Supreme Court Of Canada Rules On Rectification
A taxpayer can apply to rectify a transaction that occurred pursuant to a legal agreement or document, but that does not reflect the actual intended transaction. Typically, the application will be made where the transaction that occurred resulted in adverse consequences relative to what the taxpayer intended. For example, in the 2000 Juliar case, the Ontario Court of Appeal allowed rectification of the taxpayers' transactions because the taxpayers had a common and continuing intention to transfer certain shares on a tax-free basis, contrary to the actual transfer of shares that would have resulted in tax payable.
In the recent decision of Fairmont Hotels, the Supreme Court of Canada narrowed the scope of the Juliar decision. Without getting into complex details, the main issue in the Fairmont case was whether the court would rectify an agreement that provided a redemption of shares by a corporation into one that provided a loan from the corporation. The taxpayers argued that the share redemption frustrated their intent that the transaction takes place on a tax-neutral basis, and as such asked for the rectification order. However, the Supreme Court held that a general ongoing intention to avoid or reduce tax was not enough to grant rectification.
