The Ontario Court of Appeal has dismissed the crown's appeal in Fairmont Hotels Inc v AG (Canada).(1)

Facts

In Fairmont(2) the taxpayer succeeded in an application for rectification of certain corporate transactions. On appeal, the crown argued that the lower court had misapplied the test for rectification because the parties had not determined the specific manner in which their intention to avoid tax would be carried out. In the crown's view, the lower court's judgment sanctioned retroactive tax planning.

Decision

The Ontario Court of Appeal disagreed:

"[8] In these circumstances, relying on this court's decision in Juliar, the application judge held that the respondent was entitled to rectify the relevant corporate resolutions to correct the mistaken share redemptions. This result, the application judge noted, would avoid the imposition of an unintended tax burden that the respondent had sought to avoid from the outset, as well as an unintended tax revenue windfall to the CRA arising from the mistaken share redemptions.

[9] On the factual findings of the application judge, set out above, and the binding authority of Juliar, we see no basis for intervention with the application judge's discretionary decision to grant rectification.

[10] Juliar is a binding decision of this court. It does not require that the party seeking rectification must have determined the precise mechanics or means by which the party's settled intention to achieve a specific tax outcome would be realized. 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.

[11] In this case, on the application judge's findings, the respondent had a specific and unwavering intention from the outset of its dealings with Legacy to ensure that the Legacy-related transactions were tax neutral and, to that end, that no redemptions of the relevant preference shares should occur. Nonetheless, by mistake, the redemptions were authorized by corporate resolutions.

[12] Contrary to the appellant's argument, in these circumstances, it was unnecessary that the respondent prove that it had determined to use a specific transactional device – loans – to achieve the intended tax result. That the respondent mistakenly failed to employ an appropriate transactional device to achieve the intended tax result does not alter the nature of the respondent's settled tax plan: tax neutrality in its dealings with Legacy and no redemptions of the preference shares in question.

[13] At the end of the day, therefore, Juliar and the application judge's factual findings, described above, are dispositive of this appeal. It is not open to a single panel of this court to depart from a binding decision of this court.

[14] The appeal is dismissed."

Comment

The Ontario Court of Appeal's decision in Fairmont is an important affirmation of the result and reasoning in Juliar v AG (Canada).(3)

Recently, the crown has been aggressively arguing in rectification cases that Juliar either was wrongly decided or should be narrowly applied (two Alberta cases have followed this argument: Graymar Equipment (2008) Inc v AG (Canada)(4) and Harvest Operations Corp v AG (Canada).(5)

However, in TCR Holding Corporation v Ontario(6) and Fairmont, the Ontario Court of Appeal has clearly rejected those arguments. This should put an end to the crown's arguments about Juliar – at least in Ontario.

For further information on this topic please contact Timothy Fitzsimmons at Dentons Canada LLP by telephone (+1 416 863 4511) or email (timothy.fitzsimmons@dentons.com). The Dentons website can be accessed at www.dentons.com.

Endnotes

(1) 2015 ONCA 441.

(2) 2014 ONSC 7302,

(3) (2000) 50 OR (3d) 728 (Ont CA).

(4) 2014 ABQB 154.

(5) 2015 ABQB 237.

(6) 2010 ONCA 233.

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