The professional advisors of the respondent ("PJC Canada") recommended two alternatives ("Scenarios 1 and 2") for it to neutralize the effect of foreign exchange fluctuations on the value of its investment in its wholly-owned U.S. subsidiary ("PJC USA"). Under the alternative chosen (Scenario 1), PJC Canada lent U.S.$120 million to PJC USA, and PJC USA used U.S.$70 million in share subscription proceeds received by it from PJC Canada to make a loan of U.S.$70 million to PJC Canada. CRA assessed on the basis that the interest on the loan by PJC USA to PJC Canada gave rise to foreign accrual property income ("FAPI") to PJC Canada. PJC Canada and PJC USA then sought to rectify on the basis of having Scenario 2 (under which the FAPI would have been reduced to nil by interest expense) implemented retroactively.
In reversing the finding below that rectification was available, Schrager JA quoted (at para. 32) the statement in Graymar that "rectification is available in order to avoid a tax disadvantage which the parties had originally transacted to avoid, it is not available to avoid an unintended tax disadvantage which the parties had not anticipated," stated (at para. 38) that a "general intent…that their transaction be ‘tax neutral' is not sufficiently determinate" and further stated (at paras. 37, 38):
The parties…achieved their intended purpose of neutralizing the effect of the exchange fluctuations. …They are taxed on that basis even though they did not foresee the [FAPI] tax consequences.
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