Fairmont/Jean Coutu – Supreme Court of Canada appears to find that rectification to fix tax problems is limited to fixing badly implemented tax plans rather than fixing bad plans

In reversing Juliar, Brown J indicated in Fairmont that rectification only “allows a court to achieve correspondence between the parties’ agreement and the substance of a legal instrument intended to record that agreement, when there is a discrepancy between the two,” whereas in Juliar, the substance of the agreement was for the exchange of shares for a promissory note rather than shares, so that the purported rectification there was of the agreement itself rather than in the instrument recording the parties’ agreement. (Rectification also was not available on the particular facts before him, involving failure to recognize that a transaction gave rise to a net FX gain for tax purposes.) However, Brown J ignored the dissenting observation of Abella J that “both AES and Riopel involved errors of implementation: the error in AES was a faulty calculation and the error in Riopel was that a complex transaction was conducted in the wrong sequence,” and instead only referred to these cases for the uncontroverted proposition that rectification cannot be used to effect retroactive tax planning.

In the companion Jean Coutu case, Wagner J indicated that a Quebec contract can be rectified to correspond to its objects if they are determined or determinable with sufficient precision He described the AES and Riopel cases somewhat similarly to the above description by Abella J, and noted (likely apropos Riopel) that “modifications to written documents expressing parties’ agreement can include the insertion of transactions” (where consistent with “the contracting parties’ common intention.”) He also stated that there is a “fundamental difference” between a contract (such as in AES) where a party’s contractual obligation “necessary for obtaining the intended tax result - is to issue and deliver a note in an objectively calculable amount equal to the ACB of transferred shares, and a contract [such as that before him] under which there is no [contractual] obligation addressing FAPI.” Accordingly, rectifying to address the overlooked FAPI issue in the Jean Coutu transactions would not accord with the common intention at the time.

Given that both Brown J and Wagner J considered the common law and civil law approaches to rectification as being largely aligned, it would appear that rectification, to substitute share for note consideration, likely would be available on facts similar to Juliar if the common intention at the time were to take back the maximum amount of note consideration, and shares for the balance, and the transaction was not implemented this way only due to a calculation or implementation error. More generally, the correct post-Fairmont/Jean Coutu view may be that a botched execution of a tax plan may be rectified, but not a defective plan.

Neal Armstrong. Summaries of Canada (A. G.) v. Fairmont Hotels Inc., 2016 SCC 56 under General Concepts – Rectification and Statutory Interpretation – Interpretation Act, s. 8.1; summaries of Jean Coutu Group (PJC) Inc. v. Canada (A.G.), 2016 SCC 55 under General Concepts – Rectification and Statutory Interpretation – Interpretation Act, s. 8.1.