Written by Alison J. Gray
In Canada Life, a Canadian subsidiary (Canada Life) received $3.5 billion of investment assets from its ultimate parent, which included a portfolio of U.S. dollar bonds. These bonds were then invested in a limited liability corporation indirectly owned by Canada Life. Due to the subsidiary indirectly holding the U.S. bonds, it entered into third-party hedge contracts to eliminate any foreign exchange risk. During the 2007 taxation year, the U.S. dollar depreciated significantly with the result that Canada Life had unrealized losses and gains. For tax purposes, the losses could not be matched against the gains with the result that taxes would be payable on the gains.
In order to offset the gains and avoid taxation, a series of transactions were entered into for the purpose of realizing a large loss on Canada Life's interest in a partnership to offset the gains. However, CRA reassessed Canada Life for the 2007 taxation year and disallowed its claim for the loss due to the application of s. 98(5) (partnership rollover), which CRA said operated to eliminate the intended loss.
Canada Life applied for a rectification order effectively cancelling the 2007 transactions and replacing them with a series of transactions that dissolved the limited partnership in a way that did not attract the application of s. 98(5). The Court granted Canada Life's application.
In granting rectification, the Court stated that Juliar continues to be binding upon it, especially given the recent decision in Fairmont, in which Juliar was relied upon to rectify an internal unilateral share redemption to remedy an unintended tax assessment.
The Court found the Juliar principles were satisfied in this case and there was no attempt at retroactive tax planning as argued by the Crown. The Court held that all parties to the transactions had a continuing specific intention to carry out the transactions to create a tax loss to offset the unrealized taxable gaining and by mistake that did not happen. As a result, the parties were entitled to rectification.
This decision is interesting for its continued endorsement of a broad reading of Juliar, which enabled the court to find the mistake made in this case, namely the structuring of the transactions without including steps to address the application of s. 98(5) of the ITA, could be rectified. This again raises the question as to the intended reach of the equitable remedy of rectification, which traditionally, has been limited to rectifying mistakes in the recording of an agreement between the parties, and not the restructuring of a transaction that was not properly planned in the first place.
The Court, citing the Court of Appeal's decision in Fairmont Hotels, noted that Juliar does not require the party seeking rectification to have determined the precise mechanics or means by which to achieve the intention of a specific tax outcome. Rather, all that is needed is evidence of a continuing specific intention to undertake a transaction or transactions on a particular tax basis. Allowing parties to a transaction to restructure the transaction to eliminate an unintended tax consequence does seem to effectively be retroactive tax planning where, as in this case, the unanticipated tax consequence likely could have been anticipated. It will be interesting to see if the Supreme Court comments on this in the Jean Coutu case.