Rectification & Rescission


Retraoctive effect

As discussed above under Effective Date, an order of the Superior Court that is stated to have retroactive effect also will have retroactive effect for purposes of the Act. Accordingly, such a court order that rectifies with retroactive effect the terms of a transaction of taxpayers should be respected for purposes of the Act. An attempt by the parties themselves to rectify their transactions on a nunc pro tunc basis may not be respected as having retroactive effect for tax purposes (see S & D), although the parties' self-help rectification in AES (replacing most of a promissory note with preferred shares) was effectively ratified after the fact in a Quebec context. Where a contract provides that where any provision thereof is found to be invalid, the contract shall be rectified so as to give effect to the business intent of the parties, a subsequent rectification of the contract pursuant to this clause by the parties themselves very well may be respected as having retroactive effect for tax purposes (Sommerer). As discussed above under Effective Date, an order of the Superior Court that is stated to have retroactive effect also will have retroactive effect for purposes of the Act. Accordingly, such a court order that rectifies with retroactive effect the terms of a transaction of taxpayers should be respected for purposes of the Act. An attempt by the parties themselves to rectify their transactions on a nunc pro tunc basis may not be respected as having retroactive effect for tax purposes (see S & D), although the parties' self-help rectification in AES (replacing most of a promissory note with preferred shares) was effectively ratified after the fact in a Quebec context. Where a contract provides that where any provision thereof is found to be invalid, the contract shall be rectified so as to give effect to the business intent of the parties, a subsequent rectification of the contract pursuant to this clause by the parties themselves very well may be respected as having retroactive effect for tax purposes (Sommerer).

Common intention to avoid adverse tax consequences

The Juliar case, and subsequent cases applying it (e.g., McPeake), support the proposition that where taxpayers enter into a transaction that is intended by them to produce favourable tax consequences or avoid adverse tax consequences, the transaction does not produce these consequences, and an alternate way of implementing the transaction would have accomplished the parties' primary objectives including such tax consequences, then it generally will be appropriate to order retroactive rectification of the transaction. In AES, the Supreme Court declined to address submissions of the federal Attorney General that the Juliar line of cases was inconsistent with Shafron and Performance Industries (which applied traditional and narrower rectification doctrines). The Juliar case, and subsequent cases applying it (e.g., McPeake), support the proposition that where taxpayers enter into a transaction that is intended by them to produce favourable tax consequences or avoid adverse tax consequences, the transaction does not produce these consequences, and an alternate way of implementing the transaction would have accomplished the parties' primary objectives including such tax consequences, then it generally will be appropriate to order retroactive rectification of the transaction. In AES, the Supreme Court declined to address submissions of the federal Attorney General that the Juliar line of cases was inconsistent with Shafron and Performance Industries (which applied traditional and narrower rectification doctrines). In Fairmont, the Crown was unsuccessful in seeking to have the Court find that the Juliar line of cases should be rejected on these grounds, and the court instead found that a continuing intention to avoid tax could be accomplished by changing the type of transaction which occurred (from a share redemption to a loan).

Statements in the Juliar case might suggest that rectification only gives effect to the continuing intention of the parties at the time they implemented the transactions which they now seek to have rectified. It might follow that rectification will not be available to address adverse tax consequences if there was no intention at the time of implementation of the transactions to avoid such consequences (see Bramco), or insufficient evidence of such an intention (Kanji).

However, in S & D, transactions were rectified so as to minimize adverse tax consequences to the extent consistent with the commercial intent of the parties, even though there had not been a continuing intention of the parties to avoid tax. Instead, they had engaged in transactions without realizing they would create adverse tax consequences, but testified that they would not have carried out the transactions in that manner had they been aware of such adverse consequences. Graesser J. stated:

Equitable relief is always discretionary. I thus think it is artificial to interpret Juliar as requiring that the parties demonstrate that the mistake was a "primary and continuing objective of the applicants from the inception of the transaction". That circumstance might make the case for equitable relief stronger, but it is not a pre-condition to the court granting equitable relief if it had been necessary to a achieve a just result.

If there is uncertainty as to whether the transactions that were implemented by taxpayers in fact support a reassessment by the taxing authority or were consistent with their intention that the transaction not be subject to the particular tax that is now at issue (i.e., the transactions in fact "worked"), then in the appropriate circumstances the Superior Court may provide an order to retroactively rectify the transactions so as to accomplish such intention (QL).

If need be, the same document can be rectified more than once (McPeake).

Inherent equitable jurisdiction

There is inherent jurisdiction in a superior court to order rectification (Razzaq). As indicated in the TCR case, the doctrine of rectification is closely aligned with the inherent jurisdiction of a Superior Court to order a retroactive change to the terms of transactions the parties entered into (in that case, the nullification of an amalgamation.)


Although the common law of rectification does not apply in Quebec, in AES it was found that Art. 1425 of the Quebec Civil Code permitted a judicial declaration that the terms of written instruments as executed did not reflect the common intention of the parties to implement a plan with targeted tax consequences.


Although the English doctrine of rectification is quite narrow (Racal, see also Bolton Estate) there is a broader right there to have transactions rescinded on grounds of mistake of fact or law. Pitt found found that it generally will be appropriate to rescind a "voluntary disposition" (such as a gift, trust settlement or determination to make a trust distribution) for a mistake of fact or law (including a mistake as to tax consequences) where the consequences of that mistake are sufficiently grave. (The significance of a "voluntary disposition" is that for it, unlike a contract, there is no need ascertain if rescission would defeat the legitimate expectations of any of the parties to the contract.) Pitt was applied in B.C. in Pallen. Kennedy found that a disposition can be rescinded in part where that part represents "a self-contained and severable part of a non-contractual voluntary transaction."


Slightham et al. v. AGC, 2023 ONSC 6193

family trust deeds rectified to reflect the drafting contemplated in the original tax plan

The two applicant trusts were formed in order to acquire the common shares of a corporation (“Signature”) in an estate freezing transaction. In order that excess cash assets of Signature could be distributed from time to time so as to permit the shares of Signature to qualify for the lifetime capital gains exemption, the tax plan contemplated that a holding company (“Holdco”) would be a beneficiary of each trust, so that dividends could be received by the trusts and distributed to Holdco on an exempt basis. In order that s. 75(2) would not apply to Holdco, the tax plan contemplated that Holdco would be prohibited under the trust deeds from receiving any income or capital derived from itself. However, due to a drafting error, a reference to “Signature” was mistakenly added as one of the parties from which Holdco could not receive income or capital.

This mistake was discovered when CRA denied the s. 104(6) deduction for dividends from Signature distributed by the trusts to Holdco, on the grounds that such distributions were prohibited by the trust deeds. CRA refused to accept that the trust deeds could be amended pursuant to their amendment provisions to correct this error nunc pro tunc.

After noting that the evidence clearly supported all of the above points, Osborne J allowed this application (which was not opposed by the Attorney General) to amend the declarations of trust to delete the references to Signature, as requested in the applications, stating (at para. 65):

In this case, as in Sleep Country [2022 ONSC 6103], the parties are not changing their antecedent agreement. Rather, they are seeking the assistance of equity to change the written instrument that did not at the time it was executed, and does not now, properly and accurately reflect the agreement of the parties that has remained unchanged throughout.

Les Structures G.B. Inc. v. A.G. Canada, 2023 QCCS 3510, briefly aff'd 2023 QCCA 1415

transaction documents rectified because they did not implement the parties' intention to not trigger Part IV tax

Four individuals held their indirect holdings of 10%, 10%, 5% and 5% of the common shares of a Canadian-controlled private corporation (Structures) through three holding companies (the "Holdcos"). One of them was a joint holding company for the two indirect 5% shareholders. A tax plan drawn up by the tax advisor (Mallette) for the crystallization of the capital gains deduction (CGD) entailed "purification" transactions for first extracting investment assets of Structures as tax-free dividends or deemed dividends. It was the expectation of the shareholders that this reorganization would not trigger significant taxes and that the status of Structures as a connected corporation of the three Holdcos would be maintained. However, the issuance of some Class E shares as part of the implementation of the steps in May 2019 resulted in the three Holdcos' shareholdings in Structures falling below 10%. On December 13, 2019, the parties signed documents to rectify the steps, and on February 7, 2020, brought this application for a judgment of rectification to the implementing documents.

Before granting the requested order, Blanchard J stated (at paras. 66, 70, TaxInterpretations translation):

The de-connection of the corporations prevented the accomplishment of the will of the parties in implementing the reorganization, which was to crystallize the CGD and not pay any tax, other than minimum tax, while benefiting from the CGD. ...

In the circumstances, it is appropriate to grant the request and to correct the documents in order to conform them to what the parties had conceived. This is not the Shareholders attempting to rewrite the tax history of the file.

Agence du revenu du Québec v. Samson, 2023 QCCA 332

date of Quebec agreement did not reflect the parties’ existing intention to realize a loss

The respondent (Samson) and a corporation (Bourgade) implemented a plan set out in a tax-planning memo of a tax advisor that contemplated that they would transfer their shares of a corporation (CRP) in December 2013 after having satisfied the conditions for realizing a business investment loss under s. 50(1)(b)(iii). This result was premised on their having had a November 30, 2013 taxation year – which had occurred for Bourgade, but not for Samson who, as an individual, had a calendar taxation year.

The Quebec Superior Court agreed to rectify the share sale agreement to change its date from December 11, 2013 to the date on which it had actually been signed (April 4, 2014). After quoting from the tax planning memo, and before dismissing the ARQ’s appeal, the Court stated (at paras. 19-21, TaxInterpretations translation):

The judge further concluded that "the Agreement does not reflect the true intention of the parties", in that "its date excluded from the outset any possibility of making the election under ITA subsection 50(1)". … Since the ITA s. 50(1)(b)(iii) election could not be made before December 31, 2013, the December 11, 2013 date of the Agreement does not reflect the parties' intention.

Given this clearly expressed intention, it must be concluded that the respondent's request for rectification simply seeks to correct the date of the Agreement to give effect to that intention. This is consistent with the pronouncements of the Supreme Court in Jean Coutu. This is not a case where the taxpayer is seeking a tax benefit that he did not anticipate at the time of his tax planning.

… The answer might have been different if the rectification had given the taxpayer an additional tax benefit that he had not anticipated at the time of his tax planning. However, that is not the case here.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(b) - Subparagraph 50(1)(b)(iii) no loss realized under s. 50(1)(b)(iii) unitl year end rectifed 229

Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26

courts cannot exercise their equitable jurisdiction to reverse or alter a completed transaction to avoid unintended tax consequences

Two operating companies each implemented a plan, suggested by a tax advisor, to protect their assets from creditors. In each case, a holding company was incorporated to purchase shares in an operating company, a family trust was created with the holding company as a beneficiary, and funds were lent to the trust to purchase shares in the operating company. The operating companies paid dividends to the trusts, which were attributed to the holding companies under s. 75(2), with the holding companies, in turn, claiming the intercorporate dividend deduction under s. 112(1). The effect was to move significant sums from the two operating companies to the two family trusts fees of tax. However, Sommerer unexpectedly found that s. 75(2) did not apply to sales of property. CRA assessed the trusts on the basis that distributions from the operating companies were taxable, thereby imposing an unexpected tax liability. The trusts’ petition for the equitable remedy of rescission of the transactions was granted by the chambers judge, whose decision was affirmed in the B.C. Court of Appeal.

Before allowing the appeal and dismissing the trusts’ petition, and in finding that the principle in Fairmont Hotels and Jean Coutu, that a “court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” (para. 16(d)) was not limited to situations of requested rectification and applied as well to the equitable remedy of rescission, Brown J stated (at para. 22):

I agree with the conclusion in Canada Life that Fairmont Hotels and Jean Coutu bar a taxpayer from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute. … While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) Minister required to assess based on an unexpected case law development 365
Tax Topics - Income Tax Act - Section 220 - Subsection 220(1) s. 220 required the Minister to assess based on new judicial interpretation 177

Mandel v. 1909975 Ontario Inc., 2020 ONSC 5343

jurisdiction declined in a requested shareholding rectification whose raison d’être was a CRA assessment

In order to avoid a deemed disposition under the s. 104(4) 21-year deemed realization rule, two family trusts for the children of Mr. Mandel or Ms. Pike distributed their shares of a holding company (holding each family’s interest in a steel manufacturing operating company) under s. 107(2) to the respective children beneficiaries, who then transferred those shares on a s. 85(1) rollover basis to a newly-incorporated “Child Corporation” (of which Mr. Mandel or Ms. Pike held special voting shares) in consideration for non-voting common shares of the Child Corporation. However, Mr. Mandel or Ms. Pike then subscribed a nominal amount for a large number of convertible shares of the Child Corporation whose conversion (which they professed might occur only if a divorced spouse of a child received the non-voting common shares) would substantially dilute the entitlements of such non-voting common shares.

CRA reassessed Mr. Mandel and Ms. Pike on the basis that these transactions generated a taxable benefit under s. 15(1) to each of approximately $15 million. Each objected in November 2019, but to date, no appeal to the Tax Court had been launched. “In February 2020, further transactions occurred within each of the Child Corporations pursuant to which each child has become the controlling shareholder and a director of his or her corporation” (para. 27). The applicants brought this application seeking (1) a declaration that they have never been shareholders of the Child Corporations by virtue of OBCA s. 23(3) (providing that a share shall not be issued until it is fully paid) because they never paid for the shares; and (2) rectification of the records of the Child Corporations (pursuant to s. 97 of the Courts of Justice Act - or OBCA s. 250, contemplating “an order requiring the registers or other records of the corporation to be rectified”) to reflect that the applicants never held shares in them.

In declining to assume jurisdiction, Koehnen J stated (at paras 32, 35):

… [T]he Tax Court has jurisdiction to interpret s. 23(3) of the OBCA. …

Parliament has created a specific court with expertise in tax matters and has created a specific process to address tax issues. Given that the raison d’être of this application is the tax assessment, the issues should in my view be determined by the body with specialized expertise in that area.

Koehnen J went on to indicate that, even if he had assumed jurisdiction, he would have declined the application, stating (at paras 64, 65 and 68):

There is no need for intervention on my part to achieve justice here. There is no dispute between shareholders and there is no inability of the Corporation to conduct its affairs. …

… Given the unexplained conflict in the evidence before me about whether the applicants had paid for their shares, the absence of any dispute within the corporations and the potential for unknown consequences in granting a retroactive declaration, I exercise my discretion against awarding such a declaration.

Respecting s. 250, he stated (at paras. 82-83):

In this case, rectification is not appropriate because the corporate records accurately reflect what the parties intended in 2014 and 2015. At that time, the applicants intended to be the controlling shareholders of the Child Corporations. They signed several documents reflecting that intention. They had a specific reason for doing so: to defer the adverse tax consequences of a deemed disposition of the Family Trust assets. The corporate records accurately reflect that intention.

… [T]he applicants do not require a court order to correct the books and records of the Child Corporations. They can and in fact have changed those records to show that the applicants are no longer controlling shareholders.

Collins Family Trust v Canada (Attorney General), 2019 BCSC 1030, aff'd 2020 BCCA 196, rev'd 2022 SCC 26

Fairmont cast doubt on but did not overrule Pallen

After noting that the applications before him for the rescission of transactions entailing reliance on an interpretation of s. 75(2) that was established by Sommerer to be incorrect – and that in Pallen “which concerned an almost identical set of facts … rescission was granted” (para. 3), Giaschi J stated (at para. 5):

I agree with the submissions of the respondent that the decisions ... in Fairmont and Jean Coutu have seriously undermined Pallen. However, Pallen has not been expressly overruled and I am bound to follow it. In my view, it is for the British Columbia Court of Appeal to determine whether Pallen remains good law in light of the legal developments since it was rendered.

He went on to state (at paras. 65, 70-71):

The respondent relies heavily on Satoma ... [holding] that a tax plan similar to the ones before me (and therefore also similar to the plan in Pallen) constituted abusive tax avoidance and was subject to GAAR. …

In Satoma the primary purpose was found by the trial judge to be to avoid payment of any tax… .

…The evidence before me does not establish that the primary goal of the petitioners was to avoid payment of any tax. Rather, the evidence before me establishes that the purpose was to shield assets from creditors and to do so in a manner that did not attract tax liability, with both aspects having equal importance.

Crean v Canada (Attorney General), 2019 BCSC 146

a sale agreement rectified to turn it into a 2-step sale that no longer generated a s. 84.1 dividend

Two of the petitioners were two brothers (Thomas and Michael) who each owned 50 of the 100 issued and outstanding common shares of a holding company (Crean Holdings). On May 27, 2016, they entered into an agreement in principle for Michael to purchase all of Thomas’ interests in the Crean Group, “direct or indirect” for the sum of $3,200,000, and providing that “the transaction will be structured, to the extent possible, so that Tom receives capital gains treatment for tax purposes.” Following advice from their tax advisor and on August 31, 2016, Crean Holdings paid capital dividends to them, Michael rolled his shares of Crean Holdings under s. 85 into a new personal holding company (1086881) for common shares, Thomas then sold his 50 common shares of Crean Holdings to 1086881 for a $2.75 million promissory note of 1086881.

The tax advisor subsequently realized that these transactions gave rise to a deemed dividend under s. 84.1 to Thomas, and the parties petitioned to have the sale agreement rectified by adding Michael as a party and providing for a sale of Thomas’ 50 shares directly to Michael in consideration for a $2.75 million promissory note of Michael and for the immediate on-sale by Michael of those shares to 1086881 in consideration for 1086881 assuming the promissory note.

In granting the petition, Burke J accepted the tax advisor’s testimony that, consistent with the agreement in principle, he had been instructed to provide for a direct sale and that the failure of the documents to so provide was an error on his part. She stated (at paras. 73, 85):

Ultimately, the respondent’s position in effect appears to be that the doctrine of rectification is limited to clerical error. I disagree. …

Thomas Crean and Michael Crean had a prior definite and ascertainable agreement. This is unlike Fairmont Hotels and Jean Coutu. The Agreement in Principle is sufficient evidence to grant a rectification remedy.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) share sale for Newco note generated s. 84.1 dividend before its rectification 233

Re 5551928 Manitoba Ltd., 2018 BCSC 1482

resolution for incorrectly calculated capital dividend rectified to reflect intention to clean-out CDA

The petitioner, a Manitoba corporation with 24 shareholders, passed a resolution on November 20, 2015 that recited that “the company has a capital dividend account of the amount of $298,092”, declared a dividend in that amount “from the Company’s Capital Dividend Account pursuant to Subsection 83(2),” and directed the filing of a capital dividend election “in order to have the rules set forth in Subsection 83(2) … apply to the full amount of the dividend.” The $298,092 figure for the capital dividend account (“CDA”) was overstated by $184,880 due to the failure of the petitioner’s accountants to recognize that an addition in that amount to the CDA would only occur at the end of the petitioner’s August 31, 2016 taxation year.

After referring (at para. 11) to the test for rectification in Fairmont as to whether

there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement

Branch J found (at para. 16) in light of the resolution’s wording and statements deposed as to the directors’ intentions that

there was a definite and ascertainable agreement between the directors to effectively “clean out” the petitioner’s capital dividend account.

He granted an order to rectify the resolution to reduce the declared dividend by the $184,880 erroneous amount.

Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562

a transaction resulting from a tax mistake should not be remedied under the Court’s general equitable jurisdiction

A Canada Life subsidiary (CLICC) clearly intended to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. This was accomplished by transferring pro rata interests in the partnership to its two partners (CLICC as to a 99% interest and a wholly-owned subsidiary of CLICC (“CLICC GP”) as to a 1% interest) followed immediately by a winding-up of CLICC GP into CLICC. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.

Pattillo J had issued an order rectifying the transactions in a number of respects, including delaying the date on which CLICC GP was wound-up until after the three month period referred to in s. 98(5). In its cross-appeal, CLICC now sought an order simply cancelling the winding-up of CLICC GP. It argued that Fairmont “left open the ability for a court, in the exercise of its general equitable jurisdiction, to correct a mistake” (para. 32) and, in the alternative, that the requested relief was available on the basis of “the remedy of equitable rescission of voluntary dispositions” (para. 36).

In finding that the requested order was not available, van Rensburg JA stated (at paras 45 and 46):

Rectification is now limited to cases where the written instrument fails to record correctly the parties’ agreement.

In addition, Fairmont Hotels and Jean Coutu also affirm the underlying policy rationale of Bramco; it is not possible to alter corporate transactions on a nunc pro tunc basis to achieve particular tax objectives. In other words, the Supreme Court has signaled that retroactive tax planning by order of the Superior Court exercising its equitable jurisdiction is impermissible.

van Rensburg JA also found that the order could not be made through the equitable remedy of rescission of a voluntary disposition, stating (at paras 89 and 90):

The relief that CLICC seeks is more accurately described as rescission of a contract entered into by mistake. …None of …[the] requirements [set out in Miller Paving Limited v. B. Gottardo Construction Ltd., 2007 ONCA 422, 313 O.A.C. 137] apply in the present case, nor does CLICC attempt to bring itself within the requirements for equitable rescission of a contract.

Another impediment to the relief sought by CLICC is that rescission is an “all or nothing” remedy; partial rescission is not a recognized equitable remedy… . CLICC … does not ask the court to rescind the entire Transaction, and to restore it and its affiliates to their original rights, because to do so would not achieve its objective of triggering a loss to set off against its foreign exchange gains.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) pro-rata winding-up of partnership followed by winding up of one former partner into the other engaged s. 98(5) per CRA 92

Fournier v. Agence du revenu du Québec, 2018 QCCQ 786

taxpayer could reverse an assessment for a taxable benefit by subsequently engaging in self-help rectification

On August 15, 2007, Mr. Fournier sold land to a family corporation (“Canada Inc.”) for a purchase price that was satisfied by the issuance by it of a non-interest-bearing promissory note. Canada Inc. then started work on a condo development on the property. Mr. Fournier and his wife opted to receive a particular condo in the development pursuant to a preliminary purchase agreement dated March 18, 2009, and opted to pay various “extras” for the construction of their unit to an enhanced standard. After taking possession in December 2010 for use of the condo as their personal residence, they paid the condo-related utilities and municipal taxes personally.

Due to lender requirements, it was not possible to transfer legal ownership to Mr. Fournier in 2010, but on July 31, 2013, an executed notarial deed provided for the transfer of ownership of the condo unit by Canada Inc. to him. In 2017, apparently after an ARQ assessment of him for a taxable benefit under the Quebec equivalent of s. 56(2) respecting the rent-free use of the condo unit viewed as a corporate asset (of Canada Inc.) by him and his wife for most of the period between December 2010 and July 2013, the parties amended the July 2013 notarial deed through a deed of correction which indicated that Mr. Fournier became the owner of the condo on December 1, 2010.

Before concluding (at para. 107, TaxInterpretations translation) that “this correcting notarial deed achieved an accurate reflection of what the parties wished to write down from the outset, being that which corresponded to reality,” so that the ARQ’s taxable benefit assessments respecting the December 2010 to July 2013 period were to be vacated, Guénard JCQ noted that the documentary evidence was mixed (a hypothec granted on the property had named Mr. Fournier and his wife as the grantors) and that the credible testimony of Mr. Fournier indicated that the July 31, 2013 deed was prepared in the standard form used in other condo closings rather than to reflect the parties’ intention, as evidenced inter alia by the bearing of the condo expenses from December 2010 onwards personally.

After quoting from Jean Coutu, he stated (at para. 135):

The amended notarial deed in this case did not rewrite history.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) taxable benefit assessment relied on an inaccurate notarial deed, which could be corrected after the assessment 218

Harvest Operations Corp. v. Attorney General of Canada, 2017 ABCA 393

cannot use general equitable jurisdiction to do an end run around the narrow (post-Fairmont) rectification doctrine

A last-minute requirement of a lender (“ATB”) to the target corporation (“Krang Energy”) for ATBH’s loan to be repaid on closing resulted in the purchase price being reduced by $35M and that amount being lent by an affiliate of the buyer (a predecessor (“Viking Holdings”) to the appellant in this action) to Krang Energy to fund the loan repayment. That was a mistake. The $35M purchase price reduction reduced the s. 88(1)(d) bump for partnership interests held by Krang Energy when it was amalgamated with Viking Holdings to form Amalco, so that a capital gain was realized when the partnership interests were then transferred to repay debt owing by Amalco to the affiliate. The potential bump problem was identified on the closing date, but the solution was not identified until later.

A second problem was that some assets of Amalco, which should have been transferred by Amalco on the debt repayment to the affiliate, were left behind, so that debt forgiveness applied to Amalco, i.e., its debt to the affiliate was settled for less than full repayment. See the more detailed ABQB summary.

In affirming the denial below of rectification or other equitable relief, the Court stated (at paras 66-67):

Rectification is not available just because the means the parties adopted to execute their business objective had unanticipated adverse tax consequences.

The means that the parties utilized in pursuit of their goal of a tax-neutral transaction – and not the goal of tax neutrality – are the primary focus of a rectification application.

After having noted (at para. 9) that the appellant asked in the alternative that the Court exercise its “general equitable jurisdiction to rectify the errors,” the Court stated (at paras 74-75):

Without commenting on the merits of the assertion that a superior court has “equitable jurisdiction to relieve persons from the effect of their mistakes”, we fail to see how we can do this without undermining the rectification doctrine and ignoring the precedential value of Fairmont Hotels.

There is no principled basis, in the guise of exercising our equitable jurisdiction, to pump theoretical steroids into the rectification doctrine and give it the strength or force that the Supreme Court of Canada recently and consistently has declined to do. …

Greither Estate v. Canada (Attorney General), 2017 BCSC 994

taking back excess boot could not be rectified under the BCA provision for correcting “corporate” mistakes

627291 B.C. Ltd., which was jointly owned by two German residents (Karoline Greither and her husband), rented a B.C. property to a related company (“Old Flora”). Following the death of Karoline, and the step-up of the cost of her shares to her estate under s. 70(5), the estate, under advice from a tax lawyer who had forgotten to think about s. 212.1, transferred its shares of 627291 B.C. Ltd. to Old Flora for consideration consisting of a promissory note for $1,951,457 and a Class A Preferred share worth $1. After CRA assessed the estate for non-resident withholding tax under s. 212.1, the estate made an application under s. 229 of the B.C. Business Corporations Act (the “BCA”) to correct this “corporate” mistake by changing the consideration to a promissory note for $1 and Class A Preferred Shares for 1,951,457.

Mayer J dismissed the petition, stating (at paras 36, 37 and 38):

Based on my review of the facts, I am unable to find that any of the triggering events set out in subsection 229(1)(a) through (d) [of the BCA] have occurred. There has not been:

(a) a breach of a provision of the BCA , a former Company Act or the regulations under any of them;

(b) a default in compliance with the memorandum, notice of articles or articles of the company;

and …

(c) none of the following proceedings at or in connection with any of the following have been rendered ineffective:

(i) a meeting of shareholders;

(ii) a meeting of the directors or of a committee of directors;

(iii) any assembly purporting to be a meeting referred to in subparagraph (i) or (ii); and

(d) a consent resolution or records purporting to be a consent resolution has not been rendered ineffective.

… [T]he mistake of not completing the Transaction in the most tax effective manner does not … fall within these subsections. As a result I find that a corporate mistake engaging my discretionary power pursuant to s. 229(2) of the BCA has not occurred.

The Greither Estate did what it planned to do… . There was no omission, defect, error or irregularity resulting in one of the prescribed events. The Transaction simply did not have the desired tax effect.

Mayer J further found (at para 40 and 41):

Even if the Greither Estate was seeking the remedy of equitable rectification, … I am not satisfied that the facts of this case would justify such relief… .

As stated by the majority of Supreme Court of Canada in Fairmont Hotels business and individuals should not be allowed to exploit rectification for the purposes of engaging in retroactive tax planning and as stated by the dissent, “allowing parties to rewrite documents and restructure their affairs based solely on a generalized and all-encompassing preference for paying lower taxes is not consistent with the equitable principles that inform rectification”… .

BC Trust v. Canada (Attorney General), 2017 BCSC 209

no rectification of considered decision not to distribute trust income

The petitioner was a personal trust, with another trust (“Alta Trust”) as its sole income and capital beneficiary. In 2012, CRA made a designation under s. 104(2) (“Designation”) of the petitioner and Alta Trust as one trust, and reassessed the petitioner’s 2008, 2009 and 2010 taxation years, accordingly. For 2012, the trustees decided not to make their customary allocation of income of the petitioner to Alta Trust, as this might be contrary to the provisions of the Act and, hence, a breach of their fiduciary duties. In 2015, the dispute was resolved by CRA agreeing to reverse the Designation. The petitioner sought a declaration that a trust minute to allocate 2012 income of the petitioner to Alta Trust would have retroactive effect.

In finding that the rectification doctrine did not assist the petitioner, Weatherill J stated (at paras 29 and 30):

Fairmont Hotel…made clear that rectification is limited to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement. …

There is no written agreement or other document, including the petitioner’s 2012 T3 tax return, which incorrectly records the petitioner’s intentions at the time that the document was prepared. The doctrine of rectification is not available to the petitioner.

In finding that he also should not exercise the inherent jurisdiction of the Court to grant the requested remedy, he stated (at paras. 31-32) that it was “clear that the Trustees decided, in their absolute discretion, not to allocate the petitioner’s 2012 income to Alta Trust” and that this decision was made after they “had weighed the risks and benefits of whether or not to make the allocation.”

He also stated (at para 35):

…[T]here is nothing prohibiting the Trustees from executing a trust minute in respect of the petitioner’s 2012 income allocation. A court order is not necessary. If the petitioner decides to do so, it will be up to the CRA to decide whether or not to give that allocation retroactive effect.

Canadian Forest Navigation Co. Ltd. v. Canada, 2017 FCA 39

foreign rectification order not dispositive

The taxpayer’s Barbados and Cyprus subsidiaries paid amounts to the taxpayer in 2004, 2005 and 2006 as dividends and then, following CRA proposals to assess the dividends, obtained rectification orders from the applicable Barbados and Cyprus courts declaring that the amounts instead were loans to it (or otherwise gave rise to indebtedness). In answer to a Rule 58 question as to whether the Minister was bound to treat these transfers as giving rise to indebtedness by virtue of these rectification orders, Lamarre ACJ had found that the orders did not bind the Minister because they had not been homologated by a Quebec court.

Boivin JA rejected the relevance of homologation, and stated (at paras 15, 17 and 18):

…[P]ursuant to article 2822 C.c.Q. “[a]n act purporting to be issues by a competent foreign public officer makes proof of its content against all persons…”.

…[B]oth orders from Barbados and Cyprus are proof that the corporate resolutions have been rectified to authorize the dividend payments and to transform them into indebtedness, no more, no less.

Moreover, since these foreign orders involve the appellant and its Foreign Affiliates and not the Minister, a third-party to the foreign proceedings, there is nothing to enforce against the Minister; homologation is therefore a non-issue. …

However, Boivin JA further stated (at paras 19-20):

I cannot agree … that pursuant to article 2822 C.c.Q. these foreign orders are dispositive and that the Minister has no choice under the ITA but to accept the dividends are actually loans because the orders from Barbados and Cyprus say so.

…[W]hat remains to be determined is the foreign orders’ effect vis-à-vis the Minister…and the weight ascribed to the foreign orders as facts pursuant to article 2822 C.c.Q. These determinations are for the Tax Court judge to make, with a full evidentiary record at his or her disposal. …

On this basis, he concluded that Lamarre ACJ should not have answered the Rule 58 question, and set aside her judgment and dismissed the Rule 58 motion before the Tax Court.

Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670

rectification must give effect to common intention at time

The taxpayer (“PJC Canada”), a Quebec corporation, implemented a plan, to neutralize the effect of FX fluctuations on its investment in a U.S. subsidiary (“PJC USA”), that overlooked foreign accrual property income considerations – so that interest generated to PJC USA on a loan that it made back to PJC Canada was included in PJC Canada’s income. The Court of Appeal had reversed a decision below that the transactions could be rectified in accordance with s. 1425 of the Civil Code (respecting contractual interpretation effecting the common intention of the contracting parties where this differed from their literal expression) to retroactively adopt a revised plan to result in an offsetting interest expense to PJC Canada for the interest on the loan from PJC USA. In affirming the Court of Appeal, Wagner J stated (at para 24-25, 26, 30-31 and 33-34):

[W]hen unintended tax consequences result from a contract whose desired consequences, whether in whole or in part, are tax avoidance, deferral or minimization, amendments to the expression of the agreement in accordance with Art. 1425 CCQ can be available only under two conditions. First, if the unintended tax consequences were originally and specifically sought to be avoided, through sufficiently precise obligations which objects, the prestations to execute [sic, whose objects, being the contracted-for benefits [“prestations”] to be performed], are determinate or determinable; and second, when the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so. …

Such a reading of arts. 1412 and 1373 C.C.Q. doesn’t mean that amendments to the expression of the agreement in accordance with art. 1425 C.C.Q. can be available only to correct clerical errors. It upholds, however, the requirements stipulated in the C.C.Q. according to which the object of a contract needs to be precise and the object of an obligation sufficiently determinate or determinable to be recognized as the common intention of the parties to be sought when interpreting a contract.

Article 1425 C.C.Q. does not allow PJC Canada and PJC USA to retroactively amend the documents recording and implementing their agreement in the circumstances of this case. …[T]hey did not turn their minds to FAPI or a particular means of avoiding it, but merely had a general intention that their agreement be tax-neutral.

In [ AES and Riopel], the contracting parties had agreed on a particular set of prestations to defer tax payable. The “agreements provided . . . for the establishment of determinate structures that would, had they been drawn up properly, have made it possible to meet the objectives being pursued by the parties”, namely tax deferral on a share exchange using rollover provisions in the tax legislation (AES) and tax deferral on a corporate amalgamation as part of a detailed tax plan, again under particular tax provisions (Riopel): AES, at para. 54 (emphasis added). Because of mistakes in the documents recording and implementing the contracting parties’ agreements, tax was not deferred. In the AES case, the mistake consisted of a miscalculation in the adjusted cost base (“ACB”) of the transferred shares ― the procedure agreed to by the parties required the issuance and delivery of a note for an amount precisely equal to the shares’ ACB. In the Riopel case, the mistake was that the parties’ tax advisors reversed the order of certain transactions, contrary to the detailed tax plan to which the parties had verbally agreed.

[T]here is a fundamental difference between a contract under which one of a party’s prestations ― 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 under which there is no obligation addressing FAPI, and no prestations agreed on that would prevent its fiscal consequences. ….

Although…modifications to written documents expressing parties’ agreement can include the insertion of transactions, this is possible only where doing so would bridge the gap between the contracting parties’ common intention and the written expression thereof

Turning to broader policy considerations, he stated (at paras 41-43):

…[A]ccepting PJC Canada’s position…would… undermine one of the fundamental principles of our tax system: that tax consequences flow from the legal relationships or transactions established by taxpayers. …

[A]lowing the amendment of the written documents … would amount to retroactive tax planning. It would set an undesirable precedent, where taxpayers could point to a common intention to effect their transactions on a tax-neutral basis to immunize themselves from unforeseen tax consequences… .

[T]axpayers [instead] can bring a claim against their advisors… .

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 desriable for convergence of principles and outcomes inside and outside Quebec 161

Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720

rectification not available to correct planning errors

With a goal of ensuring foreign exchange tax neutrality, Fairmont Hotels Inc. (“Fairmont”) entered into a “reciprocal loan arrangement” with a REIT (Legacy REIT) in which it was a minority investor, which entailed back-to-back U.S.-dollar loans and preferred shareholdings between the two groups. However, that intention was frustrated on a subsequent acquisition of control of the Fairmont , which resulted in a write-down under s. 111(4) of the U.S.-dollar preferred shares held by it and a subsidiary (“FHIW”). There was no plan for protecting FHIW from its tax exposure from the write-down, because adopting a plan was deferred. The following year, Fairmont acceded to an urgent Legacy request to unwind the reciprocal loan structure, as a result of which FHIW realized a net FX gain. (The Fairmont officer had incorrectly assumed that the matter of the foreign exchange tax neutrality of FHIW had already been secured.) The rectification order granted below had treated proceeds paid by FHIW to Fairmont as a loan rather than as preference share redemption proceeds.

In finding that this rectification order should not have been given, Brown J stated (at paras 12, 19, 32 and 24):

[R]ectification 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. …

The parties’ mistake in Juliar, however, was not in the recording of their intended agreement to transfer shares for a promissory note, but in selecting that mechanism instead of a shares-for-shares transfer. By granting the sought-after change of mechanism, the Court of Appeal in Juliar purported to “rectify” not merely the instrument recording the parties’ antecedent agreement, but that agreement itself where it failed to achieve the desired result or produced an unanticipated adverse consequence — that is, where it was the product of an error in judgment. …

[T]he party seeking rectification must identify terms which were omitted or recorded incorrectly and which, correctly recorded, are sufficiently precise to constitute the terms of an enforceable agreement.

Juliar also did not account for the direction in Shell that a taxpayer should be taxed “based on what it actually did, not based on what it could have done” (para. 23).

Respecting the applicable standard of proof, Brown J quoted approvingly the statement in Thomas Bates and Son Ltd. v. Wyndman’s (Lingerie) Ltd., [1981] 1 W.L.R. 505 (C.A.), at p. 521 that:

The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself.

On the facts, “the respondents’ application for rectification should have been dismissed, since they could not show having reached a prior agreement with definite and ascertainable terms” (para. 39).

In her dissenting reasons, Abella J stated (at para. 85):

Notably, 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. The application of rectification in these circumstances clearly confirms that rectification is not confined only to correcting terms that were omitted, accidentally added, or articulated incorrectly in a written document, but is no less available when the parties’ true intention is erroneously implemented.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 convergence in civil/common law rectification 95

Anderson v Benson Trithardt Noren LLP, 2016 SKCA 120, aff'd 2017 SCC CanLii 8568

drop-down documents could not be declared retroactive to the previously-agreed effective date, as this would undercut the Tax Court

The taxpayer’s accountants met with him on October 6, 2011, when it was agreed that he would transfer personally-owned land and equipment on s. 85 rollover basis to his corporation in order to facilitate paying off a loan owing by him to the corporation. The accountants took notes of this decision, but neglected to direct the appellants' law firm to prepare the related documents. The documents were prepared, and then executed on June 6, 2013, shortly following notice of a CRA audit, with the stated effective date of the transfer being January 1, 2011. CRA found that a s. 85 rollover transfer had not been accomplished in 2011, but a proposed reassessment was delayed to allow the taxpayers to seek rectification. The chambers judge rectified the specified effective date from January 1, 2011 to October 6, 2011, but declined to declare the documents to be retroactively effective as of October 6, 2011.

In dismissing the appeal, Lane J. stated (at paras 29, 34):

… The Chambers judge was correct to limit the application of the rectification remedy as he did. He saw the application for a declaration for what it was – an attempt to obtain equitable relief not available from the Tax Court, which is a superior court of record but not a court of inherent jurisdiction, and to thereby attempt to determine the outcome of an assessment appeal by essentially binding the hands of that Court. …

The Chambers judge properly limited his decision to the issue between the appellants themselves. He correctly identified the intended purpose of the application and recognized the specialized nature of the Tax Court and its jurisdiction to decide the ultimate issue concerning the tax implications of the rollover. He correctly declined to effectively pronounce on that issue.

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Tax Topics - General Concepts - Effective Date transaction documents not declared effective to date transaction agreed to in principle 187

Slate Management Corporation v Canada (Attorney General), 2016 ONSC 4216

a generalized intent to achieve a s. 88(1)(d) bump was a sufficient basis to rectify in order to redo an amalgamation

A purchaser (“SCC”) used a newly-formed AcquisitionCo (“GTA”) to acquire a Target (“HCC”). The three corporations then amalgamated. The amalgamated corporation then learned that in order to have accomplished a s. 88(1)(d) bump, there should have been a two stage amalgamation, so that two of the corporations amalgamated, and the amalgamated corporation them amalgamated with the third corporation.

Notwithstanding a Crown submission to the contrary, Hainey J found (at para. 14) “that it is more probable than not that the parties did have a continuing specific intention to achieve the amalgamation in accordance with the tax bump rules,” given KPMG advice suggesting use of the tax bump rules, SCC instructions to KPMG to calculate the bump and an Arrangement Agreement between SCC and HCC in which HCC agreed to avoid any actions which could reduce or eliminate the bump.

Hainey J noted (at para 13):

… [T]his is not a case in which tax planning has been done on a retroactive basis. The parties’ intention from the outset was to structure the transaction to take advantage of the tax bump rules. The single-step amalgamation was mistakenly chosen as a means of effecting the transaction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) three-party non-sequential amalgamation busted bump 118

Non Corp Holdings Corp. v. Canada (Attorney General), 2016 ONSC 2737

date of capital dividend declaration rectified to eliminate Part III tax

The corporate applicant intended to distribute the applicable portion of a “capital gain” (likely, goodwill proceeds) from a business sale as a capital dividend. While the dividend was, in fact, paid on November 1, 2012 (one day after the taxation year end), the directors’ resolution and CRA election form were both dated October 31, 2012, thereby resulting in the imposition of Part III tax on the dividend. CRA considered that a court order was required to rectify the dating of the directors’ resolution, but did not oppose this application.

Before amending the directors’ resolution nunc pro tunc to change its date to November 1, 2012, Dunphy J stated (at paras. 7, 9):

This case is quite unlike…Birch Hilldecided by me…[where] [t]he rectification sought would have materially re-ordered the transaction in ways that nobody had considered at the relevant time.

There was a specific intention to allocate specific proceeds of a specific transaction to a specific tax account – the capital dividend account – to achieve a specific tax goal. A very minor mistake, in human terms at least, was made.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (c.1) capital dividend incorrectly dated before year end 79

Birch Hill Equity Partners Management Inc. v Rogers Communications Inc., 2015 ONSC 7189

stock option deduction was peripheral to the larger share sale transaction

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.”

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Tax Topics - Income Tax Regulations - Regulation 6204 - Subsection 6204(1) - Paragraph 6204(1)(a) board had discretion to determine fixed liquidation entitlement 127

Canada Life Insurance Co. of Canada v. A.G of Canada, 2015 DTC 5128 [at 6378], 2015 ONSC 281, rev'd 2018 ONCA 562

rectification transactions to avoid s. 98(5) rollover contained 2 more transactions than in original plan

In order that the applicant ("CLICC") could realize an accrued capital loss on its 99% limited partner interest in a subsidiary limited partnership ("MAM LP") (and following preliminary dividends):

  1. On December 7, 2007, MAM LP distributed an asset to CLICC and a wholly-owned subsidiary of CLICC ("CLICC GP") based on their respective 99% and 1% interests.
  2. On December 31, 2007, the interests of CLICC and CLICC GP in MAM LP were cancelled and MAM LP distributed all its remaining property (other than $100 of limited partner capital) pro rata to CLICC and CLICC GP.
  3. One hour later, MAM LP was dissolved and immediately thereafter, the remaining $100 of partnership capital was distributed pro rata to CLICC and CLICC GP.
  4. At 11:59 p.m., CLICC GP was wound up and its assets and liabilities acquired and assumed by CLICC.
  5. CLICC GP was formally dissolved on October 14, 2008.

After CRA assessed to deny the loss claimed by CLICC on the basis that the s. 98(5) rollover applied, the applicant applied for the transactions in 2 to 4 to be rectified so that s. 98(5) could not apply (entailing a distribution on December 31 of some of the partnership property to both CLICC and CLICC GP, a transfer of CLICC's LP interest to CLICC GP, a resulting wind-up of MAM LP into CLICC GP also on December 31, 2007 and the wind-up of CLICC GP into CLICC on April 30, 2008 (i.e., more than 3 months after December 31.)

In granting the requested relief, Pattillo J noted (at para. 39) that "at all material times, CLICC and the other parties…had a continuing specific intention…to create a tax loss…of approximately $168 million" and (at para. 38) that the Attorney General's ("AG's") arguments that rectification was restricted to correcting mistakes in the instruments used to implement a definite and ascertainable tax plan had been rejected in Fairmont.

In response to an AG argument that the proposed rectification transactions contained two more transactions than had occurred in December 2007, CLICC had applied after the hearing of the motion to propose alternative rectification transactions whose only change from the original transactions was to defer the winding-up of CLICC GP from December 31, 2007 to April 30, 2008. As the originally requested rectification relief was granted, this amendment motion was dismissed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) rectification to avoid s. 98(5) rollover 255

Telus Communications Inc. v. A.G. of Canada, 2015 ONSC 6245

reorganization of corporate structure to reflect what it was thought to be at the time of making a tax election

The Telus group had a tiered partnership structure. Its management decided that Telus would make a multi-tier alignment election under s. 249.1(9) so that two subsidiary partnerships ("TCC" and "TMC"), which were believed to be in a qualifying multi-tiered partnership structure would each have a January 31 fiscal period end. 15 months after filing the election on a timely basis, they discovered that a minority interest of TCC in a third partnership ("EnStream") had been overlooked (and not disclosed in the election or in a previous ruling application to CRA), which meant that the election was invalid as EnStream had a different fiscal period end than TCC and TMC.

In granting the applicants' application to correct this error by allowing a retroactive transfer of TCC's interest in EnStream to a wholly-owned corporate subsidiary of TCC (which Telus submitted it would have done at the time if it had remembered the minority interest), and after noting the Crown submission (at par. 17) that "the Applicants are asking the Court to retroactively declare that new transactions…took place when they did not," Hainey J stated (at para. 17):

The Applicants had a specific and continuing intention throughout to file a valid Election. They are not attempting to retroactively avoid an unintended tax disadvantage.

He stated (at para. 20) that in the alternative, and following TCR, he would "rely on the equitable jurisdiction of this court to relieve the Applicants from the effect of their mistake."

Zhang v. The Queen, 2015 DTC 5084 [at 6035], 2015 BCSC 1256

true agreement was to access s. 113(1)(a) deduction rather than avoid capital gains tax

The taxpayer (Mr. Zhang) briefly sought advice from his tax accountant (Bob) as to how he could extract funds from his Chinese operating company ("LABest"), and was advised that exempt surplus dividends could be paid to Canada if the shares were held by a Canadian holding company. Mr. Zhang incorporated a B.C. company ("Beamtech") and secured approval from a Chinese authority for the transfer of his shares of LABest to Beamtech for cash consideration of U.S.$150,000 – which was effected without further specific advice from Bob.

When CRA assessed Mr. Zhang under s. 69 on the basis that the fair market value of the shares was Cdn.$661,164, so that the transfer had generated a capital gain, Beamtech issued 1,000 common shares to Mr. Zhang as purported additional consideration for the transfer, a joint s. 85(1) election was filed and a rectification order was sought to have the share issue be considered to have occurred on the date of the transfer.

In dismissing the petition, Butler J stated (at para. 39):

To use the language of the Ontario Court of Appeal in Juliar, here, the true agreement between the parties was the acquisition of Mr. Zhang's interest in LABest by Beamtech in a manner that would allow for the distribution of LABest's income in British Columbia on a basis which attracted the minimum amount of income tax. It was not based on Beamtech acquiring the interest in LABest in a manner which would not attract immediate liability for capital gains tax. That was a secondary concern and one which Mr. Zhang asked Bob not to investigate. He did not seek assistance regarding the capital gains issue until long after the transaction concluded… .

Fairmont Hotels Inc. v. A.G. Canada, 2015 ONCA 441, aff'g 2014 ONSC 7302, leave granted, SCC docket 36606

continuing non-specific intention to maintain a tax neutral structure

In order to facilitate the acquisition in 2002 of a hotel in Washington by a REIT ("Legacy") of which it was the manager, Fairmont Hotels Inc. ("FHI") borrowed U.S.$67.6 million from a subsidiary of Legacy ("LHC"), subscribed for U.S.$67.6 million of U.S. dollar denominated preference shares of a Canadian subsidiary of FHI ("FHIW Canada"), which subscribed for U.S.$67.6 million of U.S. dollar denominated preference shares of a U.S subsidiary of FHIW Canada ("FHIW US"), which lent U.S.$67.6 million to an indirect U.S. subsidiary of LHC ("LHC US"). As a result of an acquisition of control of FHI in 2006, an accrued FX loss on the preferred shares of FHIW US held by FHIW Canada was extinguished under s. 111(4)(d), so that FHIW Canada was no longer hedged from a Canadian tax standpoint. The Fairmont advisors were aware of this but deferred dealing with this issue to another day.

In 2007, FHI was approached on an urgent basis by Legacy to unwind the above "reciprocal loan arrangement" in connection with an imminent sale of the Washington hotel. In the rush of the moment, the FHI VP of Taxation forgot that FHIW Canada was unhedged, and the structure was unwound through inter alia a redemption of the preference shares of FHIW Canada held by FHI, so that FHIW Canada realized an FX gain under s. 39(2). This mistake was not discovered until a subsequent CRA audit. Essentially the same reciprocal loan structure and mistaken unwinding strategy was used in connection with a Seattle hotel of Legacy.

Simmons JA noted (at para. 5) that, in granting an application to rectify the 2007 unwinding transactions so that the U.S. dollars advanced by FHIW Canada to FHI were a loan rather than redemption proceeds, Newbould J had found that from 2002 on there had been a continuing Fairmont intention for the reciprocal loan arrangement "to be carried out on a tax…neutral basis through a plan whereby any foreign exchange gains would be offset by corresponding foreign exchange losses" and that "the preferred shares of the two relevant companies…would not be redeemed."

In dismissing the crown's appeal, Simmons JA stated (at paras. 10, 12):

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. Juliar holds, in effect, that the critical requirement for rectification is proof of a continuing specific intention to undertake a transaction or transactions on a particular tax basis.

…[I]t was unnecessary that the respondent prove that it had determined to use a specific transactional device - loans - to achieve the intended tax result. That the respondent mistakenly failed to employ an appropriate transactional device to achieve the intended tax result does not alter the nature of the respondent's settled tax plan: tax neutrality in its dealings with Legacy and no redemptions of the preference shares in question.

Harvest Operations Corp v. A.G. (Canada), 2015 DTC 5067 [at 5904], 2015 ABQB 327

requested rectification order to fix bump did not match parties' specific plan at closing

The Bump Mistake

A predecessor in interest of the applicant ("Viking") entered a multi-step acquisition and restructuring transaction to acquire an arm's length corporation ("Krang"). The plan was originally for a sibling unit trust of the taxpayer ("VHT") to lend $35 million to the taxpayer's subsidiary ("082"), which would then acquire all the shares of Krang for $171 million, with 082 and Krang then amalgamating to form "Krang #2".

On the day of closing, a Krang creditor unexpectedly required Krang to repay its revolving credit facilities rather than consenting to the transaction. Consequently, VHT lent the $35 million directly to Krang, thereby reducing the purchase price paid by 082 for the Krang shares by $35 million. This had the effect of reducing the s. 88(1)(d) "bump" of the cost to Krang #2 of partnership interests previously held by Krang by the same amount, thereby resulting in a taxable capital gain on a subsequent transfer of those interests described below.

The taxpayer applied to have the transaction rectified to reflect that the loan was made to 082 instead of Krang, and that those funds were used to subscribe for additional shares of Krang.

Dario J dismissed the taxpayer's application, stating (at paras. 77, 81 and 82):

[T]his is not a case of the parties "wrote it down wrong", but rather the parties got it wrong.

… To the extent we are talking only about the increased bump room due to the Krang Debt, the evidence does not establish that the inability to benefit from this tax treatment would have terminated the acquisition, or that the common intent of the parties that drove them to the formation of the transaction was frustrated.

… The intent to complete a transaction in the most tax efficient manner possible is not sufficiently specific. The Applicant must establish how the parties had intended on achieving this tax objective… .

Cases, such as Fairmont, where courts granted "rectification where there was no ‘particular way' the parties had intended to achieve the tax objective… run contrary to the express views of the Supreme Court of Canada as set out in Performance Industries and others…" (paras. 46, 49).

Here, the taxpayer's tax advisor had listed a number of possible options to deal with the last-minute hurdles in a tax-efficient manner - none of them were taken, and furthermore none of them matched the order being sought.

The Other Assets Mistake

A subsequent leg of the series involved transferring Krang's assets (now Krang #2's assets) to VHT in purported full repayment of debt owing, with VHT then transferring the same assets to a subsidiary partnership ("Olaf"), also as a purported full debt repayment. Approximately $12 million of the $170 million in assets of Krang #2 were not transferred, with the result that both debts had been settled without full repayment, so that the debt forgiveness rules applied to both Krang #2 and VHT.

After concluding that rectification was not available in any event, Dario J stated (at para. 92):

In the present case, where these assets were unknown or forgotten, not specifically referred to in the Step Memorandum, remained (and presumably, with respect to prepaid expenses and depreciable assets, used) in the Krang #2 entity, and subsequently recorded in Krang #2's tax filings (including recording a capital cost allowance on the assets), the Applicant has not met the requisite burden of proof to establish intent.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Estoppel taxpayer estoppel when it claimed a tax benefit from its mistake rather than promptly seeking rectification 206
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) failure to fund debt repayment through increased purchase price 162

Mac's Convenience Stores Inc. v. A.G. of Canada, 2015 QCCA 837

thin cap issues were not considered at time of paying a dividend

The appellant, which was a wholly-owned Ontario subsidiary of a Quebec corporation ("CTI"), paid a $136 million dividend to CTI in connection with a "Quebec shuffle" transaction. The tax advisor did not focus on the resulting reduction in the appellant's retained earnings which, under the s. 18(4) thin cap rule, caused a substantial portion of the interest on a $185 million loan owing to a related non-resident corporation to become non-deductible.

In finding that the appellant could not retroactively rectify the dividend so as to be a stated capital distribution instead, and after noting (at para. 34) that AES and Riopel dealt with related parties committing an error in giving effect to a "legitimate corporate transaction for the purpose of avoiding, deferring or minimizing tax" and correcting "that error to achieve the tax consequences originally and specifically intended and agreed upon," Schrager JA stated (at para. 43):

The payment of the 136 million dollar dividend to CTI was intended and was effected. … Reduction of capital was not intended. The unintended consequences of the dividend, by ricochet, resulted from the thin capitalization rules and was not part and parcel of the transaction. … There was no common intention of the parties regarding these rules as they were never contemplated and so cannot be the object of a meeting of the minds to which a court can give effect.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(5) - Equity Amount - Paragraph (a) dividend triggered application of thin cap rules 65

A.G. Canada v. Le Groupe Jean Coutu (PJC) Inc., 2015 QCCA 838, aff'd 2016 SCC 55

transactions achieved purpose of neutralizing FX fluctuations and were not intended to avoid FAPI

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Foreign Accrual Property Income FAPI from loan by CFA to Canco 59

Kaleidescape Inc. v. MNR, 2014 ONSC 4983

clarification that directions to a trustee shareholder were to be made by the mooted CCPC's board rather than a non-resident executive

The applicant ("K-Can") was intended to qualify as a Canadian-controlled private corporation. Its outstanding shares consisted of 100 Class A non-voting common shares and 100 Class B voting common shares held by a Delaware corporation ("K-US"), and 100 Class C special voting shares held by a trust for K-Can employees whose trustee was a trust company (Computershare) and whose named settlor was K-Can. A unanimous shareholders' agreement ("USA") conferred the powers of the directors on the K-Can shareholders. The Declaration of Trust provided:

5.2 ...Upon the direction of the Settlor, the Trustee shall...exercise any voting rights...

5.9 Where this Deed of Trust requires or authorizes the Settlor to give directions to the Trustee, the Trustee shall accept only a direction in writing from the CEO or President of the Settlor.

CRA concluded that these two provisions gave the non-resident CEO of K-Can the authority to direct Computershare how to vote the Class C shares of K-Can, so that K-US had de jure control of K-Can.

K-Can and Computershare then signed a Deed of Rectification, amending the Deed of Trust, which recited that paragraph 5.9 might "be misinterpreted as that the CEO or the President…has the power to change …the Board of Directors," and amended it to provide that the Trustee shall accept only a direction in writing "in the form of a certified copy of a resolution from the Board of Directors of the Settlor." The amendment was stated to be effective from the date of settlement of the trust subject to approval of the Ontario Superior Court of Justice (and otherwise was effective on the date of the amendment).

The Crown argued inter alia that the amendment would have no effect on the de jure control of K-Can: due to the USA, the Board of K-Can had no right to instruct the Trustee and, as the Trustee was unwilling to vote without instruction, K-US controlled the Class C shares.

In granting the requested rectification order to retroactively confirm the amendment, Carole Brown J stated (at paras. 28-30) that she was satisfied that "the intention throughout was to ensure that K-Can…qualified for CCPC status and for the tax credits available," "that the wording chosen was chosen by mistake and not to intentionally give K-US de jure control over K-Can," and (respecting the above argument) "the Deed makes it clear that the decision-making body is the Board of Directors."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation USA did not affect decision-making status of board 203

Canada (Attorney-General) v. Brogan Family Trust, 2014 ONSC 6354

no obligation to notify Crown if tax liability which was relieved has not been assessed

The respondent family trust obtained a rectification order, to permit trust distributions to minor grandchildren beneficiaries, on 26 November 2010, which was shortly after a sale of a business by the trust. The gains on the sale were allocated to the beneficiaries for the 2010 year. The Crown did not become aware of the rectification until a subsequent CRA audit, and CRA brought a motion 10 months after this discovry to set aside the rectification order on the ground that it ought to have been given notice.

In dismissing this motion, Ray J stated (at para. 13):

I am not persuaded that… CCRA [sic] was affected by the order of McLean, J. … [After citing Canada v. Simard-Beaudry Inc. [1971] F.C. 396, para. 20:] I don't accept the CCRA's contention that tax liability was established at the moment of the sale with the amount of the tax to be determined after the return was filed by the respondents. To accept the CCRA's argument would in principle implicate the CCRA as tax collector in virtually every proceeding in the courts involving damages for termination of employment, personal injury income loss claims, family matters, or for the purchase and sale of a business.

The respondent's situation therefore was distinguishable from the situation where an applicant had already been reassessed by CRA (Aim Funds Management Inc. v. Aim Trimark Corporate Class Inc. [2009] O.J. 2408) or where the rectification application had been triggered by an adverse CRA ruling (Snow White Productions Inc. v. PMP Entertainment Inc, 2004 BCSC 604).

Furthermore, CRA had not (as required by the Rules) brought its motion "forthwith," which:

has been interpreted to mean "without unreasonable delay considering the object of the rule and the circumstances of the case" [citing Coopers & Lybrand Ltd. v. Richter & Associates, [2000] OJ No. 2073 (Ont SC) aff'd [2001] OJ No. 1087 (Ont CA)].

Fairmont Hotels Inc. v. A.G. Canada, 2014 ONSC 7302, aff'd supra, rev'd 2016 SCC 56

continuing non-specific intention to maintain a tax neutral structure

In order to facilitate the acquisition in 2002 of a hotel in Washington by a REIT ("Legacy") of which it was the manager, Fairmont Hotels Inc. ("FHI") borrowed U.S.$67.6 million from a subsidiary of Legacy ("LHC"), subscribed for U.S.$67.6 million of U.S. dollar denominated preference shares of a Canadian subsidiary of FHI ("FHIW Canada"), which subscribed for U.S.$67.6 million of U.S. dollar denominated preference shares of a U.S subsidiary of FHIW Canada ("FHIW US"), which lent U.S.$67.6 million to an indirect U.S. subsidiary of LHC ("LHC US"). As a result of an acquisition of control of FHI in 2006, an accrued FX loss on the preferred shares of FHIW US held by FHIW Canada was extinguished under s. 111(4)(d), so that FHIW Canada was no longer hedged from a Canadian tax standpoint. The Fairmont advisors were aware of this but deferred dealing with this issue to another day.

In 2007, FHI was approached on an urgent basis by Legacy to unwind the above "reciprocal loan arrangement" in connection with an imminent sale of the Washington hotel. In the rush of the moment, the FHI VP of Taxation forgot that FHIW Canada was unhedged, and the structure was unwound through inter alia a redemption of the preference shares of FHIW Canada held by FHI, so that FHIW Canada realized an FX gain under s. 39(2). This mistake was not discovered until a subsequent CRA audit.

In granting an application to rectify the 2007 unwinding transactions so that the U.S. dollars advanced by FHIW Canada to FHI were a loan rather than redemption proceeds (and in responding to the Attorney General's position (at para. 21) "that a loan to FHI…was not part of the plan in 2006 or even 2007"), Newbould J found that from 2002 on there had been a continuing Fairmont intention for the reciprocal loan arrangement to be tax neutral (although "they had no specific plan as to how they would" "deal with the unhedged position of FHIW Canada" following the 2006 acquisition of control" (para. 33)), that "the purpose of the 2007 unwind of the loans was not to redeem the preference shares of FHIW Canada or FHIS Canada, but to unwind the loans on a tax free basis," and that "the redemption of the preference shares was mistakenly chosen as the means to do so" (para. 43). As he was bound by Juliar, he did not have the "luxury" of following Graymar and, in any event, he did not think that Brown J in that case "has accurately described what happened in Juliar" (para. 41).

Essentially the same reciprocal loan structure and mistaken unwinding strategy was used in connection with a Seattle hotel of Legacy, and addressed by Newbould J in the same manner.

Jaft Corporation v. Canada (AG), 2014 DTC 5080 [at 7056], 2014 MBQB 59

attempt to rescind employment contracts, on the basis that employees had not satisfied scientific research & experimental development requirements, was retroactive tax-planning

CRA had found that the applicant's research into solutions for Sick Building Syndrome based on air treatment qualified for scientific research and experimental development credits. In proceeding to develop related products, the applicant employed several individuals on terms that their compensation be based "solely on the work done that meets the requirements of SR&ED." The applicant applied the presumed SR&ED credits towards payroll remittances. CRA found that the work did not qualify, and the taxpayer applied to have the employment contracts rescinded or declared void ab initio.

After finding that allowing the application would needlessly interfere with the Tax Court's jurisdiction on this matter (see summary under s. 171(1)), McKelvey J decided in the alternative to disallow rescission. While the applicant relied on Stone's Jewellery and Juliar, the facts were closer to Bramco. She stated (at para. 44):

This case smacks of attempts to adopt a retroactive/no-risk tax planning scenario or, in essence, rewriting history. The payroll tax remittances are lawfully owed ... and should not be rectified, rescinded, or declared void ab initio.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) superior court declined jurisdiction to consider equitable remedy that bore heavily on parallel tax court proceedings 195

Re: Pallen Trust, 2014 DTC 5039 [at 6726], 2014 BCSC 305, aff'd 2015 BCCA 222

rescission due to unexpected caselaw development

An individual ("Pallen") or his spouse ("Tonn") settled the taxpayer, a family discretionary trust, and transferred his shares of "New Integrated" to a personal holding company ("Pallen Holdings") in exchange for shares under s. 85(1). Pallen Holdings then subscribed $100 for (discretionary dividend) Class D shares of New Integrated, and sold them to the taxpayer for the same amount, which was their fair market value. New Integrated then paid approximately $1.75M in dividends on the Class D shares to the taxpayer, as to which $1.74M was satisfied by issuing a promissory note. Over a year later, New Integrated paid $0.25M to partially repay the promissory note.

The plan was intended to result in s. 75(2) attributing the $1.75M in taxpayer dividend income to Pallen Holdings, which was a beneficiary of the taxpayer, so that such dividends would be received tax-free under s. 112(1). However, following Sommerer, CRA (which viewed the plan as a surplus strip) included the $1.75M of dividends in the taxpayer's income on the grounds that s. 75(2) did not apply to a fair market value sale.

Masahura J granted the taxpayer's application for rescission of the dividends (with the monies apparently to be returned to New Integrated (per para. 56).) It was appropriate to apply Pitt, which allows for rescission of a "voluntary disposition" (such as the dividends) where there is "a mistake of sufficient causative gravity was made that would make it unconscionable, unjust or unfair to leave the mistake uncorrected" (para. 34). The "causative mistake" in this case was a mistake of law regarding s. 75(2) - and this mistake clearly had sufficient gravity given that "the tax implications were basic to the Plan" (para. 50).

After acknowledging the cautionary note in Pitt that rescission should not provide relief for artificial tax avoidance (para. 48), Masuhara J stated (at para. 57):

A key determinant in this case is the common general understanding as to the operation of s. 75(2) by income tax professionals and CRA as well as my finding that CRA would not have sought to reassess the Trust prior to Sommerer.

Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 DTC 5174 [at 6466], 2013 SCC 65, [2013] 3 S.C.R. 838

Quebec documents did not implement common intention to defer tax
Riopel Facts

Mr. Riopel was the sole shareholder of "JPF-1" and he and his wife (Ms. Archambeault) held 60% and 40% of the shares of "Déchiquetage." The parties intended to amalgamate the two corporations to form "JPF-2," with Mr. Riopel as the sole shareholder of JPF-2.

A detailed tax plan which was presented to Ms. Archambeault and Mr. Riopel on September 1, 2004, contemplated the sale by Ms. Archambeault of her shares of Déchiquetage to Mr. Riopel [sic, JPF-1?] in consideration for $720,000 to be satisfied by (a) a promissory note of $335,000 (corresponding to the ACB of her shares) and (b) the issuance of 385,000 Class C preferred shares with a redemption amount of $385,000. Shortly after the amalgamation, the promissory note would be repaid by JPF-2, and the Class C preferred shares would be redeemed with a view to the resulting deemed dividend being paid out of JPF-2's capital dividend account. However, the amalgamation in fact occurred before any sale by Ms. Archambeault, and the amalgamation agreement did not reflect Mr. Riopel as being the sole shareholder of Déchiquetage going into the amalgamation. The lawyer and accountant tried to fix these problems without alerting the clients, by having them sign revised documents to reflect a post-amalgamation s. 86 reorganization: they showed Ms. Archambeault's shares of Déchiquetage being converted on the amalgamation into common shares of JPF-2, and then they provided in the documents for the redemption of those common shares in consideration for the promissory note of $335,000 and the issuance of 385,000 preferred shares.

Both CRA and Quebec's Ministère du Revenu assessed Ms. Archambeault on the basis that she had received a deemed dividend of $335,000. The taxpayers then brought a motion seeking "recognition of the agreement they had actually reached [on September 1, 2004] so that the documents would reflect their true intention" (para. 13).

AES Facts

Preliminarily to a sale of a portion of its shares of a subsidiary ("Centre") to a new investor, AES and Centre instructed their advisors to implement a s. 86 reorganization of Centre, so that AES's voting shares of Centre were exchanged for (a) 4,500,000 voting participating shares with an aggregate paid-up capital of $1, and (b) a promissory note for $1,217,028. AES had erroneously understood that the adjusted cost base of its Class A shares of Centre was $1,217,029, so that the exchange would occur on a rollover basis. In fact, the ACB of those shares was only $96,001, so that the exchange gave rise to a taxable capital gain of $840,770. AES was reassessed accordingly.

After filing AES's notice of objection, the parties cancelled the $1,217,028 note and issued a $95,000 note and 1,122,029 Class C shares with a value of $1,122,029. They then asked the Quebec Superior Court for an order under art. 1425 declaring the effectiveness of these changes. Revenu Quebec contested the motion, and the Attorney General of Canada participated as intervener (in this case as well as Riopel).


After noting (at para. 32) that "a contract is distinct from its physical medium," LeBel J found (at para. 36) respecting Riopel that "on September 1, 2004, the parties reached a verbal agreement to carry out a detailed tax plan, the essential terms of which had been recommended to them by their tax advisors," and (at para. 37) "the agreement of wills was not implemented properly." Respecting AES, "the admissions in the record confirm the existence of a tax planning agreement…[but] the agreement, the intended effect of which was to defer the tax payable was vitiated by the error made in calculating the ACB" (para. 39).

Respecting the Court's jurisdiction in a province where the common law of rectification did not apply, "the determination of the common intention, or will, of the parties represents a true exercise of interpretation" for purposes of art. 1425 C.C.Q. (para. 48). After indicating (at para. 54) that if all that had been established was "a taxpayer's intention to reduce his or her tax liability" then "absent a more precise and more clearly defined object, no contract would be formed," LeBel J. granted the requested relief under art. 1425 in both actions, stating (at para. 54):

These agreements provided, for the corporations in question, for the establishment of determinate structures that would, had they been drawn up properly, have made it possible to meet the objectives being pursued by the parties. The subsequent amendments did not alter the nature of the structures contemplated at the outset. All they did was amend writings that were supposed to give effect to the common intention, an intention that had been clearly defined and that related to obligations whose objects were determinate or determinable.

Juliar and Shafron

After referring to the argument of the Attorney General of Canada as intervener that the Juliar line of cases was inconsistent with Shafron and Performance Industries, LeBel J stated (at para. 55) that the cases before him were "governed by Quebec civil law and are not appropriate cases in which to reconsider the common law of rectification."

Kanji v. Attorney General of Canada, 2013 DTC 5058 [5824], 2013 ONSC 781

no evidence of instructions to ensure s. 107(2) rollout from trust

The taxpayer settled a family trust in 1992 with $5000, which was used to purchase shares in a business corporation. The family trust acquired a commercial property in 2004, and by 2013 the trust's assets were worth approximately $62 million. Because the taxpayer was a settlor, trustee and capital beneficiary of the trust, s. 75(2) applied to gains and losses from the initial $5000. Therefore, s. 107(4.1) applied to all of the trust's property, and the taxpayer could not have any trust property transferred to his children on a s. 107(2) rollover, so as to avoid a deemed disposition of the trust property in 2013 under the 21-year rule in s. 104(4). The taxpayer applied for a rectification order.

Brown J. declined to give the requested order. He stated (at para. 33):

In this proceeding the applicants bear the onus of demonstrating, on a balance of probabilities, that at the time Mr. Kanji settled the Family Trust he intended to structure the Family Trust in a tax efficient manner which would allow for a tax deferred transfer of the trust's assets to his children in the future and that a mistake was made which resulted in the trust indenture failing to give effect to that intention.

The taxpayer had not called former counsel to testify about his instructions in establishing the trust. Brown J. found that the taxpayer had not shown that his instructions to counsel had expressed such tax-deferral intentions, having said on cross-examination that he did not recall whether his instructions to "minimize tax" included instructions to defer tax.

.Mac's Convenience Stores Inc. v. Couche-Tard Inc., 2012 DTC 5118 [at 7149], 2012 QCCS 2745 (Queb Sup Ct), aff'd supra

The taxpayer paid a $136 million dividend to the non-resident corporate defendant when it was indebted to the defendant. This reduced the taxpayer's retained earnings, which limited the deductibility of interest payments it could make to the defendant by virtue of the thin capitalization rules in s. 18(4). The taxpayer applied for a rectification order to declare the dividend void ab initio and replace it with a payment effecting a reduction in capital in the defendant's favour.

Before denying the application, the Hallée J stated (at para. 87-88) [Tax Interpretations translation]:

...the request of MAC's entails more than a simple modification of a written instrument.

MAC's instead would replace a legal act (a dividend declaration) by other legal acts (a capital reduction) of a significantly different nature in order to obtain a more favourable tax treatment, and this would thereby entail rewriting fiscal history contrary to proper criteria.

FNF Canada Company v. Canada (Attorney General), 2012 NSSC 217

proposed rectification inconsistent with financial statements

The applicant, incorporated by a U.S. corporation ("Fidelity National"), received $23,659,000 from Fidelity National in order to finance its business in Nova Scotia. The applicant purported to repay these amounts as a return of capital. However, Fidelity National had disposed of its shares of the Applicant to a wholly owned US subsidiary soon after incorporating the applicant, and was not a shareholder when the $23,659,000 was paid or repaid. The applicant sought an order to effect a retroactive issuance of shares (of an unspecified number, and apparently of the same class) to Fidelity National (apparently so that Fidelity National would be considered to have received some or all of the payment as a paid-up capital distribution on those shares).

Coughlan, J. dismissed the application. The applicants' and Fidelity National's financial statements indicated that the $23,659,000 was "contributed surplus," as defined in the CICA Handbook - Accounting, but contributed surplus is not equivalent to "paid-up capital" as defined in s. 89(1) of the Income Tax Act. Coughlan J. therefore concluded that "the applicants have not demonstrated on convincing proof the intention that Fidelity National's payment would constitute invested capital which could be repaid as a return of paid up capital" (para. 31).

The Juliar line of decisions was not mentioned in the reasons.

Orman v. Marnat Inc., 2012 DTC 5052 [at 6814], 2012 ONSC 549

declaration re character of Ponzi amounts received

The applicants and the respondents (which were corporations held by the applicants) were defrauded in a Ponzi scheme. The applicants took the position that the uncovering of the fraud revealed that previous amounts the respondents reported as interest payments were actually return of capital, and that payments to the applicants were corporate loans rather than bonuses. They sought an order to rectify the respondents' corporate records to reflect the actual nature of the payments.

Perell J. denied the motion because, at the time the documents were prepared, the applicants and respondents intended that the payments be on income account. He stated (at para. 42):

Rectification is concerned with mistakes in recording the parties' intent or purpose in their writing. It is not concerned about mistakes in the underlying purpose.

Nevertheless, Perell J. agreed with the taxpayers that the payments were a return of capital rather than income, and issued a declaration to that effect. However, citing a desire not to impinge on the Tax Court's jurisdiction, he made the declaration "without prejudice" to how the payments should be treated in tax law.

McPeake v. Canada, 2012 DTC 5042 [at 6770], 2012 BCSC 132

2nd rectification to avoid s. 75(2) taint

The petitioners were trustees of a family trust which had been formed in order to permit capital gains on any subsequent sale of the shares of the private company with which the trust had been settled to be allocated amongst the children beneficiaries, thereby multiplying the utilization of the capital gains exemption. Such a sale and allocation in fact occurred two years later. However CRA then assessed on the basis that as the father, who had settled the trust, was included as a beneficiary and had a reversionary interest in the shares, s. 75(2)(a)(i) applied to deem all the trust income to be attributed to the father, so that such income could not be allocated instead to the children beneficiaries. The trust deed was then rectified by order of the BC Supreme Court (with CRA not opposing on being notified of this rectification application) to correct these errors.

However, rather than reversing its assessments, CRA confirmed the reassessments. It informed the father and trust that it had identified further errors in the trust deed (namely, the father could become sole trustee and therefore have the power to direct the disposition of, or the beneficiaries in, the shares, so that s. 75(2) continued to apply on the basis of s. 75(2)(a)(ii) or (b).) The trustees applied for a second rectification of the trust deed, this time with the opposition of the Justice Department.

In allowing the application, Dorgan J found that the multiplication of the capital gains exemption was an objective of the trust that had been pursued from its inception, and that this finding of a specific intention was sufficient to allow rectification.

S & D International Group Inc. v. A.G. of Canada, 2011 DTC 5072 [at 5771], 2011 ABQB 230

transactions would have been structured differently without mistake

The corporate applicant (S & D) carried on a real estate trading and development business. It had three directors, whose wives, the individual applicants, each held 25% of S & D's shares. The directors held the remaining 25% indirectly through other corporations. The directors sought to remove their wives as shareholders. Accordingly, the shares of the wives in S & D were purchased for cancellation in consideration for the transfer of lands of S & D to a corporation owned equally by the wives. Due to a mistake, a 100% interest in the lands was transferred to the wives' corporation rather than a 75% interest. The transaction had been effected on the basis that the fair market value of the lands was equal both to their adjusted cost base and the stated price at which the wives' shares were repurchased. CRA reassessed S & D on the basis that it had realized a capital gain as a result of the lands having a fair market value that was almost five times their adjusted cost base, and the wives on the basis that they had received a deemed dividend equal to the stated (much lower) repurchase price for their shares. Following these reassessments, the taxpayers purported to rescind the transactions, but their "cancellation agreement" was found not to be effective to eliminate the corporate capital gain and the deemed dividends. The taxpayers applied to the court for a rectification order.

Graesser J. found (at para. 83) that although, unlike Juliar, the parties did not have a common continuing intention to avoid tax (but, rather, were trying to insulate the wives from an investigation of S & D by the Alberta Securities Commission):

Equitable relief is always discretionary. I thus think it is artificial to interpret Juliar as requiring that the parties demonstrate that the mistake was a "primary and continuing objective of the applicants from the inception of the transaction". That circumstance might make the case for equitable relief stronger, but it is not a pre-condition to the court granting equitable relief if it had been necessary to a achieve a just result.

After also referring to Stone's Jewellery, Graesser J. then stated (at para. 98-99):

In both cases, and on scant evidence, the courts were prepared to infer that the transactions would not have proceeded in the manner in which they did, had the parties not been operating under mistake.

I think it is a reasonable inference to make here that if the directors had not mistakenly believed that the fair market value of the lands was equal to their adjusted cost base, or that the lands could not be transferred to the shareholders at their adjusted cost base without triggering a present gain, that the transactions would have been structured differently.

Graesser J. ordered that the transfer of most of the lands by S & D to the wives' corporation be set aside (so that there would only be a transfer of lands having a fair market value equal to the stated repurchase price for the wives' shares), that such shares be canceled and that the cancellation agreement be voided ab initio.

Bouchan v. Slipacoff, 2010 ONSC 2693

two-year limitations period

The defendant and plaintiff held shares in an incorporated dental practice. In the course of a civil dispute, the defendant sought leave to plead rectification to restore a provision to their shareholder agreement that, because of an alleged clerical error, was missing from the final agreement. Hockin J. granted leave, but also allowed the plaintiff to plead that the rectification plea was outside of the two-year applicable Ontario limitations period.

Hockin J. noted that a rectification plea is a distinct cause of action (para. 7). Section 5 of Ontario's Limitations Act, 2002 essentially commences the limitations period from when the applicant knows or ought to know of a potential claim against the defendant. Hockin J. stated (at para. 11):

The issue, therefore, is whether Dr. Slipacoff had actual knowledge of the missing provision for more than two years before the motion to amend or in the absence of actual knowledge where the issue is due diligence or discoverability, whether more than two years before the motion, a "reasonable person with the abilities and in the circumstances" of Dr. Slipacoff ought to have known the provision was missing from the signed agreement.

TCR Holding Corp. v. Ontario, [2010] O.J. No. 1238, 2010 ONCA 233

corporation included in amalgamation based on mistake

The applicant resulted from several corporations being amalgamated in order that the tax losses of some of the predecessor corporations could be accessed. The application judge had concluded that a further corporation ("846") had been included in the amalgamation on the basis of a mistaken belief that it was a corporation without any liabilities whereas, in fact, it had given a guarantee to a third party. Accordingly, the application judge had set aside the amalgamation nunc pro tunc.

MacPherson, J.A. found that there was no basis for interfering with the findings of the application judge. The third-party holders of the guarantee submitted that if the true intention was that 846 was to be included in the amalgamation as a corporation without liabilities, the proper rectification order would have been to amend the amalgamation to reflect this intention (which would have been unlawful in light of the solvency requirements in the Business Corporations Act). In response, MacPherson, J.A. noted that broadly speaking, a superior court has all the powers that are necessary to do justice between the parties (i.e., it was not retricted to ordering rectification), and that this alternative equitable basis for the application judge's order provided a ground for the relief granted.

Stone's Jewellery Ltd. v. Arora, [2010] CTC 139, 2009 ABQB 656 (Alta QB)

A corporation ("Stone's") had entered into an agreement in 1996 to purchase lands for $500,000. The closing was substantially delayed, and when the purchase finally was completed in 2004, title was taken in the name of the shareholders of Stone's (the "Arora siblings"). By then, the lands had appreciated to a value of over $4 million. In 2006, after the lands had further appreciated, the Arora siblings transferred the lands to a sister corporation of Stone's pursuant to an agreement which stated the parties' intention to have subsection 85(1) apply. The purpose of this transfer was to avoid having to pledge Stone's other assets in project financings for the development of the lands.

The Minister assessed Stone's and the Arora siblings on the basis that in 2004 there had been an appropriation of Stone's beneficial interest in the lands by the Arora siblings giving rise to GST, the realization of gain by Stone's and a taxable shareholder benefit to the Arora siblings; and that the 2006 transfer did not occur on a rollover basis because the lands were inventory rather than capital property.

Strekaf J. found that rectification of the 2006 transfer was not an available or appropriate remedy, as the Court did not "have the power to direct that the 2006 Transfer proceed on a tax free basis pursuant to section 85 of the Income Tax Act in accordance with the parties' intentions" (para. 45). Similarly, rectification was not available with respect to the 2004 transaction as the Court was "not being asked to rectify the transaction back to its intended form, but to undo the transaction" (para. 68). Instead, Strekaf J. applied the common law of mistake as it applied to contracts to find that the 2006 transfer was void ab initio because it was effected under the mistaken belief of all the parties that it could be effected on a rollover basis; and the 2004 transaction also was void ab initio as it had proceeded on the basis of an (implicit) assumption by the parties that it would not have adverse tax consequences.

Strekaf J. also indicated that he would have been prepared to apply the Juliar case to rescind the two transactions, if they were not void ab initio under common law principles of contract law. He stated (at para 54):

...granting rescission in order to permit parties who intended to transfer assets on a tax free basis pursuant to section 85 of the Income Tax Act to avoid a transaction that does not accomplish the fundamental purpose of achieving a tax free rollover does not constitute any greater rewriting of history or opening of the floodgates than permitting the parties to rectify their transaction by issuing shares instead of promissory notes, in order to effect the transfer on a tax free basis as a section 85 rollover rather than pursuant to section 84.1 of the Income Tax Act, as was done in Juliar.

Winclare Management Services Ltd v. Canada (Attorney General), 2009 CanLII 18234 (Ont SC)

unopposed application to reduce capital dividend to CDA balance

The directors of the taxpayer mistakenly declared a dividend in an amount exceeding its capital dividend account, and it elected under s. 83(2) to treat it as capital dividend. The CRA identified the taxpayer's error on audit. Matlow J granted a rectification application to reduce the amount of the dividend to the CDA balance at the time of the directors' resolution. The Crown did not oppose the application.

Before granting the requested order, Matlow J stated (at para. 11:

Having regard to the fact that Winterbottom, as the sole shareholder of Winclare, would presumably have been able to secure a further resolution of the directors amending the earlier resolution to correct the error without any intervention by this court, I could not help but wonder why it should be necessary for the applicants to bring this application for rectification and incur substantial legal costs in order to do so. In response to this concern, I was further advised by counsel for the respondent that this simple solution would not suffice and, on the authority of the decision of the Tax Court of Canada inSussex Square Apartments Limited v The Queen, (1998), 99 D.T.C 443, upheld by the Federal Court of Appeal at (2000) 2000 D.T.C. 6548 a formal judgment for rectification was a mandatory requirement. For some reason, the CRA could not rely solely on the actions of taxpayers to alter a previous event retroactively and required the intervention of the court as well.

Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 15

no prior oral agreement

The parties entered into an employment contract that included a restrictive covenant, providing that the defendant would not be employed in the business of insurance brokerage within the "Metropolitan City of Vancouver" for three years after leaving employment with the plaintiff. One month after the defendant's termination of employment, the defendant took a position as an insurance salesman in Richmond, a suburb of Vancouver. The plaintiff sued to enforce the restrictive covenant.

The court considered whether the covenant could be rectified on the basis that the term "Metropolitan City of Vancouver" mistakenly described the geographic scope of the covenant, and denied rectification because the parties did not have a prior oral agreement regarding the geographic scope of the covenant and the parties did not mistakenly describe something else in the written contract.

Aim Funds Management Inc. v. Aim Trimark Corporate Class Inc., [2009] O.J. No. 4798, [2009] GSTC 170, 64 DLR (4th) 261, 2009 CanLII 29491 (Ont. Sup. Ct. J.)

The Minister assessed the applicant, a mutual fund manager, on the basis that a payment to it by mutual funds of deferred sale charges received by the mutual funds from redeeming investors represented consideration for taxable supplies of services made by the applicant to the mutual funds. Perell, J. concluded, on the evidence, that the mutual fund manager and the mutual funds intended that these amounts were to be paid to the fund manager as reimbursement in whole or in part for brokerage commissions previously paid by the mutual fund manager when the investor had purchased his units in the mutual fund, and granted an order of rectification of numerous contracts to accord with the form requested by the applicant. He stated (at para. 58) that "the Applicant does not seek to rewrite a contract to rewrite contractual history; rather the Applicant is seeking to rewrite a contract that does not correctly write the contractual history".

QL Hotel Service Ltd. v. Minister of Finance, 2008 CanLII 15226 (Ont SCJ), briefly aff'd 2009 ONCA 715

A transfer of tangible personal property by an Ontario corporation ("1006") to a second corporation ("QL") would have been exempt from Ontario retail sales tax if QL were a wholly-owned subsidiary of 1006 at the time of the transfer.

The Court first found that the transfer in fact qualified for this exemption as QL should be regarded as having issued one common share to 1006 (in consideration for the transfer to it of intangible personal property) immediately before the transfer to it of the tangible personal property (in consideration for the issue by QL to 1006 of special Class A shares.) The Court went on to find that if the common share had not been issued before the transfer of the tangible personal property, it would have been prepared to grant the request to rectify the QL resolution for the issuance of the common share and special shares to provide that the common share was issued first (thereby accomplishing the common continuing intention of 1006 and QL for the transfer to qualify for the exemption.)

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission 77

QL Hotel Service Ltd. v. Minister of Finance, 2008 CanLII 15226 (Ont SCJ), briefly aff'd 2009 ONCA 715

In a property tax dispute, counsel moved to couple the taxpayer's appeal with a rectification application, so that the rectification would serve as an alternative if the main appeal failed. Turnbull J. allowed the motion to go forward on the grounds that the Minister, the entity likely to be adversely affected by the requested order, was already a party to the appeal. The taxpayer won the main appeal; Turnbull J. also granted the rectification order.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission 174

Binder v. Saffron Rouge, 2008 DTC 6112, 2008 CanLII 1662 (Ont. S.C.J.)

The taxpayers were incorporating shareholders of a corporation. Although they realized at the time that a share issue in 2005 to a U.S. investor would cause the coproration to cease to be a Canadian-controlled private corporation (a "CCPC"), they did not realize that this change would disqualify their shares from the lifetime capital gains exemption. The taxpayers claimed that they would not have agreed to this share issue had they known of the result. In 2007, the investors agreed to retroactively reduce the share issue to a level that would restore the corporation's CCPC status. They applied to the court for a nunc pro tunc rectification order to that effect.

Hoy J. refused to give the order. The taxpayers and U.S. investor did not have a "common, continuing intention that the transaction be effected in a manner that would preserve the Applicants' capital gains tax exemption." Therefore, Juliar was inapplicable.

Re Columbia North Realty Co., 2006 DTC 6124, 2005 NSSC 212 (NSSC)

On two occasions, a Nova Scotia company ("Columbia") made cash distributions to its non-resident shareholder, purportedly as distributions of paid-up capital. However, the capital previously contributed by the non-resident shareholder had been received as contributions of capital rather than share subscription proceeds. Accordingly, the distribution was deemed to be a dividend and, therefore, was subject to Part XIII tax.

Columbia applied for an order permitting rectification of its share register to reflect the issuance of common shares retroactive to the contributions made to it by the non-resident shareholder. Further orders were requested to the effect that the cash distributions be treated as distributions of such paid-up capital (together with a consequential amendment to Columbia's Articles of Association).

Coughlin J. ordered that the Minister be given notice of the application in order to have an opportunity to make submissions to the Court.

Snow White Productions Inc. v. PMP Entertainment, Inc., 2005 DTC 5150, 2004 BCSC 604

As the common intention of the parties to agreements respecting the production of a movie was that it would be eligible for the federal film or video production services tax credit and the equivalent BC income tax credit, the court agreed to a rectification of the agreements to reflect a different party as the holder of the copyright. Burnyeat J. noted (at p. 5155) that the parties had intended from the outset to obtain the tax credits, and this was not a situation of their "now seeking rectification for the purposes of reordering their affairs so as to avoid a tax disadvantage".

Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., [2002] 1 S.C.R. 678, 2002 SCC 19

rectification available notwithstanding lack of due diligence on part of plaintiff

The plaintiff (“Sylvan”) and the defendant (“Performance”) entered into an agreement respecting a golf course that gave Sylvan the option on the 18th fairway for a specific residential development to be undertaken by it. When Performance drafted the option, it described the option strip of land as being 110 feet rather than 110 yards wide, as had been orally agreed. Sylvan signed the agreement without reading the option clause, and subsequently sued for rectification.

Before finding that Sylvan was entitled to rectification and upholding the trial judge's award of compensatory damages in lieu of specific performance, Binnie J. summarized the applicable rectification principles as follows (at para. 31):

Rectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable. The plaintiff must establish that the terms agreed to orally were not written down properly. … What is essential is that at the time of execution of the written document the defendant knew or ought to have known of the error and the plaintiff did not. Moreover, the attempt of the defendant to rely on the erroneous written document must amount to “fraud or the equivalent of fraud”. The court’s task in a rectification case is corrective, not speculative. It is to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other… .

In addition to the above four conditions, there was no “fifth” condition that Sylvan establish due diligence on its part.

Re Razzaq Holdings Ltd (2000), 11 BLR (3d) 157, 2000 BCSC 1829

In 1992 the two shareholders of a corporation purported to transfer a total of 100 Class A shares and 100 Class B shares equally to two holding companies. In fact, there were a total of 200 Class A, and no Class B, shares outstanding because a year previously an additional 100 Class A shares had been issued, and the Class B shares had been cancelled, without these 1991 transactions yet being recorded in the minute books. Burnyeat J. granted an order pursuant to s. 206 of the Company Act (BC) (which provided for the rectification of any omission, defect, error or irregularity that has occurred in the conduct of the business or affairs of a company), so that all the shares of the corporation were transferred to the two holding companies. He stated (at p. 163) that:

"As there is nothing before me to suggest that Revenue Canada is or would likely to be a creditor of Rassaq as a result of an improperly implemented s. 85 rollover, I am satisfied that it is not necessary to take into account the interests of Revenue Canada".

He also indicated that even if he were incorrect in applying s. 206, he was satisfied that the court had inherent equitable jurisdiction to rectify the written instruments in question.

Attorney General of Canada v. Juliar, 2000 DTC 6589, 50 OR (3d) 728, 2000 CanLII 16883 (Ont CA)

The Court confirmed the decision of the trial judge, to rectify an agreement for the transfer by the appellants of half the shares of a company to a newly-incorporated holding company so as to reflect consideration that was treasury shares of the holding company rather than promissory notes, on the basis of the trial judge's finding that "the true agreement between the parties here was the acquisition of the half interest ... in a manner that would not attract immediate liability for income tax" and a finding that the parties would have chosen to receive shares but for the mistaken belief of the advising accountant that the transferred shares had full cost base. Austin J.A. stated that he agreed with the propositions appearing in an extended passage from In Slocock's Will Trust [1979] 1 All ER 358, at 361, 363 (Ch. D) including the statement therein that:

"If a mistake is made in a document legitimately designed to avoid the payment of tax, there is no reason why it should not be corrected ... . It would not be a correct exercise of the discretion in such circumstances to refuse rectification merely because the Crown would thereby be deprived of an accidental and unexpected windfall."

Amalgamation of Aylwards [1975] Ltd. (2001), 16 BLR (3d) 34, 610 APR 181, 2001 CanLII 32734 (Nfld. Sup. Ct. T.D.)

A Newfoundland corporation was amalgamated with what was thought to be a wholly-owned subsidiary in a short-form amalgamation. However, it was later discovered that the subsidiary had an individual holder of preferred shares.

Green, C.J. noted (at para. 41) that under the rectification doctrine the parties are "allowed effectively to restructure the transaction by using a different mechanism, provided of course, that the result obtained by the use of the new mechanism was in accordance with the original intention of the parties". After noting (at para. 43) that there was a "clear inference from the affidavit evidence that knowledge of the existence of the [preferred] shares would not have resulted in a decision not to proceed", and that the amalgamation instead would have proceeded by way of a long-form amalgamation that preserved those preferred shares, Green, C.J. ordered rectification of the articles of amalgamation as of the original date and time of the amalgamation to reflect the existence of the preferred shares.

Dale v. Canada, 97 DTC 5252, [1997] 2 CTC 286 (FCA)

retroactive effect of nunc pro tunc rectification order

The taxpayers neglected to have shares that purportedly were issued to them in 1985 added to the authorized capital of the issuing corporation. The Supreme Court of Nova Scotia provided a rectification basis in 1992 which validated the share issue in 1985 on a nunc pro tunc basis. The Minister maintained that a rectification order, applied for in 1988, could not change the taxpayer's status from 1985-87 for the purposes of the Income Tax Act.

In finding that the retroactive character of the rectification order should be respected for tax purposes, Décary and Robertson, JJ.A. found that a rectification order (within the jurisdiction of the court) does bind the Minister in respect of tax assessment. Such an order cannot be the target of "collateral attacks" that would undermine its effect. However, the justices also acknowledged (at p. 5257) that the law might recognize an exception to the rule against collateral attacks if a jurisdictional error complained of is "at the very least, self-evident and not a matter of further debate."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date retroactive superior court order has retroactive effect for tax purposes 174
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Dividend 78
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2) 78
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) retroactive validation by Superior Court of preference share issuance was effective for s. 85 purposes 171
Tax Topics - Statutory Interpretation - Provincial Law 140

771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 OR (3d) 739 (CA), aff'g (1994), 17 OR (3d) 571 (Gen Div)

rewriting fiscal history

Ontario farm lands were transferred to a non-resident corporation for the purpose of utilizing losses of that corporation. However, it was subsequently discovered that because the transferee was a non-resident corporation the transfer was subject to land transfer tax at a very high rate (20%). The applicant sought a rectification order to substitute a resident corporation as the transferee in order to reduce the land transfer tax. Galligan J.A. that he was not prepared to exercise the court's discretion to relieve against mistake for two reasons. First, equity will not grant relief if an adequate legal remedy exists, and the Land Transfer Tax Act specifically gave the Minister of Revenue broad discretionary power to relieve against inequitable demands for the whole amount of tax. Second, "to do so would run contrary to the well-established rule in tax cases that the courts do not look with favour upon attempts to rewrite history in order to obtain more favourable tax treatment" (para. 9) and "an equitable discretion should not be exerised in order to allow a taxpayer to reorder her affairs so that she can avoid a tax disadvantage which she suffered under the Land Transfer Tax Act as the direct result of a deliberate decision on her part to obtain a tax advantage under the Income Tax Act (para. 13).

See Also

Kraft Heinz Canada ULC v. Canada (Attorney General), 2022 BCSC 796

declaration made by the parties that their contribution was annulled under Dutch law appeared to have retroactive effect

The petitioners were a Dutch cooperative (“Heinz Co-op”) and a B.C. unlimited liability company (“KH Canada”) which was the sole member of Heinz Co-op and the subsidiary of a U.S.- resident corporation. Both were members of the Kraft Heinz group of companies.

For group accounting reasons, funds were transferred from KH Canada to Heinz Co-op in the form of a capital contribution. Although the contribution was intended to be tax-neutral, four months later, it was realized that it gave rise to a deemed dividend under s. 212.3 that was subject to Part XIII tax.

The petitioners entered into a formal declaration (was to be governed by and construed in accordance with the law of the Netherlands), entitled “Declaration of Annulment Capital Contribution Agreement” signed by August, 2021, stating that the capital contribution agreement was annulled with retroactive effect and the $66.49 million capital contribution “is returnable by the Contributee to the Contributor due to lack of title (titel) on the basis of the dutch legal concept of payment without obligation (onverschuldigde betaling)”. The contribution was returned pursuant to the declaration. The petitioners sought declarations that the capital contribution was void ab initio and, alternatively, an order rescinding the transaction.

Regarding the requested declaration, Gomery J first stated (at para. 4):

The transaction is governed by Dutch law and the evidence is that, pursuant to Dutch law and by virtue of the steps the petitioners have taken, the agreement for the capital contribution is deemed never to have existed, and the contribution has been repaid. There is nothing left to rescind. An order declaring the rescission effective in Canadian law would be purely declaratory… .

Accordingly, given that there was no “live controversy giving rise to a cognizable threat to the petitioners’ legal interests” (para. 3) as CRA had not audited or assessed KH Canada (para. 23) and given that “the courts do not answer hypothetical questions or give advisory opinions in the absence of a manifest dispute” (para. 22), declaratory relief was not available.

In further rejecting the request for rescission, he stated (at paras. 39-40):

[T]he capital contribution was governed by foreign (Dutch) law and has been completely nullified, “ab initio”, pursuant to Dutch law. An order for rescission would only repeat or reinforce that which has already occurred.

In my view, the petitioners have already obtained an adequate remedy through the annulment declaration.

Accordingly, it was unnecessary to address the issue that “[t]he availability of rescission for the avoidance of unexpected tax obligations is controversial” (para. 38).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(10) - Paragraph 212.3(10)(b) a self-help Dutch-law annulment declaration retroactively voided a s. 212.3(10)(b) contribution 350

Bourgault v. The Queen, 2019 TCC 6

a rectification judgment was “justifiably obtained” and, therefore, followed for tax purposes

On April 15, 2002, the taxpayer signed an agreement for the purchase of shares of a real estate corporation (“Quatre Saisons”) that stated that the purchase price was to be satisfied by the payment to the vendor (“Placeval,” a corporation owned by a Mr. Hertzog) of 50% of the sales proceeds of real property of Quatre Saisons up to $300,000, and 30% thereafter, with such proceeds to be paid to Placeval as commissions. Those percentage amounts were paid by Quatre Saisons directly to Placeval and CRA assessed the taxpayer on May 1, 2006 for shareholder benefits under s. 15(1). On July 3, 2006, an order of the Quebec Superior Court was obtained for the rectification of the agreement to change the stated purchase price to $1. Before assessing, CRA was aware of the application for this judgment, but did not see fit to intervene, so that the Crown was not a party to the application.

Before granting the taxpayer’s appeal from the assessment, Favreau J stated (at paras. 55, 59-60, 62):

[T]he judgment of the Superior Court is not binding on the respondent as neither the Attorney General of Canada nor the Minister was involved in the application. …

Although the judgment of the Superior Court is not binding on the respondent and is not res judicata, the conduct of the parties, both before and after the concluding of the transaction, clearly demonstrates their true intention to purchase and sell the shares of Quatre Saisons for nominal consideration and not for consideration based on the future sales of lots.

The evidence demonstrates that the value of Quatre Saisons before the sale was distributed to Placeval by way of a $1,275,630 dividend and that Mr. Hertzog actually rendered services to Quatre Saisons for which the commissions were paid to Placeval. The parties considered the payments made by Quatre Saisons to Placeval as commissions. Invoices including taxes were issued to this effect by Placeval until 2008. The financial statements of Quatre Saisons for its fiscal years ending on March 31 of 2003, 2004 and 2005, also reflected the commissions paid in the cost of the sales of the lots. …

[I]t is evident that the agreement, as reduced to writing, contained drafting errors of material importance … . The parties justifiably obtained the judgment of the Superior Court to rectify the situation.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date parties justifiably rectified their agreement so that it had retroactive effect 253

Foster v. The Queen, 2016 DTC 1010 [at 2562], 2015 TCC 334

consequential reassessment permitted under s. 152(5)

Paris J found that, although a rectification order replaced a series of sales of a fishing licence and equipment with a different series of sales, both series dealt with the same "amounts" for the purpose of s. 152(5). The Minister's resulting resassessment of the taxpayer was therefore allowed under s. 152(5), despite being made outside the normal reassessment period. See summary under s. 152(5).

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Tax Topics - Income Tax Act - Section 152 - Subsection 152(5) rectification order lead to consequential out-of-period reassessment; out-of-period assessment upheld 303

Baytex Energy Ltd v Canada (Attorney General), 2015 DTC 5057 [at 5807], 2015 ABQB 278 (CanLII)

rectification allowed retroactive to 1 January 2007 despite inconsistency with 2008 amendments

The applicant (“BEL”) owned and operated oil and gas properties. To address concerns about provincial royalties eroding federal revenues, Parliament implemented a scheme in 1974-2006 under which taxpayers were entitled to a “resource allowance,” but were required in turn to add any Crown royalties to their income. This “phantom income” could be allocated to a downstream party provided that that party made an offsetting payment of the phantom income back to the producer. To that end, BEL allocated 99% of its income to a trust. However, until the end of 2010, BEL and the trust mistakenly continued making offsetting journal entries to reflect such payments notwithstanding a legislative change effective January 1, 2007 which removed the rationale for this arrangement. CRA determined that the trust had additional income of $528 million for the 2007 – 2010 period. BEL applied to rectify its agreement with the trust to cease the phantom income payments when the underlying statutory regime came out of effect.

Strekaf J granted the order. There was ample evidence to support BEL's claim that there was a prior oral agreement, inconsistent with the written agreement, that matched the rectification the taxpayer sought. The application satisfied all the requirements set out in Performance Industries.

BEL's professional advisors made technical amendments to the phantom income agreement in 2008, and had not ceased the phantom income payments. Although this would tend to suggest that the agreement was in fact intended to continue on past 2006, Strekaf J was satisfied that the professional advice in 2008 was based on an erroneous understanding of the facts or the law. The key was for the Court to be satisfied that “the parties' pre-existing oral agreement is inconsistent with the written document” (para. 50).

Canadian Forest Navigation Co. Ltd. v. The Queen, 2016 TCC 43, rev'd 2017 FCA 39

foreign rectification orders are not binding on the Tax Court (but can be given weight)

The taxpayer’s Barbado and Cyprus subsidiaries paid amounts to the taxpayer in 2004, 2005 and 2006 as dividends and then, following CRA proposals to assess the dividends, obtained rectification orders from the applicable Barbados and Cyprus courts declaring that the amounts instead were loans to it (or otherwise gave rise to indebtedness). In response to a question posed under Rule 58, Lamarre ACJ found that “the respondent is not bound by the foreign judgments since they have not been recognized in Canada by a court of competent jurisdiction, and therefore the respondent is not precluded from taking the position at trial that the appellant received dividends, rather than…loans… .”

In so finding, she stated (at paras. 21-23):

[A]s stated in Pro Swing [2006 SCC 52, [2006] 2 S.C.R. 612, at par. 13‑18] the domestic court may have to consider relevant factors so as to ensure that the Foreign Judgments do not disturb the structure and integrity of the Canadian legal system and do not conflict with domestic law. It is not merely a matter of facilitating the execution of a debt… .

That is why I conclude that the Foreign Judgments would have to be homologated by a competent tribunal in the province of Quebec in order to bind the respondent. This is all the more true since the respondent never had a chance to intervene to present her own arguments… .

[I]t is still open to the appellant to rely on the Foreign Judgments in presenting its evidence before this Court at trial, and it will be up to the presiding judge to determine the weight to be given to the Foreign Judgments when ruling on the correctness or incorrectness of the assessments being appealed.

Prowting 1968 Trustee One Limited v. Amos-Yeo, [2015] EWHC 2480 (Ch)

number of transferred shares rectified to access capital gains incentive

In order that the life tenants of two trusts (the 1968 and 1987 settlements) could access a reduced rate of U.K. capital gains tax on a sale of shares of a company held by the two trusts, it was necessary that they have held 5% of the nominal capital and of the voting rights for one year prior to closing the sale. Accordingly, somewhat more than a year before concluding a sale of the company, they purchased 115,000 shares each of the company from the trusts (representing over 5% of the number of outstanding shares). However, due to a calculation error of the trusts’ advisor (Mr Cull), who overlooked the fact that some of the shares held in the company had a higher nominal value per share, the shares sold to the life tenants represented only 4.97% of the company’s nominal capital. HMRC indicated that it was content for the claimants to proceed with a rectification application without its involvement.

In granting an application to rectify the agreements for the sales to the life tenants to increase the number of shares sold, the Court stated (at paras. 29, 36, 38):

As Barling J in Giles, [2014] EWHC 1373 points out, the distinction drawn in this criterion is between a mistake as to the effect of a document and a misapprehension of what the fiscal or other consequences are of a document which does not in fact misimplement the parties' or donor's intention. …

[T]he parties' intention was that the defendants should receive…enough shares…to satisfy the ER requirements. …[T]hey left the precise calculation of the relevant number to Mr Cull, and he made a mistake in that calculation. …[T] herefore the claimants have shown a sufficient mistake to found the jurisdiction to rectify the agreements. …

[T]he parties to the agreements had a sufficiently specific intention which was not reflected in the agreements as executed by them. The fact that they left the precise number of shares to be determined by Mr Cull to decide does not prevent their intention from being sufficiently specific.

Kennedy & Ors v. Kennedy & Ors, [2015] BTC 2, [2014] EWHC 4129

partial rescission of a trust appointment where factual mistake as to trust losses

The trustees of a family trust exercised an appointment in favour of beneficiaries including the settlor of the trust (Mr Kennedy). The transfer to Mr Kennedy (pursuant to clause 2(c) of the appointment) of the remainder of the trust fund consisted of cash, and of shares whose distribution triggered capital gains tax, notwithstanding that it was a fundamental feature of the planning that the appointment not give rise to such tax. Two of the trustees (Mr and Mrs Kennedy) did not realize that the appointment transferred such shares to Mr Kennedy, and the third trustee (Mr Sturrock, who also was the legal and tax advisor) was not aware that the trust no longer had available losses to shelter gain from the transfer of those shares.

In finding the tests in Pitt of rescission for equitable mistake were satisfied, Sir Terence Etherton found that if the trustees had not been so mistaken, they would not have executed the appointment with clause 2(c). Furthermore, there could be partial rescission, i.e., only of clause 2(c), given that it was "a self-contained and severable part of a non-contractual voluntary transaction," (para. 46) and such partial rescission was ordered. Conversely, no declaration could be made to strike down clause 2(c) only as regards the shares, as this would amount to rectifying that clause. Sir Terence stated (para. 43):

Rectification cannot be granted unless the wording or legal effect of clause 2.1(c) did not represent their true intention. Intention must be distinguished from motive. Mr Sturrock's intention… was that clause 2.1(c) should have the legal effect which it had, namely to vest the whole of the remainder of the trust fund in Mr Kennedy absolutely. His mistake was in thinking that, for purely factual reasons extraneous to the document itself, clause 2.1(c) would not give rise to a charge to CGT… .

Demers v. The Queen, 2014 TCC 368

Superior Court nullification of investment contracts did not nullify RRSP withdrawals

The two taxpayers, who had been CN employees, were convinced by two promoters (the Lavignes) to transfer all the funds in their CN pension plans to self-directed RRSPs managed by the Lavignes, with most of the funds being lost. However, they withdrew some funds from the RRSPs. In 2008, they along with other investors obtained a judgment from the Quebec Superior Court which annulled their investment contracts with the Lavignes and awarded them damages.

In finding that this judgment did not render the amounts withdrawn from the RRSPs non-taxable, Jorré J stated (paras. 39-40, TaxInterpretations translation):

[T]he Superior Court recognized that the appellants had received the two amounts in question, as they were deducted from the amount invested in the calculation of the amount which the Superior Court ordered the defendants to pay to the appellant. … Consequently, the nullification pronounced by the Superior Court does not change the fact that the appellants received the amounts…in question and that they were amounts withdrawn from their respective RRSPs.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8) Superior Court nullification of investment contracts did not nullify RRSP withdrawals 175

0741508 B.C. Ltd. and 0768723 B.C. Ltd. (Re), 2014 BCSC 1791

failure to file timely tax returns did not invoke the dirty hands bar to equitable rescission

In 2011, the petitioners conveyed undeveloped B.C. lands to a limited partnership with an affiliated general partner. Due to failed communications, the partnership had not been registered for HST purposes, so that the exemption under ETA s. 221(2) from the obligation of the petitioners to charge HST was not available. The partnership then issued LP units to 163 outside investors and commenced developing the lands. In 2013, CRA assessed the petitioners for their failure to charge HST. The petitioners then entered into a fresh agreement to convey the lands to the partnership (which now was registered) subject to a condition that the previous conveyance be judicially rescinded.

After noting that Solle v. Butcher, [1950] 1 K.B. 671 (C.A.), which established the doctrine of equitable mistake, had been reversed in Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd., [2002] EWCA Civ 1407, [2002] 4 All E.R. 689 (C.A.), Loo J stated (at para. 73) that here "the CRA does not argue that the equitable doctrine of mistake is not available."

She rescinded the transfer. First, there was no adequate legal remedy. Because of BC's abolition of HST before the discovery of the problem in 2013, the partnership could only recover, under ETA s. 171(1), the federal (5%) portion of the HST payable by it to the petitioners (assuming no rescission), as the "basic tax content" of the lands excluded the provincial HST.

Second, the mistake went to the legal effect of the transactions rather than merely their consequences: "Here, the intention of the petitioners from the very outset and throughout was that the Partnership would be registered under the ETA and there would be no net HST/GST payable" (para. 99).

Third, the petitioners had "clean hands," notwithstanding that their failure to timely file HST returns meant their non-registration was not identified before the adverse B.C. change of law. As per Hongkong Bank of Canada v. Wheeler Holdings Ltd., [1993] 1 S.C.R. 167, at 188, the clean hands doctrine only applies when "the dirt in question on the hand, has an immediate and necessary relationship to the equity sued for."

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 171 - Subsection 171(1) B.C. HST repeal reduced basic tax content 111

Graymar Equipment (2008) Inc v Canada (Attorney General), 2014 DTC 5051 [at 6802], 2014 ABQB 154

no judicial notice that tax avoidance is the intention of a commercial transaction

The applicants were a limited partnership ("FRPDI") and the partnership's wholly owned corporation ("Graymar"). The implementation of a debt restructuring entailed a complex series of transactions which resulted in an increased subscription of FRPDI for Graymar shares and a corresponding increased amount of debt owing by FRPDI to Graymar. FRPDI failed to repay the loan by the end of the following year, and the Minister assessed the FRPDI partners under s. 15(2).

Brown J dismissed the applicants' request for a retroactive repayment of the loan (by way of set-off against a return of capital by Graymar). Brown J found that rectification was not available as the debt restructuring transactions had no tax avoidance motivation, and "belatedly recognized" adverse tax consequences were insufficient for rectification (para. 79). Before stating (paras. 68-69) that it was inappropriate to consider that tax avoidance is the inherent intention in all commercial transactions, Brown J stated (para. 66):

Juliar sits uneasily with Supreme Court's direction in Performance Industries and Shafron that rectification is granted to restore a transaction to its original purpose, and not to avoid an unintended effect. While, therefore, 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 at the time of transacting.

And at para. 72:

[T]o skate over the requirement, as Juliar does, of showing the intention underlying the original transaction – would effectively render CRA (and, by extension, Canadian taxpayers) the insurer of tax advice providers.

Giles (as administratrix of Hilda Bolton estate) v. Royal National Institute for the Blind & Ors, [2014] BTC 24, [2014] EWHC 1373 (Ch)

specific intent to accomplish a particular devise at the time of botched drafting

The claimant applied for rectification of a Deed of Variation which altered the provisions of the will of Hilda Bolton with a view to reducing the incidence of inheritance tax, pursuant to s. 142 of the Inheritance Tax Act 1984, which permitted the effecting a deed of variation within two years of the date of death in order to redirect gifts passing under a will. It was intended to vary Hilda's will by providing that a devise go directly to four named charities, rather than to her sister, who survived her by one year, and who (like Hilda) left the residue of her estate to the four charities. However, contrary to the apparent intention set out in a letter to the four charities, the Deed of Variation did not redirect to them the surviving sister's entitlement to Hilda's estate but instead only redirected to them a gift of the residue of Hilda's estate.

In granting an order of rectification (which was not opposed by HMRC), Barling J applied the four criteria for rectification in Racal Group Services Ltd v Ashmore [1995] STC 1151 (CA):

  1. There was convincing proof of error as the contemporaneous correspondence established that the Deed of Variation was intended to accomplish the surrender of the whole (and not just the residue) of Hilda's estate to the four charities.
  2. Having regard to "the distinction drawn…between a mistake as to the effect of an instrument, and a misapprehension of what the fiscal or other consequences are of a document which does not in fact misimplement the parties' or donor's intention" (para. 32), the Deed of Variation did not give effect to the intent in 1, and the objective of saving inheritance tax was not a bar.
  3. Specific intent to accomplish 1 was shown.
  4. Substantive rights would be affected by the order rather than there merely being the securing of a fiscal benefit.

Sheila Holmes Spousal Trust v. Canada (Attorney General), 2013 ABQB 489

superior court declines jurisdiction in tax dispute

The federal Minister assessed the settlor of the appellant trust on the basis that the trust's taxable capital gain and investment income were taxable in his hands because the trust was a sham or invalidly settled, or because s. 75(2) applied. The settlor then filed a notice of objection. The Minister, as agent for the Government of Ontario, issued alternative reassessments in respect of the trust's Ontario provincial tax liability on the basis of the alternative conclusion that the Trust, if valid, was taxable in Ontario, not Alberta. The trustee for the trust filed a notice of objection to this assessment. In dismissing an application to the Court to declare that the trust was valid, Nixon J adverted to the principle in Addison & Leyen Ltd v Canada, 2007 SCC 33 (CanLII), [2007] 2 S.C.R. 793, at para. 11 that "Judicial review should not be used to develop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and the jurisdiction of the Tax Court," and stated (at para. 66):

The only dispute with respect to the validity of the Trust is with the CRA in relation to the payment of tax.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) superior court declines jurisdiction in tax dispute 215

Pitt v. Commissioners for HM Revenue and Customs, [2013] UKSC 26, [2013] WLR (D) 172

mistake re tax consequences justified rescinding settlement of trust

The claimant had settled the moneys received as damages for injury to her husband on a discretionary trust of which she and others were trustees. The death of her husband gave rise to an immediate inheritance tax, as the terms of the turst had failed to provide that at least half of the settled property was to be applied during his lifetime for his benefit (as in fact occurred).

On finding that the trust should be set aside on the grounds of mistake, Lord Walker noted (at para. 122) that the true requirement for rescinding a voluntary disposition such as a gift or settlement was

for there to be a causative mistake of sufficient gravity; and …[this] test will normally be satisfied only when there is a mistake as to the legal character or nature of a transaction or some matter of law which is basic to the transaction.

He further noted (at para. 132) that "consequences (including tax consequences) are relevant to the gravity of a mistake."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Mistake mistake re tax consequences justified rescinding settlement of trust 176

Racal Group Services Ltd. v. Ashmore & Ors., [1995] BTC 406 (CA)

intended terms not clear

A deed for payment of £70,000 to charity, although it was intended to comply with an income tax requirement that the payment be for a period which might exceed three years, was executed in terms that ensured that the period would not exceed three years. Peter Gibson L.J. accepted that there was an error in carrying out the intentions of the relevant executive of the taxpayer, but found that the evidence did not establish with the requisite clarity what was the executive's intention as to when the covenanted payments should be made. Accordingly, the trial judge was justified in refusing an order of rectification.

Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. (1993), 14 OR (3d) 528 (Ont Ct GD)

Given that a lease as signed did not reflect the terms agreed to in the letter of intent and that a change to the terms of a right of first refusal was never discussed with the party whom such change might adversely affect, this was found to be an appropriate case for rectification.

St. Ives Resources Ltd. v. MNR, 90 DTC 1375, [1990] 1 CTC 2539 (TCC), aff'd 92 DTC 6223 (FCTD), briefly aff'd in turn at 94 DTC 6261 (FCA)

must give effect to agreement
aff'd on other grounds 92 DTC 6223 (FCTD), briefly aff'd in turn at 94 DTC 6261 (FCA)

In refusing to recognize a price rectification agreement, Sarchuk, J. stated (p. 1378):

"Rectification is an 'equitable remedy' whereby one party to a contract seeks the court's intervention to rectify a written instrument which does not accurately reflect the terms agreed to orally by the parties prior to putting their agreement down in writing ... the remedy of rectification is not available to correct a mistaken assumption of fact. In other words there must be a literal disparity between the terms of the prior agreement and the terms of the written instrument."

Administrative Policy

10 October 2014 APFF Roundtable Q. 6, 2014-0538251C6 F - 2014 APFF Roundtable, Q. 6 - Application of subsection 75(2) after Sommerer

no comment on Pallen Trust

CRA declined to comment on Pallen Trust, 2014 BCSC 305, as it had been appealed to the British Columbia Court of Appeal.

10 June 2011 Roundtable, 2011-0404621C6 F - Rectification order in Québec

CRA awaiting resolution of AES and Riopel cases

CRA noted that as the ARQ had sought leave to appeal the AES decision to the Supreme Court and the period for seeking leave in Riopel had not yet expired, it would prefer to refrain from commenting on those decisions effect on CRA’s views on rectification.

Income Tax Technical News, No. 22, 11 January, 2002, Under "Rectification Orders".

30 April 2009 External T.I. 2008-0296721E5 F - Late filed election 85(7) - Amending transactions

CRA will not anticipate a judicial rectification

An individual transferred an immovable to his corporation for non-share consideration, and after being reassessed by CRA for the resulting gain, filed a late s. 85(7) election showing preferred share consideration and proposed to validate such late election by entering into a "deed of correction" with the corporation providing for the shares’ issuance. CRA stated:

[T]he CRA will not accept changes to the terms of a contract made after the fact that have the effect of altering the basis upon which an assessment was made, unless a court order is made to that effect.

... [E]ven if the "deed of correction" of the Contract …were to be entered into … CRA could not take it into account for the purposes of determining the tax consequences of the transfer of the Immovable. Consequently, CRA would not be able to accept a late election filed by the taxpayer and the Corporation under subsection 85(7) since, based on the Contract initially entered into … one of the conditions set out in subsection 85(1) (i.e., the issuance by the Corporation of share consideration) would not have been satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) CRA will not accept s. 85 election based on self-help rectification to retroactively issue shares at transfer time 218

18 November 2004 Internal T.I. 2004-0083251I7 - Management Fees

General discussion of the distinction between rectification of mistakes and retroactive tax planning.

18 February 1999 External T.I. 9825635 - VALIDITY OF 104(5.3) ELECTION

The comments in IT-378R, that the validity of an election may not be denied by a taxpayer once it is accepted by the Department, is applicable to other elections.


Jeff Oldewening, Rachel A. Gold, Chris Sheridan, "Statutory Ratification", Canadian Tax Journal, (2016) 64:1, 293-325

Distinction between Juliar and contract rescission cases (pp. 305-306)

Performance Industries and Shafron are non-tax, contract cases. The principal concern in such cases is unjust enrichment as between the parties to the instrument. In these cases, rectification is designed to prevent a written instrument from being used as an engine of fraud or of misconduct equivalent to fraud. The remedy restores the parties to an original oral bargain so that one party cannot rely on the strict terms of a written instrument that contravenes the true arrangement between the parties.

From a policy perspective, this limited scope for rectification in non-tax, contract cases is sound. Rectification cannot be granted as a substitute for due diligence at the time an instrument is signed….

Further, rectification should not provide a means to relieve a party from a bad bargain. It is important not to reshape a deal, because a contract confers on the parties legitimate expectations of enforcing mutual benefits earned through exchange….

In tax cases, the injustice of mistake-based taxation trumps the policy that underlies the sanctity of contracts. The Crown, which lacks privity of contract, reaps an undeserved windfall, yet strives to rely on the strict terms of the instrument to justify its enrichment. There is no suspicion that the taxpayer seeks relief from a bad bargain with the Crown. The Crown did not earn entitlement to tax receivable through a contractual exchange with the taxpayer. Thus, the sanctity of contracts does not justify the Crown's retention of a windfall at the expense of a taxpayer….

Susceptibility of Juliar principle to manipulation (p.311)

[T]he Juliar principle does not permit retroactive tax planning, because in cases of retroactive tax planning the taxpayer does not have a continuing specific intention to avoid a particular tax. The concern that the Juliar principle may be susceptible to manipulation highlights the importance of the role of the trier of fact to determine the facts of each case in order to foreclose abuse. Correcting mistakes to eliminate unintended tax consequences must be limited to implementing the taxpayer's originally intended exercise of its free will at the time of the transaction.

Narrow scope of CBCA Director policy (p. 315)

The Director maintains an administrative policy ("the policy") that governs statutory correction of "articles or certificates." [fn 76: Industry Canada, Policy Statement 2.7, "Correction of Articles or Certificates of a Business Corporation," October 13, 2015... . The policy does not apply to errors contained in routine forms filed with the Director or the annual return. A different policy applies to correction of these documents: see Industry Canada, Policy Statement 2.7.1, "Requests for Correction of CBCA Forms 2, 3, 6 and 22," January 26, 2006... .] The policy defines a "correction" as "a request to fix an error in a corporation's articles or certificate that occurred during the preparation of the articles or issuance of the certificate. The policy states that a subject person can request a correction where

  • the error is attributable only to the Director;
  • the error is obvious; or
  • the error is not obvious and occurred during the preparation of the articles or the certificate.

The policy advises that the Director will refuse to correct errors in judgment.

New Delaware corporate rectification procedure (pp. 317-320)

In the United States, Delaware has a statutory ratification procedure in its General Corporation Law (DGCL). [fn 82: Delaware Code, title 8, chapter 1, sections 204 and 205. The rules were proposed in mid-2013, became law effective April 1, 2014, and were amended to clarify and streamline the procedure effective August 1, 2015.] This process enables corporations to engage in self-help to correct a myriad of irregularities in documents under corporate law,…

Section 204 of the DGCL enables a corporation to ratify a "defective corporate act" that arose as a result of a "failure of authorization" without court assistance. This rule allows ratification of an "overissue" of "putative stock," an invalid appointment of directors, and an act or a transaction within the corporation's powers that did not comply with the statute, the corporation's constating documents, or any corporate instrument. A corporation must have a validly elected board in order to ratify defective corporate acts under the provision. If the board's validity is not settled, section 204 of the DGCL does not apply, but the corporation may seek relief from the Delaware Court of Chancery under section 205 of the DGCL. Further, a corporation is precluded from ratifying an act that never occurred (but that the corporation wishes had occurred) or from backdating an act that did occur (but that the corporation wishes had occurred earlier).

Delaware's statutory ratification process generally consists of the following elements:

  1. The directors must resolve to ratify the defective corporate act.
  2. If the defective corporate act either required shareholder approval at the time of the act or requires such approval at the time the ratifying resolution is adopted, the directors must submit the defective corporate act to shareholders for approval. At least 20 days before the meeting of the shareholders, the corporation must notify (a) current holders of valid stock and putative stock, voting and non-voting ("the current shareholders"), and (b) prior holders of such stock as of the time of the defective corporate act, other than holders whose identities or addresses cannot be determined from corporate records ("the prior shareholders").
  3. Even where no shareholder approval is needed, the corporation must notify the current shareholders and the prior shareholders of the ratification promptly upon adopting the ratifying resolution.
  4. In either case, the notice to the current shareholders and the prior shareholders must include a statement that any claim that the defective corporate act is void or voidable owing to the failure of authorization must be brought to the Delaware Court of Chancery under section 205 of the DGCL generally within 120 days of the "validation effective time.
  5. If the defective corporate act required filing a certificate with the Delaware Secretary of State, the corporation must file a certificate of validation.

Section 205 of the DGCL complements section 204. The rule confers on the Delaware Court of Chancery exclusive jurisdiction to

  1. validate a defective corporate act ratified under section 204 of the DGCL;
  2. determine the validity of a ratification procedure under section 204 of the DGCL;
  3. determine the validity of any defective corporate act not ratified or ratified defectively under section 204 of the DGCL;
  4. determine the validity of any corporate act or transaction and any stock, rights, or stock options; and
  5. modify or waive any ratification procedure.

The section also gives the court discretionary authority to, among other things, impose any conditions to validation and provide remedies for those harmed by ratification….

Delaware remedies restricted to defective corporate acts (p. 321)

If adopted in Canadian corporate legislation, the process could fix the mistake in Dale, where the taxpayer failed to file articles of amendment to authorize the issuance of a new class of shares before a purported rollover transaction. Since the Crown does not oppose that type of correction, the solution could proceed privately.

But the Delaware process does not fix other unopposed cases. The process does not fix the mistake in Winclare, where the taxpayer declared a capital dividend in excess of its CDA. The board resolutions should not be a defective corporate act because they did not suffer from any failure of authorization.…

Joel A. Nitikman, "Rectification: Specific Intent? General Intent? What is the Test? – Part II", Tax Topics, Wolters Kluwer, No. 2274, October 8, 2015, p.1.

Test is one simply of true intention, not specific intent (pp. 3-4)

In Juliar,…[t]he key passages from the Court of Appeal are these:…

[I]t is possible, , even probable, that no one mentioned income tax throughout the nine or 10 months in issue. The plain and obvious fact, however, is that the proposed division had to be carried out on a no immediate tax basis or not at all. [emphasis added]

[T]his underlined sentence is a statement of the taxpayer's true or real or overall (however one wants to say it) intention whether it is a specific intention or a general intention is simply irrelevant.

Mihail Tartsinis v. Navona Management Company [fn 7: [2015] EWHC 57 (Comm).]

The application in this case was to interpret a contract and alternatively to rectify it. The contract was for the sale of shares. There was a dispute about the sales price. It concerned a complicated adjustment mechanism….

[T]aking into account the actual negotiations and the true intentions of the parties, the Court found that the contract should be rectified to delete the adjustment mechanism, as it was never really intended. The test, said the Court, was this:

As I described earlier, the essential function of the doctrine of rectification, as the law has long been understood, is to provide equitable relief in circumstances where the objective approach of the common law results in a document being interpreted in a way that does not reflect the actual intentions of its makers. [emphasis added]

In my view this is the correct test. It is also the Canadian test. Kraft Canada Inc. v. Pitsadiotis [fn 8: 2009 CanLII 9421 (ONSC).] is a case in which a pension deed was sought to be rectified; the Court held that it was dealing with a "unilateral" document, that is, a document that reflects the intention of only its maker, as unlike a contract there is no counter-party to the document. The Court stated the test as follows:

[23] English courts have held that the settlor of a unilateral instrument may seek rectification by proving that the instrument does not express the settlor's true intention. [emphasis added]

Once again, no reference to specific or general intent, merely the true intention.

Availability of rectification where negligence inconsistent with a requirement for specific intent (p. 4)

My last point is this: in Performance Industries Ltd. v. Sylvan Golf & Tennis Club Ltd. [fn 9: 2002 SCC 19 at paragraph 66.] the Court said: "I conclude that due diligence on the part of the plaintiff is not a condition precedent to rectification."

In my view, it is simply impossible to reconcile this statement with a "requirement" to prove that there was a specific intention to avoid the tax result that occurred. If there is no requirement for due diligence, it means that rectification is available even when there is a mistake — even a negligent mistake [f.n. 10. In both Kraft Canada, at paragraphs 64 and 66, and Thomas Hugh Bartlam v. Coutts & Co, [2006] EWHC 1502 (Ch.) at paragraph 11, the Courts granted rectification even though the mistake was caused clearly by a professional advisor's negligence. This also shows that the ruling in Bramco to the effect that the existence of an alternative legal remedy (suing the professionals) means that rectification cannot be granted was incorrect.] — in the tax planning. If one had actually intended to avoid a specific tax result, it is extremely unlikely that most rectification applications would be brought: they are all brought exactly because someone did not focus specifically on a particular tax issue.

Usually will be a true intention to avoid tax in rectification cases (p. 4)

…[When] an appeal to the Supreme Court of Canada is warranted; one can hope… that the Court will set the test straight: not the specific intention, not the general intention, but the true intention. In the vast majority of cases, the inference drawn in Juliar will be true: no tax or no deal. Based on such an inference, rectification should usually be granted.

Catherine Brown, Arthur J. Cockfield, "Rectification of Tax Mistakes Versus Retroactive Tax Laws: Reconciling Competing Visions of the Rule of Law", Canadian Tax Journal, (2013) 61:3, 563-98

Juliar line of cases (pp. 573-4)

The post-Juliar decisions demonstrate that if the intention of the parties is to put into effect a transaction that avoids tax, yet the parties by some error fail to do that, rectification may be the most appropriate and effective remedy available. Several courts have also confirmed that intention can be inferred from the evidence. [fn 38: See Attorney General of Canada v. Juliar et al., (2000) 50 OR (ed) 728 (CA); see also McPeake v. Canada (Attorney General, 2012 BCSC 132] Perhaps most importantly, provincial court judges have now been unequivocal in their view that a mistake as to the effect of a transaction is sufficient to engage the equitable jurisdiction of the court. [fn 39: S & D International Group Inc. v. Canada (Attorney General), 2011 ABQB 230, at paragraph 106.]

Not surprisingly, there appear to be few limits as to when orders will be granted in tax cases provided that the requisite intention is found. [fn 40: In Binder v. Saffron Rouge Inc. (2008), 89 OR (3d) 54 (SC), the Ontario Superior Court of Justice concluded that there had been no common or continuing intention between the parties to obtain the tax benefits sought.] The Notable exception is that the remedy cannot be used for retroactive tax planning. [fn 41: Orman v. Marnat Inc., 2012 ONSC 549, at paragraph 47] In the Stone's Jewellery decision, rectification was also denied, but for the reason that it did not provide an appropriate remedy. [fn 42: Stone's Jewellery Ltd. v. Arora, 2009 ABQB 656. ...] Rescission of the contract or a finding that it was void ab initio at common law was necessary to give effect to the intention of the parties. The facts and the court's reasons are outlined below.

Shafron case (pp. 575-6)

The Supreme Court of Canada cited very different principles in the two non-tax cases since Fuliar. In Shafron, [fn 49: Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6. At issue was the wording of a restrictive covenant in an employment contract between Shafron and KRG Insurance Brokers – specifically, the interpretation of the ambiguous phrase "Metropolitan City of Vancouver." The Supreme Court denied rectification to cure the ambiguity on the basis that there was no evidence that the parties had agreed to anything other than the term found in the agreement, notwithstanding its ambiguity or vagueness.] a 2009 application, the court prefaced its analysis of rectification with the following quotation from Lord Denning in Frederick E. Rose (London) Ld.:

Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties – into their intentions – any more than you do in the formation of any other contract. [fn 50: Frederick E. Rose (London) Ld. v. William H. Pim Jnr & Co., [1953] 2 QB 450 (CA) emphasis added)

Performance Industries - criteria for rectification (p. 576)

The court then went on to cite with approval the criteria set out be the Supreme Court in Performance Industries [fn :51 Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, at paragraph 31] (the other non-tax-related decision):

(1) the existence and content of the inconsistent prior oral agreement; (2) that the party seeking to uphold the terms of the written agreement knew or ought to have known about the lack of correspondence between the written document and the oral agreement, in circumstances amounting to fraud or the equivalent of fraud; and (3) "the precise form" in which the written instrument can be made to express the prior intention. [fn: 52: paragraph 53, citing Performance paragraphs 37-40.]

The court in Shafron concluded that there was "no indication that the parties agreed on something and then mistakenly included something else in the written contract. Rather, they used an ambiguous term in the written contract." [fn 53: paragraph 57]

Provincial courts treat Shafron as not overridceing Juliar (pp.576-7)

While provincial courts pay lip service to the two Supreme Court decisions and the principles on which they rely, the same courts appear quick to distinguish those decisions. For example, the British Columbia Supreme Court considered the Supreme Court of Canada's view in Shafron in a tax-related case, Fraser Valley Refrigeration. [fn 54: Fraser Valley Refrigeration, Re, 2009 BCSC 848.] The Crown argued that Shafron had changed the law of rectification in Canada with respect to intention. The BC court disagreed:

In Shafron rectification was not available because the plaintiff was attempting to resolve a contractual ambiguity, in circumstances where the parties had not expressed intention, thus there was no mutuality of intent or agreement as to the actual meaning of the ambiguous term….Shafron does not mean that intention is irrelevant to rectification cases….In my view, the Shafron decision did not change the law of rectification. [fn 55: Fraser Valley Refrigeration, Re, 2009 BCSC 848, at paragraphs 39-40.]

Jean-Philippe Latreille, "Rectification? In Quebec?", CCH Tax Topics, No. 2045, 19 May 2011, p. 1.

Neil E. Bass, "Trends in Sales Tax Litigation", 2008 Conference Report, C.o.

Mitchell Sherman, "Can We Do Another Take?", Tax Notes International, 16 August 2004, p. 631

Discussion of Snow White Productions Inc. v. PNP Entertainment, Inc.

Jules L. Lewry, David J. Manoochehri, "Oops, I Made a Mistake ... Part II", Tax Topics, No. 1493, 19 October 2000, p. 1.

Patrick Boyle, "Rectification of Unintended Tax Consequences", Tax Litigation, Vol. VII, No. 4, p. 484.