This article was first published by the Canadian Tax Foundation in (2019) 9:2 Canadian Tax Focus.
In the two years since the SCC narrowed the availability of rectification in Fairmont Hotels ( 2016 SCC 56), provincial superior and appellate courts have attempted to interpret the new limits placed on rectification. The post-Fairmont jurisprudence has largely been determined by the specific facts of each case, but taxpayer success has depended on the existence of contemporaneous documents that demonstrate a specific intention at the time of the transaction—that is, a prior agreement with definite and ascertainable terms. If this test is met, rectification is not limited to clerical errors. However, relief is not available to alter a tax-driven corporate transaction by adding steps or fundamentally changing the transaction itself.
Relief has been granted to rectify:
- a share purchase agreement and related promissory note to avoid a deemed dividend under section 84.1 on the sale of shares to a corporate purchaser by replacing the purchaser with an individual and adding an additional step to the transaction (Crean, 2019 BCSC 146);
- a resolution, which incorrectly calculated the capital dividend account balance, by reducing the declared capital dividend to avoid the imposition of part III tax (5551928 Manitoba Ltd. (Re), 2018 BCSC 1482); and
- a deed conveying two parcels of land to an individual, by instead transferring one parcel to a corporation owned by the individual in order to avoid a tax assessment relating to that individual’s shareholder loan account (Buyting, 2017 NBQB 190).
The successful applicants in these cases were able to point to one or more documents that demonstrated a clear tax strategy. In Crean, an agreement in principle entered into by the purchaser and vendor revealed the parties’ intention to execute a direct sale, and an intervening step to the transaction was added by the court to give full effect to this agreement. In Manitoba, the directors’ resolution authorizing the capital dividend showed a specific intention to return capital to shareholders and deplete the capital dividend account. Finally, in Buytingthe applicant provided faxes from an accountant to a lawyer with clear instructions for the transfer of one parcel to the corporation.
Despite these successes, provincial courts have shown a general reluctance to grant rectification where the effect of the relief sought would fundamentally alter the underlying transaction. For example, rectification was not available to:
- convert a shareholder loan balance to a return of capital to avoid tax on unpaid shareholder loans (TechnoComm Solutions Inc., 2019 ONSC 924);
- cancel various steps taken in a reorganization and replace them with a new series of steps to alter the dissolution of a limited partnership and change the effective date of dissolution of its general partner (Canada Life, 2018 ONCA 562);
- substitute the name of a corporate borrower with its parent company’s name and interpose additional steps in a complex acquisition and reorganization transaction (Harvest Operations, 2017 ABCA 393); and
- retroactively allocate income to a corporate income and capital beneficiary of a personal trust (BC Trust, 2017 BCSC 209).
Provincial courts generally have been reluctant to exercise their inherent jurisdiction where rectification was not available. Instead, provincial courts have suggested that taxpayers use self-help alternatives, such as (1) passing director, shareholder, and/or trustee resolutions to retroactively correct records (which would not bind the CRA) and having the TCC adjudicate the consequences; (2) pursuing a professional negligence suit against the adviser responsible for the mistake; or (3) applying for a remission order.
There is a large grey area between what provincial courts have found permissible and impermissible. While the imposition of an intermediate step may not be fatal if it gives effect to a prior agreement (Crean), steps that would fundamentally alter the transaction may be precluded (Harvest Operations and Canada Life). It is uncertain to what degree one can alter a transaction while remaining within the framework provided byFairmont Hotels and not have the alteration characterized as impermissible retroactive tax planning.
Finally, note that where rectification is not available, other equitable remedies may be used to solve errors in documentation. One example is rescission, which was considered by the court but denied in Canada Life.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.