Case reference: Birch Hill Equity Partners Management Inc. v. Rogers Communications Inc., 2015 ONSC 7189
This historical case summary discusses the decision identified above. Later decisions and legislative changes may affect how it applies today. Obtain legal advice about your circumstances.
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.
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.
Rectification
Rectification is an equitable remedy that provides for the correction of written instruments that do not accurately reflect the intention of the contracting parties. Rectification of a written instrument is available when the applicant establishes that the parties had a common continuing intention that is not properly reflected in the written instrument as a result of an error.
It is well-established that rectification is available to rectify written instruments that, by error, did not achieve a specific tax result intended by the parties. A party seeking rectification is not required to have determined the precise mechanics or means by which the party’s intention to achieve a specific tax outcome would be realized. Rather, the critical requirement for rectification is a continuing specific intention to undertake a transaction on a particular tax basis.
This was recently confirmed by the Ontario Court of Appeal in Fairmont v. Canada, where the Court held that it was unnecessary for the applicant to prove that it had determined to use a specific transactional device to achieve the intended tax result. The Court rectified documents relating to an internal share redemption that triggered foreign exchange gain to instead provide for loans where the parties intended that the transaction be tax neutral. That the applicant mistakenly failed to employ the appropriate transactional device to achieve the intended tax result did not alter the nature of the applicant’s settled tax intention.
Unilateral mistake
Rectification in cases of unilateral mistake is possible, but the requirements for invoking this doctrine are intentionally much, much narrower and thus more demanding. Binnie J. summarized the law in the case of alleged unilateral mistake in arm’s-length commercial agreements such as this one in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club, [2002] 1 S.C.R. 678, [2002] S.C.J. No. 20, 2002 SCC 19 (at para. 31) as follows:
Rectification is an equitable remedy whose purpose is to prevent a written document from being used as an engine of fraud or misconduct “equivalent to fraud”. The traditional rule was to permit rectification only for mutual mistake, but rectification is now available for unilateral mistake (as here), provided certain demanding preconditions are met. Insofar as they are relevant to this appeal, these preconditions can be summarized as follows. Rectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable. The plaintiff must establish that the terms agreed to orally were not written down properly. The error may be fraudulent or it may be innocent. What is essential is that at the time of execution of the written document the defendant knew or ought to have known of the error and the plaintiff did not. Moreover, the attempt of the defendant to rely on the erroneous written document must amount to “fraud or the equivalent of fraud”. The court’s task in a rectification case is corrective, not speculative. It is to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other.
*source: Ontario Reports
