Birch Hill Equity Partners Management Inc. et al. v. Rogers Communications Inc. et al.

[Indexed as: Birch Hill Equity Partners Management Inc. v. Rogers Communications Inc.]

Ontario Reports

Ontario Superior Court of Justice,

Dunphy J.

November 25, 2015

128 O.R. (3d) 1 | 2015 ONSC 7189

Case Summary

Remedies — Rectification — Respondents' acquisition of company triggering gains by ten of company's executives on their stock options that did not benefit from tax deduction available under s. 110(1)(d) of Income Tax Act — Application to rectify acquisition documents dismissed — Evidence not establishing that either side turned its mind to tax impact on executives when they entered into securities purchase agreement — Unexpected tax consequences not sufficient reason to grant exceptional remedy of rectification — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).

The acquisition of a company by the respondents triggered gains by ten of the company's executives on stock options held by them that did not benefit from the 50 per cent deduction on stock option benefits available in certain circumstances to employees pursuant to s. 110(1)(d) of the Income Tax Act. The applicants brought an application to rectify the closing documents to enable the ten executives to improve their chances of claiming the deduction.

Held, the application should be dismissed.

The ten executives were not parties to the share purchase agreement. It was impossible to read the share purchase agreement and conclude that the tax impact of the transaction on the ten executives was the object of any fixed intention of either party, let alone both parties, at the time they entered into the agreement. There was no suggestion that either or both of the parties to the agreement viewed the tax treatment of the ten executives as material to their transaction. It was entirely peripheral. A "mistake" could not be attributed to either party. The exceptional remedy of rectification must be confined to its proper limits. It is not a remedy to reverse engineer a desired tax outcome after the fact. The criteria to rectify either mutual mistake or unilateral mistake were not satisfied in this case.

Fairmont Hotels Inc. v. Canada (Attorney General), [2015] O.J. No. 3172, 2015 ONCA 441, affg (2014), 123 O.R. (3d) 241, [2014] O.J. No. 6086, 2014 ONSC 7302, 2015 D.T.C. 5019, [2015] 3 C.T.C. 9, 36 B.L.R. (5th) 215, 37 B.L.R. (5th) 101, 248 A.C.W.S. (3d) 233 (S.C.J.); Juliar v. Canada (Attorney General) (2000), 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, 2000 16883 (C.A.), affg (1999), 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, 1999 15097 (S.C.J.), distd [page2 ]

Other cases referred to

771225 Ontario Inc. v. Bramco Holdings Co. (1995), 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, 1995 745 (C.A.); Kanji v. Canada (Attorney General) (2013), 114 O.R. (3d) 781, [2013] O.J. No. 504, 2013 ONSC 781, [2013] 3 C.T.C. 141, 2013 D.T.C. 5058, 225 A.C.W.S. (3d) 992 (S.C.J.); Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., [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

Statutes referred to

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 7(1) [as am.], 110(1)(d) [as am.]

Rules and regulations referred to

Income Tax Regulations, C.R.C., c. 945, s. 6204(1) (a), (b)

APPLICATION for a remedy of rectification.

Justin Kutyan and Stephanie Dewey, for applicants.

No one appearing for respondents.

[1] DUNPHY J.: — Few commercial transactions are entered into these days without tax planning playing some part. In recent years, our courts have faced an increasing number of applications for relief to correct what are alleged to be mistakes, invoking the equitable doctrine of rectification of mistakes. Some have been successful and some have not.

[2] The doctrine of rectification is not an all-purpose tax planning time machine to substitute the transaction a party would have preferred to have done for the one that was actually carried out. Rather, it is available subject to very strict limitations to correct genuine and demonstrable mistakes when the documents as actually drafted fail to translate the express and dominant purposes of a particular transaction at the time it was entered into and, in some cases, to prevent the law from being used as an instrument of fraud or oppression by a party seeking to take advantage of a known error. It is a narrow exception to the parol evidence rule, itself an important bulwark in protecting the integrity of commercial transactions and the values of certainty. There can be no special rules applicable to tax mistakes as opposed to any other variety. Rectification is neither an insurance policy nor a guarantee of achieving any particular desired outcome when faced with fiscal authorities. [page3 ]

[3] This is an application to rectify certain documents arising out of an acquisition by the respondents of Atria Networks LP ("Atria") in January 2011. The acquisition triggered gains by certain executives of Atria on stock options held by them that did not benefit from the 50 per cent deduction on stock option benefits available in certain circumstances to employees pursuant to s. 110(1)(d) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA"). The applicants seek to rectify the documents employed at closing so as to create an entirely different structure that would, they hope, enable the ten executives in question to improve their chances of claiming the deduction that Canada Revenue Agency ("CRA") has denied them. The respondents -- the parties who undertook the acquisition -- consent to the relief. The Attorney General for Canada (representing the interest of the Minister of Revenue) is not opposed, but without prejudice to the Minister of Revenue's right to deny the claimed deduction in any event.

[4] Is the doctrine of rectification available to assist the applicants in this case? In my view, it is not. My reasons for so concluding are set forth in greater detail below.

[5] The applicants (other than the ten named individuals) as vendors under the subject transaction may well have harboured some level of intention to structure the transaction in such a fashion as to ensure that the executives would benefit from the tax deduction permitted in some circumstances by s. 110(1) (d) of the ITA. If so, they do not appear to have given the matter much if any thought or attention. The "mistake" -- if mistake there be -- was unilateral at best and the evidence that the tax impact on the executives in question was ever given more than a cursory glance when the agreements were entered into is entirely lacking. The employee option tax structuring issue was at best peripheral and marginal to the overall transaction (involving only a small fraction of the gross purchase price of approximately $425 million). There is no evidence to suggest that the respondents/ purchasers were other than indifferent to the issue then or now.

[6] The relief requested would have the non-party executives be retroactively deemed by way of "rectification" to have entered into a transaction that never occurred five years ago with a party they never had direct dealings with in order retroactively to avoid a tax issue that has emerged after the fact and was given little to no attention at the time. Finally, the requested rectification would answer only one of the objections raised by the CRA and thus may have no impact at all on achieving the intended tax objective. [page4 ]

[7] Taken cumulatively, this application layers too many legal fictions upon each other to fit within equitable doctrines whose application ought to be rare and exceptional. At some point, the bell rings, the pens go down and the parties have to submit their final answer to be marked. While our courts have occasionally shown some flexibility in cases where a particular tax treatment was central to the transaction but was inadvertently mishandled, it would be an error to expect such rulings to afford a broad license to close first and claim a "mulligan" to fix it up later [at para. 9]: "tax liability is based upon what happened, not upon what, in retrospect, the taxpayer wished had happened".[^1]

[8] I have great sympathy for the executives whose benefit on the transaction will be less than they had hoped. Their case was well researched and presented. It did not fail for lack of thoroughness or vigour in the presentation of arguments. The available evidence simply does not fit the strict requirements of an exceptional remedy. The individual applicants (the "ten executives") have between them been denied total deductions of about $8.5 million on their collective $17 million gain, resulting in being required to pay about $4 million more tax than they had hoped to pay (plus interest). However, equitable doctrines have their limits lest they be subjected to abuse. Rectification as a remedy must remain is by its nature an extraordinary and carefully limited one. Its impact on parties not before the court can only be guessed at. Retroactively altering completed transactions is like unravelling a knit sweater: once begun, it is hard to know where it ends. Commercial certainty is not a value to be treated lightly based on a subjective assessment of who the victims of its abandonment appear to be.

[9] Parliament has chosen to provide a technical and complex set of rules to be complied with in order for taxpayers to benefit from the exceptional opportunity of deducting from ordinary employment income 50 per cent of the employment benefit arising from some carefully described option grants. If the executives in question were offered and accepted the opportunity to receive a very substantial material gain in a transaction negotiated by others that was not designed with those rules in mind and if the ITA itself provides no mechanism for relief, the court's discretion to procure a different result retroactively has its limits. I must decline to grant the relief requested. [page5 ]

Application dismissed.

Notes

[^1]: 771225 Ontario Inc. v. Bramco Holdings Co. (1995), 21 O.R. (3d) 739, [1995] O.J. No. 157, 1995 745 (C.A.), per Galligan J.A.

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