Court File and Parties

COURT FILE NO.: CV-16-11423-00CL DATE: 20160627 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

RE: Slate Management Corporation, Applicant AND: Attorney General of Canada, Respondent

BEFORE: Hainey J.

COUNSEL: Geoff R. Hall, for the Applicant Diana Aird, for the Respondent

HEARD: June 22, 2016

ENDORSEMENT

Overview

[1] This is an application by Slate Management Corporation for a rectification order with respect to the amalgamation of three corporations.

[2] The amalgamation of three corporations was undertaken by Slate Asset Management LP (“SLAM”). According to SLAM, it intended to achieve a specific tax outcome by using the “tax bump rules” under the Income Tax Act. The outcome would have been achieved if the amalgamation had been undertaken sequentially in two steps: an amalgamation involving two of the three corporations, followed by a second amalgamation. Instead the amalgamation was effected in one step and SLAM’s intention to achieve the tax outcome was defeated. The error in the amalgamation occurred because SLAM did not appreciate that a two-step amalgamation was required to achieve the tax outcome and consequently it was not conveyed by SLAM to the lawyers who effected the amalgamation.

[3] The amalgamation took place on January 1, 2015. It involved the amalgamation of Slate Capital Corporation (“SCC”), Huntingdon Capital Corp. (“HCC”) and Slate GTA Suburban Office Inc. (“GTA”) to form Huntingdon Capital Corp. (“New HCC”). New HCC changed its name to Slate Management Corporation (“Slate”) on August 4, 2015.

[4] Slate was later advised that the tax outcome it had hoped to achieve through the acquisition of HCC by SCC and the subsequent amalgamation was not available because the amalgamation took place in a single step rather than sequentially in two steps.

[5] According to the applicant, SLAM had a continuing intention to achieve the tax outcome by using the tax bump rules. If the transaction had been carried out in a two-step rather than a one-step amalgamation, Slate’s corporate reorganization would have satisfied the provisions of the Income Tax Act (Canada) and it would have achieved tax savings.

[6] Slate submits that it should not face adverse tax consequences because of an error in how the transaction was structured which affects its form but not its substance.

Issue

[7] Does the applicant meet the test for rectification of the amalgamation?

Positions of the Parties

[8] Mr. Hall, on behalf of the applicant, submits that the amalgamation should be rectified because the parties had a common, continuing intention to use the tax bump rules for Canadian federal income tax purposes upon the amalgamation of SCC and HCC. That common intention remained unchanged when the amalgamation was effected but the amalgamation mistakenly did not conform to the parties’ common prior intention.

[9] Ms. Aird, on behalf of the respondent, submits that the applicant has not satisfied the evidentiary burden of establishing that there was a continuing specific intention to use the tax bump rules because there is no evidence of a clear decision to use the tax bump rules and it was never communicated to the lawyers who effected the amalgamation on behalf of SLAM.

Analysis

[10] The test that I must apply is set out in two decisions of the Ontario Court of Appeal: Juliar v. Canada (Attorney-General) (2000), 50 O.R. (3d) 728 and Fairmont Hotels Inc. v. Canada (Attorney General), 2015 ONCA 441. In Fairmont Hotels the Court stated as follows at para. 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] Although leave to appeal to the Supreme Court of Canada has been granted in respect of the Ontario Court of Appeal’s decision in Fairmont Hotels, I agree with the applicant’s counsel that this does not justify an adjournment of this application for the reasons outlined in paras. 11-13 of the applicant’s reply factum.

[12] In considering whether the applicant has satisfied the test in Juliar, the standard of proof I must apply is the ordinary standard of proof in civil cases of proof on a balance of probabilities: McLean v. McLean, 2013 ONCA 788, at paras. 10, 11, 39-43. In other words, I must consider all of the evidence and determine whether it is more probable than not that the parties had a continuing specific intention to make use of the tax bump rules in carrying out the amalgamation.

[13] As Newbould J. noted at para 43 in Fairmont Hotels, this is not a case in which tax planning has been done on a retroactive basis. The parties’ intention from the outset was to structure the transaction to take advantage of the tax bump rules. The single-step amalgamation was mistakenly chosen as a means of effecting the transaction.

[14] I am satisfied on the collective strength of the following evidence that it is more probable than not that the parties did have a continuing specific intention to achieve the amalgamation in accordance with the tax bump rules under the Income Tax Act:

• The KPMG report concerning the amalgamation of SCC with HCC that was provided on July 31, 2014, suggests using the tax bump rules and states as follows at page 20:

  The shares of Target should be acquired using an AcquisitionCo and subsequently, Target should be wound-up into AcquisitionCo or Target and AcquisitionCo should amalgamate.

• Slate Properties’ e-mail message to KPMG dated October 24, 2014, discussing the “bump” and instructing KPMG to perform the “bump calculation”.
• KPMG’s detailed “Calculation of “Bump” under Paragraph 88(1)(d) of the Income Tax Act” prepared for Slate Capital Corp. dated November 25, 2014.
• The Arrangement Agreement between SCC and HCC dated August 12, 2014, in which HCC agreed in Article 5 to “not knowingly take … any action or enter into any transaction … that could reasonably be expected to have the effect of materially reducing or eliminating the amount of the tax cost “bump” pursuant to paragraphs 88(1)(c) and (d) of the Tax Act”.
• The evidence of Ramsey Ali, General Counsel to SLAM, which I accept, that “It was always the continuing intention of SLAM, SCC and HCC to obtain the bump … as part of their tax planning”. Mr. Ali reiterated this under cross-examination at questions 80, 146 and 186.

[15] I am also satisfied on the strength of Mr. Ali’s evidence that the intention to make use of the tax bump rules was formed at the inception of the transaction and influenced the price paid by SCC for the shares of HCC.

Conclusion

[16] For these reasons, the application is granted on the terms of the draft order contained in the application record with the revised Schedule “A” provided to me at the hearing of the application and attached to this endorsement.

Costs

[17] The applicant is entitled to its costs of the application. The parties have agreed upon an all-inclusive amount for costs of $20,000. The applicant is awarded all-inclusive costs of $20,000 to be paid by the respondent within 30 days.

HAINEY J. Date: June 27, 2016