The Canada Life Insurance Company of Canada v. The Attorney General of Canada et al.

[Indexed as: Canada Life Insurance Co. of Canada v. Canada (Attorney General)]

Ontario Reports Court of Appeal for Ontario Sharpe, G.J. Epstein and van Rensburg JJ.A. June 21, 2018

141 O.R. (3d) 321 | 2018 ONCA 562

Case Summary

Equity — Mistake — Applicant and affiliates carrying out transaction designed to realize tax loss — Transaction failing to achieve desired result because of mistake — Exercise of court's equitable jurisdiction to relieve against mistake not available to retroactively alter transaction in order to achieve tax objective.

Equity — Rescission — Applicant and affiliates carrying out transaction designed to realize tax loss — Transaction failing to achieve desired result because of mistake — Applicant seeking equitable remedy of rescission to set aside part of transaction — Partial rescission not being recognized equitable remedy — Applicant not meeting requirements for rescission in any event — Alternative remedy available to applicant in form of appeal from tax assessment.

Facts

The applicant and certain of its affiliates carried out a series of transactions and events (the "transaction") in order to realize a tax loss to offset unrealized foreign exchange gains accrued in the same taxation year. The Canada Revenue Agency disallowed the claimed loss. Asserting that it had proceeded on the basis of erroneous advice from its tax advisor, who had failed to consider that s. 98(5) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) might apply to the transaction, the applicant applied for an order setting aside the transaction and replacing it retroactively with other steps. The application judge ordered the "rectification" of the transaction, nunc pro tunc. The Attorney General appealed. The parties agreed that the application judge's order could not stand, as the decision of the Supreme Court of Canada in Fairmont Hotels Inc. v. Canada (Attorney General), which was released after the application judge's ruling, restricted the scope of rectification to the correction of written agreements. The applicant cross-appealed, seeking to substitute for the application judge's order a new order that would permit it to achieve the intended tax purpose of the transaction. The applicant relied on the court's inherent jurisdiction in equity to correct mistakes and, alternatively, on equitable rescission.

Held, the appeal should be allowed; the cross-appeal should be dismissed.

The court will not exercise its inherent jurisdiction to correct mistakes in order to retroactively achieve a tax objective. Prohibited retroactive tax planning is not limited to attempts to secure a more favourable tax consequence than one had originally hoped to generate. It includes attempts to change one's affairs so that tax consequences that were intended, but which were prevented by mistake, can be achieved. The relief the applicant sought was simply rectification by another name.

The applicant did not meet the requirement for equitable rescission of a contract, and did not attempt to do so. Moreover, rescission is an "all or nothing" remedy; partial rescission is not a recognized equitable remedy. The applicant sought to have only part of the transaction rescinded, in order to generate a particular tax outcome.

In any event, the court should not exercise its equitable jurisdiction to relief against mistake or to rescind aspects of the transaction for two reasons. First, the applicant had adequate alternative remedies, as it had appealed its tax assessment and could apply to the minister for a remission of tax. Second, the requested remedy was not required to avoid the applicant's unintended loss and unjust enrichment of the CRA. There was nothing inequitable in the applicant being taxed on what it did, rather than on what it intended to achieve, and the "unjust enrichment" relied on was the alleged "windfall gain" to the CRA, which the Supreme Court in Fairmont Hotels explicitly rejected as the basis for equitable relief in such circumstances.

Judgment

APPEAL AND CROSS-APPEAL from the order of Pattillo J., [2015] O.J. No. 6031, 2015 ONSC 281 (S.C.J.).

Counsel:

• Alexandra Humphrey, Alisa Apostle and Stephanie Hodge, for appellant/respondent by cross-appeal.
• Kent Thomson, Stephen Ruby and Sarah Weingarten, for respondent in appeal/appellant by cross-appeal.

The judgment of the court was delivered by

VAN RENSBURG J.A.:

Overview

[1] The Canada Life Insurance Company of Canada ("CLICC") and certain of its affiliates carried out a series of transactions and events (the "transaction") in December 2007. The purpose of the transaction was to realize a tax loss to offset unrealized foreign exchange gains accrued in the same taxation year. In 2012, the Canada Revenue Agency ("CRA") disallowed the claimed loss in a reassessment of CLICC's taxes for 2007. Asserting that it had proceeded on the basis of erroneous advice from its tax advisor, CLICC applied to the Superior Court for an order setting aside the transaction and replacing it with other steps, retroactive to the date of the original transaction.

[2] The application was opposed by the CRA, represented by the Attorney General of Canada (the "Attorney General"). Her Majesty the Queen in Right of Ontario, on behalf of the director appointed pursuant to s. 278 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, as amended (the "OBCA"), did not oppose the application and did not participate in this appeal.

[3] The application judge, Pattillo J., made the order requested by CLICC. Relying on this court's decisions in Canada (Attorney General) v. Juliar (2000), 50 O.R. (3d) 728 ("Juliar") and Fairmont Hotels Inc. v. Canada (Attorney General), [2015] O.J. No. 3172, 2015 ONCA 441, the application judge ordered "rectification" of the transaction, nunc pro tunc.

[4] The Attorney General appealed the decision of Pattillo J. The parties agreed to hold the appeal in abeyance until the Supreme Court released its decision in Fairmont Hotels. The parties now agree that the application judge erred in granting rectification, as the recent decision in Fairmont Hotels changed the law on which Pattillo J. relied, and restricted the scope of this equitable remedy to the correction of written agreements.

[5] In its cross-appeal, CLICC seeks to substitute for the order made in the court below a new order that would permit it to achieve the intended tax purpose of the transaction. CLICC relies on this court's inherent jurisdiction in equity and equitable rescission, as alternative bases for the relief sought. The cross-appeal is opposed by the Attorney General.

[6] At the heart of the cross-appeal is whether the remedy sought by CLICC is available in the exercise of the court's jurisdiction in equity to relieve against mistakes in the light of the Supreme Court's decision in Fairmont Hotels.

[7] I have concluded that the relief sought, albeit by a different name, is the very type of correction of an error in the structuring and implementation of a transaction to achieve a particular taxation result that the Supreme Court rejected in Fairmont Hotels. I would also reject CLICC's attempt to obtain this relief through equitable rescission, a remedy that is simply not available in the circumstances of this case. Finally, equitable considerations common to both remedies preclude the granting of a remedy in the particular circumstances of this case. As such, and for the reasons that follow, I would allow the appeal and dismiss the cross-appeal.

Facts

[8] In April 2007, CLICC entered into a series of transactions with other members of the Great West Life group of companies. These transactions left CLICC with foreign exchange exposure on U.S. denominated investments that it held indirectly through Mountain Asset Management LP ("MAM LP"), a limited partnership. To offset this exposure, CLICC entered into third party hedge contracts with various financial institutions to eliminate any foreign exchange risk resulting from changes to the Canadian/U.S. dollar exchange rate.

[9] During the last three quarters of CLICC's 2007 taxation year ending December 31, 2007, the U.S. dollar decreased in value against the Canadian dollar, which resulted in CLICC having accrued and unrealized losses of approximately $168 million on its interest in MAM LP. It also accrued the same amount of unrealized gains associated with the hedge contracts.

[10] This was a "mismatch" for Canadian tax purposes as CLICC was required to report the unrealized capital gains on its 2007 tax return, but could not claim the corresponding unrealized foreign exchange losses associated with the hedge contracts in the same taxation year. The losses would be deductible only after they were realized.

[11] The purpose of the transaction was to generate a realized loss to offset against the accrued gains to avoid taxation. The transaction, which was completed in December 2007, involved the following steps by CLICC and its affiliates:

(1) On December 6, 2007 at 2:00 p.m. (Central Time), MAM Holdings Inc. (an Ontario company owned 5.575 per cent by Great-West Life Assurance Company ("GWL") and 94.425 per cent by MAM LP), declared a dividend of $44,800,645 on its common shares, payable on December 7, 2007.

(2) Immediately following the declaration of the dividend, MAM Holdings Inc. paid the dividend to GWL and MAM LP, in accordance with their interests.

(3) On December 7, 2007 at 3:00 p.m. (Central Time), MAP LP distributed its MAM Holdings Inc. shares to its limited partner CLICC and its general partner CLICC GP based on their 99 per cent and 1 per cent interests.

(4) On December 31, 2007 at 3:00 p.m. (Eastern Time), the rights and interests of CLICC and CLICC GP in MAM LP were cancelled and extinguished. MAM LP distributed pro rata, to CLICC and CLICC GP, all of its property (except for $100 of limited partnership capital), consisting of a promissory note from MAM Holdings Inc. having a principal amount of $952,728,964 and short-term securities and cash having a value of $42,387,295.

(5) On December 31, 2007 at 4:00 p.m. (Eastern Time), MAM LP was dissolved and immediately thereafter, the remaining $100 of partnership capital was distributed, pro rata, to CLICC and CLICC GP.

(6) On December 31, 2007 at 11:59 p.m. (Eastern Time), CLICC GP was wound up and its assets and liabilities were acquired and assumed by CLICC.

(7) By certificate of dissolution dated October 14, 2008, CLICC GP was formally dissolved.

[12] The result of the transaction was that CLICC suffered a loss resulting from the disposition of its 99 per cent limited partnership interest in MAM LP in the amount of approximately $168 million (the difference between what CLICC received for its 99 per cent interest in MAM LP and the cost of CLICC's interest in MAM LP for tax purposes). CLICC included the gains from the hedge contracts in its income tax return for the 2007 taxation year ending December 31, 2007, and deducted a corresponding amount in respect of the loss realized by the disposition of its 99 per cent interest in MAM LP by reason of the dissolution of MAM LP.

[13] On July 16, 2012, CRA issued a notice of reassessment to CLICC. CRA disallowed CLICC's claim for the loss on the basis that s. 98(5) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "ITA") applied, such that the dissolution of MAM LP was effected on a "rollover" or "tax-deferred" basis, without generating the intended immediate tax loss.

[14] CLICC contends that an error was committed when the transaction was designed and implemented. It relied on the tax advice of its external counsel, and failed to consider the possibility that s. 98(5) of the ITA might apply to the transaction. If CLICC had adverted to the possible application of s. 98(5), it would have structured the transaction in such a way as to avoid the application of that provision.

[15] CLICC filed a notice of objection to the reassessment, in which it confirmed its intention to apply to the Superior Court for an order rectifying the transaction with the result that s. 98(5) of the ITA would not apply to prevent CLICC from realizing the tax loss it claimed.

The Application

[16] CLICC requested an order nunc pro tunc cancelling the various steps taken in the transaction and replacing them with a new series of steps that would dissolve MAM LP at December 31, 2007 in a way that s. 98(5) of the ITA would not apply. CLICC relied on the doctrine of rectification or, alternatively, on the court's inherent jurisdiction to relieve parties retroactively from the effects of their mistakes in circumstances where it is just and equitable to do so.

[17] CLICC brought a motion shortly after the hearing of the application in which, among other things, it proposed what it described as a simplified form of relief. That relief involved delaying the wind-up of CLICC GP from December 31, 2007 to April 30, 2008, so that more than three months had elapsed following the dissolution of MAM LP, together with a number of "ancillary" orders.

Decision of the Application Judge

[18] The application judge granted the order initially sought by CLICC based on rectification.

[19] Pattillo J. concluded that CLICC and the other parties to the transaction shared a "common and continuing intention" for CLICC in its 2007 taxation year to realize a deductible tax loss of approximately $168 million inherent in its partnership interest in MAM LP. The mistake was in structuring the transaction without including steps to address the application of s. 98(5) of the ITA. The application judge concluded that this was not a case of retroactive tax planning, as the intention was always to create a taxable loss in the 2007 tax year in order to offset the unrealized taxable gain arising from the foreign exchange gains accrued.

[20] The application judge relied on Newbould J.'s decision in Fairmont Hotels Inc. v. Canada (Attorney General) (2014), 123 O.R. (3d) 241, which by that point had been upheld on appeal to this court. In that case, Newbould J. applied this court's previous decision in Juliar to grant rectification in respect of a similar non-arm's-length corporate transaction. The application judge did not need to consider CLICC's alternative argument -- that substantially the same order could be granted through the exercise of the court's inherent jurisdiction to relieve against mistakes. He also dismissed as unnecessary CLICC's motion to substitute a more simplified form of order.

[21] The application judge's order reversed the dissolution of MAM LP and the winding-up of CLICC GP, and "rectified" certain transactions and events, nunc pro tunc as at the times and dates they occurred, whereby the winding-up and dissolution of CLICC GP was preceded by the dissolution of MAM LP and the distribution of its assets to CLICC and CLICC GP.

[22] In particular, the order:

(1) Deemed the resolutions of December 21, 2007 by CLICC and CLICC GP cancelling and extinguishing their rights and interests in MAM LP to be null and void.

(2) Deemed the cancellation and extinguishment of the partnership interests of CLICC and of CLICC GP in MAM LP and distribution of its property as well as its dissolution not to have occurred at 3:00 p.m. (Eastern Time) on December 31, 2007 and to be null and void.

(3) Deemed CLICC GP to have acquired CLICC's shares in MAM Holdings Inc. on December 7, 2007.

(4) Deemed MAM LP to have then distributed its assets on December 31, 2007 to the same extent and in the same kind as was originally planned to happen.

(5) Deemed CLICC to have sold its interest in MAM LP to CLICC GP on December 31, 2007.

(6) Declared the sale to result in the cessation and dissolution of MAM LP and the transfer of its property and assets to CLICC GP.

(7) Deemed CLICC GP to have paid a dividend to CLICC after these operations.

(8) Cancelled the resolution dissolving CLICC GP dated December 21, 2007 and deemed it to be null and void.

(9) Deemed CLICC GP to have transferred all of its property, assets and rights to CLICC on April 30, 2008. CLICC GP was deemed to have been wound up on that date.

(10) Deemed the articles of dissolution originally filed for to the December 31, 2007 wind up to have been filed for the April 30, 2008 wind-up.

(11) Deemed all the documents necessary for these operations to have been passed.

(12) Declared that the order did not affect the declaration of dissolution filed by MAM LP on December 21, 2007.

(13) Ordered costs in favour of CLICC.

The Appeal

[23] CLICC concedes that, although the application judge applied the prevailing test for rectification in effect at the time he made his order (the test in Juliar), that test was superceded by the Supreme Court decision in Fairmont Hotels, and no longer governs requests for rectification in matters of this nature.

[24] While CLICC initially responded to the Attorney General's appeal by seeking to uphold Pattillo J.'s order on the alternative basis that it could have been granted in the exercise of the court's equitable jurisdiction to relieve against mistakes, CLICC ultimately abandoned that position and its opposition to the appeal. Instead, CLICC pursues a different order in its cross-appeal.

The Cross-Appeal

[25] The order CLICC now invites this court to make has evolved from what was requested in its original notice of cross-appeal and factum. At the appeal hearing, CLICC advised that it now seeks an order the effect of which is to cancel the December 31, 2007 wind-up of CLICC GP and to cancel and reverse the transfer by CLICC GP to CLICC of all of its property, assets and rights.

[26] CLICC asserts that s. 98(5) of the ITA only deprives it of the tax loss it intended to realize because, in addition to effecting the dissolution of MAM LP on December 31, 2007, it effected the dissolution and voluntary distribution of the assets of CLICC GP immediately thereafter. The winding-up of CLICC GP in December 2007 was a matter of convenience, and was not required in order for CLICC to realize the tax loss that it intended to achieve in 2007 on the dissolution of MAM LP. If CLICC GP had not been wound up immediately, the transaction would not have been subject to the rollover provisions of s. 98(5) of the ITA.

[27] Accordingly, and relying on the same record that was before the application judge, CLICC asks this court to substitute for the order of Pattillo J. an order that:

(i) the special resolution of CLICC, as sole shareholder of CLICC GP, dated December 21, 2007 authorizing the dissolution of CLICC GP pursuant to s. 237(b) of the OBCA shall be and is hereby deemed to be cancelled and to be null and void, nunc pro tunc, as at December 21, 2007;

(ii) the dissolution of CLICC GP shall be and is hereby cancelled, ab initio;

(iii) the disposition by CLICC GP to its sole shareholder CLICC of all of its property, rights and assets on December 31, 2007, made pursuant to that dissolution, shall be and is hereby cancelled and deemed to be null and void, nunc pro tunc, as at the time such disposition was effected, and that such property, rights and assets be revested in or restored in substance to CLICC GP as at December 31, 2007;

(iv) the articles of dissolution of CLICC GP, filed with the Director appointed pursuant to s. 278 of the OBCA in respect of the dissolution of CLICC GP, shall be and are hereby cancelled and deemed to be null and void nunc pro tunc, as at the beginning of the day on which they were executed by CLICC GP;

(v) the director, having endorsed a certificate of dissolution dated October 14, 2008 on the articles of dissolution of CLICC GP, cancel that certificate, effective as at the beginning of the day on October 14, 2008; and

(vi) nothing herein affects the declaration of dissolution filed with the Ontario Ministry of Government Services on December 31, 2007 by MAM LP pursuant to s. 23(1) of the Ontario Limited Partnerships Act dissolving MAM LP effective that day.

[28] The Attorney General does not oppose CLICC's pursuit in this court of an entirely new form of order, but argues that the order should not be made.

The Issues

[29] CLICC argues two alternative bases for the order it seeks, both relying on the fact that a mistake was made in structuring the transaction:

(1) CLICC seeks to invoke this court's equitable jurisdiction to relieve a party from the effects of its mistake in the interests of fairness and equity, by unwinding or reversing transactions structured or implemented in error; and

(2) CLICC seeks relief based on the equitable remedy of rescission.

The Parties' Positions

(1) CLICC's position on the court's equitable jurisdiction to relieve against mistakes

[30] CLICC contends that the order it seeks is a different remedy than rectification.

[31] It points out that, in a number of cases where rectification was granted or considered by the court, the applicant sought, and the court would have granted, the same or similar relief on this equitable basis. See, for example, Amcor Packaging Canada, Inc. (Re), [2012] O.J. No. 5148, 2012 ONSC 6168 (S.C.J.), at paras. 17-18; Telus Communications Inc. v. Canada (Attorney General), [2015] O.J. No. 7252, 2015 ONSC 6245 (S.C.J.), at para. 20; GT Group Telecom Inc. (Re), [2004] O.J. No. 4289 (S.C.J.), at para. 5. Indeed, CLICC relied on this alternative ground before the application judge, but it did not have to be addressed.

[32] CLICC contends that Fairmont Hotels restricted the equitable remedy of rectification to the correction of written agreements, but that the Supreme Court left open the ability for a court, in the exercise of its general equitable jurisdiction, to correct a mistake, including to retroactively alter a transaction, even when the objective is to secure a particular tax treatment.

[33] CLICC maintains that the CRA will suffer no prejudice, and will only be deprived of an unwarranted benefit or windfall gain to which it would not be entitled but for the mistake.

(2) The Attorney General's position on the court's equitable jurisdiction to relieve against mistakes

[34] The Attorney General contends that CLICC cannot obtain the relief it seeks because CLICC is not entitled, by a different name, to the very relief that the Supreme Court ruled out in Fairmont Hotels. The Attorney General asserts that CLICC does not meet the requirements for equitable relief from the consequences of a mistake for essentially the same reasons it is unable to obtain relief through rectification. CLICC's objective is to avoid an adverse tax consequence by retroactively changing the facts on which its tax assessment was based.

(3) CLICC's position on equitable rescission

[35] CLICC makes the alternative argument that it is entitled to the same order -- to retroactively cancel the dissolution of CLICC GP, and to reverse the December 2007 transfer by CLICC GP to CLICC, and to revest in CLICC GP, all of its property, assets and rights -- by way of rescission. CLICC says that what it is asking the court to do is to permit it to unwind a voluntary disposition of property that was effected in error.

[36] CLICC relies on two cases involving rescission of voluntary dispositions: Pitt v. Holt, [2013] 2 A.C. 108 (U.K.S.C.) and Pallen Trust (Re), [2015] B.C.J. No. 1007, 2015 BCCA 222, which followed and applied Pitt v. Holt. It says that these cases are authority that the remedy of equitable rescission of voluntary dispositions is available, even when the objective is to avoid unintended adverse tax consequences.

(4) The Attorney General's position on equitable rescission

[37] The Attorney General does not object to CLICC putting forward the new argument of rescission as an alternative basis for the relief it seeks.

[38] However, the Attorney General asserts that CLICC is not asking this court to rescind a voluntary or gratuitous transfer of property but rather to rescind a commercial contract that it entered into with a wholly owned subsidiary, and that the test for equitable rescission of a contract for mistake cannot be met.

[39] The Attorney General also asserts that CLICC does not meet the test for equitable relief whether by the exercise of the court's inherent jurisdiction to correct mistakes or through the remedy of rescission for two reasons.

[40] First, CLICC has adequate alternative remedies to address the adverse tax consequences resulting from the mistake it relies on. As already noted, CLICC has filed a notice of objection to appeal its tax assessment, under s. 23 of the Financial Administration Act, R.S.C. 1985, c. F-11, CLICC can apply to the minister for a remission of tax, and it has a potential legal action against its professional advisors.

[41] Second, the circumstances here would not warrant the intervention of equity. Denying CLICC relief will not unjustly enrich the Crown and its "windfall" argument was considered and rejected by the Supreme Court in Fairmont Hotels.

Analysis

(1) The relief CLICC seeks is not available under the "inherent jurisdiction of the court" to relieve a party from the effects of a mistake

[42] CLICC asks this court to retroactively alter a corporate transaction that was entered into to achieve a certain tax result, and where the result has not been achieved because of a mistake in how the transaction was structured.

[43] I have concluded that CLICC is not entitled to the remedy it is seeking on its cross-appeal, through the exercise of any inherent jurisdiction the court may have to relieve against mistakes. What CLICC is seeking is the same type of intervention, by a different name, that the Supreme Court considered in Fairmont Hotels and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), [2016] 2 S.C.R. 670, a companion appeal released on the same day as Fairmont Hotels. The Supreme Court concluded that it is not possible to "rectify" a corporate transaction to retroactively avoid adverse tax consequences. In my view, the remedy CLICC seeks, whether characterized as rectification or some other equitable remedy, is precluded by the reasoning in Fairmont Hotels and Jean Coutu. To explain why I have come to this conclusion, it is helpful to describe the evolution of the law in Ontario that culminated in these two decisions.

[44] As I will explain, this court in 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739 ("Bramco"), recognized that any equitable jurisdiction that a court may have to relieve against a mistake cannot be invoked in order to retroactively alter a transaction to achieve a tax planning objective.

[45] In my view, Bramco remains an impediment to the exercise of the equitable jurisdiction of the court to correct the mistake that was made in this case. Although this court in Juliar adopted an expansive view of rectification as a basis to avoid the principle articulated in Bramco, in Fairmont Hotels, the Supreme Court expressly shut down this approach when it overruled Juliar. Rectification is now limited to cases where the written instrument fails to record correctly the parties' agreement.

[46] In addition, Fairmont Hotels and Jean Coutu also affirm the underlying policy rationale of Bramco; it is not possible to alter corporate transactions on a nunc pro tunc basis to achieve particular tax objectives. In other words, the Supreme Court has signaled that retroactive tax planning by order of the Superior Court exercising its equitable jurisdiction is impermissible.

[47] TCR Holding Corp. v. Ontario, [2010] O.J. No. 1238, 2010 ONCA 233 ("TCR Holding"), does not alter this result. While this court may have recognized that other equitable remedies remain generally available even when rectification is not, it did not authorize such equitable remedies for the purpose of impermissible retroactive tax planning. I turn now to the development of these key principles in the case law.

(a) Bramco precludes resort to equitable jurisdiction to retroactively achieve a tax objective

[48] In Bramco, the appellant, Ms. Ho, sought to correct a mistake in a property transfer. After entering into an agreement to purchase land in the name of one of her numbered companies, she effected the transfer to a second company, which was a non-resident. The result was a land transfer tax of $1.7 million, when a transfer of the property to the first company would have attracted land transfer tax of less than $85,000.

[49] This court upheld the decision of the application judge refusing rectification. The structure for the transaction was selected with income tax consequences in mind, and not with a view to minimizing land transfer tax. Ms. Ho's intention was always to take title in the name of the second company. The mistake was in failing to take into consideration the land transfer tax implications when the purchase was structured and carried out. Rectification was unavailable in circumstances where the transaction had achieved its intended purpose. I refer to this part of the reasons as the "first prong" of the decision in Bramco.

[50] This court considered the appellant's alternative argument that the same relief was available under the court's general equitable jurisdiction to relieve against mistakes, the "second prong" of the decision. Accepting for the purpose of the appeal that such jurisdiction existed, the court refused the order for two reasons.

[51] First, the appellant had an adequate alternative remedy to address the property tax issue under the Land Transfer Tax Act, R.S.O. 1990, c. L.6 (although her application for special consideration had been refused). Galligan J.A. observed that the court's equitable discretion should not be exercised "to enable a person to obtain relief through equitable remedies which she was not able to obtain by the remedy which the law afforded her" (at p. 742 O.R.).

[52] Second, to grant such relief would run contrary to the "well-established rule in tax cases" that the courts do not look with favour upon attempts to rewrite history in order to obtain more favourable tax treatment: "The cases seem to hold consistently that tax liability is based upon what happened, not upon what, in retrospect, the taxpayer wished had happened" (at p. 742 O.R.).

[53] CLICC relies on Bramco as authority for the court's general jurisdiction in equity to relieve against mistakes, as separate and independent and having a different meaning from "rectification", and says that the reasons for rejecting an equitable remedy in Bramco do not apply to its case. The Attorney General argues that Bramco, consistent with Fairmont Hotels, precludes resort to any such equitable jurisdiction to retroactively achieve a tax objective, and in any event would preclude such a remedy where, as here, the applicant has an adequate alternative legal remedy.

[54] I agree with the Attorney General's position that the reasons for refusing general equitable relief in Bramco apply equally to this case. Furthermore, Bramco identified the problems with a nunc pro tunc order designed to reverse transactions to achieve a particular tax objective.

(b) Juliar expanded the scope of rectification but did not consider impediments to equitable relief in the tax context

[55] In its later decision in Juliar, this court avoided the first prong of the Bramco decision by invoking an expanded doctrine of rectification to correct errors in the structuring of transactions to conform to the parties' intention. It did so by defining the intention required for rectification broadly to include a party's tax objectives. This expanded remedy permitted parties to revoke and replace corporate transactions to avoid adverse tax consequences, provided that the court was satisfied that the parties had a continuing intention to achieve a particular tax outcome that was not realized because of a mistake.

[56] The court did not address the second prong of the Bramco decision -- the impediments to the intervention by the court in equity to reverse a transaction for tax purposes.

[57] In Juliar, the respondents had entered into a transaction which, because of erroneous professional advice, triggered an unintended income tax liability. The tax liability could have been deferred if the transaction had been structured differently. The respondents appealed their tax reassessment, and in the interim applied to the court for rectification of the transaction, which was granted: Canada (Attorney General) v. Juliar (1999), 46 O.R. (3d) 104.

[58] The Minister of National Revenue appealed, relying on Bramco as authority that rectification was not available, and that there was no other basis on which the relief sought could be granted.

[59] This court distinguished the refusal of rectification in Bramco by focusing on the question of the parties' "intention" at the time the transaction was entered into. In Bramco, Ms. Ho's primary objective was not the avoidance of land transfer tax and the excessive land transfer tax was a consequence she only subsequently sought to avoid. By contrast, the application judge in Juliar made a finding of fact that the "true agreement between the parties" was the completion of the transaction "in a manner that would not attract immediate liability for income tax". He accepted that the transaction "had to be carried out on a no immediate tax basis or not at all" (at paras. 25 and 27 (C.A.)).

[60] This court dismissed the appeal and approved of the use of the remedy of rectification to permit the unwinding and replacement of a corporate transaction to achieve the intended tax outcome. The court did not consider whether the exercise of the court's general equitable jurisdiction to correct mistakes was available, and importantly, whether the same barriers to the exercise of that jurisdiction that existed in Bramco -- the existence of an alternative legal remedy, and the fact that the order was sought to obtain more favourable tax treatment -- would preclude relief on this basis.

(c) Fairmont Hotels and Jean Coutu overrule Juliar and affirm the policy considerations underlying Bramco

[61] Leading up to and following Juliar, orders were routinely made in the Superior Court granting rectification of corporate transactions to avoid adverse tax consequences. One such order was made in the case of Fairmont Hotels. In that case, the order rectified a corporate transaction, essentially by substituting nunc pro tunc new and different directors' resolutions to convert a share redemption into a loan.

[62] Fairmont Hotels was appealed to this court. In its brief endorsement, the court relied on the expansive interpretation of rectification adopted in Juliar and stated, at para. 10 (C.A.), that "the critical requirement for rectification is proof of a continuing specific intention to undertake a transaction or transactions on a particular tax basis". In that case, the parties intended to take certain steps on a tax-free basis, but, as a result of a mistake by a member of Fairmont's senior management, the wrong "transactional device" was used, which triggered an adverse and unintended tax consequence.

[63] As already noted, in 2016 the Supreme Court allowed the appeal from this court's decision in Fairmont Hotels. In my view, the companion decisions in Fairmont Hotels and Jean Coutu do two things: (1) they specifically overrule the broad approach to rectification in the tax context that had been taken in Juliar; and (2) they recognize and give effect to the same policy concerns that form the basis for the second prong of the Bramco decision. Fairmont Hotels and Jean Coutu effectively preclude the use of this court's equitable jurisdiction to refashion a corporate transaction to achieve a specific tax objective, whether or not that was the original intention of the parties to the transaction.

[64] On the rectification point, in his majority reasons in Fairmont Hotels, Brown J. held, at para. 3 (S.C.C.), that even if all parties to the subject transactions had a common intention of "tax neutrality", "[r]ectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement" and "does not undo unanticipated effects of that agreement". He continued, at para. 13: "[R]ectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself" (emphasis in original).

[65] The court concluded that Juliar was wrongly decided. Brown J. stated that the parties' mistake in Juliar was not in the recording of their intended agreement, but in their selection of the wrong mechanism (the transfer of shares for a promissory note instead of a shares-for-shares transfer). The Court of Appeal "purported to 'rectify' not merely the instrument recording the parties' antecedent agreement, but the agreement itself where it failed to achieve the desired result or produced an unanticipated adverse consequence -- that is, where it was the product of an error in judgment" (at para. 19 (S.C.C.)).

[66] CLICC submits that when the Supreme Court overturned Juliar in Fairmont Hotels, it left untouched the ability of the court to grant essentially the same relief -- the retroactive unwinding of a transaction and its replacement by something else -- under its general equitable jurisdiction to correct mistakes. This argument, however, ignores essential passages from Brown J.'s majority reasons. At paras. 23 and 24, Brown J. stated the following:

Finally, Juliar does not account for this Court's direction, in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 45, that a taxpayer should expect to be taxed "based on what it actually did, not based on what it could have done". While this statement in Shell Canada was applied to support the proposition that a taxpayer should not be denied a sought-after fiscal objective merely because others had not availed themselves of the same advantage, it cuts the other way, too: taxpayers should not be judicially accorded a benefit based solely on what they would have done had they known better.

This point goes to the respondents' submission that "[r]ectification is necessary to . . . avoid unjust enrichment of the Crown" (R.F., at para. 76), echoing the Court of Appeal's concern in Juliar (at paras. 33-34, quoting Re Slocock's Will Trusts, at p. 363) for the Crown's "accidental and unexpected windfall" and the chambers judge's concern in the present appeal (at para. 44) about the CRA's "unintended gain" and (at para. 52) the Crown's "tax windfall". With respect, the premise underlying such concerns misses the point of the inquiry, inasmuch as it concerns the CRA. Tax consequences, including those which follow an assessment by the CRA, flow from freely chosen legal arrangements, not from the intended or unintended effects of those arrangements, whether upon the taxpayer or upon the public treasury. The proper inquiry is no more into the "windfall" for the public treasury when a taxpayer loses a benefit than it is into the "windfall" for the taxpayer when that taxpayer secures a benefit. The inquiry, rather, is into what the taxpayer agreed to do. Juliar erroneously departed from this principle, and in so doing allowed for impermissible retroactive tax planning: Harvest Operations Corp. v. Canada (Attorney General), 2015 ABQB 327, [2015] 6 C.T.C. 78, at para. 49.

[67] The Supreme Court in Fairmont Hotels was concerned not only with the availability of rectification as a remedy, but with the court's doing something under the guise of rectification that is not permitted -- altering a corporate transaction nunc pro tunc to achieve a particular tax objective. The important point here is that tax consequences "flow from freely chosen legal arrangements, not from the intended or unintended effects of those arrangements", and that the inquiry is into what the taxpayer agreed to do. Brown J. concluded [at para. 24] that Juliar "erroneously departed from this principle, and in so doing allowed for impermissible retroactive tax planning".

[68] CLICC argues that, because the transaction in which the mistake was made was always intended to generate a loss for tax purposes, although this is tax planning, it is not a case of retroactive tax planning. Indeed, the application judge specifically noted, at para. 37, that this was not a case of retroactive tax planning "after the CRA audit and reassessment" because the purpose was always to create a taxable loss to offset an unrealized taxable gain. As such, CLICC says that Fairmont Hotels would not preclude the order it seeks.

[69] This argument has no merit. Retroactive tax planning is not limited to attempts to secure a more favourable tax consequence than one had originally hoped to generate. It includes attempts to change one's affairs so that tax consequences that were intended, but which were prevented by a mistake, can be achieved. Brown J.'s reference to impermissible retroactive tax planning, which he noted occurred in Juliar, referred to both the "intended" and "unintended" effects of parties' transactions or arrangements. Indeed, Juliar involved a transaction that was undertaken to achieve a particular tax result, as did Fairmont -- the court accepted that "tax neutrality was the parties' intention" (at para. 3).

[70] The concern about retroactive tax planning as a policy reason for refusing an order to modify a corporate transaction to achieve a tax objective was articulated by Wagner J. (as he then was) in his majority reasons in Jean Coutu.

[71] In Jean Coutu, the original transaction was intended to neutralize the effect of certain exchange rate fluctuations without adverse tax consequences. The appellant, under art. 1425 of the Civil Code of Québec, C.Q.L.R. c. C.C.Q.-1991, brought a motion for "rectification" of the documents relating to certain transactions after they attracted unforeseen tax consequences. Wagner J., in upholding the decision of the Quebec Court of Appeal refusing the remedy, addressed the policy considerations that militate against the court's retroactive amendment of parties' agreements when unforeseen tax consequences result, at paras. 41 and 42:

[A]ccepting [the appellant's] position would require this Court to ignore the legal relationships that it and [its affiliate] originally agreed to create, and actually created, in favour of the tax consequences they sought to achieve. It would thus undermine one of the fundamental principles of our tax system: that tax consequences flow from the legal relationships or transactions established by taxpayers . . . Equally, if taxpayers agree to and execute an agreement that produces unintended tax consequences, they must still be taxed on the basis of that agreement and not on the basis of what they "could have [done]" to achieve their intended tax consequences, had they been better informed. Tax consequences do not flow from contracting parties' motivations or tax objectives.

. . . I believe that allowing the amendment of the written documents in the instant appeal would amount to retroactive tax planning. It would set an undesirable precedent, where taxpayers could point to a common intention to effect their transactions on a tax-neutral basis to immunize themselves from unforeseen tax consequences. Such an intention would be common to many taxpayers and transactions, particularly where the parties are not at arm's length. Allowing a general intention of tax neutrality to serve as a basis for retroactively modifying contracts would effectively enable many taxpayers to look to art. 1425 C.C.Q. as a kind of catch-all insurance for their inadvertence or mistakes, or for those of their tax advisors, in planning transactions.

[72] The fact that CLICC entered into the transaction to achieve a particular tax outcome does not remove it from the scope of impermissible retroactive tax planning, which is precluded by Fairmont Hotels and Jean Coutu. Both of these cases involved "tax-driven" transactions (in the sense that the choice of structure was informed by tax considerations), as did Juliar (where the application judge found that the transaction [at para. 27 (C.A.)] "had to be carried out on a no immediate tax basis or not at all"). Whether the court is asked to "rectify" an agreement or to unwind transactions and replace them with other steps because of an error leading to an unplanned tax liability, the objective is to reverse the factual basis of the tax assessment, in order to defeat the tax liability that resulted from the original transaction. As both Fairmont Hotels and Jean Coutu emphasize, tax consequences flow from the transaction the taxpayer undertook, and not from its motivations or objectives.

[73] Finally, in attempting to distinguish Fairmont Hotels, CLICC contends that the order that it now seeks in its cross-appeal would not involve the rectification of or any change to any agreements that formed part of the transaction. There would be no "re-writing" of any agreement. Rather, it only wants to alter the steps taken following the agreements, to cancel the winding-up of CLICC GP.

[74] Again, this argument ignores the teaching of the Supreme Court in Fairmont Hotels that the court cannot substitute one series of transactions for another to avoid an unintended tax result. Nothing turns on whether the relief CLICC asks the court to grant involves the alteration of agreements, or the actual steps taken under the agreements to implement the transactions for which they provide.

[75] I would also observe that, although CLICC now says that the error it seeks to correct through the simplified order is the premature winding-up of CLICC GP, in fact, the mistake has been consistently described throughout the proceedings as the failure to consider that s. 98(5) of the ITA applied to the dissolution of MAM LP. While the unintended tax rollover might be avoided by delaying the winding-up of CLICC GP (that is, "correcting" the decision to wind up that entity), the "mistake" was in the structure of the transaction that permitted the rollover to take effect. This is the same kind of correction or rectification that the Supreme Court rejected in Fairmont Hotels and Jean Coutu and characterized as the "rewriting of history" in order to correct an error leading to an unforeseen tax liability.

(d) TCR Holding does not permit the retroactive alteration of transactions to correct unintended tax consequences

[76] Finally, I turn to a consideration of this court's decision in TCR Holding. CLICC says that this case permits the court to retroactively alter a transaction in the exercise of its general authority to relieve against mistakes. The case involved an application to set aside an amalgamation where a numbered company, 846, had been included in error, resulting in TCR Holding's becoming liable on an obligation guaranteed by 846. The application judge set aside the amalgamation nunc pro tunc, on the basis of rectification, or alternatively, in the exercise of the court's equitable jurisdiction to relieve against a mistake. This court dismissed the appeal.

[77] MacPherson J.A. concluded that rectification was not available because it would have violated the OBCA. He went on, however, to confirm the order of the court below on the alternative basis of the court's equitable jurisdiction to correct a mistake. He stated, at paras. 26 and 27:

Broadly speaking, a superior court has "all the powers that are necessary to do justice between the parties": see 80 Wellesley St. East Ltd. v. Fundy Bay Builders Ltd., [1972] 2 O.R. 280 (C.A.), at p. 282. More specifically, "superior courts have equitable jurisdiction to relieve persons from the effect of their mistakes": see 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739 (C.A.), at p. 741.

This was the alternative basis for the application judge's order. After reviewing the relevant evidence, he characterized the inclusion of a still debt-liable 846 in the amalgamation as "an inadvertent mistake" and, citing Bramco and this court's decision in Attorney General of Canada v. Juliar (2000), 50 O.R. (3d) 728, concluded that there was "no reason not to grant the relief to TCR under this equitable jurisdiction to relieve against mistake." I see no basis for disagreeing with this analysis or with the application judge's exercise of discretion in setting aside the amalgamation. The amalgamating companies agreed to the amalgamation based on the mistake that 846 was debt free.

[78] TCR Holding does not assist CLICC in its cross-appeal. The equitable jurisdiction of the court in that case was available to relieve against a mistake resulting in TCR Holding's assumption of an unintended liability to a creditor of 846 who had never bargained for such a benefit. It is unnecessary to attempt to define the outer limits of the equitable jurisdiction of the court to correct mistakes. The application in TCR Holding was not motivated by tax considerations, but to avoid an unintended windfall to a third party that would result from the mistake in including the insolvent debtor in an amalgamation. The tax authorities, although given notice, did not take a position on the application. The avoidance of unjust enrichment, and not unintended tax consequences, was the foundation of the court's intervention in equity.

[79] In the present case, the only mistake to be corrected concerns the unintended tax consequences that prevented the transaction from achieving its desired purpose. Bramco, Fairmont Hotels and Jean Coutu are consistent in prohibiting the adjustment of a corporate transaction to relieve against mistakes leading to unintended tax consequences.

[80] The relief CLICC seeks is simply rectification by another name. In Harvest Operations Corp. v. Canada (Attorney General), [2017] A.J. No. 1252, 2017 ABCA 393, the very argument made by CLICC in this case, including an argument based on TCR Holding, was rejected by the Alberta Court of Appeal.

[81] In that case, the appellant's corporate predecessor entered into share acquisition and reorganization transactions. Because of an error by tax experts, the transactions attracted significant adverse tax implications for some of the entities involved even though they intended the transactions to be tax-neutral. The court upheld the decision of the court below that rectification of the underlying documentation was not available, as the application judge had applied essentially the same test that was subsequently recognized and applied by the Supreme Court in Fairmont Hotels. The appellate court considered the appellant's alternative argument based on the alleged equitable jurisdiction of the court to relieve parties from the effect of their mistake. In rejecting this as a disguised attempt to avoid Fairmont Hotels, the court stated, at paras. 73 to 75:

The appellant asks us to adopt the opinion expressed by the Ontario Court of Appeal in TCR Holding Corp. v. Ontario to this effect: "Broadly speaking, a superior court has 'all the powers that are necessary to do justice between the parties'. . . . More specifically, 'superior courts have equitable jurisdiction to relieve persons from the effect of their mistakes'. . . ."

Without commenting on the merits of the assertion that a superior court has "equitable jurisdiction to relieve persons from the effect of their mistakes", we fail to see how we can do this without undermining the rectification doctrine and ignoring the precedential value of Fairmont Hotels.

There is no principled basis, in the guise of exercising our equitable jurisdiction, to pump theoretical steroids into the rectification doctrine and give it the strength or force that the Supreme Court of Canada recently and consistently has declined to do. This is really what the appellant is asking us to do.

[82] I agree with these conclusions. While Fairmont Hotels does not preclude the exercise of the court's general equitable jurisdiction to relieve against mistakes in an appropriate case, as I have already explained, the rationale underlying the court's decisions in Fairmont Hotels and Jean Coutu prevents CLICC from invoking the court's general equitable jurisdiction to achieve the objective of avoiding an unintended tax consequence.

(2) The order cannot be made through the equitable remedy of rescission

[83] I turn first to the question whether the relief that CLICC seeks is the rescission of a voluntary disposition of property or of a contract. If it is the former, CLICC contends that the decisions in Pitt v. Holt and Pallen Trust (Re) are authorities for the court to grant rescission, even where the objective is to avoid unintended adverse tax consequences.

[84] Pitt v. Holt and Pallen Trust (Re) both involved the intervention of equity to permit the rescission of a voluntary settlement by a trustee.

[85] In Pitt v. Holt, Ms. Pitt, the settlor of a trust, sought to have the court set aside the settlement, which involved the transfer of damages received as a result of Mr. Pitt's car accident into a discretionary annuity trust established for his benefit. Tax was charged on the transfer after his death. It was alleged that neither the trustee nor her advisors took into account the inheritance tax consequences of the transfer.

[86] The U.K. Supreme Court accepted, at para. 122, that where there had been "a causative mistake of sufficient gravity" that was "basic to the transaction", rescission of a voluntary settlement could be ordered in rare cases, even where rectification could not be used to relieve a taxpayer from the error. This was one such case. On the evidence, the court was entitled to find that Ms. Pitt had made a grave mistake in thinking that there would be no adverse tax consequences.

[87] In Pallen Trust (Re), the B.C. Court of Appeal purported to follow Pitt v. Holt and granted rescission of a declaration and payment of dividends by a corporation to a trust which was a shareholder in the corporation. That distribution had resulted in adverse tax consequences. The court assumed that Pitt v. Holt was consistent with the law in Canada, and that the declaration and payment of dividends was a type of voluntary transfer of property to which equitable rescission could apply.

[88] In my view, it is unnecessary to determine whether Pallen Trust (Re) is good law following the Supreme Court's decision in Fairmont Hotels, or whether Pitt v. Holt should be followed in Ontario. Even if such equitable jurisdiction exists, CLICC's characterization of the transfer of property from CLICC GP to CLICC as a "voluntary distribution" that was subject to a corporate director's exercise of discretion is inaccurate. This was not a gratuitous transfer; rather, CLICC GP's transfer of its assets occurred as part of a transaction between related entities. The transfer was effected under a contract (the general conveyance and assumption agreement) where CLICC GP agreed for valuable consideration to "sell, transfer, assign and set over" to CLICC its "right, title, interest and benefit of every nature" in and to its "undertaking, property, assets and rights".

[89] The relief that CLICC seeks is more accurately described as rescission of a contract entered into by mistake. Accordingly, this court's decision in Miller Paving Ltd. v. B. Gottardo Construction Ltd. (2007), 86 O.R. (3d) 161, 2007 ONCA 422 governs. It requires the party seeking equitable rescission of a contract to establish that (a) the parties were under a common misapprehension as to the facts or their respective rights; (b) the misapprehension was fundamental; (c) the party seeking to set the contract aside was not itself at fault; and (d) one party will be unjustly enriched at the expense of the other if equitable relief is not granted (at paras. 23, 24, 26 and 31). None of these requirements apply in the present case, nor does CLICC attempt to bring itself within the requirements for equitable rescission of a contract.

[90] Another impediment to the relief sought by CLICC is that rescission is an "all or nothing" remedy; partial rescission is not a recognized equitable remedy: G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at pp. 762 and 771-72. The purpose of rescission is to eliminate a benefit one party has received due to a mistake made by one or both parties to a contract. This is accomplished by cancelling and unwinding the contract and by issuing whatever ancillary orders are necessary to restore the parties to their original rights. Here, however, CLICC seeks to have only part of the transaction rescinded, in order to generate a particular tax outcome. It does not ask the court to rescind the entire transaction, and to restore it and its affiliates to their original rights, because to do so would not achieve its objective of triggering a loss to set off against its foreign exchange gains.

(3) Equitable jurisdiction should not be invoked

[91] In any event, this court should not exercise its equitable jurisdiction to relieve against mistake or to rescind aspects of the transaction. I say this for two reasons.

[92] First, CLICC has adequate alternative remedies to address the adverse tax consequences resulting from the mistake it relies on. As already noted, CLICC has filed a notice of objection to appeal its tax assessment, under s. 23 of the Financial Administration Act, R.S.C. 1985, c. F-11, it can apply to the minister for a remission of tax, and it has a potential legal action against its professional advisor. The question is not whether CLICC will necessarily be successful in pursuing such alternative relief, but whether there is a remedy at law: see Bramco, at p. 741 O.R.; JAFT Corp. v. Jones, [2015] M.J. No. 210, 2015 MBCA 77, 323 Man. R. (2d) 57, at paras. 44-48; J.E. Martin and H.G. Hanbury, Modern Equity, 19th ed. (London: Sweet & Maxwell, 2012), at p. 35; and Jeffrey B. Berryman et al., Remedies: Cases and Materials, 7th ed. (Toronto: Emond Publishing, 2016), at p. 568.

[93] Second, CLICC argues that the requested remedy is required to avoid its own unintended loss, and unjust enrichment to CRA. I agree with the Attorney General that, when examined closely, there is nothing that would warrant the intervention of equity as a result of the transaction carried out by CLICC and its affiliates. CLICC sought to claim a $168 million tax loss without having to trigger a corresponding economic loss. Instead, the transaction was structured in such a way as to attract the rollover provisions of the ITA, so that the intended goal was not achieved. This was an error made by CLICC as to the effect of the law. There is nothing inequitable about CLICC being taxed on "what it did" rather than on what it intended to achieve. And, the unjust enrichment that CLICC relies on here, including in its amended notice of cross-appeal and argument, is the alleged "windfall gain" to the CRA, which the Supreme Court in Fairmont Hotels explicitly rejected as the basis for equitable relief in such circumstances.

Disposition

[94] For these reasons, I would allow the appeal and dismiss the cross-appeal. I would set aside the order of Pattillo J. I would award the appellant its costs fixed in the amount agreed between the parties, $55,000, inclusive of disbursements and applicable taxes.

Appeal allowed; cross-appeal dismissed.

End of Document