Fairmont Hotels – Ontario Court of Appeal confirms that rectification can give effect to an original intention to produce a tax-neutral result - but in a different way

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, Newbould 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."

The Ontario Court of Appeal has dismissed the Crown’s appeal.  Simmons JA stated that "Juliar … does not require that the party seeking rectification must have determined the precise mechanics or means by which the party’s settled intention to achieve a specific tax outcome would be realized," so that it was sufficient that Fairmont’s "settled tax plan" at the time was to achieve "tax neutrality in its dealings with Legacy and no redemptions of the preference shares."

This is inconsistent with the approach in Harvest Operations and Graymar (both in Alberta), suggesting that the rectification "fix" should accord with a specific plan that was in place at the closing.

Neal Armstrong.  Summary of Fairmont Hotels Inc. v. A.G. Canada,  2015 ONCA 441 under General Concepts – Rectification.