March 2017 Newsletter

A recent decision of the Supreme Court of Canada has seriously restricted the use of “rectification” to fix tax problems.

Here’s the background:

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?

Until recently, it was frequently possible to fix the problem by seeking “rectification” from a 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.

The reason rectification 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.

In some cases in recent years, the concept of rectification was expanded to include situations along the lines of, “if we’d known the tax consequences of this arrangement, we wouldn’t have done it”.

This changed on December 9, 2016. That was the day the Supreme Court of Canada released its decision in Fairmont Hotels.

In essence, rather than being available where “we would have done the transaction differently”, rectification is now available only where “we clearly agreed to do X but mistakenly wrote down Y”.

As the Supreme Court explained, rectification is “limited to cases where the agreement between the parties was not correctly recorded”, and “it may not change the agreement in order to salvage what a party hoped to achieve”. A party seeking rectification must bring “clear, convincing and cogent” evidence “that the true substance of its unilateral intention or agreement with another party was not accurately recorded” in the documents signed.

The rules for rectification in Quebec are the same as for the rest of Canada, per the Supreme Court’s parallel decision in Jean Coutu Group, released at the same time.

Last modified on March 14, 2017 12:00 am
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