Attorney General of Canada v. Juliar et al. [Indexed as: Canada (Attorney General) v. Juliar]
50 O.R. (3d) 728
[2000] O.J. No. 3706
Docket No. C33039
Court of Appeal for Ontario
Austin, Goudge and MacPherson JJ.A.
October 6, 2000
*Application for leave to appeal to the Supreme Court of
Canada dismissed with costs May 24, 2001 (Gonthier, Major and
Binnie JJ.). S.C.C. File No. 28304. S.C.C. Bulletin, 2001,
p. 938.
Taxation -- Corporate taxation -- Remedies -- Rectification -- Applicants transferring their shares in family holding company into separate holding company so they could operate family business independently -- Applicants receiving promissory notes for their shares instead of shares in new holding company -- Applicants erroneously believing that transaction would not trigger tax liability -- Intention to avoid tax being primary and continuing objective in structuring transaction -- Rectification of transaction permitted -- Exchange of shares for promissory note changed into exchange of shares for shares.
The applicants owned 50 per cent of the shares of A Co., a holding company that owned all of the shares of the family convenience store business. The female applicant's sister and the sister's husband owned the other 50 per cent of the shares of A Co. The applicants decided to transfer their shares to B Co., which was incorporated for that purpose. The female applicant's sister and her husband also decided to transfer their shares of A Co. into another holding company. The main reason for the transfers was to divide the business between the two families so that the new holding companies could be operated independently. The applicants' accountant was aware that the shares had been subject to a prior transfer and believed, on the basis of information provided by the applicants, that taxes had been paid upon that transfer. He directed that promissory notes be given as consideration for the A Co. shares. The accountant believed that the shares in A Co. were being transferred for an amount equal to or lesser than their cost base, so that there would be no capital gain from the transaction and no tax consequences. In fact, the information provided by the applicants to the accountant was either wrong or incomplete. Following an audit by Revenue Canada, the applicants were advised that the transaction fell, not within s. 85 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), but rather within s. 84.1 of the Act, thereby giving rise to the immediate liability to pay tax. Had the information given to the accountant been accurate, then the accountant's advice would have been sound and no tax on disposition would have been incurred. The applicants brought an application for rectification of the transaction by changing the exchange of shares for promissory notes into an exchange of shares for shares.
The application was allowed. The application judge held that there was clear and convincing evidence that the applicants had a common and continuing intention from the inception of the transaction to effect acquisition of their one-half interest in the family business by transfer of their shares in A Co. to B Co., and to do so on a basis that would not attract immediate liability for income tax on the transaction. The intention to postpone or avoid tax was not formed as a result of the assessment by Revenue Canada. It was an intended and fundamental aspect of the transaction from its inception. The purpose of avoiding taxes and maintaining the assets of the business determined the form of the transaction. The applicants expected no other effect. The mistake was common to the parties A Co. and B Co. The applicants had no expectation as to how the tax-neutral effect would occur except as the accountant might advise them. The application judge permitted rectification of the transaction. The Minister of National Revenue appealed.
Held, the appeal should be dismissed.
The court has a discretion to rectify where it is satisfied that the transaction did not carry out the intention of the parties. If a mistake is made in a transaction legitimately designed to avoid the payment of tax, there is no reason why it should not be corrected. The application judge was entitled to find that it was the intention of the applicants that the transaction would not trigger an immediate obligation to pay income tax.
APPEAL from a judgment allowing an application for rectification of a corporate transaction.
Re Slocock's Will Trust, [1979] 1 All E.R. 358 (Ch. D.), apld Other cases referred to 771225 Ontario Inc. v. Bramco Holdings Co. (1994), 1994 7240 (ON SC), 17 O.R. (3d) 571, 36 R.P.R. (2d) 295 (Gen. Div.), affd (1995), 1995 745 (ON CA), 21 O.R. (3d) 739, 43 R.P.R. (2d) 70 (C.A.), leave to appeal to S.C.C. refused (1995), 48 R.P.R. (2d) 320n, 198 N.R. 79n Statutes referred to Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, ss. 84.1, 85
Marie-Thérèse Boris, for appellant. Frank E. Bowman and David Manoochehri, for respondent.
The judgment of the court was delivered by
AUSTIN J.A.: --
Introduction
[1] This is an appeal by the Minister of National Revenue ("the Minister") from a decision of Cameron J. made September 23, 1999 [reported 1999 15097 (ON SC), 46 O.R. (3d) 104], permitting rectification of a corporate transaction in such a manner as to avoid liability for the immediate payment of income tax.
Facts
[2] Sam and Mary Gold operated a variety store business in Niagara Falls, Ontario. It was incorporated under the name Gold's Tobacco and Variety Limited. In 1989, the business was turned over to their daughters, Karen Juliar ("Karen") and Sandra Roff ("Sandra") and their respective husbands, Paul Juliar ("Paul") and Harvey Roff ("Harvey"), through the creation of 867871 Ontario Limited ("867") in which each daughter owned 60 shares and each husband owned 40 shares.
[3] By 1993, the Juliars and the Roffs were operating seven stores. In order to allow the two couples to operate independently of one other, it was decided to divide the business in half with the two halves being held by different corporations.
[4] Crawford Smith and Swallow had been the accountants of the business for many years. Mr. Niven ("Niven") of that firm was consulted and he in turn got in touch with Mr. Amadio ("Amadio") of Broderick Marinelli Amadio Hopkins and Kirkham, which firm had done the legal work for the business for many years. Amadio incorporated new companies, Juliar Holdings Ltd. ("Juliar Holdings") and Roffco Holdings Niagara Inc. ("Roffco"), and the shares in 867 held by the Juliars were transferred to Juliar Holdings and the shares in 867 held by the Roffs were transferred to Roffco.
[5] The Juliars and the Roffs decided amongst themselves how the assets were to be divided and after the transferring of the shares, the two corporations, Juliar Holdings and Roffco, carried on as two separate businesses.
[6] This continued until September 1996, when each of the Juliars received a letter from Revenue Canada to advise that an audit of Gold's Tobacco and Variety Limited had led to the conclusion that additional income tax was payable, $74,527.38 in the case of Karen and $39,224.14 in the case of Paul. In January 1997, reassessments to the same effect were received. The Juliars objected to the reassessments, but they were confirmed by Revenue Canada. Notices of confirmation were received in September 1997. The Juliars appealed in the Tax Court in December 1999, but have not proceeded with those appeals pending disposition of this application for rectification which was commenced May 7, 1998.
[7] The reason for the reassessment is not in issue. In the case of the Roffs, Amadio, acting on the basis of advice from Niven, drew [up] an agreement whereby the Roffs transferred their shares in 867 to Roffco and took back shares in Roffco in exchange. Such a transaction falls with the provisions of s. 85 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, which was designed to permit, inter alia, "roll overs" of property from one generation to another without giving rise to immediate liability or the payment of tax. Such payment is not avoided completely; rather it is simply deferred.
[8] In the case of the Juliars, the advice came to Amadio, not from Niven, but from Paul's new accountant, David Fast ("Fast"). Fast's advice was based on misinformation from Paul to the effect that tax had been paid on the transfer from Sam and Mary Gold to the Juliars. This was not, in fact, the case. On the basis of this advice, however, Fast advised Amadio to have the Juliars receive promissory notes in exchange for their shares of 867. As a result of this provision, the transaction did not fall within s. 85 of the Income Tax Act, but rather constituted a disposition of property falling within s. 84.1 of the Act, thereby giving rise to immediate liability to pay tax. Had the information Paul gave to Fast been accurate, then Fast's advice would have been sound and no tax on disposition would have been incurred. It was Fast's view that promissory notes would be easier to redeem than shares, if and when Juliar Holdings was in funds to redeem. The wisdom of this opinion is not challenge
[9] Upon the basis that the liability was the result of an error, the Juliars asked the Minister to consent to rectification of the transaction. This was declined and this application was brought.
[10] One additional fact must be noted. In the corporate restructuring, Paul also wished to protect his assets from any potential liability on a guarantee by him of a mortgage on a commercial property. This was done by transferring the shares of the mortgagor in a contemporaneous, but unrelated, transaction to Juliar Holdings, the shares of which were to be owned solely by Karen.
The Decision Below
[11] Cameron J. concluded that rectification should be allowed. In so concluding he relied both on facts as agreed between the parties and on additional findings of fact. Amongst the former were [at pp. 107-08]:
The Juliars did not anticipate that tax consequences would be triggered when restructuring the family business.
Karen and Paul received advice from Fast in respect of the tax consequences of the transaction. They were advised by him that the tax effect of transferring their shares would be nil or negligible. Fast believed this was the case because the shares had been subject to a prior transfer upon which, according to Paul's advice to Fast, taxes had been paid. Accordingly Fast believed the cost base of the shares was $200,000 for Paul and $270,000 for Karen and therefore, as the shares in 867 were being transferred to Juliar Holdings for an amount equal to or lesser than their cost base, it wouldn't matter whether promissory notes or shares were used because there would be no capital gain and, thus, no tax consequences.
Fast felt that since promissory notes could be used in the circumstances of this transaction, they were preferable because they would be easier to redeem when cash became available.
The shares transferred to Juliar Holdings had been subject to a prior "rollover" when they were transferred from Sam Gold, Karen and Sandra's father, to Karen and Sandra. The shares of Gold's Tobacco had been rolled into 867 in 1989 and were then gifted to Sandra and Karen on a tax deferred basis.
Fast understood from information provided to him by Paul that taxes were paid at that time on the capital gain and, therefore, whether this transaction proceeded using shares, promissory notes or cash, there would be no gain and no tax consequences.
Following the reassessments by Revenue Canada, Fast learned that taxes had not been paid following the transfer of shares from Sam Gold to his daughters and, therefore, the cost base was lower than he thought. This meant there was in fact a gain on the transfers to the Juliars and tax liability resulted.
[12] The Minister relies heavily upon the argument that "intention" in the context of rectification is referable to the purpose of a transaction and not to its consequences or side effects. The intention here was to divide the assets of 867 and to transfer them to Juliar Holdings and to Roffco, and that purpose was successfully accomplished.
[13] In this regard, Cameron J. made an additional finding [at p. 109] that "the Juliars had intended from a date prior to March 1993 that . . . these transactions would not trigger an obligation to pay income tax immediately."
[14] The Minister also relied on the decision in 771225 Ontario Inc. v. Bramco Holdings Co. (1994), 1994 7240 (ON SC), 17 O.R. (3d) 571, 36 R.P.R. (2d) 295 (Gen. Div.), affd (1995), 1995 745 (ON CA), 21 O.R. (3d) 739, 43 R.P.R. (2d) 70 (C.A.), leave to appeal to S.C.C. refused (1995), 48 R.P.R. (2d) 320n, 198 N.R. 79n. In that case, the principal of two corporations, one of which was a non-resident company, erred in purchasing lands in the name of the non- resident corporation. It was an error because as a result a much higher land transfer tax was payable. The trial judge, Feldman J., held that rectification did not apply because the matter of land transfer tax was not the purpose of the transaction, but rather merely a consequence of it.
[15] A majority of the Court of Appeal agreed with the trial judge's reasoning that rectification did not apply. The appeal was also put on the basis that equity would grant relief from a mistake. Galligan J.A. for the majority accepted that proposition, but went on to rule that equity would not grant such relief where there was, as in that case, an avenue for statutory relief (under the Land Transfer Tax Act, R.S.O. 1990, c. L.6). To grant equitable relief would in effect be to review the Minister's discretion. In addition, to exercise equitable discretion in the circumstances would run contrary to the rule in tax cases that the courts do not look with favour upon attempts to rewrite history to obtain more favourable tax treatment. Tax liability is based upon what happened, not upon what, in retrospect, the taxpayer wishes had happened.
[16] Grange J.A. dissented for the following reasons [at pp. 744-46 O.R.]:
With great respect, I do not think this is a case of rectification at all. Rectification is the changing of a document, normally a contract, to make it conform to the common intention of the parties. Here, the only parties concerned (other than Ms. Ho and her companies) are the vendor and the tax authorities. The former was not concerned with the identity of the purchaser and the latter was not a party to the transaction. What happened here did not call for rectification of the contract. What was needed was relief for the plaintiff from Ms. Ho's mistake in the performance of the contract, i.e., the naming of the grantee in the deed of purchase.
In my view, therefore, the court should exercise its equitable jurisdiction to correct the mistake made by the appellant resulting from her mistaken view of the status of 002.
I would therefore allow the appeal and order that the direction of title in favour of 648002 Ontario Limited be declared null and void. I would further order that title be taken as directed by Ms. Ho in favour of a company which is a resident for land transfer tax purposes and that the register of titles for the lands the subject of this action be amended nunc pro tunc to that effect.
[17] Cameron J. distinguished Bramco on two grounds [at p. 113]:
First, in this case the intention to avoid income tax was a primary and continuing objective of the applicants from the inception of the transaction. In Bramco, the income tax objective was a primary and continuing objective; the land transfer tax objective did not arise until after the assessment. Second, the objective of protection of Paul's assets was collateral to and clearly subordinate to the objective of tax avoidance. In Bramco the land transfer tax liability was the reason for the attempted change.
(Emphasis added)
[18] He went on to discuss the significance of tax consequences on commercial transactions and noted [at p. 114] that:
Division of a family business among the children of the founder of the business is not an uncommon occurrence and is invariably intended to be effected with little or no cash and on a basis that does not attract immediate liability for income tax.
[19] He found on the evidence [at p. 114] that the Juliars had a common and continuing intention from the outset to transfer their half interest in the business of Juliar Holdings and to do so "on a basis which would not attract immediate liability for income tax on the transaction."
[20] He also found [at p. 114] that:
. . . the structure of the transaction would have been in accordance with s. 85 of the Income Tax Act had the mistake in determining the cost of the 867 shares not been made. This intention is confirmed by the advice of Niven to the Roffs in a parallel transaction.
[21] Cameron J. also found that Paul's objective of protecting his assets from a possible claim on his guarantee of a mortgage was clearly a subordinate objective, the opportunity for which was based on Fast's advice based on the mistaken information. The judge below noted [at p. 115] that:
The objective of asset protection could not have been achieved to the extent of the value of the promissory note given to Paul.
[22] He concluded [at p. 115] that "I am convinced that the asset protection would have been quickly sacrificed to the dominant objective of avoiding tax on the share transfer as noted earlier." In other words, asset protection was secondary and would have been scrapped had the new accountant been made aware of the non-payment of tax on the 1989 transaction.
[23] Cameron J. concluded his reasoning as follows [at p. 115]:
Denial of the application would place on the Juliars a heavy burden which they were entitled to avoid and which they sought to avoid from the inception of the transaction. It would yield to Revenue Canada a premature gain solely because of an error in understanding or communication between Paul and Fast.
Analysis
[24] I agree entirely with the reasons and conclusions of the judge below.
[25] The trial judge effectively found that the true agreement between the parties here was the acquisition of the half interest in the Gold's tobacco business by transfer of shares in 867 to Juliar Holdings in a manner that would not attract immediate liability for income tax. In these circumstances, that had to be, not a transaction pursuant to s. 84.1 of the Income Tax Act, but a shares for shares transaction. Hence, it was appropriate for the trial judge to permit rectification to reflect that transaction.
[26] The appellant quarrels with the finding of fact that "it was the intention of the Juliars that the transactions would not trigger an immediate obligation to pay income tax." The appellant argues that this finding "was based more on an inference than on clear, direct, and admissible evidence."
[27] This latter is a fair comment. It is possible, even probable, that no one mentioned income tax throughout the nine or 10 months in issue. The plain and obvious fact, however, is that the proposed division had to be carried out on a no immediate tax basis or not at all.
[28] The affidavit of Amadio is perfectly clear in that regard. He was cross-examined at some length on his affidavit, but that point was not touched.
[29] Evidence was not taken from Niven, but his notes of a conversation with Amadio on March 10, 1993, at the outset of these transactions, has a reference to "sec 85" marked on one page five times, including opposite the notation "Paul will trans his shares of 867871 Ont. Ltd. to Juliar Holdings" and again opposite an identical note respecting Karen. Clearly, Niven's understanding and intention was to proceed under s. 85. Paul and Karen's intention would be the same as Niven's in these circumstances.
[30] The Minister also quarrels with the finding of Cameron J. that the asset protection sought by Paul was a collateral objective which was subordinate to and would have been sacrificed to the dominant objective of not triggering an immediate tax liability. The Minister argues that there was no clear, direct and admissible evidence upon which to base such finding.
[31] That objection is well taken as against Paul. His affidavit did not deal with that subject, nor was he cross- examined on the subject. Amadio, however, did deal with it. In his affidavit he said that "Paul Juliar's attempted asset protection scheme was an unimportant, minor, non-essential idea that was added to the transaction at Paul Juliar's request."
[32] In cross-examination, he denied that his opinion was "entirely speculative." He said it was based on "things that went on and knowing the client." Amadio's evidence made it clear that if there were going to be tax liability, there would have been no transaction. In the circumstances, Cameron J. was entitled to draw the inference he did respecting the relative importance of the asset protection scheme.
[33] In Re Slocock's Will Trust, [1979] 1 All E.R. 358 (Ch. D.) the court was concerned with an application for rectification of a deed designed to reduce or avoid payment of tax on the death of a party, but which deed mis-described the property involved due to a solicitor's error. In granting rectification, Graham J. said the following at pp. 361 and 363:
The general principle in regard to rectification is clearly stated in Snell's Principles of Equity [now Snell's Equity, 30th ed. p. 693] in the following words:
"If by mistake a written instrument does not accord with the true agreement between the parties, equity has power to reform, or rectify, that instrument so as to make it accord with the true agreement. What is rectified is not a mistake in the transaction itself but a mistake in the way in which that transaction has been expressed in writing. `Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of contracts'."
The true principles governing these matters I conceive to be as follows. (1) The court has a discretion to rectify where it is satisfied that the document does not carry out the intention of the parties. This is the basic principle. (2) Parties are entitled to enter into any transaction which is legal, and, in particular, are entitled to arrange their affairs to avoid payment of tax if they legitimately can. The Finance Acts 1969 and 1975 tell them explicitly how they can do so in the case of estate duty and capital transfer tax. (3) If a mistake is made in a document legitimately designed to avoid the payment of tax, there is no reason why it should not be corrected. The Crown is in no privileged position qua such a document. It would not be a correct exercise of the discretion in such circumstances to refuse rectification merely because the Crown would thereby be deprived of an accidental and unexpected windfall. (4) As counsel for the trustees submitted, neither Whiteside v. Whiteside [[1949] 2 All E.R. 913] nor any other case contains anything which compels the court to the conclusion that rectification of a document should be refused where the sole purpose of seeking it is to enable the parties to obtain a legitimate fiscal advantage which it was their common intention to obtain at the time of the execution of the document.
[34] I agree with these propositions and it appears to me that the facts of the instant case fall squarely within them. I would therefore dismiss the appeal with costs.
Appeal dismissed.