On December 9, 2016, the Supreme Court of Canada released two landmark decisions which provided much-needed clarification on the doctrine of rectification in the tax context.
Rectification is an equitable remedy that allows courts to retroactively amend written documents which, due to some mistake, fail to express the true intentions of the interested parties. Over the past two decades, it has served as a useful tool for taxpayers to correct a variety of mistakes which have resulted in unintended tax consequences.
Traditionally, courts have limited rectification to fixing mistakes of a documentary nature. However, the Ontario Court of Appeal’s 2000 decision of Juliar v Canada,  OJ No 3706, 50 OR (3d) 728 expanded the use of rectification in the tax context by ruling that tax mechanisms could be rectified, rather than just documents describing such mechanisms. According to Juliar, courts had the power to amend (or even replace) a taxpayer’s chosen mechanism, provided the taxpayer always had a “common and continuing intention” to avoid taxes generally.
However, the recent Supreme Court of Canada decision of Fairmont Hotels Inc. v Canada, 2016 SCC 56 overruled Juliar by affirming the traditional view that rectification is strictly confined to harmonizing the words of written instruments with their “antecedent” (generally, oral) counterparts. Specifically, the Court in Fairmont held that rectification is “limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement” and that it is “not concerned with mistakes merely in the making of that antecedent agreement.” This approach accords with the Supreme Court’s previous decisions of Shafron v KRG Insurance Brokers (Western) Inc., 2009 SCC 6 and Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, which dealt with rectification in the non-tax context.
According to Fairmont, in order to receive rectification, an applicant must show the exact method by which the desired tax result was to be brought about. It is not enough to simply demonstrate that the transaction was intended to have a certain result. The following four requirements must be met:
- The parties must have reached a prior agreement whose terms are definite and ascertainable;
- The prior agreement must have still been effective when the instrument was executed;
- The instrument must fail to accurately record the prior agreement; and
- If rectified, the instrument would carry out the agreement.
The Supreme Court in Jean Coutu Group (PJC) Inc. v Canada, 2016 SCC 55 set forth a similar rectification analysis to be applied in the civil law context.
Fairmont and Jean Coutu Group were both 7-2 decisions in favour of the restrictive view of rectification. In both cases, Justice Abella wrote for the minority and expressed concerns that the majority’s analysis would lead to undeserved windfalls to Canada Revenue Agency. The majority dismissed her concerns, suggesting that an overly generous view of rectification would lend itself to abuse as a tool for retroactive tax planning, which is forbidden under the Canadian tax system. As Justice Brown wrote in Fairmont: “Rectification is not equity’s version of a mulligan.”
Neither Fairmont nor Jean Coutu Group dealt with the issue of statutory rectification, such as exists under section 236 of The Business Corporations Act (Saskatchewan). Accordingly, the Supreme Court did not indicate whether a different analysis is to be employed in cases of statutory rectification.
While Fairmont and Jean Coutu Group did not answer all of the outstanding questions regarding rectification in the tax context, the Supreme Court of Canada still provided much-needed guidance regarding the general analysis. More than anything, these cases demonstrate that when entering into tax-driven transactions, it is crucial to fully understand and document the desired tax effects and mechanisms used to be used.