Kanji v. Canada (Attorney General) 2013 ONSC 781

October 15, 2013 | Alison Minard

This case dealt with an application to rectify a trust indenture in order to avoid a significant capital gains tax liability on the 21st anniversary of the settlement of a trust.  Unfortunately, the applicants received no such relief from the Ontario Superior Court of Justice.

At the time of the application, Mr. Kanji was the Chief Executive Officer of a prominent property management business, the ownership of which was held in a discretionary trust (the “Trust”) for the benefit of Mr. Kanji, his late wife and their issue.  Mr. Kanji was entitled to remove trustees and appoint substitute or additional trustees.  He acted as one of two trustees of the Trust (the “Trustees”) at all times after its settlement.  Mr. Kanji is a trained accountant and an experienced businessman.  

The Trust was settled by Mr. Kanji on March 26, 1992, with $5,000 in cash.  Mr. Kanji received legal advice from a prominent Toronto law firm before setting up the Trust.  The Trustees used the settlement funds to purchase shares of the corporation that held the property management business.  The Trust subsequently acquired additional commercial assets.

In the intervening years, Mr. Kanji sought legal advice relating to the Trust from another prominent Toronto law firm, and at least by 2004, he was aware of the rule requiring the deemed disposition of the assets in a trust on the 21st anniversary of settlement (commonly referred to as the “21-year rule.”  In 2009, he was advised subsection 75(2) would apply to attribute income and gains of the trust to Mr. Kanji, and subsection 107(4.1) would apply to deny the tax-deferred distribution of all assets in the Trust to any beneficiary of the Trust other than Mr. Kanji.  At this time, Mr. Kanji was again alerted to the application of the 21-year rule.

On February 3, 2011, the applicants commenced an action against the two Toronto law firms that had advised Mr. Kanji in 1992 and subsequent years with respect to matters relating to the Trust.  On December 21, 2012, Mr. Kanji and his family commenced this rectification application.  At the time of the application, the potential tax liability of a deemed disposition of the Trust’s assets was estimated to be approximately $11.8 million.

The rectification of a mistake by a court is a discretionary equitable remedy, with the burden of proof resting on the party or parties seeking the rectification.  The court’s role in a rectification case is corrective rather than speculative, and involves restoring the parties to their original bargain, rather than rectifying a belatedly recognized error of judgment by one party or the other.[1]

Rectification cases are necessarily based on the facts surrounding the transaction in question.  The findings of fact about intention and mistake, which support a grant of rectification, will generally be based on evidence adduced by the party or parties to the transaction and their advisors.  For example, in the frequently cited decision of the Ontario Court of Appeal in Juliar v. Canada,[2] the Court looked to the evidence and advice of both the accountant and the lawyer who advised the taxpayer on the implementation of the structure to determine the intentions of the taxpayer at the time the structure was set up.  This third-party evidence was central to the Court’s decision to grant a rectification.

In the instant case, the only document filed by the applicants was a 1992 memorandum from Mr. Kanji’s legal advisors, which addressed a number of issues, including subsection 75(2) and the 21-year rule, but excluding a discussion of the prohibition in subsection 107(4.1) of a tax-deferred rollover to anyone other than Mr. Kanji.  The only evidence adduced by the applicants was that of Mr. Kanji himself.  He testified his intention in setting up the Trust was to implement a tax-deferred transfer of the Trust’s assets to his children in the future.

Further, the applicants did not adduce any affidavit or evidence from the law firm that advised Mr. Kanji in implementing the trust structure and, in response to undertakings given by Mr. Kanji during cross-examination, it was established that the legal advisors who assisted Mr. Kanji with the implementation of the Trust structure had advised that any evidence provided by them would not be supportive or helpful to the applicants’ position.  No affidavit or evidence from Mr. Kanji’s legal counsel in 2004 and 2009 was filed, and Mr. Kanji testified he did not try to obtain an affidavit from these legal advisors or secure documents from the firm in his client file.  No expert evidence was filed. 

The Court found it was unclear whether Mr. Kanji had instructed his advisors to implement a tax-deferred transfer of the trust assets to his children or merely to minimize tax.  In addition, the Court found the applicants’ failure to file any evidence from the legal advisors who assisted Mr. Kanji in establishing the Trust to be striking, and stated as follows (at paragraph 36):

When, after the passage of almost 21 years, a taxpayer seeks tax relief from the court by asking for the rectification of an instrument, it would be imprudent for a court to rely solely on the evidence of the taxpayer about his or her intention without the comfort of some form of independent evidence—contemporaneous documents or the evidence from other persons—which supports the evidence of the taxpayer.  While there may be cases where the defect or mistake in an instrument is patently obvious, this is not one of those cases.  As noted by one of the commentators relied on by the applicants, the establishment of a trust may or may not be tax-motivated, so a court cannot infer what specific tax motivation may have driven the creation of a trust.  Nor did the applicants file any expert evidence to the effect that the form of the 1992 trust indenture reflected a structure used only where the objective was to accomplish estate freeze tax deferrals.

The Court noted there was not only a lack of third-party evidence, but also an express statement from one of Mr. Kanji’s advisors that any evidence that could be provided by this advisor would not be supportive to Mr. Kanji’s case.  The Court also noted there was only one piece of evidence in support of the application.

In the result, the Court denied the application for a grant of rectification, finding the applicants had not demonstrated Mr. Kanji intended to set up the Trust in a manner that would allow for a future tax-deferred transfer of the assets in the Trust to his children, and that there was no mistake made at the time the Trust was settled that would fail to give effect to this intention.

While the decision in Kanji is troubling in that it denies an application, citing as one of its reasons the fact that only one piece of evidence was adduced in support of the application (such evidence being that of an interested taxpayer who stood to bare a significant economic loss), the decision is likely largely fact-specific.  Brown, J. was very likely influenced by Mr. Kanji’s testimony on cross-examination, in which he acknowledged it was possible he did not speak about tax deferral at all with his advisors prior to the settlement of the Trust, as well as by the fact Mr. Kanji’s former solicitors made it clear they were not able to support the position taken by the applicants. 

The Court’s reference to there only being one piece of evidence in support of the application should not be considered to stand for the proposition that more than one piece of evidence will be required in order to grant a rectification, or third party evidence must be submitted.  Instead, the decision in Kanji should be interpreted as demonstrative of what can happen where the only evidence adduced before the court in a grant for rectification is disputed. 

In the opinion of the author, the decision in Kanji does not set aside the general common law principle that, where there is any evidence before the court and it is not disputed, the Court cannot reject the facts stated in that evidence. 

[1]     Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club, [2002] 1 S.C.R. 678, per Binnie, J. (as he then was).

[2]     (1999), 99 D.T.C. 5743.


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