Given the Supreme Court's recent granting of leave to appeal
in the Jean Coutu case, which I blogged about earlier (Supreme Court of Canada to Hear Tax Rectification Case),
the Ontario Court of Justice's decision to follow Juliar v
Canada (1999), 46 O.R. (3d) 104 (Ont. S.C.J.); aff'd
(2000), 50 O.R. (3d) 728 (CA), and grant rectification in
Canada Life v Attorney General of Canada, 2015 ONSC 281,
is an interesting one. This case, along with the recent decision in
Fairmont Hotels Inc. v A.G. Canada, 2014 ONSC 7302 (SCJ);
aff'd 2015 ONCA 441, show that Juliar is still good
law in Ontario, despite the tendency of other Canadian courts to
now read Juliar more restrictively.
In Canada Life, a Canadian subsidiary (Canada Life)
received $3.5 billion of investment assets from its ultimate
parent, which included a portfolio of U.S. dollar bonds. These
bonds were then invested in a limited liability corporation
indirectly owned by Canada Life. Due to the subsidiary indirectly
holding the U.S. bonds, it entered into third-party hedge contracts
to eliminate any foreign exchange risk. During the 2007 taxation
year, the U.S. dollar depreciated significantly with the result
that Canada Life had unrealized losses and gains. For tax purposes,
the losses could not be matched against the gains with the result
that taxes would be payable on the gains.
In order to offset the gains and avoid taxation, a series of
transactions were entered into for the purpose of realizing a large
loss on Canada Life's interest in a partnership to offset the
gains. However, CRA reassessed Canada Life for the 2007 taxation
year and disallowed its claim for the loss due to the application
of s. 98(5) (partnership rollover), which CRA said operated to
eliminate the intended loss.
Canada Life applied for a rectification order effectively
cancelling the 2007 transactions and replacing them with a series
of transactions that dissolved the limited partnership in a way
that did not attract the application of s. 98(5). The Court granted
Canada Life's application.
In granting rectification, the Court stated that Juliar
continues to be binding upon it, especially given the recent
decision in Fairmont, in which Juliar was relied
upon to rectify an internal unilateral share redemption to remedy
an unintended tax assessment.
The Court found the Juliar principles were satisfied in
this case and there was no attempt at retroactive tax planning as
argued by the Crown. The Court held that all parties to the
transactions had a continuing specific intention to carry out the
transactions to create a tax loss to offset the unrealized taxable
gaining and by mistake that did not happen. As a result, the
parties were entitled to rectification.
This decision is interesting for its continued endorsement of a
broad reading of Juliar, which enabled the court to find
the mistake made in this case, namely the structuring of the
transactions without including steps to address the application of
s. 98(5) of the ITA, could be rectified. This again raises the
question as to the intended reach of the equitable remedy of
rectification, which traditionally, has been limited to rectifying
mistakes in the recording of an agreement between the parties, and
not the restructuring of a transaction that was not properly
planned in the first place.
The Court, citing the Court of Appeal's decision in
Fairmont Hotels, noted that Juliar does not
require the party seeking rectification to have determined the
precise mechanics or means by which to achieve the intention of a
specific tax outcome. Rather, all that is needed is evidence of a
continuing specific intention to undertake a transaction or
transactions on a particular tax basis. Allowing parties to a
transaction to restructure the transaction to eliminate an
unintended tax consequence does seem to effectively be retroactive
tax planning where, as in this case, the unanticipated tax
consequence likely could have been anticipated. It will be
interesting to see if the Supreme Court comments on this in the
Jean Coutu case.
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 Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
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).