Canada: Two For Two To Rectify: The McPeake Case


Rectification has emerged as an important remedy for certain taxpayers faced with unintended tax consequences from transactions in which they participate. If certain conditions are met, the remedy allows taxpayers essentially to 'fix' the transaction documents (or even the transactions themselves) so that the intended tax consequences are achieved. The law in this area has expanded dramatically since 2000, when the Ontario Court of Appeal confirmed, in Canada (Attorney General) v. Juliar, 2000 CanLII 16883, that the taxpayers in that case could replace an exchange of shares for debt (taxable in the circumstances) with an exchange of the shares for other shares (not taxable in the circumstances) in order to achieve the taxpayers' presumed intention that the transfer not attract tax. The Supreme Court of Canada subsequently refused leave to hear the appeal of Juliar.

On January 26, 2012, the Supreme Court of British Columbia released the judgment of Madam Justice Dorgan in McPeake v. Canada (Attorney General).1 In this case, the Court granted the taxpayers a second rectification of a trust deed that had contained several flaws. The case is significant because it contains a discussion of the precise nature of the taxpayer's tax intent required in order to support a successful rectification application, and a discussion of the standard of proof placed on a taxpayer seeking an order of rectification. In this bulletin, we discuss this case.


Rectification is a remedy that courts have developed in order to restore parties to a transaction to their intended bargain. In its traditional form, rectification was used mainly to correct documents containing errors that gave rise to consequences that the parties did not intend. Courts were careful to assert that they were not correcting transactions, but correcting documents that did not accord with the intentions of the parties. One leading scholar has described rectification as follows:

Where the terms of a written instrument do not accord with the true agreement between the parties, equity has the power to reform, or rectify, that instrument so as to make it accord with the true agreement. What is rectified is not a mistake in the transaction itself, but a mistake in the way in which that transaction has been expressed in writing.2

More recently, and particularly since the decision in Juliar, courts have appeared willing to rectify transactions as well, in circumstances where the transactions achieve unintended tax consequences. In other words, courts have acknowledged that the avoidance of tax is a legitimate intention for purposes of determining whether rectification is available, and that transactions themselves (if they resulted in clearly unintended tax consequences) can sometimes be modified or changed in order to achieve the tax intention.

In order to obtain rectification, the party seeking it must show all of the following:

  • the existence of a common intention by the parties prior to the making of a document or instrument that contains the alleged error
  • that the common intention remained unchanged at the time the document or instrument was made
  • that the document or instrument does not conform to the common intention

Typically, a person seeking rectification brings an application in the superior court of the relevant province.3 If the rectification is to correct a tax mistake, the decision must be made whether to give notice (or whether notice is required to be given) to counsel acting for the Canada Revenue Agency ("CRA") and/or the relevant provincial tax authority. Many rectification applications are unopposed, if the tax authority can be convinced that the relevant taxpayers are restoring their bargain rather than rewriting fiscal history to achieve a better tax result.


In McPeake, a family trust owned a significant portion of Mr. McPeake's software business. The business was sold for proceeds of $4 million, a portion of which was distributed to beneficiaries of the trust. This structure was tax efficient in part because several individuals were entitled to claim a capital gains exemption in connection with the sale.

The taxpayers sought to rectify the relevant trust deed, the terms of which ran afoul of the so-called revocable trust attribution rule in subsection 75(2) of the Income Tax Act (Canada) ("Tax Act"). In essence, subsection 75(2) applies to attribute to a person who transfers property into a trust, income and capital gains or losses from the property, if the property (i) can revert to the transferor, (ii) can pass to persons determined by the transferor, or (iii) cannot be disposed of without the transferor's consent or direction. In 2003, CRA issued reassessments to the trust and to Mr. McPeake on the basis that the trust in question was a revocable trust because property that Mr. McPeake had contributed to the trust could revert to him. In May 2009, the trustees brought a successful (and unopposed) application for rectification.

Later in 2009, CRA informed the trustees that the trust deed contained two other errors that had not been rectified. The trust was still a revocable trust (and subsection 75(2) of the Tax Act still applied) because trust property could pass to persons determined by Mr. McPeake and could not be disposed of but for the consent or direction of Mr. McPeake. As a result, the trustees brought a second rectification application (this time opposed), arguing again that the trust deed continued not to reflect their intention that income and capital gains from property transferred to the trust not be attributed to the transferor (Mr. McPeake).

In the result, Justice Dorgan was satisfied, based on the affidavit evidence in the application, that "the trust deed as it stands now does not reflect the true intentions of the petitioners in forming the trust". She was satisfied that the common specific intention of the creators of the trust was "to avoid tax payable on capital gains from the sale of shares [in the trust] by maximizing tax exemptions that could be multiplied across the trust's many beneficiaries." She was also satisfied that this common specific tax intention existed before the formation of the trust deed and continued after the trust deed was created.


The McPeake case is consistent with several prior cases in which rectification was granted in circumstances where the taxpayers were able to show an intention to avoid tax but where the documents or transactions did not accord with the intention. The case is also significant in three other ways.

First, Madam Justice Dorgan does an admirable job of attempting to reconcile two lines of authority in Ontario with respect to rectification. In Juliar, as noted above, rectification was granted because the court was prepared to infer that the taxpayers in question wished to transfer shares without paying income tax on the transfer. However, in 771225 Ontario Inc. v. Bramco Holdings Co.,4 Ontario trial and appellate courts denied rectification because they were not convinced that the taxpayer had a specific intention to avoid land transfer tax. The cases can be reconciled because, in Bramco, there was no or insufficient evidence led of a specific intention to avoid land transfer tax. In fact, there was evidence of an intention to avoid income tax, and the transaction that occurred in order to avoid income tax gave rise to a land transfer tax liability. Accordingly, Bramco does not stand for the proposition that tax avoidance itself is not a legitimate intention for purposes of a rectification, but for the proposition that the specific kind of tax avoidance intention must be proven.

Second, Madam Justice Dorgan clarified the standard of proof in rectification cases. In other cases, courts have held that the person seeking rectification must show "convincing proof" or meet a "convincing standard", being something more than a simple balance of probabilities and something less than the criminal standard of "beyond reasonable doubt". In McPeake, Madam Justice Dorgan pointed out that the Supreme Court of Canada has rejected any intermediate or higher standard of proof in civil cases than the balance of probabilities. Accordingly, an applicant for rectification should not have to meet a higher test than the balance of probabilities.

Third, McPeake serves as a reminder that rectification is an 'equitable' remedy: "...the inequities which Mr. McPeake would face if the court were not to rectify the trust are also aligned with the facts in favour of rectification. ...Mr. McPeake would suffer the tax liabilities of ownership of the trust's property without having any of its benefits." One of the factors a Court will consider in a rectification application is what unfairness or harm would flow from a decision to not correct relevant documentation.


McPeake confirms that rectification remains an important tool in the arsenal of taxpayers confronted with unintended tax consequences arising from transactions or documents. It also confirms that it is wise for taxpayers and their advisors to document the specific tax avoidance intention clearly and unambiguously – that is, to document as clearly as possible that the avoidance of a particular kind (or particular kinds) of tax was a motivating or non-incidental feature of the transaction or document in question.


1 2012 BCSC 132.

2 John McGhee, ed. Snell's Equity, 32nd ed. (London: Sweet & Maxwell, 2011), para. 16-001 (footnotes omitted).

3 The Tax Court of Canada does not have jurisdiction to grant equitable remedies. Accordingly, applications for rectifications usually proceed before provincial superior courts.

4 (1994), 17 O.R. (3d) 571 (Gen. Div.), affirmed at (1995), 21 O.R. (3d) 739 (C.A.).

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions