Rectification is an equitable remedy that allows for judicial corrections of a document that, due to errors in drafting, does not reflect the true intentions of the parties. Rectification changes a document’s mistaken expression of that intention. Rectification is restorative, rather than “retroactive”. In terms of timing, it acts from the creation of an instrument forward. Rectification applications are becoming more common as a means of taxpayers’ defence against the Canada Revenue Agency (“CRA”). This trend has been growing since the year 2000, in large part due to the leading case of Juliar v. Canada, (2000) 50 OR (3d) 728 (CA) (“Juliar”).
In Juliar, shares in a company were transferred by its owners to their daughters and the daughters’ husbands on a tax-deferred basis. One couple decided to transfer shares to a family holding company. The couple received promissory notes from the holding company rather than shares, as the tax advisor mistakenly believed the initial transfer from the father to the daughter involved payment of tax on a capital gain, so that no tax consequences would result irrespective of whether cash, promissory notes, or shares were used. CRA advised the couple that the transactions brought the shares under the umbrella of section 84.1 of Income Tax Act, that being a disposition of property resulting in a deemed dividend. CRA consequently assessed the couple for the resulting tax liability. The couple brought an application for rectification, which was allowed on the basis that the intention to defer tax liability was a fundamental aspect of the transaction from its inception. The Minister of National Revenue appealed to the Ontario Court of Appeal, which found that the trial judge did not err in concluding the primary intention was that of deferring tax liability on the transaction. The Court of Appeal concluded that rectification was the appropriate remedy, because in the absence of the error, the transaction would have been effected under section 85 of the Income Tax Act rather than 84.1 of the Income Tax Act. The Court highlighted that rectification should not be refused simply because the purpose of seeking it is to enable the parties to obtain a legitimate tax advantage, which was their intention at time of executing the instrument.
In terms of substantive requirements, the party seeking rectification bears the onus. The petitioner must establish that: 1) the written document does not reflect the true intention of the parties; and 2) the parties share a common and continuing intention up to the time of signature, in that the provision in question stands as agreed, versus what is reflected in the written instrument. Procedurally, rectification applications are done by an Originating Application in the Court of Queen’s Bench, or applicable superior court, typically with affidavit evidence, demonstrating the factual grounds for the application. The affidavit must: 1) be based on personal knowledge, versus information and belief; and 2) include a clear explanation of the facts illustrating the common intention of the parties. In terms of a practice point, it is recommended that you provide notice to CRA and the Department of Justice, given CRA’s interest in such matters.
Recent case law has commented on the evidential requirements of rectification: see McPeake Family Trust, 2012 BCSC 132 (“McPeake”), where sufficient evidence of common intention was demonstrated. In that case, the Court placed particular emphasis on the corroborative evidence presented, as more than one source confirmed the common intention of the parties to avoid the payment of tax at the time the trust’s creation. Conversely, in the case of the Kanji Family Trust, 2013 ONSC 781 (“Kanji”), the Court held that there was insufficient evidence of common intention. In Kanji, the Court voiced concerns that the only evidence presented was that of the petitioner, and no expert evidence was adduced, specifically in the form of the lawyer who created the trust in question. Thus, the McPeake and Kanji cases stand for the proposition that Courts prefer to see corroborative and expert evidence, speaking to the intention of the parties, when presented with rectification applications.
In November of 2013, the Supreme Court of Canada rendered decisions in Agence du Revenu du Quebec v. Services Enviornnementaux AES Inc., et al. and in Agence du Revenu du Quebec v. Jean Riopel, et al. 2013 SCC 65. These companion cases dealt with the nature and scope of agreements between taxpayers involving corporate reorganizations, tax planning, and tax consequences. In each case, the shareholders of the respective companies engaged in various transactions to reorganize corporations and transfer interests therein. The parties intended that their agreements would have no tax consequences; however due to errors made by the shareholders’ tax advisors, Revenue Quebec and CRA issued notices of assessment in which the tax authorities claimed tax amounts that the taxpayers had not anticipated paying. In the decision, the Supreme Court upheld the lower Court’s decisions that rectification was available to correct documents under Quebec civil law. In addition, the Supreme Court declined the request of the Attorney General of Canada to consider and reject the rectification line of authority established in Juliar. That said, the Supreme Court cautioned taxpayers to not view its conclusions as an invitation to engage in bold tax planning on the assumption that it will always be possible to redo contracts retroactively should that planning fail.
Over a decade after Juliar, rectification continues to be recognized by the Courts as means of correcting instruments that do not reflect the intentions of the parties as it relates to tax matters. Further evolution of what qualifies as rectification will no doubt occur, as the Courts consider this equity based remedy.