Fairmont Hotels – Ontario Superior Court follows Juliar rather than Graymar in finding that a continuing (non-specific) intention to maintain a tax neutral structure was a sufficient basis for rectification

As part of a larger intercompany "reciprocal loan arrangement," a Canadian Fairmont company (FHIW Canada) held U.S. dollar denominated prefs of a U.S. subsidiary which had been financed by matching U.S. dollar denominated prefs in its capital. As a result of a subsequent indirect acquisition of control, there was a s. 111(4)(d) write-down in FHIW Canada’s hands of the prefs held by it reflecting the depreciation of the U.S. dollar, without any ability to eliminate the corresponding accrued FX gain on the prefs in its capital. The fact that FHIW Canada was no longer hedged from a Canadian tax perspective was temporarily forgotten when this structure was unwound a year later through inter alia a redemption of the two matching sets of prefs, so that FHIW Canada realized a s. 39(2) gain on redeeming the prefs in its capital.

In rectifying this redemption to treat it instead as a loan by FHIW Canada to its parent, Newbold J found that there had been a continuing intention for the reciprocal loan arrangement to be tax neutral, and that "the purpose of the…unwind of the loans was not to redeem the preference shares of FHIW Canada…but to unwind the loans on a tax free basis." As he was bound by Juliar, he did not have the "luxury" of following Graymar and, in any event, he questioned that case. Accordingly, it did not matter that the particular rectification solution adopted (using a loan) was not contemplated at the time of the unwind.

Neal Armstrong. Summary of Fairmont Hotels Inc. v. A.G. Canada, 2014 ONSC 7302 under General Concepts – Rectification and Rescission.