Can an Estate With an Unexpected Tax Bill Seek Rectification?

Can an Estate With an Unexpected Tax Bill Seek Rectification?

In Ontario, it has long been recognized that testators “have the right to organize their affairs in a way which will allow their estates to pay as few probate fees or as few taxes as legally possible”: Granovsky Estate v. Ontario, 1998 CanLII 14913 (Ont. S.C.). In light of recent case law decided by the Supreme Court of Canada, however, it appears that there may now be a limit on this principle. If an estate faces an unexpected (and adverse) tax bill because of how a will was drafted, it may not be possible to rectify the will in order to reduce the tax bill.

Under the common law, the courts in Ontario have the power to cure an error or omission in a will through rectification. This equitable doctrine is available so long as the error or omission was made by the will drafter, rather than the testator, and would defeat the testator’s intentions unless it is cured. 

Rectification is also available to cure other legal documents, including contracts. Since 2016, the courts have restricted the use of rectification to engage in retroactive tax planning in the context of contracts and commercial transactions, as per the Supreme Court of Canada’s decisions in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 and Jean Coutu Group (JPC) Inc. v. Canada (Attorney General), 2016 SCC 55.While rectification is available where a written agreement incorrectly recorded the parties’ agreement, this remedy will not be granted for the purpose of limiting tax liability. As noted by Justice Brown in Fairmont, “[r]ectification is not equity’s version of a mulligan,” and will not be grantedsimply because an agreement has an undesirable or otherwise unexpected outcome.  

More recently, in Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26, the majority of the Supreme Court affirmed that taxpayers in Canada are precludedfrom resorting to equitable remedies, including rectification, to undo or alter a transaction in order to avoid tax liability. In this case, Justice Brown went into detail explaining why the limiting principle of equity does not apply to tax laws, as “there is nothing unconscionable or unfair in the ordinary operation of tax statutes to transactions freely agreed upon.” 

While these cases dealt with contracts, language used by the majority in Collins Family Trust could be applied to testamentary instruments as well. For example, Justice Brown expressly held that “a court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” (emphasis added). This statement suggests that rectification is available for instruments beyond commercial agreements, and may even extend to instruments that only impact one party. 

It also appears reasonable to conclude that theseSupreme Court decisions apply in the context of wills and estates, as the Court of Appeal for Ontario recently affirmed that the test for rectification articulated in Fairmont applies to rectification of wills: see Ihnatowych Estate v. Ihnatowych, 2024 ONCA 142

This precise issue – whether will drafting that results in an unexpected tax liability may be rectified – has not yet been addressed by the courtsHowever, this relief has been granted in the past. In Balaz Estate v Balaz, 2009 Carswell Ont 2007 (WL), the testator had instructed her counsel to set up a spousal trust that would defer the tax consequences that would otherwise arise on her death as a result of a deemed disposition of capital property. Accordingly, her counsel prepared a secondary will which created a trust that would hold a holding company in trust for her husband during his lifetime. After the testator had executed the will and passed away, however, counsel learned that some of the powers granted to the trustee through the will were inconsistent with the creation of a valid spousal trust. As a result, the estate would be liable for a significant amount of income tax.  

The estate trustee applied to the Superior Court of Justice for rectification, seeking to delete the will clauses at issue. In light of the evidence of the drafting lawyer, the courtgranted the application, holding that the will was only valid to the extent that the testator knew and approved its contents and that passages where the testator did not intend or approve the words in the will could be struck. As the language in the will that inadvertently tainted the intended spousal trust was included without the knowledge or approval of the testator, the court held that the clauses could be deleted so that the secondary will would conform to her wishes. 

Would the court decide Balaz Estate differently today in light of the new Supreme Court of Canada case law? The answer to this question is not clear. While the testator’s instructions were not fulfilled due to drafting errors, the underlying intent throughout was to minimize the estate’s tax obligations. If rectification is not available under such circumstances, however, another question arises – when could a will drafted by a lawyer which results in an unexpected tax consequence be rectified? It’s an interesting question to consider.

Enjoy the rest of your day,

Suzana.