Court and Parties

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN :

GARY EVANS, THE EVANS (2009) FAMILY TRUST, HEIDI EVANS, GREGORY EVANS, and PHILIP EVANS, Applicants – and – THE ATTORNEY GENERAL OF CANADA Respondent

Counsel: R.G. Morton, for the Applicants R. Zsigo, for the Respondent

HEARD: February 21, 2024

JUDGE: Justice H.A. Rady

Reasons for Decision

Introduction

[1] The applicants seek rectification of a resolution of the Trustee of The Evans (2009) Family Trust, dated December 17, 2012. The applicants submit that the resolution erroneously failed to identify clearly and definitely the amounts payable to the Trust’s beneficiaries. The payments arose from the sale of two family-owned businesses and the Trust received the proceeds of disposition.

[2] The Income Tax Act, R.S.C. 1985, c.1 (5th supp.) permits certain trusts to allocate income to its beneficiaries. Although no money changes hands, the income is taxable in the beneficiaries’ hands. The applicant’s original submission was that the Trustee intended to allocate all of the proceeds of disposition from the sale to the beneficiaries, leaving nothing in the Trust at year end. During oral argument, the applicants conceded that they could not prove that the entire proceeds of disposition were to be allocated. However, they submit that they have proved that there was an agreement to allocate at least $375,000 to each of the beneficiaries. They say that the amount of the allocation was designed to permit the beneficiaries to use their Lifetime Capital Gains Exemption (LCGE).

[3] The LCGE provision is found in the Act and allows for certain capital gains to be tax-free. In 2012, an individual could exempt capital gains of $750,000 from taxation. Because only 50% of capital gains are included in income, an individual could exempt $375,000 from taxation.

[4] In this case, the relevant resolution failed to specify that each beneficiary had been allocated at least $375,000 of taxable gains in 2012.

[5] The Canada Revenue Agency (CRA) reassessed the Trust in August 2015 for the 2012 taxation year. CRA took the position that the resolution did not make any portion of the Trust income payable to the beneficiaries before the end of 2012 pursuant to s. 104(24) of the Act. Accordingly, it said the income should be taxed in the Trust. This resulted in a tax on the income that the applicants say the Trust sought to distribute on a tax-free basis. Consequently, the applicants brought this application for rectification on April 29, 2016.

[6] The respondent opposes rectification. It submits that the applicants have failed to demonstrate with clear, convincing and cogent evidence that the substance of their agreement is not reflected in the Resolution. Indeed, the respondent says that there is no evidence that an agreement ever crystallized. It also submits that the applicants’ remedy may lie elsewhere – the accountants or lawyers who prepared the resolution, for example.

The Evidence

[7] The applicants rely on the following evidence:

i. Affidavits of Gary Evans dated August 4, 2016 and November 26, 2022 ii. Affidavits of Nick Mastroluisi dated August 4, 2016, November 29, 2022 and October 31, 2023 iii. Affidavit of Tony DeLuca dated November 29, 2022 iv. Affidavits of Heidi Evans dated August 4, 2016 and November 26, 2022 v. Affidavit of Philip Evans dated November 26, 2022 vi. Affidavits of Gregory Evans dated August 4, 2016 and November 26, 2022

[8] The respondent filed no evidence. It did not cross-examine any of the affiants. Therefore, the applicants’ evidence is unchallenged. However, if I understand the respondent’s position, it says that the applicants have failed to meet their burden of proof to demonstrate that an agreement was reached. It submits that some of the evidence is vague and contradictory. It intimates that the applicants’ evidence over time has become more detailed and responsive to the position of being advanced in defence, the implication being that the applicants’ credibility is adversely affected.

The Facts

[9] The following recitation attempts to summarize the facts set out in the various affidavits, and which as already noted are unchallenged.

[10] The Evans (2009) Family Trust was settled on October 1, 2009, by Wilfred Evans. Gary Evans has always been the only Trustee, and he has had the sole discretion to distribute any part of the Trust’s income or capital to any beneficiary. The beneficiaries are 2219314 Ontario Inc., Gary, his wife Heidi and their two sons, Gregory and Philip. The Trust’s year end is December 31.

[11] Before the Trust was established, Gary owned shares in two corporations, Edson Packaging Machinery (2007) Limited and Edson Realty Corporation.

[12] The Trust had been established on the advice of Gary’s former accountants for income tax purposes. Through a freeze transaction in which Gary’s common shares were exchanged for fixed value preferred shares, the Trust came to own the common shares in the two Edson companies. The Trust and freeze transactions were designed so that the future growth of the Edson businesses would accrue to the Trust. Any future capital gains on a share sale by the Trust could be paid or be made payable to a beneficiary, allowing the beneficiary to use their LCGE to receive all or part of their share of the capital gain tax-free.

[13] In 2012, the shareholders of the two Edson companies entered into an agreement of purchase and sale for all of the companies’ shares. The deal closed on February 1, 2012. The share sale resulted in a capital gain to the Trust. The sale proceeds were used to fund an investment portfolio with BMO, which resulted in more income for the Trust in 2012.

[14] Nick Mastroluisi and Tony DeLuca provided accounting and tax planning advice to the family. Both Mr. Mastroluisi and Mr. DeLuca have sworn that planning for the share sale began in advance of 2012. As early as September 2011, the accountants say they began to discuss with Gary the use of the beneficiaries’ LCGE on the share sale and specifically using the full LCGE then available to the beneficiaries.

[15] The total proceeds of the share sale could not be ascertained until after December 31, 2012 due to post-closing adjustments. Investment information slips from BMO for the investment portfolio were not available until April 1, 2013. As a result, the Trust’s income for 2012 could not be definitely known until after December 31, 2012.

[16] Nevertheless, the accountants knew there would be a significant capital gain and that the beneficiaries could use their LCGE to reduce their tax liability. The accountants met with Gary and Heidi on October 16, 2012, to discuss how to handle the capital gain from the share sale. Mr. Mastroluisi prepared an agenda for the meeting which reflected the possibility of an allocation of the capital gain to the beneficiaries. The agenda is reproduced below.

CARY EVANS & THE EVANS (2009) FAMILY TRUST SALE OF SHARE IN EDSON REALTY CORPORATION & EDSON PACKAGING MACHINERY (2007) LIMITED FEBRUARY 1, 2012

THE EVANS 2009 FAMILY TRUST – ITEMS FOR DISCUSSION

1. Do you want to allocate more capital gains to Greg and Philip? This will save tax because of i) the lower tax rates available to them and ii) reduce the minimum tax they have to pay in 2012. The downside is more funds will need to be allocated to them.
2. In the case of each of Greg and Philip, the gross capital gain is $750,000. This means: a) They are each allocated a taxable gain of $375,000 which will be offset by their exemption. b) The other $375,000 of the $750,000 can go to Gary or Heidi as capital. c) Will this be paid in cash by December 31, 2012 or by way of note?
3. Consider increasing the allocation to Heidi and decrease the allocation to Gary. Gary has considerable income in 2012. This will save on the tax rate Gary is in a higher bracket. Could increase Heidi by $444,000
4. Need resolutions of the trustees indicating the allocations
5. Prior to finalizing the calculations, need to consider: a) Results of the escrow payout b) Ensure all disposition expenses are picked up. c) Ensure all post closing items are picked up.

Yes OK OK OK NOTE YES DO THIS No adj as of 3/31/13 Done Done

[17] He also prepared, as Schedule 1A, a calculation of the taxes and how the capital gain might be allocated. It specifically contemplated allocating $375,000 to each of Heidi, Gregory, and Philip. The applicants say that the initial idea was for Gary and Heidi to each receive approximately 30% of the capital gain, and Gregory and Philip approximately 20% in order for each to use the maximum amount of their available LCGE.

[18] Mr. Mastroluisi prepared certain notes to the calculations. Note 2 says “Heidi has never used her exemption. Balance is $750,000 x 50% = $375,000”. Note 4 provides “Greg & Philip have been allocated $750,000 to enable them to use their exemption”.

[19] Ultimately, however, the applicants say the decision was made to allocate the entire gain to Heidi, Gregory, and Philip in view of Gary’s unique circumstances, namely his ownership of Edson Realty’s shares. He was able to use his capital gains exemption on the sale of those shares. The applicants assert the decision was made at the October meeting, although the total available for allocation could not then be determined. Heidi swears that she was present at the meeting and was privy to Gary’s decision to allocate her at least $375,000 capital gain from the 2012 share sale.

[20] Mr. Mastroluisi and Mr. DeLuca depose that Gregory and Philip were aware of their father’s plan regarding the allocation of the capital gain sufficient to allow them to use their LCGE. They also depose that they told Gary to tell his sons that this was what had been decided. Gary says he did so following the October meeting.

[21] On December 17, 2012, the accountants met again to discuss the allocation. They say that they called Gary to confirm his instructions.

[22] In his first affidavit, Mr. Mastroluisi deposes as follows:

16. On or about December 17, 2012, Gary confirmed to me and Tony De Luca his decision that he made at the October 16 th meeting that none of the 2012 income of the Trust would be paid to him, but rather that all of the Trust’s income would be allocated to his wife and his sons and made payable to them by way of promissory notes for any amounts not paid to them before December 31, 2012. As at December 17, 2012, the Trust’s income could not yet be determined so the precise amounts that each beneficiary would receive could not be ascertained, however at that time all parties were aware that the ultimate allocation would be equivalent to not less than $375,000 to each of Heidi, Gregory, and Philip.

[23] Gary deposes that he confirmed his instructions, and also confirmed that he had advised the beneficiaries that they would be allocated at least $375,000 of capital gains in 2012. The beneficiaries have all sworn that as early as October 16, 2012 and no later than December 17, 2012, they knew of Gary’s decision to allocate to each of them $375,000 of the Trust’s capital gain and all of the Trust’s income.

[24] On April 4, 2013 and after the Trust’s income was determined in early 2013, the accountants instructed the Trust’s lawyers to prepare the Trustee’s resolution and demand promissory notes to document the beneficiary’s allocations. Mr. Mastroluisi deposes that Gary’s instructions never changed respecting a minimum allocation of $375,000 to Heidi, Gregory, and Philip.

[25] In the letter of instruction to the lawyers, Mr. Mastroluisi advised that 2012 T3 – Trust Income Tax and Information Return for the Trust had been filed. He said that all of the Trust’s 2012 income and capital gains were allocated to the Trust’s beneficiaries. He continued “It is our understanding that since the income of the Trust would not be ascertainable at December 31, 2012, Gary Evans, the sole trustee of the Trust on or about December 17, 2012 resolved to pay all of the Trust’s income to the beneficiaries of the Trust and advised the beneficiaries of his decision.”

[26] He set out the amounts that had been allocated to the three beneficiaries, which reflected a distribution of all of the Trust’s income. He asked that promissory notes be prepared to reflect the allocations.

[27] The promissory notes that were ultimately prepared and dated March 31, 2013 provide for payment on demand of the following amounts:

• Heidi $726,769.33
• Gregory $529,274.38
• Philip $488,560.30

[28] I pause here to note that the promissory note for Gregory contains a figure that does not align with the letter of instruction. The note is for $13,902.79 more. I do no believe anything turns on this discrepancy.

[29] The resolution that forms the basis of this application is excerpted below:

Original Resolution

The income of the Trust be allocated to the Beneficiaries of the Trust payable by way of demand Promissory Note in such amounts to be determined when the income of the Trust is ascertained as follows (the “Distribution”)

BENEFICIARY:

GREGORY EVANS

PHILIP EVANS

HEIDI EVANS

[30] The Trust and the beneficiaries filed income tax returns reflecting the allocation of $375,000 to Heidi, Gregory, and Philip. In 2014, CRA audited the Trust’s 2012 tax year. It took the position that the income allocated to the beneficiaries should be taxed in the Trust because the resolution did not specify the amounts to be payable to the beneficiaries. In other words, it said that the resolution was not sufficiently specific to allocate at least $375,000 of taxable capital gains to each beneficiary in 2012. As a result, the Trust was taxed on the basis of 2012 income of $1,574,609 resulting a tax liability of $749,240.98 plus interest.

[31] The Trust filed an objection to its reassessment. Because CRA only reassessed the Trust, the 2012 income has been double taxed, once in the hands of the Trust and then again in the beneficiaries’ hands. The beneficiaries have filed adjustment requests. CRA issued reassessments to which objections have been filed to ensure that any adjustments that might result from this application can be facilitated.

[32] The respondent highlights various inconsistencies in the applicant’s evidence and points out that some of their evidence is vague and lacking in detail. By way of example, with respect to the October 16, 2012 meeting, the discussion among Gary, Heidi and their sons was an “initial option” of allocating all of the Trust’s income among them and the potential distribution and amounts that could be made payable.

[33] The respondent suggests that it is not clear when a decision was made to leave Gary out of the distribution. Mr. Mastroluisi suggests that the decision was made during the October meeting, but Heidi says it was on December 17, 2012 that Gary confirmed his decision.

[34] The respondent points out that there is no documentation that clearly expresses that $375,000 was to be allocated to the beneficiaries. It also suggests that Gregory and Philip’s evidence about when they were aware that a decision was made to allocate $375,000 to them is vague and does not identify the source of this information.

[35] In addition, the respondent emphasizes that Gary’s first affidavits speak to a decision to allocate all of the Trust’s income to the beneficiaries. In contrast, Gary’s last affidavit elaborates that he had decided that not less than $375,000 was to be allocated.

The Law

[36] Rectification is a discretionary and equitable remedy available by virtue of the Courts of Justice Act, R.S.O. 1990, C. 43 s. 96.

[37] The leading case is the Supreme Court of Canada’s decision in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, which was heard with Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R 670.

[38] The facts in Fairmont are somewhat complicated but are neatly summarized in the headnote as follows:

Fairmont Hotels Inc. was involved in the financing of Legacy Hotels’ purchase of two other hotels, in U.S. currency. The financing arrangement was intended to operate on a tax-neutral basis. When Fairmont was later acquired, that intention was frustrated, however, since the acquisition would cause Fairmont and its subsidiaries to realize a deemed foreign exchange loss. The parties to Fairmont’s acquisition therefore agreed on a plan, which allowed Fairmont to hedge itself against any exposure to the foreign exchange tax liability, but not its subsidiaries. There was no plan for protecting them from such exposure because the plan was deferred. The following year, Legacy Hotels asked Fairmont to terminate their financing arrangement to allow for the sale of the two other hotels. Therefore, Fairmont redeemed its shares in its subsidiaries, by resolutions passed by their directors. This resulted however in an unanticipated tax liability. Fairmont sought to avoid that liability by rectification of the directors’ resolutions. Both the application judge and the Court of Appeal granted that rectification on the basis of the parties’ intended tax neutrality.

[39] The application judge held that the parties’ intention for tax neutrality supported rectification. The Court of Appeal agreed. The Supreme Court overturned their decisions holding that rectification is not available where the basis for seeking it is that one or both parties wish to amend not the instrument recording the agreement but the agreement itself. The court set out the principles that guide the application judge’s exercise of discretion.

[40] Four requirements must be satisfied in order for an applicant to qualify for rectification:

i. the parties had reached a prior agreement whose terms are definite and ascertainable; ii. the agreement was still effective when the instrument was executed; iii. the instrument failed to record accurately that prior agreement; and iv. if rectified as proposed, the instrument would carry out the agreement.

[41] The parties agree on the basic principles underlying the remedy of rectification. Where they part company is whether the applicants have discharged their onus to prove a prior agreement.

[42] The applicants and respondent agree that those seeking rectification bear the onus to establish, with evidence that is sufficiently clear, convincing and cogent, that the true substance of their agreement was not accurately recorded (Fairmont at para. 36). Rectification is not available to amend a bargain in order to fix “errors in judgment” (Fairmont at paras. 3 and 13). Rectification is available even if it permits a party to avoid adverse tax consequences, provided the four requirements enumerated above are satisfied (Fairmont at para. 25).

[43] An earlier decision of the Supreme Court of Canada in Québec (Agence du revenue) v. Services Environnementaux AES, 2023 SCC 65 held that rectification should be available where “…a writing contains an error, particularly one that can…be attributed to the taxpayer’s professional advisor…” (at para. 52). Although the decision involved an interpretation of the Civil Code, its reasoning was endorsed in Fairmont supra at para. 33.

[44] The Supreme Court had occasion to consider the availability of rescission in Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26. Rescission like rectification is an equitable remedy. As a result, the discussion in Collins Family Trust is relevant to rectification as well.

[45] In that case, two companies implemented a plan to protect corporate assets from creditors without incurring income tax liability. The plan was based in part on interpretations published by CRA of the attribution rules in s. 75(2) and the inter-corporate dividend deduction in s. 112(1) of the Income tax Act. It involved the creation of family trusts, to which dividends were paid. After the plans were implemented, the Tax Court of Canada, in another matter, interpreted s. 75(2) differently than what had been commonly accepted by tax professionals and CRA. CRA reassessed the trusts’ returns and imposed an unanticipated tax liability. The trusts petitioned for the equitable remedy of rescission of the transactions leading to and including the payment of dividends.

[46] The application judge granted rescission and an appeal to the British Columbia Court of Appeal was dismissed. The Supreme Court overturned the decisions below. It held that taxpayers should be taxed based on what they actually agreed to do and did, and not on what they could have done or later wished they had done. The proper inquiry is into what the taxpayer agreed to do and not into whether there is a windfall to the public treasury or a taxpayer. A court cannot modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability.

[47] The Court also noted that these principles are of general application and not confined to cases where rectification is sought.

[48] Finally, there is authority for the proposition that rectification is available for a mistake in a Trust deed: Slightham et al v. AGC, 2023 ONSC 6193. It follows that rectification should be available to correct a document executed by a Trustee in the exercise of its duty as Trustee, the rationale being that if rectification is available to correct a Trust deed, it is available to correct a resolution, both being unilateral acts of the Trustee.

Analysis

[49] The essence of the dispute is whether there was a prior agreement whose terms are definite and ascertainable, that Gary had decided to allocate at least $375,000 of taxable capital gains to Heidi, Philip, and Gregory. The applicants concede that the balance of the agreement, namely whether to allocate all of the remaining income of the Trust to the three beneficiaries, is not definite and ascertainable. They agree that there was no allotment of the remainder to them prior to the end of 2012.

[50] For its part, the respondent concedes that there is some evidence of a discussion of a potential payout of $375,000 to each of the beneficiaries. However, it submits that the evidence falls short of proving that an agreement was in fact reached.

[51] I have concluded that the applicants have proven on a balance of probabilities that Gary decided at least $375,000 of the Trust income would be allocated to each of the beneficiaries. The resolution erroneously did not adequately reflect that agreement.

[52] Accordingly, rectification should be granted. The fact that a potential remedy might lie against the professional advisors should not be an impediment to rectification for reasons set out below.

[53] As already noted, the respondent filed no material and did not cross-examine the applicants or the accountants. Their evidence is uncontroverted as a result. In my view, if the respondent intended to challenge the credibility of the deponents, it would have been preferrable to do so as a matter of fairness.

[54] The situation is somewhat analogous to running afoul of the Rule in Browne v. Dunn (1893), 6 R. 67 (H.L.) which provides that if a cross-examiner intends to impeach the credibility of a witness by means of extrinsic evidence, he or she must give the witness notice of that intention.

[55] The Rule applies to closing arguments as well, which by analogy, would include argument on an application. In Browne, the Court noted at pages 71-72:

To my mind nothing would be more absolutely unjust than not to cross-examine a witness upon evidence which they have given, so as to give them notice, and to give them an opportunity of explanation, and an opportunity very often to defend their own character, and not having given them such an opportunity, to ask the jury afterwards to disbelieve what they have said, although not one question has been directed with to either their credit or to the accuracy of the facts they have deposed to.

[56] I hasten to add that I recognize that the Rule does not create a presumption that a witness who has not been cross-examined is telling the truth, particularly where that evidence is inconsistent with other evidence. Such a proposition was rejected in R. v. Mete, [1973] 3 W.W.R. 709 (B.C.C.A).

[57] To reiterate, the question is whether the applicants have adduced sufficient evidence to show an agreement was reached to allocate $375,000 to Heidi, Gregory, and Philip. I am satisfied that they have done so.

[58] I agree with the respondent that there is some imprecision in the language used in the affidavits and there are instances where the affiants’ evidence does not align precisely. This is hardly surprising. Indeed, if it were otherwise, one might be suspicious that the affiants had collaborated to ensure their evidence was identical.

[59] In my view, there is no good reason to reject the applicants’ evidence that by December 17, 2012, a decision had been made to leave Gary out of the distribution and that Heidi, Gregory and Philip were to be allocated at least $375,000 each in order for them to take advantage of their LCGE. Mr. Mastroluisi’s evidence on this is clear. I can see no reason why he would be untruthful. There is corroboration in the contemporaneous documents prepared by Mr. Mastroluisi and in particular his October 16, 2012 agenda, and the income tax returns prepared for the applicants.

[60] The fact that the applicants may have an alternative remedy should not prevent rectification. Justice Côté discussed the issue in her dissent in the Collins Family Trust decision. She wrote as follows:

[59] There are two competing approaches to the assessment of the availability of alternative remedies. In Canada Life Insurance Co. of Canada v. Canada (Attorney General), 2018 ONCA 562, 141 O.R (3d) 321, the Ontario Court of Appeal held that the mere existence of a legal remedy warrants denying equitable relief. The court framed the question not as whether an alternative remedy would be successful, but solely whether there exists a remedy at law. The opposite view was expressed by the British Columbia Court of Appeal in 5551928 Manitoba Ltd. v. Canada (Attorney General), 2019 BCCA 376, 439 D.L.R. (4th) 483; it held that, when a court must determine whether an equitable remedy should be granted, it is no sufficient for an alternative remedy to merely exist. The court must, in exercising its discretion, ask whether the alternative remedy is practical or adequate.

[60] The second approach should be endorsed. The mere theoreticalpossibly of an alternative remedy where there is no evidence on how the remedy might apply in practice is insufficient to displace the court’s equitable jurisdiction to grant rescission. The alternative remedy must be sufficient to replace the relief being sought. In 5551928 Manitoba Ltd., a case concerning rectification, Newbury J.A. rightfully quoted a comment from Snell’s Equity that “rectification will not be decreed if the desired result can conveniently be achieved by other means” (paras. 40-41 (emphasis in original), quoting Snell’s Equity (31st ed. 2005), at para. 43-04. She went on to “doubt that Equity would force upon a party…an ‘alternative’ that is neither practical nor certain” (para. 41).

[61] These comments, albeit in dissent, are apt here. The majority did not comment on the issue. The mere possibility in this case of an alternative remedy is insufficient. It is not practical but rather encourages a multiplicity of proceedings. A remedy is not a certainty either. If the applicants were to bring action again their professional advisors, one might reasonably expect the latter would defend on the basis that the applicants failed to mitigate their loss through an application for rectification. An applicant would find itself in a “Catch-22” situation and left entirely without a remedy.

[62] In conclusion, I am satisfied that the applicants are not attempting to retroactively amend their agreement to achieve beneficial tax consequences. Rather, they seek to rectify the resolution itself because it did not sufficiently express the agreement they had reached.

[63] The application is granted. I encourage the parties to resolve the issue of costs. If they are unable to do so, I will receive brief written submissions of no more than three pages plus Bills of Costs within one month of the release of this decision.

“Justice H.A. Rady”

Justice H.A. Rady

Released: May 17, 2024

COURT FILE NO.: CV-16-2099 DATE: 20240517 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: Gary Evans, The Evans (2009) Family Trust, Heidi Evans, Gregory Evans and Philip Evans -and- The Attorney General of Canada REASONS FOR decision Justice H.A. Rady

Released: May 17, 2024