Rectification is an equitable remedy that allows a court to correct errors in a written document, such as a contract or legal instrument, when the document fails to reflect the true intentions of the parties. In a series of decisions, the Supreme Court of Canada (SCC) significantly limited the availability of rectification in the tax context.1 However, Dentons' recent success before the Ontario Superior Court (Commercial List), with legal counsel provided by Douglas Stewart, Jacob Yau and Caroline Harrell, demonstrates that while rectification may be down, it's not out. In appropriate situations rectification may meet the approval of the Department of Justice's Rectification Committee and the Court.
Slightham
In Slightham et al. v. The Attorney General of Canada (Slightham),2 the applicants sought an order rectifying two trust deeds on a retroactive basis. The trust deeds inadvertently prohibited the trustees from distributing amounts received from a family operating company (Opco) to a corporate beneficiary of the trusts (Holdco). Unaware of the mistake, the trustees distributed dividends received from Opco to Holdco and the trusts claimed deductions in respect thereof. The Canada Revenue Agency (CRA) reassessed the trusts to deny the deductions, on the basis that the distributions were prohibited by the terms of the trust deeds. The trustees attempted to correct the error by amending the trust deeds, however, the CRA took the position that it would only accept amendments to the trust deeds if they were made pursuant to a court order, and did not oppose the application.
In concluding that rectification was appropriate in the circumstances, Osborne J. carefully considered the jurisprudence, which prohibits rectification where its purpose is to achieve retroactive tax planning. His Honour distinguished the present case from Canada (Attorney General) v. Fairmont Hotels Inc. (Fairmont) and Canada (Attorney General) v. Collins Family Trust on the basis that the parties were not trying to amend their agreement to avoid unintended tax consequences, rather, they sought to amend a written document that did not reflect their agreement.
Osborne J. determined that test set out in Fairmont was satisfied in this case. There was clear, consistent evidence that a prior agreement existed and that the parties always intended that the trustees could allocate dividends from Opco to Holdco. This was evidenced by affidavits from all parties and their advisors, corroborating contemporaneous documentation (e.g., closing agenda drafts), and the subsequent conduct of the applicants and their advisors.
Key takeaway
As the SCC commented in Fairmont, "rectification is not equity's version of a mulligan," so taxpayers cannot use rectification merely to avoid an unintended tax consequence. However, provided the test set out in Fairmont is met, there remains situations where rectification is available, even if it may cure an unforeseen tax result.
Obtaining an order for rectification can be a challenging and lengthy process, which includes putting together a clear, thorough, and persuasive record before the court and working collaboratively with the Department of Justice's Rectification Committee. Dentons' civil and tax litigation team has the expertise and a history of success in navigating rectification applications, including on an urgent basis.
Footnotes
1. See Canada (Attorney General) v Fairmont Hotels Inc., 2016 SCC 56 ; Jean Coutu Group (PJC) Inc. v Canada (Attorney General), 2016 SCC 55; and Canada (Attorney General) v Collins Family Trust, 2022 SCC 26.
2. 2023 ONSC 6193.
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