http://www.ontariocourts.ca/decisions/2015/2015ONCA0441.pdf
Fairmont Hotels Inc v Attorney General of Canada (June 17, 2015 – 2015 ONCA 441).
This commentary is provided by guest contributor, Rebecca Jones, of Lenczner Slaght LLP.
Précis: In
Fairmont Hotels Inc v Attorney General of Canada, the Ontario Court of Appeal upheld the application judge’s granting of the equitable remedy of rectification to a taxpayer whose intention to achieve a particular tax result was mistakenly implemented. [Note: notwithstanding the case citation, the Crown was in fact the appellant in this decision.]
The factual background is as follows. From 2002 onwards, the respondent, Fairmont Hotels, intended to execute its loan arrangements with Legacy (a real estate investment trust in which Fairmont Hotels had an interest) on a tax neutral basis, such that foreign exchange gains would be offset by corresponding foreign exchange losses. This intention persisted despite the change in control of Fairmont in 2006, and the unwinding of the loan in 2007. However, a mistake made by a member of Fairmont Hotels’ management team (the redemption of preference shares that were not intended to be redeemed) led to adverse and unintended tax consequences. In light of this mistake, and despite the appellant’s argument that rectification would sanction impermissible retroactive tax planning, the application judge granted the respondent the remedy of rectification.
Decision: The Court of Appeal upheld the application judge’s granting of rectification. In so doing, the Court of Appeal relied on its prior decision in
Canada (Attorney General) v. Juliar, which held that “the critical requirement for rectification is proof of a continuing specific intention to undertake a transaction or transactions on a particular tax basis.”
The Court of Appeal rejected the appellant’s argument that
Juliar required, as a prerequisite to rectification, that the taxpayer prove that it had settled on a concrete plan for achieving its intended tax results before the mistake occurred. Instead, the Court held that the respondent’s failure to use an appropriate means to achieve its intended tax outcome, i.e., tax neutrality in its dealings with Legacy, was sufficient to justify rectification.
The Court of Appeal’s decision is one of a series of recent decisions in which Canadian courts have demonstrated a greater willingness to grant rectification to taxpayers. The decision of the Alberta Court of Queen’s Bench in
Baytex Energy Ltd v Canada (Attorney General) is another example.
The
Baytex case arose out of agreements made between Baytex Energy Ltd. (“BEL”) and Baytex Energy Trust (the “Trust”) on matters relating to a royalty regime under the
Income Tax Act. Due to an impending change to the
Income Tax Act, of which BEL and the Trust were aware, they intended to cease their former practice of transferring and effecting reimbursement of unearned income to avoid certain tax consequences. Due to a mistake, however, BEL and the Trust continued with their offsetting reimbursement practice. Upon discovering this mistake, they sought the assistance of professional advisers, who recommended that the parties continue with their offsetting reimbursement practice. This led to a series of audit inquiries from the CRA, which reassessed BEL and the Trust as having earned an additional $135 million and $528 million in income respectively.
The Court granted rectification on the basis that the agreement to continue with the transfer and reimbursement practice after the changes to the
Income Tax Act was not an accurate reflection of the parties’ common intention to cease such practices once the royalty regime had been eliminated. Rather, it was a mistake based on incorrect professional advice.
The Court of Appeal`s decision in
Fairmont Hotels, and the Alberta Queen`s Bench decision in Baytex, demonstrate Canadian courts’ willingness to grant rectification when faced with clear evidence of a taxpayer’s mistake in carrying out its intention to achieve a particular tax result. The mistake need not be a mistake in the implementation of a particular, concrete, transaction (as demonstrated by
Fairmont), and can arise despite a specific intention to take the mistaken step due to incorrect professional advice (as in
Baytex). Courts are awarding rectification despite vociferous arguments by CRA that rectification fosters retroactive tax planning.