On December 9, the Supreme Court of Canada clarified the conditions under which a taxpayer may seek rectification to avoid unintended tax consequences. The Court set a high standard for taxpayers seeking rectification in Attorney General (Canada) v. Fairmont Hotels Inc. and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General).1 2
Key Holdings: New Legal Test for Rectification
- The approach to rectification is now essentially the same across Canada, whether in common law jurisdictions or in Québec, within the tax and the non-tax context.
- A taxpayer cannot obtain a rectification order simply by demonstrating an intention to achieve tax neutrality.
In common law jurisdictions, to be eligible for rectification, a taxpayer must demonstrate on a balance of probabilities that:
- a prior agreement existed, with definite and ascertainable terms;
- the agreement was in effect at the time the written instrument under review was executed;
- the written instrument under review does not accurately record the prior agreement; and
- the instrument, if rectified, would carry out the prior agreement of the parties. (In the case of a unilateral mistake, the party seeking rectification must demonstrate the other party knew or ought to have known about the mistake, and allowing the defendant to take advantage of the error would amount to fraud or the equivalent.)3
- The new legal test rejects the approach of the Ontario Court of Appeal in Juliar v. Canada (Attorney General), which has governed rectification in common law jurisdictions since 2000.4 In that case, the court held that an intention to achieve tax neutrality was sufficient to ground a claim for rectification.
In Québec, a taxpayer seeking rectification must meet a two-part test, demonstrating that:
- the unintended tax consequences were originally and specifically to be avoided, through sufficiently precise obligations which objects, the prestations to execute, are determinate or determinable; and
- the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so.
Overview of the Rulings
Common Law: Fairmont
Fairmont limits rectification to recording errors in written legal instruments. Justice Brown, writing for a 7-2 majority, held that a court has discretion to fix a written instrument that has incorrectly recorded a prior agreement between parties. Rectification does not permit one or both of those parties to amend that agreement after the discovery of unintended tax consequences. A party can no longer rely on proving a "common continuing intention" (in this case, an intention to avoid tax liability) to obtain rectification.
Based on Fairmont, a taxpayer must meet four requirements to be eligible for rectification (see above). The court will require evidence, on a balance of probabilities, "exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the parties’ true intended course of action."5
The majority took issue with Fairmont’s plan, finding that the plan was not only imprecise, but it was "really not a plan at all, being at best an inchoate wish to protect the subsidiaries, by unspecified means."6
Justice Brown stressed that courts rectify instruments that fail to record correctly the agreements between parties. They do not rectify agreements that are properly recorded in an instrument but the outcome is either undesirable or unexpected. "Rectification," he writes, "is not equity’s version of a mulligan."7
Civil Law: Jean Coutu
As in Fairmont, the Court held in Jean Coutu that a general intention to achieve tax neutrality is insufficient to obtain an order of rectification. The Court held that there must be a precise juridical operation and a determinate or determinable prestation or prestations within the meaning of article 1373 of the Civil Code of Québec. The Court also required there to be a common intention that forms part of the original agreement and serves as a basis for modifying the written documents expressing that agreement under article 1425 of the Civil Code of Québec.
The Supreme Court dismissed Jean Coutu’s appeal. The Court held that Jean Coutu and its subsidiary had agreed on the precise set of prestations they wanted to execute, and there was no error in the expression or execution of their agreement. Rather, the agreement resulted in unforeseen and undesirable tax consequences for the Canadian parent company. There was a mistake in the transactions agreed to, not in the way they were expressed. Rectification was therefore unavailable under the Civil Code of Québec.
The Court in Jean Coutu commented that rectification under Québec civil law and in equity under the common law share similar principles and lead to similar results. Each requires a determination of whether the true agreement between the contracting parties is accurately expressed in the written instruments reflecting either the terms of the agreement or the execution of the obligations themselves. Only the expression of the contract can be amended; the contract itself cannot. The true agreement is paramount, not its intended consequences or effects.
1 2016 SCC 56.
2 2016 SCC 55.
3 Para. 38.
4 (1999), 46 OR (3d) 104 (SCJ), aff’d (2000), 50 OR (3d) 728 (CA).
5 Para. 36.
6 Para. 40.
7 Para. 39.
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