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Rectification and Rescission: Fairmont and Collins Family Trust
Where an error has occurred in tax planning or the implementation of the plan, a taxpayer could face significant unintended tax consequences. Rectification and rescission are powerful remedies which can be used to correct the error.
Unlike other tax repair work, rescission or rectification is brought in the superior court of a province. For a taxpayer in Ontario, rather than starting a proceeding in the Tax Court of Canada or the Federal Court of Canada, the proceeding is brought in the Ontario Superior Court of Justice.
The leading case on rectification is Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 (Fairmont) and its companion case from Québec Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55 (Jean Coutu). In Fairmont the court held:
If by mistake a legal instrument does not accord with the true agreement it was intended to record – because a term has been omitted, an unwanted term included, or a term incorrectly expresses the parties’ agreement – a court may exercise its equitable jurisdiction to rectify the instrument so as to make it accord with the parties’ true agreement.
A clear plan is required. The intention to minimize taxes is insufficient. As the court in Fairmont stated:
A party seeking rectification faces a difficult task in meeting this standard, because the evidence must satisfy a court that the true substance of its unilateral intention or agreement with another party was not accurately recorded in the instrument to which it nonetheless subscribed. A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the party’s true, if only orally expressed, intended course of action.
Rectification is not equity’s version of a mulligan. Courts rectify instruments which do not correctly record agreements. Courts do not “rectify” agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome.
In the simplest instances of rectification, the court is asked to correct the implementation of an otherwise good tax plan. For instance, if the plan involved 10 steps, and one step was missing, the court would grant rectification to include that step. Similarly, if one of the steps was improperly implemented, the court would correct the step to align with the plan.
The further removed rectification gets from correcting these technical deficiencies in the implementation of the plan, the more complex and uncertain the rectification application becomes.
Rescission is often referred to as the companion remedy to rectification. This is accurate to the extent that both are equitable remedies and both respond to relieve taxpayers from their errors. However, while rectification corrects errors in the implementation of an agreement and puts the parties in the position that was agreed upon, rescission allows the parties to be returned to the position as if the agreement had never been entered into.
To use a metaphor, rectification places the parties at the finish line, while rescission returns the parties to the starting line.
It is important to understand that rescission will unwind all transactions involved. As stated in the leading Ontario decision of rescission in the tax context Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562 (Canada Life):
rescission is an “all or nothing” remedy; partial rescission is not a recognized equitable remedy…The purpose of rescission is to eliminate a benefit one party has received due to a mistake made by one or both parties to a contract. This is accomplished by cancelling and unwinding the contract and by issuing whatever ancillary orders are necessary to restore the parties to their original rights.
Another leading case on rescission in the tax context is the British Columbia Court of Appeal decision in Collins Family Trust v. Canada (Attorney General), 2020 BCCA 196 (Collins Family Trust). Of interest, the court discusses the differences between rectification and rescission, stating:
… I see no principled reason why different equitable remedies may not have different results, especially since rectification and rescission serve different purposes and have different effects. Rectification is limited to a clearly-established disparity between the words of a legal document and the intentions of the parties, and is not concerned with consequences. Rescission considers consequences to be relevant to the gravity of a mistake…Rectification places the parties in the position they originally intended (which, in the tax context, achieves their tax plan), but rescission places the parties back in their original position (which does not) [sic]…
In the context of a voluntary settlement or transfer of property, the test requires a “causative mistake of sufficient gravity”, which is a mistake as to either the legal character or nature of a transaction, or some matter of fact or law which is basic to the transaction.
It should also be kept in mind that rescission is an equitable remedy. Therefore, the courts will look at the equities of the situation to determine whether it is just/equitable/fair for the taxpayer to be granted rescission. This is a wide-ranging inquiry, and would include the circumstances of the taxpayer and the nature of the advice received.
As the above indicates, rectification and rescission, while similar, are distinct equitable remedies. As such, cases which blur the line between the two should be treated with caution. This is especially important given that when rescission has been attempted, it was often as an alternative to rectification. This has often meant that rescission has been addressed by the courts in the context where the taxpayer was attempting to use rescission to achieve indirectly what it was prevented from achieving directly through rectification (e.g. Canada Life).
In any rescission application it will be important to separate rescission from rectification where rescission is part of the relief sought. This is especially so given the courts (at least in British Columbia) appear to look more favourably on rescission as a remedy rather than rectification post-Fairmont.
Further, it appears that while the law on rectification has been settled across Canada following Fairmont and Jean Coutu, the law on rescission may be more regional. For instance, the treatment of alternative remedies (e.g. remission, negligence claim against the accountants) before rescission can be granted may be different depending on the province.
The Ontario decision in Canada Life held that rescission will be denied where the remedies are merely available, while the British Columbia decision in Collins Family Trust held the remedies must be practical/appropriate before rescission will be denied.
This possible regional difference should be kept in mind when rescission is sought.
However, Collins Family Trust has been appealed to the Supreme Court of Canada (“SCC”) by the Crown. The SCC has granted leave and will hear the appeal. Hopefully this appeal will provide clarity and consistency on the application of rescission in the tax context, in particular the differences between rectification and rescission, and the treatment of alternative remedies.
In our practice, we have noticed an increasing desire on the part of the Canada Revenue Agency (“CRA”) and their lawyers at the Department of Justice (“DOJ”) to request ever more documents to evidence the plan and its implementation. The evidence (introduced by way of affidavits) must be thorough and complete, leaving no stone unturned in the explanation of the plan, the implementation, and the unintended tax consequences.
Rectification and rescission are complex proceedings, requiring knowledge of tax, equity, and the relevant court procedure.
If you would like to discuss whether rectification or rescission could apply to you, please contact one of our experienced tax lawyers.
This article was written by Tax Lawyer Graham Morton.