Respondents Fairmont-Hotels-Inc-et

File No. 36606
IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL OF ONTARIO)
BETWEEN:
ATTORNEY GENERAL OF CANADA
Appellant
- and FAIRMONT HOTELS INC.,
FHIW HOTEL INVESTMENTS (CANADA) INC. and
FHIS HOTEL INVESTMENTS (CANADA) INC.
Respondents
FACTUM OF FAIRMONT HOTELS INC,
FHIW HOTEL INVESTMENTS (CANADA) INC. and
FHIS HOTEL INVESTMENTS INC.
McCarthy Tetrault LLP
Suite 5300
Toronto-Dominion Bank Tower
Toronto ON M5K 1E6
Conway Baxter Wilson LLP
401-1111 Prince of Wales Drive
Ottawa ON K2C 3T2
Geoff R. Hall
Tel: (416) 601-7856
Fax: (416) 868-0673
Email: ghall@mc earthy. ca
Colin S. Baxter
Tel: (613) 780-2016
Fax: (613) 688-0271
E-mail: [email protected]
Chia-yi Chua
Tel: (416) 601-7715
Fax: (416) 868-0673
Email: [email protected]
Counsel for the Respondents
Agent for the Respondents
-2Department of Justice
99 Bank Street, Suite 1100
Ottawa ON K1A OH8
Department of Justice
50 O'Connor Street, Suite 500
Ottawa ON K1A 0H8
Daniel Bourgeois
Eric Noble
Tel: (613) 670-64401(416) 973-9032
Fax: (613) 941-2293
Email: [email protected]
eric.noblegustice.gc.ea
Christopher Rupar
Tel: (613) 946-2351
Fax: (613) 954-1920
Email: [email protected]
Counsel for the Appellant
Agent for the Appellant
File No. 36606
IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL OF ONTARIO)
BETWEEN:
ATTORNEY GENERAL OF CANADA
Appellant
- and FAIRMONT HOTELS INC.,
FHIW HOTEL INVESTMENTS (CANADA) INC. and
FHIS HOTEL INVESTMENT (CANADA) INC.
Respondents
FACTUM
PART I. OVERVIEW AND FACTS
Overview
1.
The circumstances in which rectification may be appropriate are varied:
(a)
Rectification may be appropriate to correct an error in a written contract (as was
the case in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. 1 ),
or to correct an error in some other written instrument (such as a corporate
resolution, as in the case at bar).
(b)
Rectification may be appropriate where there has been a unilateral mistake (as in
Performance Industries), or where there has been a mutual mistake (as in Royal
Bank of Canada v. El-Bris Limited2).
2002 SCC 19, [2002] 1 S.C.R. 678 ("Performance Industries").
2 2008 ONCA 601 ("El-Bris").
2
(c)
Rectification may be appropriate where there has been a clerical error (as in
Performance Industries, where the parties intended "110 yards" but wrote "110
feet"), or where it is necessary to change the mechanics of the written instrument
in order to accord with the parties' intentions (as in the Riopel transaction
considered by this Court in Quebec (Agence du revenu) v. Services
environnementaux AES inc.3).
(d)
Rectification may be appropriate where the instrument in question is a standalone
contract between parties dealing at arm's length (as in Performance Industries
and El-Bris), or where the instrument is one component of a larger transaction
between non-arm's length parties (as in AES, Juliar v. Canada (Attorney
Genera1, 4 and the case at bar).
(e)
Rectification may be appropriate even though one of the parties to the transaction
denies there was any mistake (as in Performance Industries), or where the parties
agree there was a mistake and rectification is contested only by the Crown on the
basis that rectification will change the tax treatment of the transaction (as in AES,
Juliar, and the case at bar).
2.
Contrary to what the Attorney General seems to suggest, Performance Industries and
Shafron v. KRG Insurance Brokers (Western) Inc. 5 do not set out a complete code governing the
test for rectification in the myriad of circumstances in which it may be sought. As is developed
herein, the test for rectification is a flexible one based on a set of five consistent principles and
2013 SCC 65, [2013] 3 S.C.R. 838 ("AES").
4 (1999), 46 O.R. (3d) 104 (S.C.J.), affd. (2000), 50 O.R. (3d) 728 (C.A.), leave to appeal refused [2000] S.C.C.A.
No. 621 ("Jultar").
5 2009 SCC 6, [2009] 1 S.C.R. 157 ("Shafron").
3
3
the particular circumstances of the case, with Performance Industries and Shafron being specific
applications of the general principles in particular circumstances. The five principles are:
(a)
There must be a specific intention by the party to the written instrument, or
common to all of the parties if there was more than one, that is antecedent to the
instrument and that remained unchanged until the instrument was signed.6
(b)
There must be a mistake in the written instrument or in the implementation of the
specific (common) intention such that the instrument fails to put the intention into
effect.?
(c)
Rectification is not limited to the correction of clerical errors.8
(d)
The purpose of rectification is to restore parties to their original intention and
thereby prevent unjust enrichment.9
(e)
3.
Since it is an equitable remedy, rectification is discretionary.'°
In the circumstance of a non-arm's length arrangement in which rectification is sought to
address a tax implication caused by an error in a written instrument, the Juliar line of cases
demonstrates how the governing principles operate:"
(a)
A court hearing a rectification application must scrutinize carefully whether there
has been a continuing specific intention to undertake a transaction on a particular
tax basis (a general intention to minimize tax is not sufficient), although it is not
See paras. 34-42.
7 See para. 43.
8 See paras. 44-48.
9 See paras. 49-52.
19 See para. 53.
11 See paras. 54-62.
6
4
necessary for all the details of the specific plan to be worked out in advance. The
court must ensure that the intention was a continuing one up to the point that the
instrument in question was signed. Because the issue arises in the context of a
non-arm's length transaction, the court undertakes a close scrutiny at this step,
and looks for corroborating evidence from contemporary documentation and
independent witnesses such as external tax advisors.
(b)
There must be an error in the written instrument or the implementation of the
settled plan such that the instrument fails to give effect to the continuing specific
intention to undertake the transaction on a particular tax basis.
(c)
Rectification may change the mechanics of the transaction as originally
documented, if such a change is necessary to give effect to the continuing specific
intention.
(d)
In respect of unjust enrichment the Crown stands in the same position as a private
party, so rectification may be ordered to prevent a windfall to the Crown. The
Crown is entitled to tax on the basis of a taxpayer's real transactions, but it is not
entitled to benefit from a drafting or implementation error.
(e)
The court may exercise discretion to refuse rectification even if the requirements
are otherwise met (if, for example, the party seeking rectification is engaging in
abusive conduct or is attempting to engage in retroactive tax planning).
4.
Juliar and cases which have followed it (including the decision of the Ontario Court of
Appeal below that is under appeal) are not wrongly decided and should not be overruled by this
Court. On the contrary, the Juliar line of cases should be recognized as the correct application of
5
the five principles governing rectification in the context of a non-arm's length arrangement in
which rectification is sought to give effect to a continuing intention to effect a specific tax
outcome. The Juliar line of cases makes rectification available where there is an error in
documentation or implementation of a plan but not where there is an error in the design of a
plan.
5.
A comparative law perspective reinforces the conclusion that the Juliar line of cases
should not be overruled. There is an appropriate parallel between the Juliar principles and the
corresponding civil law principles accepted by this Court in AES and as summarized in
paragraph 51 of the factum of Le Groupe Jean Coutu (PJC) Inc. ("Jean Coutu") in the
companion appeal (File No. 36505). Each set of principles is firmly grounded in the legal
system in which they are based: the Juliar principles are deeply rooted in principles of common
law and equity, while the principles set out in AES and by Jean Coutu in the companion appeal
are deeply rooted in principles of Quebec civil law. Yet both sets of principles focus on the same
thing, namely giving effect to the parties' intentions in the face of an error in a written instrument
or an error in implementation of a specific plan, t2 and result in two tests that are conceptualized
differently but are functionally very similar. This is a very apt way for Canada's two systems of
private law to operate, especially where they interact with federal tax law.
6.
Applying the five principles governing rectification, rectification was properly granted by
the courts below:
(a)
The findings of fact made at first instance — and not tainted by palpable and
overriding error — establish the requisite continuing specific intention, namely an
12
See AES, supra footnote 3 at pares. 28-35 and 44-45.
6
intention to effect the transactions in question without incurring a taxable foreign
exchange gain or loss. This intention was present at all times up to the signing of
the erroneous corporate resolutions.
(b)
Crucially, Fairmont's intention did not change at a key point in the chronology,
namely 2006. At that point, Fairmont had to modify its original plan because of
an intervening event, and for business reasons the modified plan left certain
details to be determined later. But the specific and continuing intention — never to
incur a taxable foreign exchange gain or loss, including on the unwind of the
Legacy financing — did not change. In fact, it was entrenched by another specific
intention that arose in 2006, namely never to redeem certain preferred shares,
including on the unwind.
(c)
Rectification was sought not to engage in retrospective tax planning, but rather to
restore the parties to their original intention and thereby prevent the Crown from
securing a significant tax windfall through an error in the written documentation
and in the implementation of Fairmont's plan. There was no way to achieve that
purpose other than to change the mechanics of the transaction as originally
documented. Fairmont is not seeking to use rectification to change the original
design of its plan, but rather to correct an error in the documentation and
implementation of the plan.
7.
Therefore the appeal ought to be dismissed.
The three critical time periods
8.
Three time periods are critical: (i) 2002 and 2003; (ii) 2006; and (iii) 2007.
7
Events in 2002 and 2003
9.
In 2002 and 2003, Fairmont Hotels Inc. ("FHI"), a hotel management company, agreed
to finance the acquisition by Legacy Hotels REIT ("Legacy"), a real estate investment trust in
which it had an interest, of two hotels in the United States (specifically in Washington, D.C. and
in Seattle, Washington). FHI did so in order to secure contracts to manage the two hotels. t3
10,
Since the financing was in U.S. dollars, FHI faced potential foreign exchange gains or
losses. In order to eliminate that potential, a structure was created to hedge against any such gain
or loss. FHI established two subsidiaries, FHIW Investments Canada Inc. ("FHIW") and FHIS
Hotel Investments Canada Inc. ("FHIS"), and put in place reciprocal loans that were neutral for
accounting and tax purposes: each of FHI, FHIW and FHIS had a U.S. dollar denominated asset
and a U.S. dollar denominated liability of equal value. Fainnont's14 and Legacy's tax and
financial advisors spent at least a year planning the structures to ensure they were set up to
achieve the parties' business and tax objectives.15 The structures were expected to stay in place
for 10 years or longer." It was foreseen from the outset that the structures would eventually be
unwound — always in a tax-neutral way with no net taxable foreign exchange gains or losses.
Events in 2006
11.
In 2006, an intervening event occurred: Fairmont was acquired by Kingdom Hotels
International and Colony Capital LLC. At this point, FHI and its advisors recognized that if
Reasons for judgment of the Ontario Superior Court of Justice ("ONSC Reasons"), paras. 2-5; Appellant's
Record ("AR"), Vol. I, p. 9.
14 "Fairmont" means Fairmont Hotels Inc., FHIW Hotel Investments (Canada) Inc. and FHIS Hotel Investments
(Canada) Inc. collectively.
15 ONSC Reasons, paras. 5-8; AR, Vol. I, pp. 9-10.
16 Cross-examination of Terrence P. Badour, Q68; AR, Vol. II, p. 74.
13
8
nothing was done, the acquisition would frustrate the intention that no entity would realize a net
foreign exchange gain or loss in connection with the reciprocal loan arrangements, because a
change of control of Fairmont would cause a deemed foreign exchange loss without a matching
foreign exchange gain.17
12.
Initially, Fairmont's tax advisors proposed a plan which would have maintained the
hedge, and would also have allowed for future redemption of the preferred shares without
realizing any taxable foreign exchange gains. However, the buyers' tax advisors expressed
concern that subsection 40(3.6) of the Income Tax Act might apply to any redemption of shares,
which would have the effect of deeming the foreign exchange losses arising on a redemption of
shares to be nil for tax purposes.18 As a result, the parties agreed on a modified plan.
13.
Contrary to the Attorney General's submissions, the record does not provide any support
for the theory that Fairmont "knowingly abandoned", "sacrificed" or "knowingly gave up" the
objective of tax neutrality. In fact, the modified plan was described in the affidavit of Fairmont's
General Counsel Terrence P. Badour as follows:
"28. As demonstrated by the 2006 planning to preserve FHI's foreign exchange
hedging, and the effort to preserve the foreign exchange hedging of FHI's
subsidiaries, FHI, FHIW Canada and FHIS Canada continued to intend that no
entity realize a net foreign exchange gain or loss in connection with the reciprocal
loan arrangements."19
Further, the Attorney General states that "Fairmont admitted that the use of loans would be
17 ONSC Reasons, paras. 9-10; AR, Vol. I, p. 10-11. In simple terms, upon an acquisition of control of a
corporation, there is a deemed disposition of capital assets that are in a loss position and the cost base of the assets is
revised to their fair market value. In other words, capital losses are triggered. There is no corresponding triggering
of capital gains upon an acquisition of control. The policy rationale for these rules is to prevent capital losses from
being carried forward to a new owner.
18 ONSC Reasons, para. 11; AR, Vol. I, p. 11.
Affidavit of Terrence P. Badour, paras. 26 and 28; AR, Vol. II, pp. 8-9.
9
insufficient to meet the goal of tax neutrality" (see paragraph 76 of the Attorney General's
factum). This reading of Mr. Badour's evidence is simply wrong.2° Indeed, the labelling of the
transfer of funds in the unwind transactions as a loan, instead of a share redemption, is wholly
consistent with the continuing intention that there be no net foreign exchange gains or losses and
that there be no redemptions. Once rectification is granted, further steps will be taken to dissolve
FHIS and FHIW or amalgamate them with FHI, which will extinguish the loans. There is no
need for the Court to assist with these steps through the rectification order, as Fairmont can
undertake these steps on its own.
14.
Mr. Badour explained on cross-examination that the plan did not set out all the details of
how the Legacy financing would eventually be unwound in a tax-neutral way. This was for the
simple reason that the Legacy financing was not being unwound at that point: "the way we
restructured the deal was really to preserve the integrity of that reciprocal loan structure, so we
can actually have a chance to figure it out another day. Because we didn't wind it up then,
because we knew we couldn't. So in effect, we just preserved it."21 At the same time, Fairmont
adverted to several possibilities to achieve the eventual unwind on a tax-neutral basis, including
by way of loans and dissolution.22
15.
Part of the specific plan of 2006 was never to redeem the preferred shares of FHIW and
FHIS, because doing so would defeat the continuing intention since 2002 never to trigger any net
taxable foreign exchange gains or losses:
"25. However, Kingdom and Colony's tax advisors were concerned that
subsection 40(3.6) of the Income Tax Act (Canada) might apply to any redemption
Cross-examination of Terrence P. Badour, Q350-Q354; AR, Vol. II, pp. 110-111.
21 Ibid., Q171; AR, Vol. II, p. 84.
22 /bid., Q309; AR, Vol., II, p. 100.
20
- 10 of shares so as to deem the foreign exchange losses arising on a redemption of
shares to be nil for tax purposes. Accordingly the tax advisors recommended, and
FHI accepted such recommendation, that no redemption of the preferred shares
should occur at any time."23
16.
As expressed by Carrie Smit, an external tax lawyer who was advising the buyers with
respect to their acquisition of Fairmont:
"As a result, it was determined that the preferred shares of FHIW and FHIS would
not be redeemed, but rather the loss inherent in such shares to FHI would be
realized through a transfer of such shares to a new corporation. ...
It is my clear recollection that this tax planning was based on the intention of the
advisors that the preferred shares of FHIW and FHIS would never be redeemed.
Rather, the advisors contemplated that the Legacy Financing could be unwound in
the future through other transactions (including possibly the wind-up of FHIW
and FHIS into FHI, or the amalgamation of such companies with FHI)....'524
17.
The fact that the details of how to unwind the Legacy financing were left for another day
is not surprising — there was no need to figure out those details in 2006, and given that Legacy
was not part of the 2006 discussions it was actually impossible to do so — and does not detract
from the fact that Fairmont had a specific intention for purposes of rectification. Rectification
does not require parties to foresee every possible eventuality, and Fairmont had no business
imperative in 2006 to set out the exact details of how the Legacy financing would eventually be
unwound.
Events in 2007
18.
On September 10, 2007, Legacy asked Fairmont to terminate the reciprocal loan
arrangements on an urgent basis so as to allow for the sale of the Washington and Seattle hotels.
At that time, the Fairmont management team was particularly busy, completing multiple
23
24
Affidavit of Terrence P. Badour, para. 25; AR, Vol. II, p. 8.
Affidavit of Carrie Smit, ex. A; AR, Vol. II, p. 45.
transactions with an aggregate value of almost $1 billion. The next day, acting in haste to
unwind the reciprocal loan arrangements, a Fairmont executive suggested effecting the unwind
by redeeming the preferred shares.25
19.
At this point, a mistake in implementation occurred. Fairmont's Vice-President of Tax
mistakenly believed that the original 2006 plan, not the modified plan, had been put in place.
Because of extreme time constraints, with the Legacy closing scheduled for September 18, 2007
and several other significant transactions ongoing at the same time, the Vice President of Tax did
not have the opportunity to review the last-minute unwind proposal in great detail or engage
external tax advisors to review it. As a result of his mistaken belief that the original 2006 plan
had been implemented, he agreed with the suggestion that FHIW and FHIS redeem the preferred
shares held by FHI. Had he realized that the original 2006 plan had not in fact been
implemented, the Vice President of Tax would not have agreed with the redemption of preferred
shares to effect the unwind because it did not fulfil Fairmont's intention that existed since 2002
not to have any net foreign exchange gains or losses as a result of the reciprocal loan
arrangements with Legacy.26 Instead, unless rectified the error will cause Fairmont to incur tax
on an accrued gain of $35.5 million (see paragraph 13 of the Attorney General's factum).
20.
The mistaken belief of Fairmont's Vice President of Tax that the original 2006 plan had
been implemented is confirmed by the tax returns for each of FHIW and FHIS for their taxation
years ended on December 31, 2007, for which he was responsible. The unwind transactions
were reported as if the original 2006 plan had been implemented such that at the time of the
ONSC Reasons, paras. 14-15; AR, Vol. I, p. 12.
26 ONSC Reasons, paras. 15 and 18; . AR, Vol. I, p. 12-13.
25
- 12 acquisition of control in 2006, the accrued foreign exchange losses were offset by accrued
foreign exchange gains and were fully hedged going forward for tax purposes.27
The four key findings of fact
21.
The applications judge in the Ontario Superior Court of Justice made four key findings of
fact:
(a)
Fairmont had a continuing intention from 2002 onwards that its loan arrangements
with Legacy would be carried out on a tax and accounting neutral basis through a
plan whereby any foreign exchange gains would be offset by corresponding
foreign exchange losses.
(b)
Fairmont had a continuing intention from 2006 onwards that the preferred shares
of FHIW and FHIS would not be redeemed.
(c)
It was by reason of the mistake by Fairmont's Vice President of Tax that the
preferred shares of FHIW and FHIS were redeemed in 2007, triggering serious,
adverse, and unintended tax consequences.
(d)
22.
Fairmont did not engage in retroactive tax planning.28
As such, as the Ontario Court of Appeal expressed it, Fairmont had a "settled tax plan",
namely "tax neutrality in its dealings with Legacy and no redemptions of the preference shares in
question."29
ONSC Reasons, para. 16; AR, Vol. I, p. 12-13.
28 Reasons for judgment of the Ontario Court of Appeal ("ONCA Reasons"), paras. 5-7, AR, Vol. I, pp. 27-28;
ONSC Reasons, paras. 42-43, AR, Vol. I, p. 20.
29 ONCA Reasons, para. 12; AR, VoI. I, p. 30.
27
-13Despite the Attorney General's apparent desire to relitigate these findings of fact, there is
23.
no palpable and overriding error in any of those findings and no basis for appellate intervention
in respect of them.
The holding in the courts below
Based on the applications judge's findings of fact, both courts below applied Juliar and
24.
held that the requirements for rectification were met.
PART II. QUESTIONS IN ISSUE
The issues are:
25.
(a)
What are the principles governing rectification?
(b)
How do those principles apply in the context of a non-arm's length transaction in
which there is a continuing and settled intention to achieve a particular tax
outcome (the AESIJuliar context)?
(e)
Applying the principles in the particular context (the AESIJuliar context), was
rectification appropriately granted by the courts below?
PART III. STATEMENT OF ARGUMENT
I.
WHAT ARE THE PRINCIPLES GOVERNING RECTIFICATION?
Performance Industries and Shafron are not a universal test
26.
Contrary to the Attorney General's submissions, Performance Industries and Shafron do
not express a universal test for rectification. Both cases turned on specific circumstances and
- 14 particular facts. A literal reading of Performance Industries and Shafron might suggest that they
purported to set out a universal test, but such a reading ignores the greater context, cannot be
reconciled with the law of rectification generally, and would create conflicts with results under
civil law as expressed by AES.
27.
The facts of Performance Industries involved bad faith and fraud, or at least
circumstances close to fraud. After Bhasin v. Hrynew,3° Performance Industries might well have
been decided on the basis of the organizing principle of good faith in contractual performance. It
is difficult to generalize its teachings to cases in which bad faith and fraud are not present.
28.
The Performance Industries preconditions cannot be a universal test applicable to all
rectification cases. Where the instruments in question were corporate resolutions entered into
among non-arm's length parties, it is meaningful to speak of a prior intention but not a prior oral
agreement. In a case like the present one, the requirement for fraud or conduct equivalent to
fraud31 just does not make any sense at all.
29.
In El-Bris the Ontario Court of Appeal considered and rejected the contention that
Performance Industries establishes a universal test for rectification. El-Bris clarified that
Performance Industries is the test applicable in the case of unilateral mistake in a contract, and
held that where there is a mutual mistake the Performance Industries hurdles do not apply:
"RBC, however, argues that to obtain an order for rectification, Ellis must show
more than a common intention. He must also satisfy Sylvan's [i.e., Performance
Industries] four prerequisites to rectification. I do not agree.
Sylvan was a case of unilateral mistake. The party seeking rectification, because
of his own negligence, had mistakenly signed an inaccurately drawn document.
3° 2014
SCC 71, [2014] 3 S.C.R. 494 at paras. 32, 41, 82, 83 and 85.
Industries, supra footnote 1 at paras. 38-39.
31 Performance
- 15 Binnie J., writing for court, set out four prerequisites for parties seeking
rectification for unilateral mistake: (i) a previous oral agreement inconsistent with
the written document; (ii) the other party knew or ought to have known of the
mistake and permitting that party to take advantage of the mistake would amount
to unfair dealing; (iii) the document can be precisely rewritten to express the
parties' intention; and (iv) each of the first three prerequisites must be
demonstrated by convincing proof.
The case before us is not a case of unilateral mistake. On the trial judge's
reasonable view of the record, it is a case of common mistake: when entering into
the written agreement, neither party intended to create two independent $700,000
obligations. Both thought the obligations were connected.
The prerequisites in Sylvan do not apply to cases of common or mutual
mistake...." 32
30.
Similarly, in Fraser v. Houston33 the B.C. Court of Appeal distinguished between
rectification in the circumstance of unilateral mistake (in which case Performance Industries
applies) and in the circumstance of a mutual mistake (in which case it does not apply).
31.
There is also a certain irony in the Attorney General's attempt to use Performance
Industries to reduce the availability of rectification. Prior to Performance Industries it was
generally believed that rectification was only available in cases of mutual or common mistake,
and was not available in cases of unilateral mistake.34 Performance Industries established that
rectification is also available in cases of unilateral mistake, albeit under certain strict
preconditions. In other words, Performance Industries expanded the availability of rectification.
Using Performance Industries in an attempt to limit the availability of rectification stands the
case on its head.
32
El-Bris, supra footnote 2 at paras. 14-17.
2006 BCCA 66 at paras. 26-42, leave to appeal refused [2006] S.C.C.A. No. 133.
34 See, for example, Downtown King West Development Corp. v. Massey Ferguson Industries Ltd (1996), 28 O.R.
(3d) 327 (C.A.) ("Do►vntoivn King West") at 336: "The remedy is normally granted only where the mistake is
mutual or common to the contracting parties."
33
- 16 32.
Shafron involved a restrictive covenant — a type of contract which the common law has
always been hesitant to enforce — and a circumstance in which there was no evidence of a
meeting of minds in the first place. Read in proper context, Shafron's comments about the
availability of rectification cannot be taken as a universal test.
33.
Since Performance Industries and Shafron do not set out a universal test for rectification
in all contexts, it is worth examining the principles that govern all rectification proceedings.
The principles
(a) There must be an intention by the parties to the instrument, common to all parties if
there is more than one, that is antecedent to the instrument and remained unchanged until
the instrument was signed
34.
The first prinCiple governing rectification was well expressed by the Ontario Court of
Appeal in Council of the Wasauksing First Nation v. Wasausink Lands Inc. :35
"The pre-conditions to the granting of rectification were considered by the
English Court of Appeal in Joscelyne v. Nissen, [1970] 2 Q.B. 86 at 98. The court
held in that case that an applicant seeking rectification of a written agreement
must demonstrate, on 'convincing proof, that the parties had a common intention,
antecedent to the formal document in question and evidenced by some outward
expression of accord, that continued unchanged until the time that the formal
document was executed by the parties and that the formal document mistakenly
did not conform to the prior common intention."
The Joscelyne formulation has been repeatedly accepted by provincial appellate courts.36
35.
Another way to express the same point is the formulation set out by McLachlin J.A. (as
she then was) in Bank of Montreal v. Vancouver Professional Soccer Ltd. :37
Council of the Wasauksing First Nation v. Wasausink Lands Inc., [2004] O.J. No. 810 (C.A.) at para. 77.
36 See Peter Pan Drive-In Ltd. v. Flambro Realty Ltd. (1980), 26 O.R. (2d) 746 (C.A.), leave to appeal refused
[1981] 1 S.C.R. xi; John Austin & Sons Ltd. v. Smith (1982), 35 O.R. (2d) 272 (C.A.); and Dynamex Canada Inc. v.
Miller (1998), 161 Nfld. & P.E.I.R. 97 (Nfld. C.A.).
37 (1987), 15 B.C.L.R. (2d) 34 (C.A.) at 36.
35
- 17 "Before rectification can be obtained, the applicant must establish:
that the written instrument does not reflect the true agreement of the
1.
parties;
that the parties shared a common continuing intention up to the time of
2.
signature that the provision in question stand as agreed rather than as reflected in
the instrument."
36.
Except in cases of unilateral mistake in an arm's length instrument (in which case
Performance Industries applies), the common intention need not be established by a prior oral
agreement. In Hart v. Boutilier, this Court expressed the test for rectification (in a case of
mutual mistake) as requiring not a prior oral agreement but rather merely an "intention" which
"continued" in the minds of "all parties" up to the date on which the contract was executed:
"The power of rectification must be used with great caution; and only after the
Court has been satisfied by evidence which leaves no 'fair and reasonable doubt'
(Fowler v. Fowler (1859), 4 DeG. & J. 250, at 264, 45 E.R. 97), that the deed
impeached does not embody the final intention of the parties. This evidence must
make it clear that the alleged intention to which the plaintiff asks that the deed
be made to conform, continued concurrently in the minds of all the parties
down to the time of its execution; and the plaintiff must succeed in shewing also
the precise form in which the instrument will express this intention."38 [Emphasis
added.]
37.
In England, it appeared at one point that a prior oral agreement was a prerequisite for
rectification. In Frederick E. Rose (London) Ltd. v. William H Pim Jnr. & Co.,
39 Denning L.J.
(as he then was) stated "[r]ectification is concerned with contracts and documents, not with
intentions. In order to get rectification it is necessary to show that the parties were in complete
agreement on the terms of their contract, but by an error wrote them down wrongly...."
Hart v. Boutilier (1916), 56 D.L.R. 620 (S.C.C.) at para. 49.
39 [1953] 2 Q.B. 450 (C.A.) at 461.
38
- 18 However, that view was later rejected by the English courts. In Earl v. Hector Whaling Ltd., the
Court of Appeal stated the following:40
"As to the facts it does not appear to me that there ever was an oral agreement.
There was a common intention and that is enough. In spite of Denning L.J.'s
observations in Frederick E. Rose (London) Ltd. v. William H Pim Jnr. & Co.
Ltd. [1953] 2 Q.B. 450, 461; I think that Clauson J.'s original decision in Shipley
Urban District Council v. Bradford Corporation [1936] Ch. 375 (as followed by
Simonds J. in Crane v. Hegeman-Harris Company Inc. [1939] 1 All E.R. 662,
664) that you do not need a prior contract, but a prior common intention, is
right." [Emphasis added.]
38..
In any event, what is at issue in this case is the law in Canada, not the law in England,
and Denning L.J.'s statement does not express the law at it presently stands in this country (if
indeed it ever did). The state of the law in Canada immediately prior to Performance Industries
Was well summarized by Dynamex Canada Inc. v. Miller, a decision of the Newfoundland Court
of Appeal shortly before Performance Industries:
"... It is no longer a requirement, as appellant's counsel suggests, that the party
seeking rectification must show a concluded enforceable agreement between the
parties prior to the execution of the document which is sought to be rectified.
That was an earlier view coming out of such cases as Rose v. Pim and Lovell &
Christmas Ltd. V. Wall (1911), 104 L.T. 85 at p. 88. That view was rejected,
however, in the English Court of Appeal decision in Joscelyne v. Nissen, which
held that it was unnecessary to find a concluded antecedent agreement and that
rectification could nevertheless be granted so long as there was clearly established
a 'common continuing intention' in regard to a particular provision of the
agreement incorrectly embodied therein. In fact, in language closely mirroring
the 'common continuing intention' test approved in Joscelyne, Duff, J. in the
earlier Supreme Court of Canada decision in Hart v. Boutilier (1916), 56 D.L.R.
620 described the test at p. 630 as an 'intention' which 'continued concurrently in
the minds of all parties down to the time of ... execution'.
.• •
40 [1961] 1 Lloyd's Rep. 459 (C.A.) at 470. This formulation was also accepted as correct in Joscelyne v. Nissen,
[1970] 2 Q.B. 86 (C.A.) at 97.
- 19 I conclude therefore that proof of a concluded antecedent agreement is not a
precondition to invoking the equitable jurisdiction of the court to rectify a written
contract. It is sufficient if the party seeking rectification can demonstrate clearly
that the parties, whether or not they actually met and struck a bargain before
signing the impugned document, had the same intentions as to what the agreement
was to contain and that intention continued down to the time of execution and
formed the basis for each party's execution."41
39.
Performance Industries did nothing to change the law in respect of claims of rectification
where there is a mutual mistake. It only addressed the circumstance of unilateral mistake. It was
in that context, and that context alone, that the requirement of a prior oral agreement was
imposed.
40.
Another fundamental distinction is between cases in which one or more of the parties to
the instrument deny the existence of any mistake (as in Performance Industries and Shafron) and
cases in which the parties to the instrument are all agreed that there was a mistake and the only
objector is the Crown, seeking to assess tax on a basis that the parties agree was erroneous (as in
Juliar and the case at bar). The policy reason underlying the requirement for a prior oral
agreement in the context of unilateral mistake42 is not present: there is no risk that rectification
will have the effect of allowing an unhappy party to resile from what has turned out to be a poor
bargain, thereby undermining the confidence of the commercial world in written contracts.
41.
Yet another fundamental distinction is between a complex, multi-step transaction not
undertaken at arm's length (which is usually the case where rectification is sought to address tax
issues, as in the case at bar) and a discrete standalone agreement made at arm's length (as in
Performance Industries and Shafron). In the case of an arm's length discrete standalone
41
97 (C.A.) at paras. 23 and 27.
Dynamex Canada Inc. v. Miller (1998), 161 Nfld. &
"The
requirement
of
a
prior
oral
agreement
closes
the
'floodgates'
to unhappy contract makers who simply failed
42
to read the contractual documents, or who now have misgivings about the merits of what they have signed":
Performance Industries, supra footnote 1 at para. 37.
- 20 agreement, the requirement of a prior oral agreement is an appropriate one. In circumstances
where the parties are not at arm's length, and are contemplating only a single step within a much
larger transaction, it is unrealistic to expect that the parties will engage in negotiations that
produce a binding oral agreement prior to implementing that particular step. In those
circumstances, the whole exercise of looking for a prior oral agreement has an air of unreality
about it.
42.
Imposing the prior oral agreement in all circumstances.would be to impose rigidity on a
flexible equitable remedy that is not warranted.
(b) There must be a mistake in the written instrument such that it fails to put the common
intention into effect
43.
An error in the written instrument is the essence of rectification, As the Ontario Court of
Appeal explained in Downtown King West:43 "In principle, rectification is permitted, not for the
purpose of altering the terms of an agreement, but to correct a contract which has been
mistakenly drawn so as to carry out the common intention of the parties and have the contract
reflect their true agreement."
(c) Rectification is not limited to the correction of clerical errors
44.
Although rectification clearly is available in circumstances of clerical or slip-of-the-pen
errors where the wrong word gets written down (as in Performance Industries, in which "feet"
was erroneously substituted for "yards"), it is equally clear that its availability is not limited to
such circumstances.
43
Supra, footnote 34 at 336.
-21 45.
The best illustration of this point is this Court's decision in AES, which involved two
separate appeals on two different sets of facts. One (known as AES) involved an error in a dollar
figure in a promissory note — a clerical error. The other (known as Riopel) involved a change in
the mechanics of a transaction, specifically the reversal of the order of a corporate amalgamation
and a share transfer.44 This Court made no distinction between the AES transaction and the
Riopel transaction, and granted the civil law rectification-like remedy in both.
46.
Another good illustration of the point is El-Brix. The principal of a company signed both
a personal guarantee for $700,000 and a collateral mortgage for $700,000 in support of a loan to
the company. The documentation clearly showed two separate obligations in support of the loan.
In fact the parties had intended only one support for the loan (in other words, the parties'
intention was that upon the company's default the bank could recover $700,000 under the
guarantee or $700,000 under the collateral mortgage, but could not recover under both).
Rectification was granted to accord the documentation to that intention. It did not matter that the
error was more than a clerical one, and that the mechanics of the transaction had to be altered
(two separate obligations of $700,000 each became one aggregate obligation for $700,000) in
order to achieve the parties' intention.
47.
Rectification has never required a specific and continuing intention both with respect to a
party's goal and the mechanics by which the goal is to be achieved. As expressed by the English
Court of Appeal in 2002, "I see no reason in principle why equity should be prevented from
44
AES, supra footnote 3 at paras. 5 and 14.
- 22 giving relief merely because the parties had not agreed on the mechanics by which effect should
be given to a clear and simple common intention."45
48.
A corollary to this point is that the mere fact that a particular form of words was intended
is not a bar to rectification if those words fail to achieve the common and continuing intention.
As the English Court of Appeal expressed in 2002, "[t]he fact that a party intends a particular
form of words in the mistaken belief that it is achieving his intention does not prevent the court
giving effect to the true common intention...."46 As the House of Lords expressed in 2009, "[i]t
is generally accepted that Brightman J. was right In re Butlin's Settlement Trusts [1976] Ch 251
in holding that rectification is available not only when then parties intended to use different
words but also when they mistakenly thought their words bore a different meaning."47 When a
mistake is made, it is unrealistic to expect people to advert to the precise mechanics needed to
address every possible thing that might go wrong in a transaction.
(d) The purpose of rectification is restorative in nature, with the Crown standing in the
same position as a private party
49.
The purpose of rectification is to restore parties to their original intention. In other
words, rectification is only available "to rewrite a contract that does not correctly write the
contractual history", and is not available "to rewrite a contract to rewrite contractual history".48
45 Swainland Builders Ltd. v. Freehold Properties Ltd., [2002] EWCA Civ 560 ("Sivainland") at para. 44.
Swainland was cited with approval on this point in McLean v. McLean, 2013 ONCA 788 at para. 46, leave to appeal
refused [2014] S.C.C.A. No. 76.
46 Swainland, supra footnote 44 at para. 34, citing Cooperative Insurance Society Ltd v. Centremoor Ltd, [1983] 2
EGLR 52 at 55 and Re Butlin's Settlement Trusts, [1976] Ch. 251 at 260.
47 Chartbrook Ltd. v. Persimmon Homes Ltd., [2009] A.C. 1101 (H.L.) at para. 46.
48 Aim Funds Management Inc. v. Aim Trimark Corporate Class Inc., 2009 CanLII 63131 (Ont. S.C.J.) at para. 58.
- 23 50.
Restoration to the parties' original intention ensures'that there is no unjust enrichment as
a result of errors in written instruments: "Rectification is an equitable remedy designed to ensure
that one party is not unjustly enriched at the expense of another."49
51.
In the realm of rectification, unjust enrichment of the Crown is no more acceptable than
unjust enrichment of a private party. As such, rectification is available to prevent the Crown
from receiving a tax windfall:
"The true principles governing these matters I conceive to be as follows. (1) The
court has a discretion to rectify where it is satisfied that the document does not
carry out the intention of the parties. This is the basic principle. (2) Parties are
entitled to enter into any transaction which is legal, and, in particular, are entitled
to arrange their affairs to avoid payment of tax if they legitimately can... (3) If a
mistake is made in a document legitimately designed to avoid the payment of tax,
there is no reason why it should not be corrected. The Crown is in no privileged
position qua such a document. It would not be a correct exercise of the
discretion in such circumstances to refuse rectification merely because the
Crown would thereby be deprived of an accidental and unexpected
windfall..."5° [Emphasis added.]
52.
Similarly, one of the purposes of the civil law equivalent of rectification as recognized by
this Court in AES is that revenue authorities do not have an acquired right to rely on an erroneous
writing to secure tax revenue:
"Nevertheless, the dispute in the two appeals before us necessarily concerns the
ARQ and the CRA. Because of their situations, it must be asked whether they can
rely on acquired rights to have an erroneous writing continue to apply even
though the existence of an error has been established and it has been shown that
the documents filed with the tax authorities are inconsistent with the parties' true
intention."51
El-Bris, supra footnote 2.
5° Re Slocock's Will Trusts, [1979] 1 All E.R. 358 (Ch.D.) at 363, quoted with approval in fuliar, supra footnote 4 at
paras. 33-34.
51 AES, supra footnote 2 at para. 44.
49
- 24 (e) As an equitable remedy, rectification is discretionary
53.
"[R]ectification is an equitable remedy and its award is in the discretion of the court."52
This is an important safety valve, in all contexts but particularly where a rectification order has
tax implications. If there is abusive conduct or retroactive tax planning (not an issue in this case
given the applications judge's express finding of fact that Fairmont had not engaged in
retroactive tax planning), a judge hearing a rectification application has the discretion to refuse
relief.
II.
HOW ARE THE PRINCIPLES APPLIED IN THE AESIJULIAR CONTEXT?
54.
In the tax context, rectification is almost always sought in respect of a non-arm's length
transaction. In that context, of the five principles of rectification the one that is the most
warranting of careful judicial scrutiny is the first: was there an intention, common to the parties
to the instrument (albeit not acting at arm's length) and antecedent to that instrument, that
remained unchanged until the instrument was signed?
55.
More specifically, what is the requisite intention? There are three possibilities:
(a)
a general intention to minimize tax;
(b)
an intention to achieve a specific and adverted-to tax outcome; or
(c)
an intention to put in place a specific transaction using specific mechanics to
achieve a particular tax outcome.
52
Performance Industries, supra footnote 1 at para. 66.
- 25 56.
No one could reasonably argue that (a) is sufficient. Everyone has a general intention to
minimize tax. As Brown J. (then of the Alberta Court of Queen's Bench) aptly noted in
Graymar Equipment (2008) Inc v Canada (Attorney General),53 every taxpayer will say they
intended to do something else if the test for rectification is "what would they have done had they
known about this unanticipated tax outcome?":
"Here lies the problem with equating the questions 'what did the parties originally
intend to do?' and 'what would they have done had they known about this
unanticipated tax outcome?' The first question is that which, as a matter of
Canadian law, the Applicants need to answer. It goes to the heart of whether they
are entitled to rectification, as its availability has been circumscribed at the
Supreme Court. By substituting the second question for the first, this central
inquiry into intention is effectively eliminated. This is because the second
question might as well not even be posed, since the answer, as S&D International
correctly observes, will 'clearly be "something else"'. Nobody will answer the
latter question by saying 'I would still have taken the tax hit'. This is particularly
so in the Applicants' circumstances, where the tax disadvantage was incurred
unnecessarily (since, as the Applicants acknowledged in their submissions, the
shareholder's loan could have been repaid at any time prior to December 31, 2011
without affecting the 2010 Debt Restructuring)."
If an intention as general as (a) were sufficient for rectification, it would open the floodgates and
facilitate retroactive tax planning, an outcome that would clearly be unacceptable from the
perspective of both principle and pOlicy.
57.
The Attorney General urges this Court to find that (c) is the proper approach. This
approach would be inconsistent with the five principles of rectification outlined in paragraph 3
above, and would make rectification impossible to achieve in almost all cases with tax
implications. Such a narrow availability of rectification cannot be justified either on the basis of
principle or policy.
53
2014 ABQB 154 at para. 71.
- 26 58.
The Attorney General's proposed approach (c) would defeat the vast majority of
rectification applications. To provide but three examples:
(a)
Approach (c) would have defeated the rectification application in Re GT Group
Telecom Inc. 54 A corporation with loss carryforwards was to be acquired after an
internal reorganization was completed. Due to a sequencing mistake, the
purchaser acquired control before the wind-up of a subsidiary, eliminating the loss
carryforwards. The Ontario Superior Court of Justice applied Juliar and rectified
the transactions to change the sequence of the steps and convert the wind-up of
the subsidiary to an amalgamation, thereby preserving the tax losses. The
Superior Court expressly noted that the rectification in question "includes a
change of mechanics from that originally filed".55
(b)
Approach (c) would have defeated the rectification application in QL Hotel
Service Limited v. Ontario (Finance),56 in which Juliar was applied to grant
rectification in which a share issuance resolution was divided into two parts. The
mechanics of the rectified transaction were different than what the board of
directors had originally contemplated — the board contemplated a one-step
transaction, while the rectified transaction had two steps — but that did not matter.
All that mattered was that the court found "a common and continuing intention
from the inception of the transaction to structure their affairs so as to allow [the
taxpayer] to avail itself" of a particular exemption in the Ontario Retail Sales Tax
[2004] 0..j. No. 4289 (S.C.J.).
55 Ibid. at para. 2.
56 (2008), 90 O.R. (3d) 760 (S.C.J.) at paras. 51, 52, 55, 58 and 59, affd. 2009 ONCA 715.
54
- 27 Act.57 The court granted rectification to substitute the mechanics needed to give
effect to that continuing intention.
(c)
Approach (c) would have defeated the application for rectification in Re
Amalgamation of Aylwards (1975) Ltd., 58 which stated the following:
"In the context of the current case, what is significant about Juliar
is that the court was prepared to allow rectification where the
mechanism chosen to reach an intended result was mistakenly
used. The parties were allowed effectively to restructure the
transaction by using a different mechanism, provided of course that
the result obtained by the use of the new mechanism was in
accordance with the original common intention of the parties. In
achieving rectification, the parties were permitted, retroactively, to
create new, or modify existing, instruments to achieve their
original purpose where the original instruments could not do so as
a result of a common mistake, and this was so even though the
parties may not have adverted to the appropriateness of the use of
the specific mechanism that had originally been mistakenly chosen
to effectuate their original intention." [Emphasis added.]
(d)
Approach (c) would have defeated the application for rectification in Juliar itself:
in Juliar an exchange of shares for a promissory note was rectified to be an
exchange of shares for shares in order to achieve the parties' continuing specific
intention to undertake a tax-free rollover.
59.
The proper approach is (b). Consistent with the five principles governing rectification
and sound in terms of policy, approach (b) requires a court hearing a rectification application to
scrutinize carefully whether the party seeking rectification had a specific and continuing
intention to achieve undertake a transaction on a particular tax basis: "the critical requirement for
57
5a
Ibid. at para. 58.
[2001] N.J. No. 195 (T.D.) at para. 41.
- 28
rectification is proof of a continuing specific intention to undertake a transaction or transactions
on a particular tax basis".59 This is the approach of AES and Juliar.
60.
Approach (b) limits rectification to circumstances in which there has been an error in
documentation or implementation of a settled plan. It does not make rectification available to
change the design of a settled plan. This is an important restriction on the availability of
rectification, and is fully consistent with the civil law approach adopted by this Court in AES. It
ensures that rectification is available to correct real mistakes, but not poor tax planning. It also
achieves an appropriate balance between fairness and finality: taxpayers will not be prejudiced
by errors in documentation or implementation, but rectification will not be available as a device
to allow tax planning to be achieved after-the-fact through litigation.
61.
At the same time, approach (b) does not mean that every last detail or eventuality has to
be fleshed out at the time the specific intention is formed. That would be commercially
unrealistic given the complexities of tax law and the realities of business, and would reduce
rectification to a remedy that would only be available to correct clerical errors. In this regard,
AES is instructive:
"From this perspective, for a contract to exist and become a legal reality, the
parties' undertakings must be sufficiently precise to establish the details of the
contemplated operation. In some cases, the details of the operation will be clear
immediately. In other cases, a plan will take shape gradually and will come into
legal existence as a contract that is binding on the parties and represents the law
applicable to them once its details are sufficiently clear."60
59
60
ONCA Reasons, para. 10, AR, Vol. I, p. 29.
AES, supra footnote 3 at para. 31.
- 29 62.
Approach (b) is necessary to avoid the tax authorities taking a "gotcha" attitude, and in
no way undermines tax policy. This point was well expressed by a commentator writing in the
Canadian Tax Journal:
... The use of rectification orders by definition must be limited to cases where it is
equitable to grant such relief.
We are comfortable that the ultimate result in Juliar is such an equitable case. The
tax policy that underpins the provisions of section 85 is that reorganizations such
as the one in Juliar may be accomplished on a tax-deferred basis. The Act
provides that in order to take advantage of this tax policy, certain very specific
steps must be taken. These steps are simply mechanics and do not embody the
overall tax policy. Unsophisticated taxpayers might very well describe the
mechanical steps as pitfalls rather than opportunities. For the CCRA to take a
`gotcha' attitude where a taxpayer fits within the clear tax policy but falls short
on the mechanical steps is particularly unappealing."61 [Underlining in original;
bold and italics added.]
63.
Approach (b) is also necessary to ensure that taxpayers' real intentions are achieved. As
expressed by another commentator:
"... In a narrow sense, the CRA might be correct in asserting that when the legal
effect of a document executed by a taxpayer carries tax consequences adverse to
the taxpayer, it is not appropriate for a court to order rectification of the document
to create a different legal effect if the taxpayer understood and intended the legal
effect of the document but did not intend to complete the transaction in a manner
that would carry adverse tax consequences. That, the CRA might assert,
constitutes retroactive tax planning. Recent court orders for rectification have,
however, concluded that what actually is being accomplished by a rectification
order is an adjustment of the documentation to reflect the real intention that the
taxpayer has demonstrated to the court he had prior to executing the
documentation. In that more substantive sense, a rectification order restores the
taxpayer's real intention and prevents the CRA from capitalizing on a taxpayer's
(or his adviser's) mistake and enjoying an unintended windfall."62 [Emphasis
added.]
GI
D. Wentzell, "How Do You Spell 'Relief? Rectification Orders Revitalized in Canadian Tax Jurisprudence"
(2001), 49 Can. Tax J. 141 at 145.
62
D.S. Ewens, "Comments on Rectification" (2005), 57 Can. Tax Found. 23:1 at 2.
- 30 How the AESIJuliar approach is applied
64.
Following the AESIJuliar approach, rectification is sometimes granted and it is
sometimes denied, depending on whether the requisite specific intention is established. The
requirement for a specific intention means that a general intention to get gOod tax results is not
sufficient: there must be a specific intention to achieve a particular tax treatment. The
requirement for a continuing intention means that retroactive tax planning is not permissible:
the intention in question must have been held since the outset of the transaction, and cannot be an
after-the-fact realization that a better tax outcome could have been achieved if something
different had been intended.
65.
The requirement for a specific intention is well illustrated by the different outcomes of
two leading Ontario cases, Juliar and 771225 Ontario Inc. v. Bramco Holdings Co. Ltd 63 In
Juliar, rectification was appropriate because there had been a specific intention to effect a
transaction pursuant to a rollover under section 85 of the Income Tax Act, meaning that the
transaction would not constitute a disposition triggering immediate capital gains tax. In Bramco,
rectification was not appropriate because the parties had never turned their minds to the tax in
question (land transfer tax) until after the transaction had been completed, and instead had
focused on minimizing another tax (income tax). The parties had a general intention to minimize
tax, but that was not enough. Only a specific intention to achieve a particular tax result (as was
the case in Juliar) provides a sufficient basis for rectification.
66.
Juliar has been consistently followed and applied in the common law provinces and
territories since it was decided over 15 years ago. There are numerous reported cases in which
63
(1995), 21 O.R. (3d) 739 (C.A.), leave to appeal refused (1995), 198 N.R. 79n (S.C.C.). ("Bronco").
- 31 Juliar has been applied (and no doubt Juliar has been applied in many more unreported
decisions), emanating from six provinces and one territory, with the taxpayer prevailing in some
cases64 and not in others.65
67.
Contrary to the Attorney General's assertions, Juliar does not open the floodgates to
retrospective tax planning. Courts applying Juliar scrutinize the evidence carefully and do not
hesitate to deny rectification if the evidence does not establish a specific continuing intention.
They look for corroborating evidence from professional advisors who are independent of the
taxpayer:
"Mr. Kanji did not file any affidavit evidence or rule 39.03 [of the Ontario Rules
of Civil Procedure] evidence from the legal advisors who assisted him in
establishing the family trust. That omission was striking. I would note that in
two cases of this court relied upon by the applicants -- Juliar v. Canada (Attorney
General) and TCR Holdings Corp. v. Ontario -- the findings of fact about intent
and mistake which supported the grant of rectification were based upon evidence
adduced by the party to the transaction, its lawyer and its accountant. In each
case, the court drew upon the evidence from all three sources to arrive at its
findings of fact about intent and mistake. In another case, GT Group Telecom Inc.
(Re), in granting rectification the court relied on a combination of the existence of
contemporaneous documentation substantiating the professed true intention of an
agreement, together with the lack of opposition to the rectification sought by the
Canada Revenue Agency and the director under the Ontario Business
Corporations Act.' 6
Courts also look for corroborating evidence from contemporaneous documentation: "in
rectification cases courts naturally look for evidence contemporaneous with the creation of the
British Columbia: Snow White Productions Inc. v. PMP Entertainment Inc., 2004 BCSC 604, Re Fraser Valley
Refrigeration, 2009 BCSC 848, McPeake v. Canada (Attorney General), 2012 BCSC 132; Alberta: Stone's
Jewellery Ltd. v. Arora, 2009 ABQB 656 (decided under rescission rather than rectification but nonetheless applied
Juliar); Ontario: Re GT Group Telecom Inc., [2004] 0.3. No. 4289 (S.C.J.), Di Battista v. 874687 Ontario Inc.
(2005), 80 Q.R. (3d) 136 (S.C.J.), QL Hotel Service Limited v. Ontario (Finance) (2008), 90 O.R. (3d) 760 (S.C.J.),
TCR Holding Corporation v. Ontario, 2009 CanLII 43432 (Ont. S.C.J.), affd. 2010 ONCA 233; Newfoundland and
Labrador: Re Amalgamation of Aylwards (1975) Ltd., [2001] N.J. No. 195 (T.D.).
64
65
66
See the chart in paragraph 68.
Kanji v. Attorney General of Canada, 2013 ONSC 781 at para 35.
- 32 instrument which can shed light on the evidence of a sole affiant who may suffer an adverse tax
consequence if rectification is not granted."67 Finally, courts have the ability to exercise their
discretion to refuse relief even if the test is met.
68.
Rectification has been denied in the following cases that have applied Juliar:
Province or
territory
Case
Application of Juliar to deny rectification
British
Columbia
Zhang v. Canada
(Attorney General),
2015 BCSC 1256
"When I consider all of the evidence, I conclude
that the parties did not have a specific or precise
intention to avoid capital gains tax on the
transaction. The specific intention was to set up a
corporate structure which would permit the
profits from LABest to be distributed to
Beamtech in Canada on a tax-free basis. While
Mr. Zhang and Beamtech had a general intent to
transfer the interest in LABest to Beamtech in a
tax-efficient way, their focus was on establishing
the proper corporate structure to permit the
revenue to be received tax-free in British
Columbia. The intention of the Agreement was to
set up the required corporate structure and to do
so in a way that was acceptable to the Chinese
authorities. In other words, the focus was on
crafting the optimal tax structure in relation to
income, and not on capital gains." (para. 34)
Saskatchewan
R. v. Husky Oil
Operations Limited,
2014 SKQB 116
"The evidence here does not establish that Husky
and the third party contractors had a common
intention to structure their contracts as supply
and install contracts. Husky's view of the
contracts now differs from the third party
contractors, but the evidence does not establish
that Husky's intention and the third parties'
intention at the time of making the contracts was
for a supply and install contract. More
importantly, the evidence fails to establish that
the parties intended the contracts to be supply
and install contracts, but mistakenly drafted them
in another way. The evidence does not establish
the parties mistakenly drafted the contracts such
67
Ibid. at para. 38.
- 33 Province or
territory
Case
Application of Juliar to deny rectification
that Husky paid the PST when the parties
actually intended the third parties to pay the PST.
Husky failed to establish, on a balance of
probabilities, that a mistake was made in the
agreements. Husky has failed to establish that the
agreements did not carry out the parties'
intentions. There is not, here, as there was in
Juliar, supra, evidence of a common continuing
intention that the transaction be effected in the
manner as is now suggested by Husky." (paras.
424-425)
•
Manitoba
DAFT Corp. v. Canada
(Attorney General),
2014 MBQB 59, affd.
2015 MBCA 77
"I take no issue with the fact that JAFT, Lance
and David never intended the taxation results that
have ultimately transpired. Indeed, they may
have made an honest mistake. That being said,
are these circumstances the type that should
attract an equitable remedy? ...
I acknowledge JAFT's reliance on cases such as
Stone's Jewellery Ltd. and Juliar. However, I am
persuaded that the merits of this case are closer to
those of Bramco Holdings Co. ...
Here, given the advantage of hindsight, would
JAFT, David, Lance and William have written
the same development agreement or entered into
the same employment contract(s)? Perhaps
not. However, their intentions were reflected in
those relevant aspects of the employment
contract(s). History cannot be rewritten. This
case smacks of attempts to adopt a
retroactive/no-risk tax planning scenario or, in
essence, rewriting history. The payroll tax
remittances are lawfully owed under the
transaction as originally structured and should
not be rectified, rescinded, or declared void ab
initio." (paras. 39, 43 and 44)
Ontario
Binder v. Saffron
Rouge Inc. (2005), 80
O.R. (3d) 136 (S.C.J.)
"Regrettably, this case is quite different from
Juliar. Here, while the applicants did not intend
to adversely affect their capital gains exemption
by the 2005 financing, the parties to the
- 34 Province or
territory
Case
Application of Juliar to deny rectification
transaction -- Saffron and the Investors -- did not
have a common, continuing intention that the
transaction be effected in a manner that would
preserve the applicants' capital gains tax
exemption. Given the Investors' response to the
advice that the 2005 financing would result in the
loss of Saffron's CCPC status, an intention to
structure the transaction on a basis that preserved
tax benefits cannot be inferred." (para. 22)
Kanji v. Canada
(Attorney General)
2013 ONSC 781
"In this proceeding, the applicants bear the onus
of demonstrating, on a balance of probabilities,
that at the time Mr. Kanji settled the family trust
he intended to structure the family trust in a tax
efficient manner which would allow for a tax
deferred transfer of the trust's assets to his
children in the future and that a mistake was
made which resulted in the trust indenture failing
to give effect to that intention. For several
reasons, I conclude that the applicants have not
met that burden." (para. 33)
Birch Hill Equity
Partners Management
Inc. v. Rogers
Communications Inc.,
2015 ONSC 7189
"[T]here is insufficient evidence here of an initial
mutual "mistake" as to a dominant or even
important issue to the transaction itself that was
inaccurately reflected in the documents at the
time. ...
The quality of evidence of mistake needs to be
quite specific if it is to satisfy the strict
requirements for application of the remedy. In
Kanji v. Canada (Attorney-General), 2013
ONSC 781, Brown J. (as he then was)
commented on the lack of specific and
corroborative evidence of the mistake alleged
there. I echo those comments here. On the
central question of the intention of the parties to
the actual transaction that is sought to be
rectified, I have almost no evidence at all. The
passing comments of Deloitte in a draft
discussion piece memorandum prepared more
than two months after the transaction had been
entered into (but prior to closing) is a long way
from satisfying me that the claimed tax treatment
- 35 Province or
territory
Case
Application of Juliar to deny rectification
of these 10 non-parties to the SPA was 'an
intended and fundamental aspect of the
transaction from its inception': per Cameron J.
in Juliar (supra) at para. 43,
There is no suggestion on the record before me
that either or both of the parties to the SPA
viewed the tax treatment of the 10 Executives as
material to their transaction. It was entirely
peripheral. They had no particular reason to
structure their affairs to advantage the 10
Executives nor can it be said that they had any
reason to • decline to do so. In such
circumstances, the attribution of a 'mistake' to
either party appears to me to be a very strained,
ex post facto interpretation." (paras. 34, 40 and
41)
Northwest
Territories
Re Aboriginal
Diamonds Group, Ltd.,
2007 NWTSC 37
"In this case, the Agreement was not designed to
avoid the payment of tax; it was designed to
govern the rights and obligations of the
Petitioners vis a vis each other. The purpose of
the transaction was not to avoid payment of tax
or obtain a tax benefit. The tax consequence that
has resulted cannot be said to flow from the
Agreement, as was the case in Juliar and Snow
White. The tax consequence in this case flows
from where WWW provides its services.
Paragraph 32 of the Petition, one of the
paragraphs adopted by the deponents of the
affidavits, says that at all material times, the
Petitioners intended to structure their Agreement
in an administratively efficient and tax efficient
manner. They ask me to infer from this that the
true agreement was that WWW would provide
services in a manner that would not attract
liability for tax; they rely on certain statements in
Juliar about making inferences in that
regard. However, in Juliar, the Court found on
the evidence that it was clear that the transaction
had to be carried out on a no-tax basis or not at
all. The evidence in this case'does not lead to the
same conclusion. It suggests instead that WWW
- 36 Province or
territory
Case
Application of Juliar to deny rectification
simply assumed that it would not be liable for tax
but did not take steps to ascertain whether that
was in fact the case before signing the
Agreement." (para. 40-41)
69.
Even cases which have questioned the Juliar line of cases have focused on whether there
has been a continuing specific intention and evidentiary support for same:
(a)
In Graymar Equipment (2008) Inc. v. Canada (Attorney General), the taxpayers
failed because there was "no evidentiary basis to support the inference that the
Applicants had a specific and common tax avoidance intention underlying the
2010 Debt Restructuring". Rather the taxpayers were seeking "to engage in
precisely the retroactive tax planning that courts discourage".68
(b)
In Harvest Operations Corp. v. Canada (Attorney General), the taxpayer failed
because it lacked a specific intention: "More is required, however, than a general
intent (McPeake at para 18). The intent to complete a transaction in the most tax
efficient manner possible is not sufficiently specific."69
(c)
In FNF Canada Co. v. Canada (Attorney General), the taxpayers failed because
"[o]n the evidence, the applicants have not demonstrated on convincing proof the
intention that Fidelity National's payment would constitute invested capital which
could be repaid as a return of paid up capital".7°
2014 ABQB 154 at paras. 77 and 79.
6° 2015 ABQB 327 at para. 82.
70 2012 NSSC 217 at para. 31.
68
-3770.
The cases set out in paragraphs 68 and 69, as well as cases such as Bramco, show that
there are significant safeguards to the availability of rectification. Where there is sufficient proof
of a continuing and specific intention, rectification is available. Where such proof is lacking, the
courts do not hesitate to deny rectification. Accordingly, there is no floodgates problem.
71.
There appears to be no case — and the Attorney General certainly does not identify one —.
in which a court has accepted the proposition the Attorney General is urging in this case, namely
that rectification is only available if the taxpayer has a continuing specific intention to undertake
a transaction on a particular tax basis and has an intention as to the particular mechanics of how
to achieve that intention. Such a requirement would in fact be a radical change in the law, which
has consistently held that there is no prohibition against adjusting mechanics if that is necessary
to restore parties to their original intention,71 and would narrow the equitable jurisdiction of
superior courts to relieve persons from the effects of their mistakes. It would mean that
rectification was wrongly granted in Juliar, GT Group and QL Hotel, and is inconsistent with
this Court's treatment of the Riopel transaction in AES. Such a requirement is not justified by
the authorities, and would effectively eliminate the equitable remedy of rectification in many if
not most tax cases.
A comparative law perspective: parallel with AES and Quebec civil law
72.
Comparative law provides a further reason to affirm the Juliar line of cases in common
law: doing so would establish an appropriate parallel between the common law and civil law.
The Juliar line of cases, as properly applied in the cases set out above, is functionally quite
similar and will generally yield the same results as the civil law approach set out in AES.
71 Swainland,
para. 41.
supra footnote 45 at para. 44 and Re Amalgamation of Aylwards (1975) Ltd, supra footnote 63 at
-38 73.
While the common law notion of rectification and its civil law counterpart as described in
AES are not conceptually identical — quite appropriately, as each is firmly grounded in the
distinct legal traditions from which each has developed — it is desirable that the two approaches
be functionally similar. In Bhasin v. Hrynew,72 one of the reasons for this Court to recognize an
organizing principle of good faith in the common law of contract was to bring Canada's two
legal systems of private law closer together in commercial matters. The same rationale applies to
common law rectification and its civil law counterpart.
74.
If anything, the rationale is even more apt in the case of rectification given that the issue
often arises in the context of federal income tax.' It is desirable that Canada's two systems of
private law yield generally similar results in federal tax cases. Conflicting results under the two
systems would not be appropriate. It would be incongruous where the same mistake could be
rectified if the instrument in question is governed by Quebec law but not if it is governed by the
law of a common law province (or vice versa), leading to different federal tax results depending
on the governing law of the instrument.
75.
Given that in AES, decided a mere three years ago, this Court recognized a civil law
counterpart to common law rectification that functionally operates in a very similar manner to
common law rectification (albeit conceptualized very differently because it is grounded in the
concept of a contract under Quebec civil law), it would be a backward step to move the common
law concept of rectification away from its civil law counterpart.
III. WAS RECTIFICATION APPROPRIATELY GRANTED BY THE COURTS
BELOW?
76.
72
Rectification was appropriately granted in the courts below:
Supra, footnote 28 at paras. 32, 41, 82, 83 and 85.
- 39 (a)
As expressed by the Ontario Court of Appeal, Fairmont "had a specific and
unwavering intention from the outset of its dealings with Legacy to ensure that
the Legacy-related transactions were tax neutral and, to that end, that no
redemptions of the relevant preference shares should occur. Nonetheless, by
mistake, the redemptions were authorized by corporate resolutions." Thus
Fairmont had a "settled tax plan: tax neutrality in its dealings with Legacy and no
redemptions of the preference shares in question."73
(b)
The fact that the details of how to unwind the Legacy financing were left for
another day is not surprising — there was no need to set out those details in 2006,
and given that Legacy was not part of the 2006 discussions it was actually
impossible to do so — and does not detract from the fact that Fairmont had a
specific intention for purposes of rectification. The specific plan was, as had been
the case since 2002, never to incur net foreign exchange gains or losses, and also
since 2006 never to redeem the FHIS and FHIW preferred shares.
(c)
There was an error in the corporate resolutions such that they failed to give effect
to the continuing specific intention identified by the applications judge in the
Ontario Superior Court of Justice.
(d)
It was unnecessary for Fairmont to establish that it had determined to use a
specific transactional device, namely loans, to achieve its intended tax result.74
Indeed, it is impossible to give effect to Fairmont's continuing intention without
altering the mechanics of the erroneous corporate resolutions.
ONCA Reasons, paras. 11-12; AR, Vol. I, p. 29-30.
74 ONCA Reasons, para. 12; AR, Vol. I, p. 30.
73
- 40 (e)
Rectification is necessary to restore Fairmont's original intention and thereby
avoid unjust enrichment of the Crown — unjust enrichment which in this case
would be approximately $10 million.
There is no basis to exercise discretion to refuse rectification, as there is no
evidence of any abusive conduct and Fairmont did not engage in retroactive tax
planning.75
PART IV. SUBMISSIONS ON COSTS
77.
Fairmont agrees with the Attorney General that there is no reason to depart from the
usual practice that costs should follow the event. If the appeal is allowed, the Attorney General
should be awarded costs both in this Court and in the courts below. If the appeal is dismissed, it
should be dismissed with costs.
PART V. ORDER SOUGHT
78.
Fairmont requests that the appeal be dismissed with costs.
ALL OF WHICH IS RESPECTFULLY SUBMITTED this 2nd day of May, 2016.
Geoff R. Hall
Chia-yi Chua
McCarthy Tetrault LLP
Counsel for the Respondents
75
ONCA Reasons, paras. 5-7, AR, Vol. I, p. 27-29; ONSC Reasons, paras. 42-43, AR, Vol. I, p. 20.
PART VI. TABLE OF AUTHORITIES
Cases
Paragraph
References
1.
Re Aboriginal Diamonds Group, Ltd., 2007 NWTSC 37
68
2.
Re Amalgamation of Aylwards (1975) Ltd., [2001] N.J. No. 195 (T.D.)
58, 66, 71
3.
Binder v. Saffron Rouge Inc. (2008), 89 O.R, (3d) 54 (S.C.J.)
68
4.
Re Butlin's Settlement Trusts, [1976] Ch. 251
48
5.
Canada Co. v. Canada (Attorney General), 2012 NSSC 217
69
6.
Chartbrook Ltd. v. Persimmon Homes Ltd., [2009] A.C. 1101 (H.L.)
48
7.
Cooperative Insurance Society Ltd v. Centremoor Ltd, [1983] 2 EGLR 52
48
8.
Council of the Wasauksing First Nation v. Wasausink Lands Inc., [2004]
O.J. No. 810 (C.A.)
34
9.
Di Battista v. 874687 Ontario Inc. (2005), 80 O.R. (3d) 136 (S.C.J.)
66
10.
Downtown King West Development Corp. v. Massey Ferguson Industries
Ltd (1996), 28 O.R. (3d) 327 (C.A.)
31, 43
11.
Dynamex Canada Inc. v. Miller (1998), 161 Nfld. & P.E.I.R. 97 (Nfld.
C.A.)
34, 38
12.
Re Fraser Valley Refrigeration, 2009 BCSC 848
66
13.
Fraser v. Houston, 2006 BCCA 66, leave to appeal refused [2006] S.C.C.A.
No. 133
30
14.
Graymar Equipment (2008) Inc. v. Canada (Attorney General), 2014
ABQB 154
56, 69
15.
Re GT Group Telecom Inc., [2004] O.J. No. 4289 (S.C.J.)
58, 66, 67, 71
16.
Hart v. Boutilier (1916), 56 D.L.R. 620 (S.C.C.)
36
17.
Harvest Operations Corp. v. Canada (Attorney General), 2015 ABQB 327
69
18.
JAFT Corp. v. Canada (Attorney General), 2014 MBQB 59, affd. 2015
MBCA 77
68
19.
John Austin & Sons Ltd. v. Smith (1982), 35 O.R. (2d) 272 (CA.)
33
20.
Juliar v. Canada (Attorney General) (1999), 46 O.R. (3d) 104 (S.C.J.), affd.
(2000), 50 O.R. (3d) 728 (C.A.), leave to appeal refused [2000] S.C.C.A.
No. 621
1, 3, 4, 5, 6, 24,
25, 40, 51, 58,
59, 62, 64, 65,
62, 69
21.
Kanji v. Canada (Attorney General), 2013 ONSC 781
67, 68
2
Paragraph
References
22.
McLean v. McLean, 2013 ONCA 788
47
23.
McPeake v. Canada (Attorney General), 2012 BCSC 132
66
24.
Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002
SCC 19. [2002] 1 S.C.R. 678
1, 2, 26, 27, 28,
29, 30, 31, 36,
38, 39, 40, 41,
44, 53
.
25.
Peter Pan Drive-In Ltd. v. Flambro Realty Ltd. (1980), 26 O.R. (2d) 746
(C.A.), leave to appeal refused [1981] 1 S.C.R. xi
34
26.
QL Hotel Service Limited v. Ontario (Finance) (2008), 90 O.R. (3d) 760
(S.C.J.), affd. 2009 ONCA 715
58, 66, 71
27.
1, 5, 61
28.
Quebec (Agence de Revenu) v. Services Environnementaux AES inc., 2013
SCC 65, [2013] 3 S.C.R. 838
R. v. Husky Oil Operations Limited, 2014 SKQB 116
68
29.
Royal Bank of Canada v. El-Bris Limited, 2008 ONCA 601
1, 29
30.
Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1
S.C.R. 157
2, 26, 33, 40, 41
31.
Re Slocock's Will Trusts, [1979] 1 All E.R. 358 (Ch.D.)
51
32.
Snow White Productions Inc. v. PMP Entertainment Inc., 2004 BCSC 604
66, 68
33.
Stone's Jewellery Ltd. v. Arora, 2009 ABQB 656
66, 68
34.
Swainland Builders Ltd. v. Freehold Properties Ltd., [2002] EWCA Civ 560 47, 48, 71
35.
TCR Holding Corporation v. Ontario, 2009 CanLII 43432 (Ont. S.C.J.),
affd. 2010 ONCA 233
66
36.
Zhang v. Canada (Attorney General), 2015 BCSC 1256
68
Other Authorities
37.
D.S. Ewens, "Comments on Rectification" (2005), 57 Can. Tax Found. 23:1
63
38.
D. Wentzell, "How Do You Spell 'Relief? Rectification Orders Revitalized
in Canadian Tax Jurisprudence" (2001), 49 Can. Tax J. 141
62
PART VII. PROVISIONS OF STATUTES RELIED UPON
None.