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
Shea Nerland LLP, Calgary