Canada (Attorney General) v. Fairmont Hotels Inc.

Canada (Attorney General) v. Fairmont Hotels Inc.
Collection
Supreme Court Judgments
Date
2016-12-09
Neutral citation
2016 SCC 56
Report
[2016] 2 SCR 720
Case number
36606
Judges
McLachlin, Beverley; Abella, Rosalie Silberman; Cromwell, Thomas Albert; Moldaver, Michael J.; Karakatsanis, Andromache; Wagner, Richard; Gascon, Clément; Côté, Suzanne; Brown, Russell
On appeal from
Ontario
Subjects
Commercial law
Notes
SCC Case Information: 36606
Decision Content
SUPREME COURT OF CANADA
Citation: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720
Appeal heard: May 18, 2016
Judgment rendered: December 9, 2016
Docket: 36606
Between:
Attorney General of Canada
Appellant
and
Fairmont Hotels Inc.,
FHIW Hotel Investments (Canada) Inc. and
FHIS Hotel Investments (Canada) Inc.
Respondents
Coram: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.
Reasons for Judgment:
(paras. 1 to 42)
Dissenting Reasons:
(paras. 43 to 92)
Brown J. (McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner and Gascon JJ. concurring)
Abella J. (Côté J. concurring)
Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720
Attorney General of Canada Appellant
v.
Fairmont Hotels Inc., FHIW Hotel Investments (Canada) Inc.
and FHIS Hotel Investments (Canada) Inc. Respondents
Indexed as: Canada (Attorney General) v. Fairmont Hotels Inc.
2016 SCC 56
File No.: 36606.
2016: May 18; 2016: December 9.
Present: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.
on appeal from the court of appeal for ontario
Contracts — Equity — Remedies — Rectification of written instrument recording prior agreement — Agreement intended by parties to operate on tax‑neutral basis — Corporate resolutions effecting share redemption — Share redemption having unintended tax consequences — Whether courts below erred in holding parties’ intention can support grant of rectification — Whether equitable remedy of rectification available.
Commercial law — Corporations — Taxation — Whether rectification of contract amounts to retroactive tax planning.
Fairmont Hotels Inc. was involved in the financing of Legacy Hotels’ purchase of two other hotels, in U.S. currency. The financing arrangement was intended to operate on a tax‑neutral basis. When Fairmont was later acquired, that intention was frustrated, however, since the acquisition would cause Fairmont and its subsidiaries to realize a deemed foreign exchange loss. The parties to Fairmont’s acquisition therefore agreed on a plan, which allowed Fairmont to hedge itself against any exposure to the foreign exchange tax liability, but not its subsidiaries. There was no plan for protecting them from such exposure because the plan was deferred. The following year, Legacy Hotels asked Fairmont to terminate their financing arrangement to allow for the sale of the two other hotels. Therefore, Fairmont redeemed its shares in its subsidiaries, by resolutions passed by their directors. This resulted however in an unanticipated tax liability. Fairmont sought to avoid that liability by rectification of the directors’ resolutions. Both the application judge and the Court of Appeal granted that rectification on the basis of the parties’ intended tax neutrality.
Held (Abella and Côté JJ. dissenting): The appeal should be allowed.
Per McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ.: Both courts below erred in holding that the parties’ intention of tax neutrality could support a grant of rectification. A common continuing intention does not suffice. Rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. It is limited to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement. In other words, rectification is not available where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself.
Where the error is said to result from a mistake common to both or all parties to the agreement, rectification of the instrument is available upon the court being satisfied that 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.
It falls to a party seeking rectification to show not only the putative error in the instrument, but also the way in which the instrument should be rectified in order to correctly record what the parties intended to do. The applicable standard of proof to be applied to evidence adduced in support of a grant of rectification is the balance of probabilities. A court will typically require evidence 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. On rectification, both equity and the civil law are ad idem, despite each legal system arriving at it by different paths — the former being concerned with correcting the document, and the latter focusing on its interpretation. This convergence is undoubtedly desirable.
These principles are to be applied in a tax context just as they are in a non‑tax context. This is to avoid impermissible retroactive tax planning. In this case, the application of these principles leads unavoidably to the conclusion that Fairmont’s application for rectification should have been dismissed, since it could not demonstrate having reached a prior agreement with definite and ascertainable terms. It is clear that Fairmont intended to limit, if not avoid altogether, its tax liability in unwinding the financing arrangement. And, by redeeming the shares, this intention was frustrated. Without more, however, these facts do not support a grant of rectification. Rectification is not equity’s version of a mulligan. Courts rectify instruments that 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.
Relatedly, Fairmont has not demonstrated how its intention, held in common and on a continuing basis with its subsidiaries, was to be achieved in definite and ascertainable terms while unwinding the financing arrangement. Fairmont refers to a plan to protect its subsidiaries from foreign exchange tax liability, but that plan was not only imprecise. It really was not a plan at all, being at best an inchoate wish to protect the subsidiaries, by unspecified means.
Per Abella and Côté JJ. (dissenting): There is no adjustment to the test for rectification in a tax case, and in this case the test has been met. The lower court’s decisions to grant rectification resulted from the factual finding that the parties had a continuing, ascertainable intention to pursue the transaction on a tax‑free basis or not at all. The majority’s approach however unduly narrows the doctrine of rectification’s scope. A common, continuing, definite and ascertainable intention to pursue a transaction in a tax‑neutral manner has usually satisfied the threshold for granting rectification. The additional requirement that the parties clearly identify the precise mechanism by which they intended to achieve tax neutrality, and how that mechanism was mistakenly transcribed in a document, has the effect of raising the threshold and frustrating the purpose of the remedy. Whether a mistake is unilateral or mutual, rectification is, ultimately, an equitable remedy that seeks to give effect to the true intention of the parties, and prevent errors from causing windfalls. The doctrine is also based on the principle of unjust enrichment, namely, that it would be unfair to rigidly enforce an error that enriches one party at the expense of another.
While rectification seems most often to have been granted in the context of agreed upon terms having been transcribed incorrectly, since unjust enrichment can result from a mistake in carrying out the intention of the parties, the remedy is also available to correct errors in implementation. Courts have, as a result, granted rectification where a corporate transaction was conducted in the wrong sequence, where an underlying calculation in a contract was incorrect, and where the requisite steps of an amalgamation were not correctly carried out.
Whether the errors are in transcription or in implementation, courts may refuse to exercise their discretion where allowing rectification would prejudice the rights of third parties. But the mere existence of a third party will not bar rectification. Only where the third party has actually relied on the flawed agreement will rectification be barred. Just as rectification can prevent one party from enforcing an error and being unjustly enriched by the other’s mistake, rectification can also prevent a third party who has not relied on the agreement from enforcing a mistake and receiving a windfall.
Allowing the tax authorities, a third party, to profit from legitimate tax planning errors, when its own rights have not been prejudiced in any way, amounts to unjust enrichment. Businesses and individuals are legally entitled to structure their affairs in a way that minimizes their tax burden. The tax department is not entitled to play “Gotcha” any more than would any other third party who did not rely to its detriment on the mistake. On the other hand, businesses and individuals should not be allowed to exploit rectification for purposes of engaging in retroactive tax planning.
Civil law and common law rectification in the tax context are clearly based on analogous principles, namely, that the true intention of the parties has primacy over errors in the transcription or implementation of that agreement, subject to a need for precision and the rights of third parties who detrimentally rely on the agreement. That means that there is no principled basis in either legal system for a stricter standard in the tax context simply because it is the government that is positioned to benefit from a mistake.
In this case, Fairmont was found by the application judge to have always had a clear, continuing intention to unwind the financing arrangement on a tax‑neutral basis and never to redeem the shares. Fairmont was not attempting to change its original intention because of unanticipated tax consequences. It had anticipated the tax consequences of unwinding the arrangement with a share redemption mechanism, and it specifically rejected this course of action. But, by mistake, the preferred share redemption terms were included in the directors’ resolutions. This is exactly the kind of mistake rectification exists to remedy. Once the application judge was satisfied of the true intention of the parties, he was entitled to give effect to it by allowing rectification of the directors’ resolutions.
To require an exhaustive account of how the unwinding was supposed to have proceeded would amount to imposing a uniquely high threshold for rectification in the tax context and would give the Canada Revenue Agency, as the tax authorities, an unintended gain because of the mistake. There is no basis for permitting a windfall to the Canada Revenue Agency that no other third party would have been entitled to.
Cases Cited
By Brown J.
Overruled: Juliar v. Canada (Attorney General) (1999), 46 O.R. (3d) 104, aff’d (2000), 50 O.R. (3d) 728; considered: Joscelyne v. Nissen, [1970] 2 Q.B. 86; referred to: Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157; Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368; Ship M. F. Whalen v. Pointe Anne Quarries Ltd. (1921), 63 S.C.R. 109; Hart v. Boutilier (1916), 56 D.L.R. 620; Re Slocock’s Will Trusts, [1979] 1 All E.R. 358; Racal Group Services Ltd. v. Ashmore (1995), 68 T.C. 86; Ashcroft v. Barnsdale, [2010] EWHC 1948, [2010] S.T.C. 2544; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Harvest Operations Corp. v. Canada (Attorney General), 2015 ABQB 327, [2015] 6 C.T.C. 78; Crane v. Hegeman‑Harris Co., [1939] 1 All E.R. 662; Wasauksing First Nation v. Wasausink Lands Inc. (2004), 184 O.A.C. 84; Dynamex Canada Inc. v. Miller (1998), 161 Nfld. & P.E.I.R. 97; Frederick E. Rose (London) Ld. v. William H. Pim Jnr. & Co., [1953] 2 Q.B. 450; Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670; Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838; F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41; Thomas Bates and Son Ltd. v. Wyndham’s (Lingerie) Ltd., [1981] 1 W.L.R. 505.
By Abella J. (dissenting)
H. F. Clarke Ltd. v. Thermidaire Corp., [1973] 2 O.R. 57, rev’d [1976] 1 S.C.R. 319; Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678; Hart v. Boutilier (1916), 56 D.L.R. 620; Mitchell v. MacMillan (1980), 5 Sask. R. 160; Reed Shaw Osler Ltd. v. Wilson (1981), 17 Alta. L.R. (2d) 81; Bryndon Ventures Inc. v. Bragg (1991), 82 D.L.R. (4th) 383; Dynamex Canada Inc. v. Miller (1998), 161 Nfld. & P.E.I.R. 97; Wasauksing First Nation v. Wasausink Lands Inc. (2004), 184 O.A.C. 84; Joscelyne v. Nissen, [1970] 2 Q.B. 86; Peter Pan Drive‑In Ltd. v. Flambro Realty Ltd. (1978), 22 O.R. (2d) 291, aff’d (1980), 26 O.R. (2d) 746; Graymar Equipment (2008) Inc. v. Canada (Attorney General), 2014 ABQB 154, 97 Alta. L.R. (5th) 288; I.C.R.V. Holdings Ltd. v. Tri‑Par Holdings Ltd. (1994), 53 B.C.A.C. 72; McLean v. McLean, 2013 ONCA 788, 118 O.R. (3d) 216; Swainland Builders Ltd. v. Freehold Properties Ltd., [2002] EWCA Civ 560; Co‑operative Insurance Society Ltd v. Centremoor Ltd., [1983] 2 E.G.L.R. 52; Royal Bank of Canada v. El‑Bris Ltd., 2008 ONCA 601, 92 O.R. (3d) 779; Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157; GT Group Telecom Inc., Re (2004), 5 C.B.R. (5th) 230; Oriole Oil & Gas Ltd. v. American Eagle Petroleums Ltd. (1981), 27 A.R. 411; Prospera Credit Union, Re, 2002 BCSC 1806, 32 B.L.R. (3d) 145; Wise v. Axford, [1954] O.W.N. 822; Augdome Corp. v. Gray, [1975] 2 S.C.R. 354; Consortium Capital Projects Inc. v. Blind River Veneer Ltd. (1988), 63 O.R. (2d) 761, aff’d (1990), 72 O.R. (2d) 703; Kolias v. Owners: Condominium Plan 309 CDC, 2008 ABCA 379, 440 A.R. 389; Carlson, Carlson and Hettrick v. Big Bud Tractor of Canada Ltd. (1981), 7 Sask. R. 337; Love v. Love, 2013 SKCA 31, [2013] 5 W.W.R. 662; Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Kanji v. Canada (Attorney General), 2013 ONSC 781, 114 O.R. (3d) 1; Pallen Trust, Re, 2015 BCCA 222, 385 D.L.R. (4th) 499; 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739; Canada (Attorney General) v. Juliar (2000), 50 O.R. (3d) 728; McPeake v. Canada (Attorney General), 2012 BCSC 132, [2012] 4 C.T.C. 203; Slate Management Corp. v. Canada (Attorney General), 2016 ONSC 4216; Fraser Valley Refrigeration, Re, 2009 BCSC 848, [2009] 6 C.T.C. 73, aff’d 2009 BCCA 576, 280 B.C.A.C. 317; Birch Hill Equity Partners Management Inc. v. Rogers Communications Inc., 2015 ONSC 7189, 128 O.R. (3d) 1; Binder v. Saffron Rouge Inc. (2008), 89 O.R. (3d) 54; Re: Aboriginal Diamonds Group, 2007 NWTSC 37; Zhang v. Canada (Attorney General), 2015 BCSC 1256, 2015 DTC 5084; Husky Oil Operations Ltd. v. Saskatchewan (Minister of Finance), 2014 SKQB 116, 443 Sask. R. 172; JAFT Corp. v. Jones, 2014 MBQB 59, 304 Man. R. (2d) 86, aff’d 2015 MBCA 77, 323 Man. R. (2d) 57; Capstone Power Corp. v. 1177719 Alberta Ltd., 2016 BCSC 1274; Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838.
Statutes and Regulations Cited
Civil Code of Québec, art. 1425.
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 245 .
Authors Cited
Berryman, Jeffrey. The Law of Equitable Remedies, 2nd ed. Toronto: Irwin Law, 2013.
Brooks, Neil, and Kim Brooks. “The Supreme Court’s 2013 Tax Cases: Side‑Stepping the Interesting, Important and Difficult Issues” (2015), 68 S.C.L.R. (2d) 335.
Brown, Catherine, and Arthur J. Cockfield. “Rectification of Tax Mistakes Versus Retroactive Tax Laws: Reconciling Competing Visions of the Rule of Law” (2013), 61 Can. Tax J. 563.
Fridman, G. H. L. The Law of Contract in Canada, 6th ed. Toronto: Carswell, 2011.
Goff, Lord, of Chieveley and Gareth Jones. The Law of Restitution, 7th ed., by Gareth Jones, ed. London: Sweet & Maxwell, 2007.
Hall, Geoff R. Canadian Contractual Interpretation Law, 3rd ed. Toronto: LexisNexis, 2016.
Hanbury and Martin Modern Equity, 20th ed., by Jamie Glister and James Lee. London: Sweet & Maxwell, 2015.
Hartford, Patrick. “Clarifying the Doctrine of Rectification in Canada: A Comment on Shafron v. KRG Insurance Brokers (Western) Inc.” (2013), 54 Can. Bus. L.J. 87.
Hodge, David. Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake, 2nd ed. London: Sweet & Maxwell, 2016.
Janke‑Curliss, Karen, et al. “Rectification in Tax Law: An Overview of Current Cases”, in Tax Dispute Resolution, Compliance, and Administration in Canada: Proceedings of the June 2012 Conference. Toronto: Canadian Tax Foundation, 2013, 21:1.
McCamus, John D. The Law of Contracts, 2nd ed. Toronto: Irwin Law, 2012.
McInnes, Mitchell. The Canadian Law of Unjust Enrichment and Restitution. Markham, Ont.: LexisNexis, 2014.
Nitikman, Joel. “Many Questions (and a Few Possible Answers) About the Application of Rectification in Tax Law” (2005), 53 Can. Tax J. 941.
Peel, Edwin. The Law of Contract, 14th ed. London: Sweet & Maxwell, 2015.
Smith, Lionel. “Can I Change My Mind? Undoing Trustee Decisions” (2008), 27 E.T.P.J. 284.
Snell’s Equity, 31st ed., by John McGhee, ed. London: Sweet & Maxwell, 2005.
Snell’s Equity, 33rd ed., by John McGhee. London: Sweet & Maxwell, 2015.
Spry, I. C. F. The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages, 9th ed. Pyrmont, N.S.W.: Lawbook Co., 2014.
Swan, Angela, and Jakub Adamski. Canadian Contract Law, 3rd ed. Markham, Ont.: LexisNexis, 2012.
Waddams, S. M. The Law of Contracts, 6th ed. Toronto: Canada Law Book, 2010.
APPEAL from a judgment of the Ontario Court of Appeal (Simmons, Cronk and Blair JJ.A.), 2015 ONCA 441, 45 B.L.R. (5th) 230, 2015 DTC 5073, [2015] O.J. No. 3172 (QL), 2015 CarswellOnt 8955 (WL Can.), affirming a decision of Newbould J., 2014 ONSC 7302, 123 O.R. (3d) 241, [2015] 3 C.T.C. 9, 2015 DTC 5019, 36 B.L.R. (5th) 215, [2014] O.J. No. 6086 (QL), 2014 CarswellOnt 17975 (WL Can.). Appeal allowed, Abella and Côté JJ. dissenting.
Daniel Bourgeois and Eric Noble, for the appellant.
Geoff R. Hall and Chia‑yi Chua, for the respondents.
The judgment of McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ. was delivered by
Brown J. —
I. Introduction
[1] This appeal concerns the conditions under which a taxpayer may ask a court to exercise its equitable jurisdiction to rectify a written legal instrument, where the effect of that instrument was to produce an unexpected tax consequence. As I will explain, this entails inquiring into the nature and particularity of the terms which the taxpayer had intended to record in the instrument, whether the instrument contains those intended terms and, if not, whether those intended terms are sufficiently precise such that they may now be included in the instrument.
[2] The present case arises from a financing arrangement which the parties had intended, both at its inception and ongoing, to operate on a tax-neutral basis. Because of the particular financing mechanism chosen, an unanticipated tax liability was incurred. Both the chambers judge at the Ontario Superior Court of Justice and the Court of Appeal for Ontario granted rectification on the grounds of the parties’ intended tax neutrality.
[3] Without disputing that tax neutrality was the parties’ intention, for the reasons that follow it is my respectful view that both courts below erred in holding that this intention could support a grant of rectification. Rectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement: A. Swan and J. Adamski, Canadian Contract Law (3rd ed. 2012), at §8.229; M. McInnes, The Canadian Law of Unjust Enrichment and Restitution (2014), at p. 817. It does not undo unanticipated effects of that agreement. While, therefore, a court may rectify an instrument which inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage what a party hoped to achieve. Moreover, these rules confining the availability of rectification are generally applicable, including where (as here) the unanticipated effect takes the form of a tax liability. To be clear, a court may not modify an instrument merely because a party has discovered that its operation generates an adverse and unplanned tax liability. I would therefore allow the appeal.
II. Overview of Facts and Proceedings
A. Background
[4] The respondent Fairmont Hotels Inc. and its subsidiaries FHIW Hotel Investments (Canada) Inc. and FHIS Hotel Investments (Canada) Inc. ask the Court to rectify instruments recording a complex financing arrangement made in 2002 and 2003 between Fairmont and Legacy Hotels REIT, a Canadian real estate investment trust in which Fairmont owned a minority interest. While Fairmont’s aim in participating in this financing arrangement was to obtain the management contract for the two hotels which Legacy purchased with the financing, its participation exposed it to a potential foreign exchange tax liability, since the financing was in U.S. currency. With the goal of ensuring foreign exchange tax neutrality, Fairmont — through its subsidiaries FHIW and FHIS — entered into reciprocal loan agreements with Legacy, all of which were transacted in U.S. currency.
[5] When Fairmont was acquired by Kingdom Hotels International and Colony Capital LLC in 2006, however, that goal of foreign exchange tax neutrality was frustrated, since this acquisition would cause Fairmont and its subsidiaries to realize a deemed foreign exchange loss, without corresponding foreign exchange gains, on the financing arrangement with Legacy. Fairmont, Kingdom Hotels and Colony Capital agreed on a “modified plan” which allowed Fairmont (but not its subsidiaries) to realize both its gains and losses in 2006, thereby fully hedging it against exposure to prospective foreign exchange tax liability. The matter of similarly protecting the subsidiaries from exposure was deferred, without any specific plan as to how that might be achieved.
[6] In 2007, Legacy asked Fairmont to terminate the reciprocal loan arrangements “on an urgent basis” so as to allow for the sale of the hotels. Four days later, and on the incorrect assumption that the matter of the subsidiaries’ foreign exchange tax neutrality had been secured, Fairmont complied with Legacy’s request by redeeming its shares in its subsidiaries via resolutions passed by the directors of FHIW and FHIS. This resulted in an unanticipated tax liability, discovered only after the Canada Revenue Agency (“CRA”) audited the 2007 tax returns of FHIW and FHIS and questioned Fairmont on those returns.
[7] The respondents now seek to avoid that liability to Fairmont by asking the Court to rectify the 2007 resolutions passed by the directors of FHIW and FHIS. Specifically, they wish to convert Fairmont’s share redemption into a loan whereby FHIW and FHIS will loan to Fairmont the same amount that they paid to Fairmont for the share redemption.
B. Judicial History
(1) Superior Court of Justice — Newbould J. (2014 ONSC 7302, 123 O.R. (3d) 241)
[8] Relying on the decision of the Ontario Court of Appeal in Juliar v. Canada (Attorney General) (1999), 46 O.R. (3d) 104 (S.C.J.), aff’d (2000), 50 O.R. (3d) 728 (C.A.), the chambers judge allowed the application for rectification. He found that, since 2002, Fairmont had intended that its financing arrangement with Legacy be tax-neutral in effect, and that this intention subsisted after Fairmont’s 2006 acquisition by Kingdom Hotels and Colony Capital (para. 32).
[9] The chambers judge also found that, in light of the foreign exchange tax exposure presented to Fairmont’s subsidiaries by that acquisition, Fairmont intended “at some point in the future” to address “the unhedged position of [FHIW] and [FHIS] in a way that would be tax . . . neutral although they had no specific plan as to how they would do that” (para. 33). Observing (at para. 42) that the tax liability arose as a result of inadvertence by a member of Fairmont’s senior management team, he said that this was not “a case in which tax planning has been done on a retroactive basis after a CRA audit”, but rather a case in which a “redemption of the preference shares was mistakenly chosen as the means” to “unwind the loans on a tax-free basis” (para. 43). “[D]enial of the application to rectify would”, he concluded, “result in a tax burden which Fairmont sought to avoid from the inception of the 2002 reciprocal loan arrangement” while “giv[ing] CRA an unintended gain” (para. 44). And, in any event, he noted that Juliar was binding on him in the circumstances (para. 41).
(2) Court of Appeal — Simmons, Cronk and Blair JJ.A. (2015 ONCA 441, 45 B.L.R. (5th) 230)
[10] In brief reasons for judgment, the Court of Appeal affirmed the chambers judge’s decision, taking note of his findings regarding Fairmont’s continuing intention from 2002 that its financing arrangement with Legacy would be carried out on a tax neutral basis; that this intention subsisted after Fairmont’s acquisition in 2006; that the adverse tax consequence was triggered by a mistake in 2007 on the part of a member of Fairmont’s senior management; and that the purpose of the 2007 resolutions was not to redeem the shares, but rather “to unwind [the Legacy transactions] on a tax free basis” (para. 7).
[11] The Court of Appeal also commented on the evidentiary burden resting on the party seeking rectification. Juliar, it said, “does not require that the party seeking rectification must have determined the precise mechanics or means by which [its] settled intention to achieve a specific tax outcome would be realized” (para. 10). Rather, “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” (para. 10). In this case, then, it was in the court’s view unnecessary for Fairmont to prove that it had resolved to use “a specific transactional device — loans — to achieve the intended tax result” (para. 12). Rather, the chambers judge’s findings regarding Fairmont’s intention, coupled with Juliar’s direction regarding the prerequisite intention to obtain rectification, were dispositive of the application in the respondents’ favour.
III. Analysis
A. General Principles and Operation of Rectification
[12] If by mistake a legal instrument does not accord with the true agreement it was intended to record — because a term has been omitted, an unwanted term included, or a term incorrectly expresses the parties’ agreement — a court may exercise its equitable jurisdiction to rectify the instrument so as to make it accord with the parties’ true agreement. Alternatively put, rectification 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. Its purpose is to give effect to the parties’ true intentions, rather than to an erroneous transcription of those true intentions (Swan and Adamski, at §8.229).
[13] Because rectification allows courts to rewrite what the parties had originally intended to be the final expression of their agreement, it is “a potent remedy” (Snell’s Equity (33rd ed. 2015), by J. McGhee, at pp. 417-18). It must, as this Court has repeatedly stated (Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157, at para. 56, citing Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at para. 31), be used “with great caution”, since a “relaxed approach to rectification as a substitute for due diligence at the time a document is signed would undermine the confidence of the commercial world in written contracts”: Performance Industries, at para. 31. It bears reiterating that rectification is limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement (Swan and Adamski, at §8.229). It is not concerned with mistakes merely in the making of that antecedent agreement: E. Peel, The Law of Contract (14th ed. 2015), at para. 8-059; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368, at p. 375 (“Courts of Equity do not rectify contracts; they may and do rectify instruments”). In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself. More to the point of this appeal, and as this Court said in Performance Industries (at para. 31), “[t]he court’s task in a rectification case is . . . to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other”.
[14] Beyond these general guides, the nature of the mistake must be accounted for: Swan and Adamski, at §8.233. Two types of error may support a grant of rectification. The first arises when both parties subscribe to an instrument under a common mistake that it accurately records the terms of their antecedent agreement. In such a case, an order for rectification is predicated upon the applicant showing that the parties had reached a prior agreement whose terms are definite and ascertainable; that the agreement was still effective when the instrument was executed; that the instrument fails to record accurately that prior agreement; and that, if rectified as proposed, the instrument would carry out the agreement: Ship M. F. Whalen v. Pointe Anne Quarries Ltd. (1921), 63 S.C.R. 109, at p. 126; McInnes, at p. 820; Snell’s Equity, at p. 424; Hanbury and Martin Modern Equity (20th ed. 2015), by J. Glister and J. Lee, at pp. 848-49; Hart v. Boutilier (1916), 56 D.L.R. 620 (S.C.C.), at p. 622.
[15] In Performance Industries (at para. 31) and again in Shafron (at para. 53), this Court affirmed that rectification is also available where the claimed mistake is unilateral — either because the instrument formalizes a unilateral act (such as the creation of a trust), or where (as in Performance Industries and Shafron) the instrument was intended to record an agreement between parties, but one party says that the instrument does not accurately do so, while the other party says it does. In Performance Industries (at para. 31), “certain demanding preconditions” were added to rectify a putative unilateral mistake: specifically, that the party resisting rectification knew or ought to have known about the mistake; and that permitting that party to take advantage of the mistake would amount to “fraud or the equivalent of fraud” (para. 38).
B. Juliar
[16] As I have recounted, both courts below considered the Court of Appeal’s decision in Juliar, coupled with the chambers judge’s findings, to be dispositive. In my respectful view, however, Juliar is irreconcilable with this Court’s jurisprudence and with the narrowly confined circumstances to which this Court has restricted the availability of rectification.
[17] In Juliar, the parties had, by a written agreement and in the course of the restructuring of a family business, transferred shares to a corporation in exchange for promissory notes for an amount equal to what the parties believed to be the value of the shares. Upon discovering that the promissory notes were worth more than the shares’ value (resulting in the taxpaying party being assessed as having received a taxable deemed dividend), the parties sought rectification in order to convert what had originally been structured as a shares-for-promissory notes transfer into a shares-for-shares transfer (which would have been tax-deferred). For the Court of Appeal, and citing the decision of Re Slocock’s Will Trusts, [1979] 1 All E.R. 358 (Ch. D.), Austin J.A. held that the written agreement could be rectified as sought, citing the trial judge’s finding that the parties had “a common . . . continuing intention” to transfer shares in a way that would avoid immediate tax liability (para. 19). In order to achieve that objective, Austin J.A. said, the deal “had to be . . . a shares for shares transaction” (para. 25).
[18] This reasoning presents several difficulties. First, as many commentators have observed, it is indisputable that Juliar has relaxed the requirements for obtaining rectification, and correspondingly expanded the scope of cases in which rectification may be sought and granted beyond that which the governing principles allow (C. Brown and A. J. Cockfield, “Rectification of Tax Mistakes Versus Retroactive Tax Laws: Reconciling Competing Visions of the Rule of Law” (2013), 61 Can. Tax J. 563, at p. 571; N. Brooks and K. Brooks, “The Supreme Court’s 2013 Tax Cases: Side-Stepping the Interesting, Important and Difficult Issues” (2015), 68 S.C.L.R. (2d) 335, at p. 385; K. Janke-Curliss et al., “Rectification in Tax Law: An Overview of Current Cases”, in Tax Dispute Resolution, Compliance, and Administration in Canada (2013), 21:1, at pp. 21:8 and 21:9).
[19] I agree with this observation. As I have stressed, rectification is available not to cure a party’s error in judgment in entering into a particular agreement, but an error in the recording of that agreement in a legal instrument. Alternatively put, rectification aligns the instrument with what the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do. 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. As J. Berryman observed (in The Law of Equitable Remedies (2nd ed. 2013), at p. 510):
In Juliar, the applicants had acted directly on the advice of their accountant. The accountant made a mistake as to the nature of the business ownership and the taxes that were paid prior to the arrangement he advised his clients to pursue. This is not a case for rectification. The clients intended to use the instrument given to them by their accountant. Their motive may have been to avoid tax but that is different from their intent which was to use the very form in front of them.
[20] Secondly, even on its own terms, Juliar’s expansion of the availability of rectification cannot be justified. By way of explanation, in the case upon which Austin J.A. relied, Re Slocock’s Will Trusts, the plaintiff was the life beneficiary of her father’s residuary estate, with the capital and income after her death to be paid to her issue as she should appoint. She appointed her children to take after her death. Later, lands owned by her father’s family were sold to a development company, with the proceeds to be received and distributed by a management company in which the plaintiff received an allotment of shares, proportionate to her interest in the proceeds. After taking legal advice, the plaintiff and her children decided that she should surrender by deed her life interest in those proceeds as well as her shares in the management company (pp. 359-60). The deed, however, did not faithfully record the parties’ agreement, because it released only the plaintiff’s shares in the management company, and not her beneficial interest in the proceeds of sale (p. 360).
[21] While the outcome sought by the plaintiff and her children would have also secured a tax advantage for the children (specifically, avoidance of capital transfer tax upon the plaintiff’s death), Graham J. granted rectification not to secure that tax advantage, but on the strength of his finding (Re Slocock’s Will Trusts, at p. 361) that the deed as recorded omitted the proceeds of the sale of the lands, thereby failing to record fully the terms of the parties’ original agreement. This was, therefore, an unremarkable application of rectification to cure an omission in the instrument recording an antecedent agreement. Nothing in Re Slocock’s Will Trusts justifies Juliar’s modified threshold for granting rectification solely to avoid an unanticipated tax liability. Re Slocock’s Will Trusts simply confirmed that, provided that the underlying mechanism by which the parties had agreed to seek a particular tax outcome was omitted or incorrectly recorded, and provided that all other conditions for granting rectification are satisfied, a court retains discretion to grant rectification. The focus of the inquiry remained properly fixed on whether that originally intended mechanism was properly recorded, and not on whether it achieved the desired tax outcome or resulted in a party incurring an undesired or unexpected tax outcome.
[22] Subsequent English authorities confirm that Re Slocock’s Will Trusts created no distinct threshold for granting rectification in the tax context. In Racal Group Services Ltd. v. Ashmore (1995), 68 T.C. 86 (C.A.), the English Court of Appeal made clear that a mere intention to obtain a fiscal objective is insufficient to ground a claim in rectification: “. . . the court cannot rectify a document merely on the ground that it failed to achieve the grantor’s fiscal objective. The specific intention of the grantor as to how the objective was to be achieved must be shown if the court is to order rectification” (p. 106). Similarly, the court in Ashcroft v. Barnsdale, [2010] EWHC 1948, [2010] S.T.C. 2544 (Ch. D.), held that it could not rectify an instrument “merely because it fails to achieve the fiscal objectives of the parties to it”: para. 17 (emphasis in original). See also D. Hodge, Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake (2nd ed. 2016), at para. 4-145:
A mere misapprehension as to the tax consequences of executing a particular document will not justify an order for its rectification. The specific intention of the parties (or the grantor or covenantor) as to how the objective was to be achieved must be shown if the court is to order rectification. [Emphasis deleted.]
[23] Finally, Juliar does not account for this Court’s direction, in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 45, that a taxpayer should expect to be taxed “based on what it actually did, not based on what it could have done”. While this statement in Shell Canada was applied to support the proposition that a taxpayer should not be denied a sought-after fiscal objective merely because others had not availed themselves of the same advantage, it cuts the other way, too: taxpayers should not be judicially accorded a benefit based solely on what t