In this case, Fairmont Hotels Inc. (FHI) sought an order
rectifying documentation relating to an internal unilateral share
redemption. In 2002 and 2003, FHI was involved in the financing of
the purchase of two US hotels in return for management contracts.
As the financing was in US dollars, there was a potential foreign
exchange tax exposure for FHI. As a result, reciprocal loans
considered neutral for accounting purposes were entered into, and
the foreign exchange exposure was fully hedged.
In 2006, FHI was acquired and its shares ceased to be publicly
traded. As the acquisition would cause FHI to realize a deemed
foreign exchange loss without a matching foreign exchange gain, the
purchasers agreed to a modified plan in which FHI realized its
accrued foreign exchange gains and losses and allowed its foreign
exchange exposure to be hedged. The plan, however, did not address
the foreign exchange exposure of the Canadian affiliates. In 2007,
the decision was made to terminate the reciprocal loans. To do so,
FHI and the Canadian affiliates redeemed their preferred shares
under the mistaken assumption that no taxable foreign gains would
be triggered. A CRA audit revealed the mistake. An order was sought
to rectify the resolutions under which the preferred shares were
redeemed to change the share redemption to a loan, which would
trigger no taxable foreign exchange gain.
The Court of Appeal upheld the lower court's grant of
rectification, rejecting the Crown's argument that
rectification in the tax context requires the applicant to
establish it had settled on the means by which to realize its
intended tax outcome before any mistake in its implementation was
discovered. The lower court judge's finding that there was a
continuing intention to carry out the reciprocal loans on a tax
neutral basis and not trigger any tax consequences was upheld. The
Court cited with approval the conclusion that there was no
retroactive tax planning in this case, as the real purpose of the
2007 transaction was not to redeem the preferred shares, but to
unwind the reciprocal loans on a tax free basis. The preferred
share redemption was the mistaken means to achieve that
The Court of Appeal went on to comment that Juliar does
not require the party seeking rectification to have determined the
precise mechanics or means by which to achieve a specific tax
outcome, as long as the continuing specific intention to achieve
that outcome is present.
This case, along with the companion case Jean Coutu,
will provide an opportunity for the Supreme Court of Canada to
provide the much needed guidance on what intention must be proven
for rectification in the tax context to be granted, and when a
request for rectification merely amounts to retroactive tax
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