Kanji et al. v. The Attorney General of Canada

[Indexed as: Kanji v. Canada (Attorney General)]

Ontario Reports

Ontario Superior Court of Justice,

D.M. Brown J.

February 5, 2013

114 O.R. (3d) 1 | 2013 ONSC 781

Case Summary

Trusts and trustees — Rectification — Settlor of family trust applying almost 21 years later for order rectifying trust indenture on basis that it did not give effect to his intention to allow for transfer of trust's assets to his children on tax deferred basis — Application dismissed — Cross-examination of settlor on his affidavit introducing element of uncertainty into settlor's evidence as to his original intention — Settlor failing to file evidence from legal advisors who assisted him in establishing family trust — Mistake not patently obvious — Only document filed by settlor which was made contemporaneously with trust indenture not supporting settlor's position — Settlor failing to establish on balance of probabilities that he intended to structure family trust in tax efficient manner which would allow for tax deferred transfer of trust's assets to his children and that mistake was made which resulted in trust indenture failing to give effect to that intention.

In 1992, the applicant set up a family trust. He claimed that he set up the trust to allow for accumulated wealth to pass to his children in the future in a tax efficient manner. In 2009, he received legal advice that the trust deed, as drafted, would not achieve those objectives. He brought an application to rectify the trust indenture to give effect to what he claimed were his original intentions.

Held, the application should be dismissed.

The applicant failed to establish on a balance of probabilities that, at the time he settled the trust, he intended to structure it in a tax efficient manner which would allow for a tax deferred transfer of the trust's assets to his children in the future and that a mistake was made which resulted in the trust indenture failing to give effect to that intention. Cross-examination of the applicant on his affidavit introduced an element of uncertainty into his evidence as to his original intention. The applicant did not file any affidavit evidence or rule 39.03 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 evidence from the legal advisors who assisted him in establishing the trust. When, after the passage of almost 21 years, a taxpayer seeks tax relief from the court by asking for the rectification of an instrument, it would be imprudent for a court to rely solely on the evidence of the taxpayer about his or her intention without the comfort of some form of independent evidence -- contemporaneous documents or the evidence from other persons -- which supports the taxpayer's evidence. While there may be cases where the defect or mistake in an instrument is patently obvious, this was not one of those cases. The only document filed by the applicant which was made [page2 ]contemporaneously with the trust indenture was a memo from the applicant's then solicitors which was silent on the issue of whether the applicant had instructed them to put an estate freeze in place. A draft closing agenda attached to that memo also made no specific reference to an estate freeze.

Cases referred to

McPeake Family Trust (Trustee of) v. Canada, [2012] B.C.J. No. 160, 2012 BCSC 132, [2012] 4 C.T.C. 203, 2012 D.T.C. 5042, distd

Juliar v. Canada (Attorney General) (2000), 2000 16883 (ON CA), 50 O.R. (3d) 728, [2000] O.J. No. 3706, 136 O.A.C. 301, 8 B.L.R. (3d) 167, [2001] 4 C.T.C. 45, 2000 D.T.C. 6589, 100 A.C.W.S. (3d) 55 (C.A.), affg (1999), 1999 15097 (ON SC), 46 O.R. (3d) 104, [1999] O.J. No. 3554, 103 O.T.C. 294, 49 B.L.R. (2d) 243, [2000] 2 C.T.C. 464, 99 D.T.C. 5743, 91 A.C.W.S. (3d) 392 (S.C.J.), consd

Other cases referred to

771225 Ontario Inc. v. Bramco Holdings Co. (1995), 1995 745 (ON CA), 21 O.R. (3d) 739, [1995] O.J. No. 157, 77 O.A.C. 75, 43 R.P.R. (2d) 70, 52 A.C.W.S. (3d) 1267 (C.A.); Amcor Packaging Canada, Inc. (Re), [2012] O.J. No. 5148, 2012 ONSC 6168 (S.C.J.); Aylwards (1975) Ltd. (Re), 2001 32734 (NL SC), [2001] N.J. No. 195, 203 Nfld. & P.E.I.R. 181, 16 B.L.R. (3d) 34, 107 A.C.W.S. (3d) 46 (S.C. (T.D.)); Bouchan v. Slipacoff, [2010] O.J. No. 2592, 2010 ONSC 2693 (S.C.J.); GT Group Telecom Inc. (Re), 2004 52533 (ON SC), [2004] O.J. No. 4289, 5 C.B.R. (5th) 230, 134 A.C.W.S. (3d) 540 (S.C.J.); H. (F.) v. McDougall, [2008] 3 S.C.R. 41, [2008] S.C.J. No. 54, 2008 SCC 53, 61 C.R. (6th) 1, 61 C.P.C. (6th) 1, 297 D.L.R. (4th) 193, 83 B.C.L.R. (4th) 1, [2008] 11 W.W.R. 414, 260 B.C.A.C. 74, EYB 2008-148155, J.E. 2008-1864, 60 C.C.L.T. (3d) 1, 380 N.R. 82, 169 A.C.W.S. (3d) 346, EYB 2008-148155; Parris v. Laidley, [2012] O.J. No. 5214, 2012 ONCA 755; Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club, [2002] 1 S.C.R. 678, [2002] S.C.J. No. 20, 2002 SCC 19, 209 D.L.R. (4th) 318, 283 N.R. 233, [2002] 5 W.W.R. 193, J.E. 2002-448, 98 Alta. L.R. (3d) 1, 299 A.R. 201, 20 B.L.R. (3d) 1, 50 R.P.R. (3d) 212, 111 A.C.W.S. (3d) 733; Québec (Sous-ministre du Revenu) v. Services environnementaux AES Inc.), [2011] Q.J. No. 1911, 2011 QCCA 394, 2011EXP-879, J.E. 2011-470, EYB 2011-187420, 2011 D.T.C. 5045; Riopel c. Agence du revenue du Canada, [2011] J.Q. no 5720, 2011 QCCA 954, EYB 2011-190953, 2011EXP-1743, J.E. 2011-957; Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 157, [2009] S.C.J. No. 6, 2009 SCC 6, 52 B.L.R. (4th) 165, [2009] 3 W.W.R. 577, 301 D.L.R. (4th) 522, 87 B.C.L.R. (4th) 1, 68 C.C.L.I. (4th) 161, 70 C.C.E.L. (3d) 157, 265 B.C.A.C. 1, EYB 2009-153214, J.E. 2009-241, [2009] CLLC Â210-010, 383 N.R. 217, 173 A.C.W.S. (3d) 151; TCR Holdings Corp. v. Ontario, [2009] O.J. No. 3430, 64 B.L.R. (4th) 139, 179 A.C.W.S. (3d) 830 (S.C.J.); Thomas Bates & Son Ltd. v. Wyndham's (Lingerie) Ltd., [1981] 1 All E.R. 1077, [1981] 1 W.L.R. 505, [1981] 1 W.L.R. 505, 41 P. & C.R. 345, 257 E.G. 381, [1981] E.G.D. 65 (C.A.); Van der Linde v. Van der Linde, [1947] Ch. 306 (Ch. Div.)

Statutes referred to

Income Tax Act, R.S.C. 1985, c. 1 (5th supp.), ss. 75(2) [as am.], 104(4) [as am.], 107(2) [as am.], (4.1) [as am.]

Limitations Act, 2002, S.O. 2002, c. 24, Sch. B [as am.]

Business Corporations Act, R.S.O. 1990, c. B.16 [as am.]

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 39.03

Authorities referred to

Crockett, Brenda"Subsection 75(2): The Spoiler" (2005), 53 Can. Tax J. 806 [page3 ]

Hall, Geoff R., Canadian Contractual Interpretation Law, 2nd ed. (Markham, Ont.: LexisNexis, 2012)

Louis, David, Implementing Estate Freezes, 3rd ed. (Toronto: CCH, 2011)

Louis, David"Is a Family Trust Vulnerable to the CRA? More Warning Signs: Subsections 75(2)-107(4.1)", Tax Notes, June 2010

Louis, David, Samantha Prasad and Michael Goldberg, Tax and Family Business Succession Planning, 3rd ed. (Toronto: CCH, 2009)

Prasad, Samantha"Ins and Outs of a Family Trust", The Tax Letter, March 2001

APPLICATION for an order rectifying a trust indenture.

S. Novoselac and D. Stevens, for applicant.

D. Prevost and M-T Boris, for respondent.

D.M. BROWN J.: —

I. Application to Rectify a Family Trust Deed to Conform with Alleged Tax Planning Intention

[1] Back in March 1992, the applicant, Mr. Nizar Kanji, set up the Kanji family trust. Mr. Kanji deposed that he set up the family trust to allow for accumulated wealth to pass to his children in the future in a tax efficient manner. In late July or early August 2009, Mr. Kanji received legal advice that the trust deed, as drafted, would not achieve his desired tax objectives. In addition to commencing an action against the lawyer who had drafted the indenture for the family trust, on December 21, 2012, Mr. Kanji, and the other applicants, commenced this proceeding seeking an order rectifying the trust indenture in a specified manner. The applicants contended that if the trust indenture was not rectified in the manner sought, a significant capital gains tax liability might arise on the 21st anniversary of the settlement of the family trust -- March 26, 2013.

[2] The Attorney General of Canada ("AGC") opposed the application, submitting that Mr. Kanji had not established that the trust indenture failed to reflect accurately the intention which he held when he set up the family trust.[^1]

[3] For the reasons set out below, I dismiss the application.

II. The Tax Problem and its Discovery

[4] Mr. Kanji is the chief executive officer of the Sutter Hill Group of Companies. In 1992, Mr. Kanji reached an agreement [page4 ]with his employer, Alexis Nihon Developments, to acquire its Ontario third-party property management business using Sutter Hill Corporation. At that time, Mr. Kanji's wife, Gulzar Nizar Kanji, was still alive, and they had two adult children, Karim Kanji and Sophia Ukani. Both the children and Mrs. Kanji worked in the family business.

[5] Mr. Kanji deposed that in 1992 he wished to find a means to achieve estate planning and, after obtaining legal advice from Mr. Jeffrey Trossman of the law firm Blake Cassels & Graydon LLP ("Blakes"), he settled the family trust.

[6] The family trust was created by indenture made March 26, 1992, with Mr. Kanji as the settlor and Mr. and Mrs. Kanji as the initial trustees. Mr. Kanji read the trust indenture and discussed its terms with the Blakes lawyers before signing it.[^2] Mr. Kanji transferred $5,000 in cash to the family trust. The beneficiaries of the family trust were Mr. and Mrs. Kanji and their issue.[^3] All beneficiaries were eligible to receive income and capital from the trust.

[7] Under the terms of the trust, Mr. Kanji could remove any of the trustees and appoint substitute or additional trustees.

[8] Income from the settled amount was used by the family trust to purchase all of the shares of Sutter Hill Corporation. Mr. Kanji deposed that in 1996, Mrs. Kanji transferred title to the matrimonial home to the family trust, but the respondent questioned that information based on a title search which still showed the house in the name of Mrs. Kanji.[^4] Starting in 1997, the family trust acquired three commercial rental properties.

[9] In 2004, the family trust bought commercial property at 48 Yonge St., Toronto. At that time, Mr. Kanji was aware of the 21-year rule and sought legal advice from Mr. Graham Turner at the Fraser Miller Casgrain law firm ("FMC") about how the family trust should acquire the property. Full details of that advice were not placed in evidence.

[10] Mr. Kanji again consulted FMC in the early part of 2009. In a March 24, 2009 memo, Mr. Jules Lewy, a FMC lawyer, advised that because Mr. Kanji was the settlor of the family trust, one of the two trustees and a capital beneficiary, s. 75(2) of [page5 ]the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "ITA" or the "Act")[^5] would apply to the initial $5,000 contribution which he made to the family trust. Mr. Lewy continued:

Assuming that subsection 75(2) of the Act applies to the Trust, section 107(4.1) of the Act[^6] would be applicable. Accordingly, the Trust will not be [page6 ] able to distribute any property of the Trust on a "roll-over" basis to any beneficiary other than the person from whom property was received (or in certain situations the spouse of such person) during the lifetime of that person. If the Trust distributes property to any other person, the Trust will be deemed to have disposed of the property and receive proceeds of disposition equal to its fair market value.

[11] Mr. Lewy, in a subsequent July 30, 2009 memo to Mr. Kanji, advised that s. 104(4) of the ITA provides that property owned by a trust is deemed to be disposed of on the 21st anniversary of the creation of the trust and such a deemed disposition might cause the trust to have capital gains. To avoid that result, trust capital with accrued gains often is distributed to Canadian resident capital beneficiaries on a tax-deferred, rollover basis under ITA s. 107(2):

However, subsection 107(4.1) of the Act generally provides that subsection 107(2) is not applicable to capital distributions made by a trust in a situation where subsection 75(2) is applicable to any property of the trust and in such event, a distribution of assets by a trust will result in a deemed disposition of such assets by the trust[.]

It should be noted that subsection 107(4.1) can apply to all of the property of the trust, not only the property of the trust which is subject to section 75(2). As noted by one tax commentator"if a Settlor contributed $100 to a trust and reserved one or more of the powers described in subsection 75(2) . . . even if the balance of the assets of the trust were contributed by others or acquired with borrowed funds, subsection 107(4.1) would potentially apply to the distribution of every asset of the Trust"[.]

[12] In the July 30 memo, Mr. Lewy offered the following opinion:

[I]n my view, subsection 75(2) applies to the Trust and, accordingly, subsection 107(4.1) can potentially deny the tax-deferred distribution of all of the trust assets to a beneficiary of the Trust other than the person from whom the Trust received the property[.][page7 ]

Mr. Lewy also offered some views about the potential liability of Blakes in respect of the preparation of the trust indenture and the potential liability of FMC for advice given to Mr. Kanji in 2004.

[13] On his cross-examination, Mr. Kanji testified that before he met with FMC in 2009, he had learned from some financial planners that he might have a problem with the trust indenture and he had gone to see Mr. Trossman to ask him whether any such issues existed.[^7] The details of that discussion were not placed in evidence.

[14] According to Mr. Kanji, the 21-year rule will deem the family trust to dispose of and reacquire all of its assets on March 26, 2013, unless the family trust distributes its assets to Mr. Kanji before that date. The value of the trust's assets has reached approximately $62 million, and Mr. Kanji estimated that on a deemed disposition of the trust's assets capital gains tax of about $11.8 million would become payable. Mr. Kanji deposed that if the family trust were required to distribute its assets to him before March 26, 2013, that would frustrate "my intention to allow for the transfer of the family trust's assets to my children on a tax deferred basis".

[15] On February 3, 2011, the applicants commenced an action against Blakes and FMC in respect of legal advice given concerning the family trust. In his affidavit, Mr. Kanji did not offer any explanation about why, having discovered this tax problem in late July 2009, he waited for over three years before commencing this rectification application on December 21, 2012.[^8]

III. Rectification: The Governing Legal Principles

[16] Let me start by considering the law concerning rectification in the case of a contract which results from negotiations between two arm's-length parties. Rectification is an equitable remedy. As described by Binnie J. in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club: [page8 ]

The traditional rule was to permit rectification only for mutual mistake, but rectification is now available for unilateral mistake (as here), provided certain demanding preconditions are met. Insofar as they are relevant to this appeal, these preconditions can be summarized as follows. Rectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable. The plaintiff must establish that the terms agreed to orally were not written down properly. The error may be fraudulent, or it may be innocent. What is essential is that at the time of execution of the written document the defendant knew or ought to have known of the error and the plaintiff did not. Moreover, the attempt of the defendant to rely on the erroneous written document must amount to "fraud or the equivalent of fraud". The court's task in a rectification case is corrective, not speculative. It is to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other (citations omitted) . . . In Hart, supra, at p. 630, Duff J. (as he then was) stressed that "[t]he power of rectification must be used with great caution". Apart from everything else, a relaxed approach to rectification as a substitute for due diligence at the time a document is signed would undermine the confidence of the commercial world in written contracts.[^9]

[17] The person seeking rectification bears the onus of satisfying the court that the request to rectify merely would align the document with the true intentions underlying it and that the aspects sought to be rectified are mistakes which obstruct the true intentions which drove the document's formation.[^10] Although over the years some cases have held that a person seeking rectification must make out its case on a clear and convincing standard, in H. (F.) v. McDougall the Supreme Court of Canada held that in civil cases only one standard of proof exists at common law -- proof on a balance of probabilities.[^11] Of course, judges must remain mindful of inherent probabilities or improbabilities.[^12] In this regard, the comments of Brightman LJ. in Thomas Bates & Son Ltd. v. Wyndham's (Lingerie) Ltd. are apposite:

The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties' intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from [page9 ] the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties' intention because it is a document signed by the parties.[^13]

[18] Rectification of a mistake is a discretionary remedy which should be cautiously watched and guarded,[^14] especially in the case of a voluntary settlement.[^15]

[19] A number of cases have considered how to apply these standard rectification principles to situations, such as that in the present case, where the document at issue was not the product of a bargain between two arm's-length parties, but a transaction which essentially involved a re-organization of a person's or family's affairs, such as through a rollover device, amalgamation or the creation of a trust.

[20] First, in such situations, as a practical matter the requirements of prior agreement and error tend to be articulated in the following way: the applicant must show that (i) a common, specific intention existed amongst the creators of the instrument effecting the transaction to accomplish a particular result and (ii) a mistake caused the instrument not to comport with the common intention of the parties.[^16]

[21] Second, our Court of Appeal has held that rectification should not be denied merely because the Crown would be deprived of an accidental and unexpected windfall:

[No case] 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.[^17]

The Quebec Court of Appeal reached a similar conclusion in two recent cases, both of which resulted in appeals to the Supreme Court of Canada which presently are under reserve. In Québec (Sous-ministre du Revenu) v. Services environnementaux AES Inc., the Quebec Court of Appeal stated: [page10 ]

In this case, the parties had agreed on a transaction that complied with the taxation rules of the country and of the province such that it had no immediate tax consequences. In fact, the contractual documents that they executed did not reflect that intention because, as the taxation authorities were to discover thereafter, they had an immediate and material tax consequence. Correction of the contractual documents will make it possible to reflect the parties' true intention.

The respondents' application is legitimate. In fact, it is not for them a matter of rewriting the taxation history of the file, but of being able to correct the documents to make them consistent with the story designed and written by the parties on the basis of the scenario proposed by the tax legislation. The taxation authorities do not suffer any prejudice because both the Income Tax Act and the Taxation Act set out for the taxpayer the procedure to follow so that a share-for-share exchange can take place without immediate tax consequences and, moreover, if the parties had done so in a manner consistent with their will, there would have been no immediate tax consequences for them.[^18]

By contrast, courts do not look with favour upon attempts to rewrite history in order to obtain more favourable tax treatment: "[T]he cases seem to hold consistently that tax liability is based upon what happened, not upon what, in retrospect, the taxpayer wished had happened."[^19]

[22] Third, it is a question of fact whether part of the true agreement was to effect the transaction in a way which would not attract an immediate liability for income tax.[^20] The fact-driven nature of the exercise was highlighted in the case upon which the applicants heavily relied, Juliar v. Canada (Attorney General).^21 In that case, husband and wife, owners of 50 per cent of the shares in a holding company which owned an operating business, decided to transfer their shares into their personal family holding company, Juliar Holdings Ltd. Each sold their shares to Juliar in exchange for a promissory note. A subsequent assessment by Revenue Canada imposed a significant tax liability on both of them because the consideration for the share transfer was in the form of promissory notes, instead of shares in the new family holding company. The application judge, Cameron J., found, as a fact, that the husband and wife formed an intention, from the inception of the transaction, to transfer their [page11 ]shares to their new family holding company on a basis which would not attract immediate liability for income tax on the transaction. The Court of Appeal did not interfere with that key finding of fact. Significantly, Cameron J. had before him considerable evidence upon which to make that finding of fact: (i) the affidavit of the husband as to his intention; (ii) an affidavit from the accountant for the husband and wife who confirmed that intention and which revealed that the use of promissory notes, instead of exchanged shares, for the consideration occurred because of incorrect information provided to him about the past tax treatment of the couples' shares; and (iii) the affidavit of their lawyer which supported the husband's evidence regarding intention. On the basis of that evidence, Cameron J. was able to conclude:

The intention to postpone or avoid tax on the transaction 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 the tax avoidance and maintaining the assets of the business determined the form of the transaction. The Juliars expected no other effect. It is clear from the evidence and advice of [the accountant] and the evidence of [the husband] and of [the lawyer] 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.[^22]

[23] I would observe that the British Columbia Supreme Court, in the McPeake Family Trust case, pointed to the Court of Appeal decision in Juliar for the proposition that a plain intention about the purpose of a transaction may be inferred from all of the evidence, even if the intention was not recorded at the point of formation of the impugned transaction.[^23] While I acknowledge that evidentiary principle, the specific passage in Juliar quoted by the B.C. Supreme Court in support of the inference-drawing principle was immediately followed by the Court of Appeal stating that the evidence of the lawyer clearly supported the finding with respect to intention.[^24] The facts found in Juliar about intent rested more on direct evidence than they did on inference-drawing. [page12 ]

IV. Intention and Mistake

A. The evidence

A.1 Evidence of Mr. Kanji

[24] As a general rule, evidence of a party's understanding about the purpose of an agreement is not admissible to interpret the contract. In cases of rectification, however, parole evidence is admissible to ascertain whether the agreement as drafted accurately recorded the parties' actual agreement. As put by Geoff Hall in Canadian Contractual Interpretation Law, Second Edition:

Rectification has aptly been described as the "most venerable breach in the parol evidence rule", because a simple matter of pleading puts rectification into issue and therefore allows essentially unrestricted admission of extrinsic evidence, even evidence of a party's subjective intention.[^25]

[25] The only evidence adduced by the applicants was that of Mr. Kanji. An accountant by training and an experienced businessman, Mr. Kanji deposed, with respect to his investments and business assets, that he "established the Family Trust to allow for the accumulated wealth to pass to my children in the future in a tax efficient manner". To that end, he retained Blakes:

I explained my reasons for establishing the Family Trust to Mr. Trossman and Blakes and instructed Mr. Trossman and Blakes to structure the Family Trust in a tax efficient manner, which would, among other things, allow for a tax deferred transfer of the Family Trust's assets to my children in the future.

The Family Trust indenture was drafted in legal language, incorporating provisions the purposes of which were not and are not all known to me. At the time the Family Trust was settled, my intention was to structure the Family Trust in a tax efficient manner, which would allow for a tax deferred distribution of the Family Trust's assets to my children. I believed that my intention had been properly realized.

[26] Mr. Kanji deposed that he did not intend to receive any capital distributions from the family trust, nor did he intend to receive back any of the property he had contributed to the trust, notwithstanding that he was designated as a beneficiary in the trust indenture (s. 3.1(a)) and was eligible to receive capital from the trust (s. 4.3). He believed that Mr. Trossman and Blakes [page13 ]"made a mistake in drafting the Family Trust indenture and implementing the planning, since they did not consider the effect of a particular provision (s. 107(4.1)) of the Act. This has frustrated my intention to structure the Family Trust on a tax efficient basis. Mr. Trossman and Blakes never discussed the effect of that provision with me."

[27] On his cross-examination, Mr. Kanji testified that back in 1992, he told Mr. Trossman that he wanted to do a tax-deferred transfer of the trust's assets to his children in the future, and he pointed to the beneficiary designation (s. 3.1) and distribution date (s. 3.2) clauses in the trust indenture as reflecting that intention. Mr. Kanji acknowledged that neither clause contained a direct reference to a tax deferral or rollover, but he understood that to be the whole purpose in forming the trust.[^26]

A.2 Evidence of Mr. Kanji's legal advisors

[28] The applicants did not adduce any affidavit or compelled evidence from the lawyer who advised Mr. Kanji on establishing the family trust, Mr. Trossman, or any other lawyer from Blakes. On his cross-examination, Mr. Kanji testified that he did not contact Mr. Trossman or Blakes in preparing for this application, nor did he attempt to obtain copies of the documents in his file at Blakes.[^27] Applicants' counsel, in his letter providing answers to undertakings given on Mr. Kanji's cross-examination, wrote:

When the statement of claim was served on Mr. Trossman, our firm as counsel for the applicants asked him whether he might be able to offer evidence in support of the application. In response, counsel for Mr. Trossman advised us that the evidence of Mr. Trossman would not be supportive or helpful to the applicants' position and that if the application proceeded it would not be with the assistance of evidence from Blakes.

[29] Mr. Kanji did attach to his affidavit a March 23, 1992 memorandum to file prepared by Mr. Trossman. I shall consider that document below.

[30] One of the 2009 memoranda prepared by Mr. Lewy at FMC for Mr. Kanji referred to advice he had received about the family trust in 2004 from Mr. Graham Turner, another FMC lawyer. Neither FMC lawyer filed an affidavit on this application. On his cross-examination, Mr. Kanji testified that he did not try to obtain an affidavit from anyone at FMC or to secure documents from the firm in his client file.[^28] [page14 ]

A.3 Expert evidence

[31] No expert evidence was filed. However, the applicants filed several articles from tax law journals to explain the basics of estate freezes, as well as the effect of ITA s. 107(4.1) on trusts which possess the characteristics described in ITA s. 75(2). Several points emerged from those articles:

(i) the establishment of a trust may or may not be tax-motivated;[^29]

(ii) an estate freeze involves sequestering future growth of a business or investment in the hands of subsequent generations rather than the current owners;[^30]

(iii) the basic configuration of an estate freeze concerning an incorporated business usually involves a corporate reorganization such that the parents have shares with limited or no participation in the future growth of the corporation and the children hold shares carrying rights to future appreciation;[^31]

(iv) sometimes the children's shares may be held through a family trust which affords a degree of control and protection against mismanagement by the beneficiaries and flexibility in the ultimate determination of beneficiaries;[^32]

(v) "An estate freeze can carry its own set of pitfalls. Potentially, one of the most pervasive of these is subsection 107(4.1). This provision -- which applies where the so-called reversionary trust rules (subsection 75(2)) have ever applied to the trust -- can preclude a tax-deferred distribution to beneficiaries of the trust. Generally, the reversionary trust rules may apply where the Freezor wants to keep too many strings on the trust";[^33]

(vi) ITA s. 107(4.1) was enacted in 1988 and did not contain any grand-fathering rules. As observed by one commentator: [page15 ]

This can be very problematic since, as stated previously, some estate freezes may have been purposely formulated with the knowledge that subsection 75(2) would apply, e.g. because dividend splitting was not desired and the Freezor wanted a high degree of control of the trust assets.[^34]

[32] The applicants relied on a comment made by one commentator, Samantha Prasad, in a 2011 article, about the rule in ITA s. 75(2):

This rule has greater meaning today as a larger number of trusts approach their 21st anniversary and run the risk of running afoul of this attribution rule.

This is because the actual rule preventing the tax-free roll-out of the trust property did not come into play until the late 1980s. The possible consequences of tripping over the revised rules were not always fully appreciated by practitioners well into the early 90s.[^35]

B. Analysis

[33] In this proceeding, the applicants bear the onus of demonstrating, on a balance of probabilities, that at the time Mr. Kanji settled the family trust he intended to structure the family trust in a tax efficient manner which would allow for a tax deferred transfer of the trust's assets to his children in the future and that a mistake was made which resulted in the trust indenture failing to give effect to that intention. For several reasons, I conclude that the applicants have not met that burden.

[34] First, although Mr. Kanji deposed, unequivocally, that he had instructed Mr. Trossman and Blakes to structure the family trust in a tax efficient manner which would allow for a tax deferred transfer of the trust's assets to his children in the future, on cross-examination his evidence on that point became less certain:

Q. 331 Mr. Kanji, is it possible that at that meeting with Mr. Trossman you told him simply that you were looking to perhaps minimize tax and that was your instruction?

A. Amongst other things, possible, yes. [page16 ]

Q. 332 What I am going to suggest to you is that it is possible that all you said was to minimize tax and that you did not, in fact, speak about the tax deferral that is mentioned in your affidavit.

R. I don't recall the specifics of the discussion but, in my own mind, tax structure is not the only means for minimizing tax; there are many other planning tools available. So I can't -- I am just saying to myself, I could not have possibly just confined myself to using a trust for that purpose.

(Emphasis added)

In light of that evidence on cross-examination, an element of uncertainty surrounds Mr. Kanji's evidence about his intention.

[35] Second, Mr. Kanji did not file any affidavit evidence or rule 39.03 [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] evidence from the legal advisors who assisted him in establishing the family trust. That omission was striking. I would note that in two cases of this court relied upon by the applicants -- Juliar v. Canada (Attorney General) and TCR Holdings Corp. v. Ontario[^36] -- the findings of fact about intent and mistake which supported the grant of rectification were based upon evidence adduced by the party to the transaction, its lawyer and its accountant. In each case, the court drew upon the evidence from all three sources to arrive at its findings of fact about intent and mistake. In another case, GT Group Telecom Inc. (Re),[^37] in granting rectification the court relied on a combination of the existence of contemporaneous documentation substantiating the professed true intention of an agreement, together with the lack of opposition to the rectification sought by the Canada Revenue Agency and the director under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16.

[36] Tax-driven claims for rectification must be approached with care since common sense tells us that most taxpayers would like to minimize the amount of tax they must pay to the government. When, after the passage of almost 21 years, a taxpayer seeks tax relief from the court by asking for the rectification of an instrument, it would be imprudent for a court to rely solely on the evidence of the taxpayer about his or her intention without the comfort of some form of independent evidence -- contemporaneous documents[^38] or the evidence from other persons -- which supports the evidence of the taxpayer. While there [page17 ]may be cases where the defect or mistake in an instrument is patently obvious, this is not one of those cases. As noted by one of the commentators relied on by the applicants, the establishment of a trust may or may not be tax-motivated,[^39] so a court cannot infer what specific tax motivation may have driven the creation of a trust. Nor did the applicants file any expert evidence to the effect that the form of the 1992 trust indenture reflected a structure used only where the objective was to accomplish estate freeze tax deferrals.

[37] Applicants' counsel submitted that this was not a proper case in which to draw an adverse inference against the applicants as a result of their failure to call as witnesses their legal advisors from Blakes who established the trust. In support of that position, the applicants pointed to the following caution voiced by the Court of Appeal about drawing adverse inferences:

Drawing adverse inferences from failure to produce evidence is discretionary. The inference should not be drawn unless it is warranted in all the circumstances. What is required is a case-specific inquiry into the circumstances including, but not only, whether there was a legitimate explanation for failing to call the witness, whether the witness was within the exclusive control of the party against whom the adverse inference is sought to be drawn, or equally available to both parties, and whether the witness has key evidence to provide or is the best person to provide the evidence in issue.[^40]

[38] I would make two comments. First, in rectification cases courts naturally look for evidence contemporaneous with the creation of the instrument which can shed light on the evidence of a sole affiant who may suffer an adverse tax consequence if rectification is not granted. Such an affiant has an obvious interest in the outcome of the proceeding, so courts are interested whether more independent evidence is available to assist in making the factual determination on the issue of intent. Second, in the particular circumstances of this case, I do not need to infer from the applicants' failure to call Mr. Trossman that his evidence would be adverse to the applicants' position because one of Mr. Kanji's undertaking responses indicated that Mr. Trossman's evidence in fact would be adverse: "the evidence of Mr. Trossman would not be supportive or helpful to the applicants' position". [page18 ]

[39] The applicants also submitted that in the McPeake Family Trust case the court was prepared to grant rectification where the legal advisors did not testify. That case was quite different from the present one. First, several years previous the court had granted an initial rectification order. One can only conclude that at that time the court was satisfied, on the evidence before it, about the specific intent of the creator of the trust and that, as a result of a mistake, the trust document did not reflect that intention. The prior rectification order influenced the court which made the subsequent one.[^41] Second, several affiants, not just one, filed evidence about the intent which existed at the time the trust was created. In the present case, I only have the affidavit of Mr. Kanji.

[40] Third, the only document filed by the applicants which was made contemporaneously with the family trust's trust indenture was the March 23, 1992 Blakes memo which was sent to Mr. Kanji before he signed the trust indenture. That document dealt with a number of issues: attribution rules, including ITA s. 75(2); possible amendments to the tax regime which might mitigate the impact of deemed dispositions resulting from the operation of the 21-year rule through the designation of "exempt beneficiaries"; maximizing the availability of capital gains exemptions; the characteristics of the special shares to be issued by Opco to Holdco; and the treatment of inter-corporate dividends. The applicants submitted that since the memo did not refer to ITA s. 107(4.1), clearly the legal advisors had made a mistake and failed to give effect to Mr. Kanji's instructions. I cannot draw that conclusion from simply reading the document. Whether the legal advisors failed to address an issue would depend upon what instructions Mr. Kanji gave to them, and on that cardinal issue the document is silent. Indeed, a July 3, 1992 letter sent by Blakes to Mr. Kanji to explain the bill which they had rendered on his file described several issues on which the firm had provided him with legal advice:

As you are aware, your personal planning required the incorporation of two corporations, a review of the relatively complicated income tax rules with respect to personal services businesses, small business corporations, the capital gains exemption and the attribution rules as they affect family members.

In addition, because the share structure was somewhat unusual it was necessary to create special shares other than merely common shares of the [page19 ]corporation and to review and revise those share conditions in light of the tax planning.

Further, we prepared a draft trust agreement and reviewed your will in order to ensure that your income tax and estate planning objectives were met. Throughout the process I believe that you were kept informed, your comments were reviewed and incorporated and our analysis and views were conveyed to you on a timely basis.[^42]

[41] The July 3, 1992 letter did not specifically refer to putting in place an estate freeze. Nor did the March 23, 1992 memorandum, although it did make reference to deferring the application of the 21-year rule to the trust, as well as structuring the special shares so that they would not share in any of the increase in value of Opco. However, the focus of the memorandum on the latter point was the extent of the availability of capital gains exemptions in the event Revenue Canada took the position the value of the special shares was greater than nominal.

[42] A draft closing agenda was attached to the March 23, 1992 memorandum. It made no specific reference to an estate freeze. Also, unlike the typical estate freeze in which one class of shares is issued to the parents' generation and another to the children's, either directly or through a family trust,[^43] the draft closing agenda contemplated transferring all issued shares in Opco and Holdco to the family trust. Whether the draft closing agenda turned out to be the final closing agenda was not clarified in the evidence. Suffice it to say, the draft closing agenda does not permit any clear inference to be made that the transactions accompanying the creation of the family trust in 1992 were intended to secure the rollover of trust assets to the Kanji children on a tax-deferred basis.

[43] On his cross-examination, Mr. Kanji testified that he did not seek to obtain Blakes' file for this application. No one from Blakes filed evidence on this application. In the absence of such evidence, it is not possible to understand the context for the discussion of the issues in the March 23, 1992 memo or identified on the draft closing agenda, nor am I able to infer from the memo or the agenda what instructions Mr. Kanji gave to Blakes at that time.

[44] For these reasons, based on the evidence placed before me, I conclude that the applicants have not demonstrated, on a balance of probabilities, that at the time Mr. Kanji settled the family trust he intended to structure the family trust in a tax [page20 ]efficient manner which would allow for a tax deferred transfer of the trust's assets to his children in the future or that a mistake was made which resulted in the trust indenture failing to give effect to that intention.

V. Summary and Costs

[45] Accordingly, for the reasons set out above, I dismiss the application.

[46] I would encourage the parties to try to settle the costs of this application. If they cannot, the respondent may serve and file with my office written cost submissions, together with a bill of costs, by February 20, 2013. The applicants may serve and file with my office responding written cost submissions by March 1, 2013. The costs submissions shall not exceed three pages in length, excluding the bill of costs.

Application dismissed.

Notes

[^1]: As to the standing of the Attorney General of Canada, on behalf of the Canada Revenue Agency, to oppose claims for rectification based upon the intended tax consequences of a transaction, see McPeake Family Trust (Trustee of) v. Canada, [2012] B.C.J. No. 160, 2012 BCSC 132, para. 2.

[^2]: Transcript of the cross-examination of Nizar Kanji conducted January 10, 2013, QQ. 296-304.

[^3]: In some years following the creation of the family trust both Mr. and Mrs. Kanji received income from the trust: transcript of cross-examination of Verena Zbyrovski conducted January 10, 2013, Q. 75.

[^4]: Zbyrovski CX, QQ. 95-104.

[^5]: Section 75(2) of the ITA provides as follows:

75(2) Where, by a trust created in any manner whatever since 1934, property is held on condition

(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person"), or

(ii) pass to persons to be determined by the person at a time subsequent to the creation of the trust, or

(b) that, during the existence of the person, the property shall not be disposed of except with the person's consent or in accordance with the person's direction,

any income or loss from the property or from property substituted for the property, and any taxable capital gain or allowable capital loss from the disposition of the property or of property substituted for the property, shall, during the existence of the person while the person is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the person.

[^6]: Section 107(4.1) of the ITA provides as follows:

107(4.1) Subsection (2.1) applies (and subsection (2) does not apply) in respect of a distribution of any property of a particular personal trust or prescribed trust by the particular trust to a taxpayer who was a beneficiary under the particular trust where

(a) the distribution was in satisfaction of all or any part of the taxpayer's capital interest in the particular trust;

(b) subsection 75(2) was applicable at a particular time in respect of any property of

(i) the particular trust, or

(ii) a trust the property of which included a property that, through one or more dispositions to which subsection 107.4(3) applied, became a property of the particular trust, and the property was not, at any time after the particular time and before the distribution, the subject of a disposition for proceeds of disposition equal to the fair market value of the property at the time of the disposition;

(c) the taxpayer was neither

(i) the person (other than a trust described in subparagraph (b)(ii)) from whom the particular trust directly or indirectly received the property, or property for which the property was substituted, nor

(ii) an individual in respect of whom subsection 73(1) would be applicable on the transfer of capital property from the person described in subparagraph (i); and

(d) the person described in subparagraph (c)(i) was in existence at the time the property was distributed.

[^7]: Kanji CX, QQ. 392-396.

[^8]: The case of Bouchan v. Slipacoff, [2010] O.J. No. 2592, 2010 ONSC 2693 (S.C.J.), para. 9, stands for the proposition that equitable claims for rectification are subject to the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B. No party, however, raised a limitations issue on this application, so I have not considered the implications of the Limitations Act, 2002 on the applicants' claim.

[^9]: 2002 SCC 19, [2002] 1 S.C.R. 678, [2002] S.C.J. No. 20, para. 31. See, also, Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157, [2009] S.C.J. No. 6.

[^10]: McPeake Family Trust, supra, para. 17.

[^11]: [2008] 3 S.C.R. 41, [2008] S.C.J. No. 54, 2008 SCC 53.

[^12]: Ibid., para. 40.

[^13]: [1981] 1 All E.R. 1077, [1981] 1 W.L.R. 505 (C.A.), p. 1090 All E.R.

[^14]: Juliar v. Canada (Attorney General) (1999), 1999 15097 (ON SC), 46 O.R. (3d) 104, [1999] O.J. No. 3554 (S.C.J.), para. 35.

[^15]: Van der Linde v. Van der Linde, [1947] Ch. 306 (Ch. D.), at p. 311 Ch.

[^16]: Aylwards (1975) Ltd. (Re), 2001 32734 (NL SC), [2001] N.J. No. 195, 203 Nfld. & P.E.I.R. 181 (S.C. (T.D.)), para. 42; Amcor Packaging Canada, Inc. (Re), [2012] O.J. No. 5148, 2012 ONSC 6168 (S.C.J.), paras. 18-21.

[^17]: Canada (Attorney General) v. Juliar (2000), 2000 16883 (ON CA), 50 O.R. (3d) 728, [2000] O.J. No. 3706 (C.A.), paras. 33 and 34.

[^18]: [2011] Q.J. no 1911, 2011 QCCA 394, paras. 20 and 21. See, also, Riopel c. Agence du revenu du Canada, [2011] J.Q. no 5720, 2011 QCCA 954.

[^19]: 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 1995 745 (ON CA), 21 O.R. (3d) 739, [1995] O.J. No. 157 (C.A.), p. 742f O.R.

[^20]: Juliar (C.A.), supra, para. 25.

[^22]: Juliar (S.C.J.), supra, para. 48.

[^23]: McPeake, supra, para. 35.

[^24]: Juliar (C.A.), supra, paras. 27 and 28.

[^25]: Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed. (Markham, Ont.: LexisNexis, 2012), 2.8.6.

[^26]: Kanji CX, QQ. 314-330.

[^27]: Kanji CX, QQ. 416-417; 421-423.

[^28]: Kanji CX, QQ. 424-428.

[^29]: Brenda Crockett"Subsection 75(2): The Spoiler" (2005), 53 Can. Tax J. 806, 808.

[^30]: David Louis, Samantha Prasad and Michael Goldberg, Tax and Family Business Succession Planning, 3rd ed. (Toronto: CCH, 2009), 201.

[^31]: David Louis, Implementing Estate Freezes, 3rd ed. (Toronto: CCH, 2011), p. 4.

[^32]: Ibid., p. 8.

[^33]: Louis, Prasad and Goldberg, supra, 102, fn. 3.

[^34]: Ibid., 223, p. 64.

[^35]: Samantha Prasad"Ins and Outs of a Family Trust", The Tax Letter, March 2001, p. 7; similar comments were made by David Louis in "Is a Family Trust Vulnerable to the CRA? More Warning Signs: Subsections 75(2)-107(4.1), Tax Notes, June 2010.

[^36]: [2009] O.J. No. 3430, 64 B.L.R. (4th) 139 (S.C.J.).

[^37]: 2004 52533 (ON SC), [2004] O.J. No. 4289, 5 C.B.R. (5th) 230 (S.C.J.).

[^38]: In Amcor Packaging Canada Inc. (Re), supra, Newbould J. relied, in part, on contemporaneous documents in granting the rectification of an amendment made to a pension plan.

[^39]: Brenda Crockett"Subsection 75(2): The Spoiler".

[^40]: Parris v. Laidley, [2012] O.J. No. 5214, 2012 ONCA 755, para. 2.

[^41]: McPeake Family Trust, supra, para. 42.

[^42]: Kanji CX, Exhibit 2.

[^43]: Louis, Implementing Estate Freezes, supra, p. 4.

End of Document