Harvest Operations – Alberta Court of Queen’s Bench refuses to rectify a bump transaction, as the correct way of bumping Target’s assets had not been identified at closing

A last-minute requirement of a Target lender for its loan to be repaid on closing resulted in the purchase price being reduced by $35M and that amount being lent by an affiliate of the Buyer to the Target to fund the loan repayment.  That was a mistake.  The $35M purchase price reduction reduced the s. 88(1)(d) bump for partnership interests held by Target when it was amalgamated with Buyer to form Amalco, so that a capital gain was realized when the partnership interests were then transferred to repay debt owing by Amalco to the affiliate.

The potential bump problem was identified on the closing date, but the solution was not identified until later.  Dario J found that this precluded rectification, stating that cases, such as Fairmont, where courts granted "rectification where there was no ‘particular way’ the parties had intended to achieve the tax objective… run contrary to the express views of the Supreme Court of Canada as set out in Performance Industries."

A second problem was that some assets of Amalco, which should have been transferred by Amalco on the debt repayment to the affiliate, were left behind, so that debt forgiveness applied to Amalco, i.e., its debt to the affiliate was settled for less than full repayment.  After also denying rectification here as well, Dario J noted that this equitable remedy could also be denied to Amalco on the basis of estoppel, i.e., Amalco had claimed CCA on the non-transferred assets rather than applying to the Court promptly for rectification.

Neal Armstrong.  Summary of Harvest Operations Corp v. A.G. (Canada), 2015 ABQB 327 under General Concepts – Rectification and Estoppel.