Court of Appeal for Ontario

Date: 2017-10-04 Docket: C62491

Panel: Hoy A.C.J.O., van Rensburg and Roberts JJ.A.

Between

Slate Management Corporation Applicant (Respondent in appeal)

and

The Attorney General of Canada Respondent (Appellant)

Counsel

For the Respondent: Geoff R. Hall and Ryan MacIsaac

For the Appellant: Christa Akey and Diana Aird

Heard: June 21, 2017

On Appeal

On appeal from the order of Justice Glenn A. Hainey of the Superior Court of Justice, dated June 27, 2016, with reasons reported at 2016 ONSC 4216.

Reasons for Decision

Hoy A.C.J.O.:

Background

[1] The Attorney General of Canada (the "AG") appeals a rectification order. For the following reasons, I agree with the respondent Slate Management Corporation ("Slate") that the appeal is moot and this court should not exercise its discretion to hear it.

[2] On January 1, 2015, three subsidiaries of Slate Asset Management LP ("SLAM") amalgamated under the Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA"), in a single step.

[3] SLAM intended to increase the cost amount of the real estate owned by Huntingdon Capital Corp. ("HCC"), one of its amalgamating subsidiaries – obtaining what is colloquially referred to as a "tax bump" – through the amalgamation. Increasing the cost amount of the properties would reduce the amount of capital gains tax payable on any subsequent disposition.

[4] SLAM later learned that it had not achieved its intended tax outcome because it amalgamated the three subsidiaries in a single step. Under s. 87(11) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), a "bump" is only available on an amalgamation where a parent amalgamates with one or more of its wholly-owned subsidiaries. To achieve its objective, SLAM should have effected the amalgamation of the three subsidiaries in two steps: first, SLAM's wholly-owned subsidiary, Slate Capital Corporation ("SCC"), should have amalgamated vertically with its wholly-owned subsidiary HCC; second, the corporation resulting from the amalgamation of HCC and SCC should have amalgamated horizontally with the third wholly-owned subsidiary of SLAM and their "sister" corporation, Slate GTA Suburban Office Inc. ("GTA").

[5] On June 9, 2016, Slate applied for a rectification order.

[6] By order dated June 27, 2016 (the "rectification order"), the application judge granted the relief Slate had requested, including: deeming the January 1, 2015 single-step amalgamation (the "initial amalgamation") not to have occurred; deeming in substitution the amalgamation to have occurred in the required two-steps on January 1, 2015 (the "two-step amalgamation"); approving a plan of arrangement under the OBCA deeming the initial amalgamation not to have occurred and the required two-step amalgamation to have occurred on January 1, 2015, nunc pro tunc; and directing the Director under the OBCA to cancel the certificate of amalgamation in respect of the initial amalgamation and endorse the Articles of Arrangement pursuant to s. 183 of the OBCA with a certificate dated January 1, 2015.

[7] On July 26, 2016, the AG served a notice of appeal of the rectification order. It did not seek a stay of the rectification order pending appeal.

[8] On August 2, 2016, the plan of arrangement was implemented. This was more than five weeks after the application judge granted the rectification order.

[9] On December 9, 2016, the Supreme Court of Canada released its decision in Fairmont Hotels Inc. v. Canada (Attorney General), 2016 SCC 56, [2016] 2 S.C.R. 720, overruling the test for rectification applied by the application judge, and clarifying the test for rectification in a tax context.

[10] The AG appeals the rectification order, arguing that Slate does not meet the test in Fairmont and that the rectification order should be set aside. It seeks an order cancelling the certificate of arrangement and reinstating the certificate of amalgamation issued on January 1, 2015. In the alternative, it argues that this court could order the filing of a new plan of arrangement, undoing the plan of arrangement effected in August of 2016. In the further alternative, it asks that this court find as a fact that the original amalgamation reflects Slate's true legal status.

[11] Slate argues that the effect of the Supreme Court of Canada's decision in Norcan Oils Ltd. v. Fogler, [1965] S.C.R. 36 is that this court cannot overturn the plan of arrangement approved as part of the rectification order; therefore, the AG's appeal of the rectification order is moot, and there is no reason for the court to exercise its discretion to hear the appeal. Further, Slate argues that the order below satisfies the new test in Fairmont in any event, and that this appeal ought to be dismissed.

Analysis

(1) The Principle in Norcan Renders the Appeal Moot

(i) The Principle in Norcan

[12] In Norcan, the court at first instance granted an order approving the amalgamation of two companies under Alberta's corporate legislation and the corporate registrar accordingly issued a certificate of amalgamation. One of the shareholders appealed. The Appellate Division of the Supreme Court of Alberta allowed the appeal approximately ten months after the certification of amalgamation had been issued. The Supreme Court allowed the subsequent appeal and restored the initial order approving the amalgamation.

[13] Justice Martland, writing for the majority of the Supreme Court, explained that upon the certificate of amalgamation being issued, the amalgamating companies became one company which "possessed all the property rights, privileges and franchises and became subject to all the liabilities, contracts and debts of each of the amalgamating companies." (Norcan, at p. 36) The amalgamated company had existed and done business on its own account since the amalgamation, including entering into agreements, obtaining a loan, and incurring trade obligations.

[14] He noted that, in the absence of a valid stay of proceedings, the enabling legislation required the parties to file the amalgamation agreement and approving order with the registrar and required the corporate registrar to issue the certificate of amalgamation. The filing of the notice of appeal did not stay or invalidate the approving order. He explained, at p. 44, that:

…the whole purpose for which the order was made was fulfilled, a certificate of amalgamation was issued, and rights and interests have been acquired by other persons against and in the amalgamated company, upon the strength of that certificate.

He also explained that any person making a contract with the amalgamated company was "entitled to rely upon the certificate [of amalgamation] as sufficient basis for the capacity of the amalgamated company so to do."

[15] Finally, Martland J. observed that the Alberta corporate legislation contained no provision for the revocation of such a certificate. He concluded that the Appellate Division had no power to revoke the certificate and the setting aside of the approving order could have no effect.

(ii) The Application of Norcan in This Appeal

[16] Norcan was not decided in the context of an application for rectification, and it does not stand for the proposition that the court cannot order the revocation of a certificate (whether a certificate of incorporation, amendment, amalgamation or arrangement) issued by the Director under corporate legislation unless the corporate legislation authorizes its revocation. While commercial certainty is important, it is also important that courts be able to relieve persons from the effect of their mistakes.

[17] In TCR Holding Corp. v. Ontario, 2010 ONCA 233, this court held that an application judge has equitable authority to set aside an amalgamation nunc pro tunc based on the superior court's equitable jurisdiction to relieve persons from the effect of their mistakes. Slate apparently accepts this: while the OBCA contains no provision for the cancellation of a certificate of amalgamation, Slate sought and obtained an order from the application judge that among other things directed the Director under the OBCA to cancel Slate's certificate of amalgamation.

[18] In my view, if there is authority to direct the Director to cancel a certificate of amalgamation and endorse the articles of arrangement nunc pro tunc with a certificate dated January 1, 2015 incident to a rectification order, there is authority to order the Director to cancel that certificate of arrangement and reinstate the certificate of amalgamation if it is determined on appeal that the applicant was not entitled to rectification.

[19] However, in the exercise of that authority, the court should be guided by the principle in Norcan. In my view, where, as here: (1) the Director under the OBCA issues a certificate pursuant to a rectification order; (2) the appellant could reasonably have sought a stay of the rectification order pending appeal; (3) the court is not satisfied that no third party acted, directly or indirectly, in reliance on the certificate issued pursuant to the rectification order and would not be prejudiced by its revocation; and (4) there are no special circumstances which justify exercising the power to cancel the certificate, thereby undermining certainty in a court-approved corporate fundamental change, the principle in Norcan requires the court to decline to exercise its authority to order the revocation of that certificate or otherwise unwind the court-approved corporate fundamental change.

[20] The AG is a sophisticated party. It had ample time to seek a stay of the rectification order and provided no explanation why it did not do so.

[21] I am not persuaded that no third party acted, directly or indirectly, in reliance on the certificate of arrangement issued pursuant to the rectification order and would not be prejudiced by its revocation.

[22] While the AG is correct that the relief requested would not undermine third party reliance on the existence of the amalgamated company (as was the case in Norcan), Slate has provided evidence that third parties have relied on the financial consequences of the plan of arrangement implemented pursuant to the rectification order.

[23] Slate's General Counsel deposed that, in January 2017, Slate renewed and increased a revolving line of credit with one of its lenders and the lender, in renewing and increasing the line of credit, "relied upon, among other things, Slate's current financial statements which reflected the tax bump benefit it obtained through the two-step amalgamation." Slate's General Counsel further deposed that Slate provided copies of its updated financial statements to another lender under a credit facility that pre-dates the January 1, 2015 amalgamation.

[24] The General Counsel's evidence that third parties indirectly relied on the certificate of arrangement was not challenged through cross-examination and the AG did not provide any evidence to contradict it. It is not disputed that the financial impact of the "bump" achieved through the plan of arrangement is material to Slate. It is reasonable to think it may also have been significant to the lender which increased the credit extended to Slate.

[25] Finally, fraud is not alleged and there are no other special circumstances which justify exercising the power to cancel the certificate of arrangement.

[26] The principle in Norcan also requires the court to decline to order the alternate relief the AG seeks. This relief, whether in the form of an order directing Slate to file a new plan of arrangement unwinding the plan of arrangement approved by the application judge, or an order declaring that the original amalgamation reflects Slate's true legal status, is also a means of unwinding a court-approved corporate fundamental change following its implementation. Again, the AG could have obtained a stay of the rectification order but failed to do so; I am not persuaded that no third party acted, directly or indirectly, in reliance on the certificate of arrangement issued pursuant to the rectification order and would not be prejudiced by the unwinding of the transaction; there are no special circumstances justifying unwinding the court-approved transaction.

[27] Because Norcan, properly interpreted, would not permit this court to give effect to a decision that Slate fails to meet the test for rectification in Fairmont, I find that this appeal is purely academic.

(2) This Court Should Not Exercise Its Discretion to Hear the Appeal

[28] Once a court determines that an appeal is moot, it is necessary to decide whether the court should nonetheless exercise its discretion to hear the case: Borowski v. Canada (Attorney General), [1989] 1 S.C.R. 342, at p. 353. Three factors are relevant in determining whether a court should entertain a moot appeal: (i) the presence of an adversarial context that will ensure that the issues are well and fully argued; (ii) concern for judicial economy; and (iii) awareness of the court's proper law-making function: Borowski, pp. 358-363.

[29] Considering these factors, I am not persuaded that the court should exercise its discretion to hear the appeal. While the appeal involves two sophisticated parties represented by counsel and its resolution would not intrude on the role of the legislative branch of government, the second factor weighs heavily against hearing it.

[30] There are no special circumstances in this case that justify the use of scarce judicial resources to resolve the appeal: it will not have a practical effect on the rights of the parties; it does not entail an important issue that might independently evade review or of which a resolution is in the public interest; the appeal is not of jurisprudential importance. It concerns the application of the recently revised test for rectification to very particular facts. As a result, there is no social cost in leaving the matter undecided.

Disposition

[31] For the above reasons, I would quash the appeal. I would order that Slate be entitled to costs in the agreed-upon amount of $25,000, inclusive of disbursements and HST.

Released: October 4, 2017

"Alexandra Hoy A.C.J.O."

"I agree K.M. van Rensburg J.A."

"I agree L.B. Roberts J.A."