Tax planning sometimes goes wrong.
Transactions executed for tax purposes often involve corporate reorganizations, contracts, issuing new classes of shares, mergers, transfers, etc. What happens if someone forgets to sign the right document, or the lawyers do not draft the right documents to make the transaction work?
Or worse yet, what happens if you or your corporation engage in some transaction, such as a real estate deal, setting up a trust, or a transfer of property within a family group, and aren’t properly advised about the tax consequences, and a huge tax problem results?
Surprisingly, it may be possible to fix the problem by going to Court. Not the Tax Court of Canada, which is the only Court that can hear your tax appeal, but the superior court of the province whose law governs the corporation or the transaction. In Ontario, this is the Ontario Superior Court of Justice; in BC, Nova Scotia, PEI and Newfoundland/Labrador, it is the province’s Supreme Court; in Alberta, Saskatchewan, Manitoba, and New Brunswick, it is the Court of Queen’s Bench; in Quebec it is the Superior Court.
The reason this works is that the province’s superior court has the sole right under the Constitution Act, 1867 to determine matters of “property and civil rights in the province”. The Tax Court of Canada, on a tax appeal, is required to apply provincial law to determine the status and meaning of such things as contracts and corporate documents and, if the province’s superior court has issued a formal Order deeming a contract to have included a particular provision or deeming a corporation to have issued a particular class of shares, the Tax Court is required to accept that ruling as determining those matters.
One can apply to the superior court for a retroactive order “rectifying” a contract or document. The Court may be quite sympathetic, as long as you are simply trying to fix a mistake and get the effect you intended, or would have intended if you had known about the problem.
Sometimes a court will apply rescission instead of rectification, so as to cancel a contract completely.
If such a Court order can be obtained (whether rectification, rescission or a “declaratory order”), it will effectively be binding on the Canada Revenue Agency and the Tax Court for tax purposes.
The limits of rectification are still being tested in the Courts. Note that rectification in the provincial superior courts cannot be used to remedy a failure to file a document with the CRA on time, since that is a matter of federal jurisdiction. The provincial superior courts can make findings of fact that the CRA must accept for purposes of determining what transaction took place, but these courts cannot intrude directly on CRA administration.
The CRA’s Income Tax Technical News No. 22 acknowledges that rectification is valid and that the CRA will generally accept a Court order rectifying past transactions. However, if you are seeking a rectification order your lawyer should notify the CRA’s lawyers and the Department of Justice, ahead of time and seek their agreement not to oppose your application.