Last week, the Supreme Court of Canada released two decisions concerning the equitable doctrine of rectification: Canada (Attorney General) v. Fairmont Hotels Inc. and Jean Coutu Group (PJC) Inc. v. Canada (Attorney General). Fairmont deals with the equitable doctrine while Jean Coutu deals with rectification under Quebec civil law. Together, these decisions materially change the law of rectification by narrowing its scope. Both cases concern rectification for the purpose of tax planning. It remains to be seen what effect, if any, these decisions will have in the estates context.
In Fairmont, Fairmont Hotels and Legacy Hotels entered into a financing agreement that was intended to operate on a tax-neutral basis. When the financing agreement was terminated to allow Legacy Hotels to sell two hotels, there was an unanticipated tax liability for Fairmont. Fairmont applied to the court to rectify their directors’ resolutions to avoid the tax liability. Likewise, in Jean Coutu, a Quebec corporation, the Jean Coutu Group (PJC) made a series of transactions designed to be tax neutral, but were unsuccessful in avoiding tax consequences. After the audit, PJC sought to rectify the documents, arguing the intention of the parties to the transactions was to be tax neutral.
The Doctrine of Rectification Reviewed
In both cases, the court held that a general intention of tax neutrality is insufficient as a basis for rectifying the written documents of an agreement. Instead of looking at the motivation for entering into the agreement, a court must consider what the parties actually agreed to do. In Fairmont, the court stated: “It bears reiterating that rectification is limited solely to cases where a written agreement has incorrectly recorded the parties’ antecedent agreement. […] In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself.” In the case of Fairmont, the court held that Fairmont only had a wish to protect its subsidiaries from tax liability, not a plan to do so in concrete and ascertainable terms. Rectification was therefore not available.
The court will grant rectification for two types of error:
(1) where both parties subscribe to a written agreement on the mistaken common understanding that it accurately reflects the terms of their antecedent agreement; and
(2) where there is a unilateral mistake, either in a unilateral act such as the creation of a trust, or where an instrument was created to record an agreement made between parties and one party argues it does not accurately do so.
In the first case, a mutual mistake, the court must be satisfied: “that there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement.” In the latter situation, the preconditions to rectify a unilateral mistake are: “the party resisting rectification knew or ought to have known about the mistake” and “permitting that party to take advantage of the mistake would amount to ‘fraud or the equivalent of fraud.’”
Thank you for reading.