principles consistent with Juliar. Although the SCC's prior decision in Quebec (Agence du revenu) v. Services Environnementaux AES inc. (2013 SCC 65) did not expressly comment on Juliar, that case was decided on the basis of the true intention of the parties. Abella J wrote that departing from these principles and allowing the CRA to profit from legitimate tax-planning errors is akin to a windfall amounting to unjust enrichment. Abella J found the majority's decision imposed a "uniquely high" evidentiary threshold.

In my view, the majority's concern about the use of Juliar to undo tax liabilities stemming from poor planning or risky transactions may have led to the narrowed test. As Abella J noted, the courts have recognized the distinction between legitimate mistakes and attempts at retroactive tax planning, and have granted rectification in many instances involving errors of implementation.

In light of these two decisions, tax advisers should take greater care to ensure that the intention of a transaction is articulated in definite and ascertainable terms when they draft recitals to agreements and resolutions—particularly since the CRA will assess on the basis of the documents as they exist (Income Tax Technical News no. 22, January 11, 2002 (archived)). When faced with unintended results, and if rectification is no longer available, taxpayers should consider correcting resolutions (Twomey v. The Queen, 2012 TCC 310) or other equitable remedies such as rescission (Re Pallen Trust, 2015 BCCA 222, and Stone's Jewellery Ltd. v. Arora, 2009 ABQB 656). Also, in Telus Communications Inc. v. Canada (Attorney General) (2015 ONSC 6245), the court was prepared to use its "equitable jurisdiction" to relieve taxpayers from the effect of their mistake if they were not entitled to rectification under the principles established in Juliar.

Rami Pandher
Shea Nerland LLP, Calgary

Canadian Tax Focus
Volume 7, Number 1, February 2017
©2017, Canadian Tax Foundation