Canada (Attorney General) v. Fairmont Hotels Inc. – SCC Update on Rectification – Canadian Tax Lawyer Analysis – Part III
I and II of this article provided background on rectification in a Canadian tax context and reviewed the facts and judicial history of Canada (Attorney General) v. Fairmont. Part III of this Toronto tax lawyer tax rectification article discusses the Supreme Court of Canada’s decision and its tax planning implications.
Supreme Court of Canada Decision – Canada (Attorney General) v. Fairmont Hotels Inc
The Supreme Court of Canada allowed the CRA appeal and found that Fairmont did not meet the requirements for rectification. Although Fairmont demonstrated a continuing intention to maintain foreign exchange tax neutrality, that intention alone is not sufficient to qualify for rectification. The Supreme Court emphasized that the role of rectification is to correct errors in the recording the terms of an agreement in a written instrument. The parties must have had an agreement in mind with definite and ascertainable terms which they failed to accurately record as a written instrument. In such situations, the Court will use rectification to alter the written instrument so it reflects the terms of the antecedent agreement.
The Supreme Court took the position that it is relevant that Fairmont never had a specific plan in mind as to how they were going to achieve foreign exchange tax neutrality for their subsidiaries. This meant that there wasn’t an agreement with definite and ascertainable terms that Fairmont failed to record. Fairmont’s desire to protect its subsidiaries and maintain tax neutrality by unspecified means was not sufficient to qualify for rectification. The Supreme Court stated that cases like Juliar v. Canada (Attorney General) which allowed taxpayers to qualify for rectification on the basis of their tax objectives for a transaction alone are inconsistent with the Supreme Court’s jurisprudence in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. and Shafron v. KRG Insurance Brokers (Western) Inc. which emphasize that rectification’s role is to restore the parties to an agreement to their original bargain, not repair an error in judgement. The Supreme Court also relied on the principle established in Shell Canada Ltd. v. Canada that taxpayers should expect to be taxed based on what they actually did, not what they could have done. If you would like a more in depth explanation of this tax rectification decision and how it impacts you, please contact one of our knowledgeable Toronto tax lawyers.
This decision is significant because the lower courts have frequently proved willing to grant rectification on the basis of an intention to achieve a certain tax result even in the absence of the parties having worked out the means of properly achieve that result at the time of the transaction. This decision will likely narrow the scope of tax problems that can be fixed through rectification. Taxpayers will need to be able persuade the Court that they had a specific plan in mind that would achieve their tax objectives for the transaction, and not merely that they had those specific tax objectives. This makes proper tax planning involving a detailed written tax planning memo which sets out the taxpayer’s objectives and the intended means for achieving them even more essential than prior to the decision. Without such a written tax plan it is unlikely that rectification will be granted. If you need help determining how changes to the law of tax rectification will impact your tax situation, please consider speaking with one of our expert Toronto tax lawyers.
Read previous part of this article SCC Update on Tax Rectification Part 2.