Written by Alison J. GrayThe Supreme Court of Canada recently granted leave to appeal from the Ontario Court of Appeal decision in Fairmont Hotels Inc v Canada (Attorney General), 2015 ONCA 441. This follows the granting of leave in the Jean Coutu case, see Supreme Court of Canada to Hear Tax Rectification Case, and following the recent Ontario decision in Canada Life, which follows Fairmont Hotels, see Ontario Court Follows Juliar and Allows Rectification of a Series of Transactions. The granting of leave in Fairmont Hotels seems to signal that the Supreme Court is prepared to consider the question of whether the decision in Juliar v Canada is good law and should govern requests for rectification in tax cases.
In this case, Fairmont Hotels Inc. (FHI) sought an order rectifying documentation relating to an internal unilateral share redemption. In 2002 and 2003, FHI was involved in the financing of the purchase of two US hotels in return for management contracts. As the financing was in US dollars, there was a potential foreign exchange tax exposure for FHI. As a result, reciprocal loans considered neutral for accounting purposes were entered into, and the foreign exchange exposure was fully hedged.
In 2006, FHI was acquired and its shares ceased to be publicly traded. As the acquisition would cause FHI to realize a deemed foreign exchange loss without a matching foreign exchange gain, the purchasers agreed to a modified plan in which FHI realized its accrued foreign exchange gains and losses and allowed its foreign exchange exposure to be hedged. The plan, however, did not address the foreign exchange exposure of the Canadian affiliates. In 2007, the decision was made to terminate the reciprocal loans. To do so, FHI and the Canadian affiliates redeemed their preferred shares under the mistaken assumption that no taxable foreign gains would be triggered. A CRA audit revealed the mistake. An order was sought to rectify the resolutions under which the preferred shares were redeemed to change the share redemption to a loan, which would trigger no taxable foreign exchange gain.
The Court of Appeal upheld the lower court's grant of rectification, rejecting the Crown's argument that rectification in the tax context requires the applicant to establish it had settled on the means by which to realize its intended tax outcome before any mistake in its implementation was discovered. The lower court judge's finding that there was a continuing intention to carry out the reciprocal loans on a tax neutral basis and not trigger any tax consequences was upheld. The Court cited with approval the conclusion that there was no retroactive tax planning in this case, as the real purpose of the 2007 transaction was not to redeem the preferred shares, but to unwind the reciprocal loans on a tax free basis. The preferred share redemption was the mistaken means to achieve that purpose.
The Court of Appeal went on to comment that Juliar does not require the party seeking rectification to have determined the precise mechanics or means by which to achieve a specific tax outcome, as long as the continuing specific intention to achieve that outcome is present.
This case, along with the companion case Jean Coutu, will provide an opportunity for the Supreme Court of Canada to provide the much needed guidance on what intention must be proven for rectification in the tax context to be granted, and when a request for rectification merely amounts to retroactive tax planning.