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Attorney General) V So You Screwed Up Your Client’s Tax Plan! Now What? Rectification, Rescission & Other Remedies Agenda 1. Rectification 2. Implead 3. Mistake 4. Rescission 5. Remission Orders 6. Declaratory Judgment 7. Voluntary Disclosure What is Rectification? • It is an Equitable Remedy • Rectification permits a Court of Equity: ̶ To correct the wording ̶ of an “instrument” ̶ where its terms do not reflect the “real bargain” • The purpose of rectification is to ensure that written agreements accurately reflect the original intention of the parties What is Rectification? – Cont’d • Core Case: ̶ Canada (Attorney General) v. Fairmont Hotels Inc. ̶ (2016 SCC 56) (“Fairmont”) ̶ “Rectification is not equity’s version of a mulligan. Courts rectify instruments which do not correctly record agreements. Courts do not ‘rectify’ agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome” • Brown J. at para. 39 What may be Rectified? • An Instrument • Written legal document defining rights, duties, entitlements or liabilities ̶ Directors resolutions, invoices, share purchase agreements ̶ Articles of Association, Amendment, Amalgamation Why Rectify? • Self help may be ineffective • Sussex Square Apartments Ltd. v. R (99 DTC 443 (TCC) aff’d 2000 DTC 644 (FCA)) ̶ Modification of agreements tax effective ̶ Only if ratified in superior court • S & D International Group Inc. v. Canada (2011 ABQB 230) ̶ “Cancellation agreements” ineffective ̶ Taxpayer still allowed to rectify Why Rectify – Cont’d • Contrast: ̶ Twomey v. R. (2012 TCC 310) ̶ Simple recording error ̶ corrected by amended resolution ̶ No need to rectify Why Rectify – Cont’d • Retroactivity: ̶ Court orders rectification “nunc pro tunc” = “now for then” ̶ Rectified instrument effective as at the date of the original transaction ̶ See Winclare Management Services Ltd. v. Canada (2009 5 CTC 278) • Binding on the CRA and the Tax Court ̶ See Dale v R (97 DTC 5252) ̶ But CRA may argue it is not bound unless served with application Statutory Rectification • Canadian corporate statutes contain mechanisms ̶ administrator can fix errors in certain corporate documents • For example, section 265 of the Canada Business Corporations Act provides that: “If there is an error in articles, a notice, a certificate or other document, the directors or shareholders of the corporation shall, on the request of the Director, pass the resolutions and send to the Director the documents required to comply with this Act, and take such other steps as the Director may reasonably require so that the Director may correct the document.” ̶ The “Director” = Administrator of CBCA Statutory Rectification – Cont’d • CBCA subsection 265(6) • Director may issue a corrected certificate or file the corrected articles, notice or other document if the application is accepted ̶ This suggests that the document must be capable of issuance or filing by the Director ̶ Case law suggests corporate statutes may be limited to errors ̶ That require correction in order to comply with the corporate law legislation ̶ See: Allsco Building Supplies Ltd. v. McAllister (1990), NBQB) Statutory Rectification – Cont’d • Various corporate statutes codify ̶ The courts ability to grant rectification ̶ In certain circumstances • Some statutes broader than others • I.e., the BC Corporations Act defines “basic records” as articles, notice of articles or memorandum, minutes of any meeting of shareholders or directors, any resolution passed by shareholders etc. • Court may make any order requiring company to correct basic records Corporate Statutes • Contrast with Alberta • Subsection 244(1) Alberta Business Corporations Act allows rectification in the following context: ̶ “If the name of a person is alleged to be or to have been wrongly entered or retained in, or wrongly deleted or omitted from, the registers or other records of a corporation, the corporation, a security holder of the corporation or any aggrieved person may apply to the Court for an order that the registers or records be rectified” Income Tax Act and Rectification • Rectification is not a statutory remedy under the Income Tax Act • The same principles apply whether the reason for the request rectification is tax or non tax related. • Rectification remains an equitable remedy • Granted by way of an application to Court for an order History of Rectification (non-tax) • Leading non-tax case: Performance Industries v Sylvan Lake Golf and Tennis Club, (2002 SCC 19) (“Sylvan”) "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” • Per Sylvan: “general, common intention” • Sufficient basis for rectification • Sylvan provided “wide door” to rectification History and Rectification • In Shafron v KRG Insurance Brokers (Western Inc.) (2009 SCR 6) (“Shafron”), the SCC stated that: ̶ “…rectification is used to restore what the parties’ agreement actually was, were it not for the error in the written agreement.” (at para. 57) • Prior to Fairmont, the leading decision on tax matters as it related to rectification was Juliar v. Canada (Attorney General) ((2000) 50 OR (3d) 728) (“Juliar”) Fairmont • Fairmont Hotels Inc. held an interest in a Canadian real estate investment Trust, Legacy Hotels REIT • Fairmont and its affiliates entered into reciprocal U.S. currency loan agreements to provide financing to Legacy, which was acquiring properties in the U.S. • Instead of financing the purchase of the hotels directly, Legacy moved the financing through Fairmont Group corporations, and Fairmont would obtain the management contract for the hotels • The loans were designated in USD, which exposed Fairmont Group to foreign exchange tax liabilities Fairmont – Cont’d • The financing structure was set up to fully hedge the Fairmont Group’s foreign exchange exposure, and the tax and financial advisors spent significant time planning the structures to ensure they would achieve the parties’ tax objectives • In 2006, a plan was created which would have allowed for Fairmont and its affiliates’ foreign exchange exposures to be continue to be fully hedged for tax purposes, and would have allowed for the affiliates to redeem their shares without realizing taxable foreign exchange gains • The plan was slightly modified which would provide that Fairmont’s Foreign exchange was fully hedged, but not that of its affiliates Fairmont – Cont’d • In 2007, Fairmont Group mistakenly assumed the 2006 plan was implemented • Transactions were reported as if the plan had been implemented • This resulted in large unanticipated foreign exchange gains that were not hedged by accrued foreign exchange losses • Fairmont sought rectification of the directors’ resolutions that implemented the share redemptions and termination of loans • Fairmont argued that the intent from 2002 onwards was to have the reciprocal loan transactions and unwinding on a tax neutral basis Fairmont – Cont’d • Ontario Superior Court allowed the application, following Juliar • Court of Appeal upheld the Superior Court decision, stating: ̶ "[I]n these circumstances, it 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" Supreme Court of Canada • SCC overturned the decision, stating that: ̶ “Juliar is irreconcilable with this Court’s jurisprudence and with the narrowly confined circumstances to which this court has restricted the availability of rectification” • When there is a common mistake, a court may grant rectification upon the court being satisfied on a balance of probabilities that: ̶ The parties had reached a prior agreement whose terms are definite and ascertainable; ̶ The agreement was still effective when the instrument was executed; ̶ The instrument failed to accurately record the prior agreement; and ̶ If rectified, the instrument would carry out the agreement as intended General Principles • Rectification is limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement • Rectification aligns the written instrument with the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do • A common and continuing intention to achieve a particular tax consequence (i.e. tax deferred transaction) is not sufficient on its own to grant rectification • A relaxed approach to the doctrine of rectification in relation to executed contracts is inappropriate and would undermine the confidence of the commercial world in written contracts Jean Couteau Group (PJC) Inc. v. Attorney General fo Canada (2016 SCC 55) • Companion case to Fairmont, in the context of the Quebec Civil Code • Test parallels that in Fairmont, requiring the contracting parties to have actually intended to take specific measures to avoid undesirable tax consequences • Civil code is not confined to only clerical errors Post Fairmont Jurisprudence • BC Trust v. Canada (Attorney General) (2017 BCSC 209): the applicant requested a rectification order allowing the trustees to retroactively allocate income to a beneficiary and amend its 2012 tax return
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