The general partner of an Ontario limited partnership (“Atria”) granted stock options on its Class C shares to 10 Atria executives. The partners of Atria agreed to sell the limited partnership units of Atria and the shares of the general partner to a third party (“Rogers”) for $425 million. As provided in the sale agreement (to which the executives were not party), they exercised their options and sold their Class C shares (at a $17.1 million gain over the exercise price) to a major partner (“BHEP Management”), so that such shares were included in what was purchased by Rogers at closing. Four years later, the executives were reassessed to deny the s. 110(1)(d) deduction on the basis that their Class C shares would reasonably have been expected to be acquired by a specified person (BHEP Management).
The executives and the parties to the sale agreement sought rectification so as to have the executive be treated as having sold their shares directly to Rogers for the same proceeds. Although CRA did not contest the rectification application, it also took the position that the shares were not prescribed shares on the basis of not satisfying the Reg. 6204(1)(a)(ii) requirement that their liquidation entitlement not be subject to a minimum nor maximum because the Board on liquidation had the discretion to establish a fixed liquidation amount for the shares - and reserved the right to maintain its denial of the s. 110(1)(d) deduction on this basis as well.
Dunphy J denied relief, stating (at para. 33):
Three observations are sufficient to distinguish this case from the line of cases represented by Juliar (supra) and Fairmont Hotels (supra). Firstly, there 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. Secondly, the criteria for relieving against unilateral mistake are clearly not satisfied. Thirdly, the proposed “fix” for the alleged mistake may or may not be effective.
Respecting the first point, he stated (at para. 37) that “I cannot characterize as a mistake a matter which was simply too insignificant to the parties to make its way on to the radar screen when they were negotiating their $425 million transaction.” Respecting the second point, he stated (at para. 42) before quoting Performance Industries, 2002 SCC 19, at para. 31 that “rectification in cases of unilateral mistake is possible, but the requirements for invoking this doctrine are intentionally much, much narrower and thus more demanding.”