Filing an Appeal with the Supreme Court of Canada
If the taxpayer is unsuccessful at the Federal Court of Appeal, the final chance to appeal is at the Supreme Court of Canada. Litigants who wish to argue at the Supreme Court must be granted leave by the Supreme Court or the Federal Court of Appeal itself to appeal to the Supreme Court. It is very rare for the Supreme Court to hear tax cases, and typically only a few cases each year are granted leave. As such, the Federal Court of Appeal is said to act as a de facto final decision maker in most taxation law matters.
As the Federal Court of Appeal only reviews the decision of the Tax Court judge, the Supreme Court’s function is to review the Federal Court of Appeal’s decision. Again, completely new arguments are not permitted at the Supreme Court.
Have you encountered unexpected tax consequences due to a tax planning error? In some cases you may be able to obtain a rectification (i.e. correction) order from a provincial court that will correct the document or instrument giving rise to the unintended tax consequences. Once such an order is obtained, the Canada Revenue Agency (“CRA”) will be bound by the provincial court’s decision.
A rectification order is an equitable remedy used to correct a document that, as a consequence of an error, does not reflect the parties’ original intention. It is a feature of Anglo-Canadian contract law, and has particular significance for undoing tax-planning errors in some cases.
Since it is an “equitable” remedy, tracing its roots to the courts of equity, it can only be decided by certain provincial courts that have the proper jurisdiction. Thus, this remedy could not be issued by the Tax Court of Canada.
In the tax context, the courts have not limited this remedy to correcting inadvertent drafting errors; they have also used it to correct errors due to a misunderstanding of the facts or the law.
The decision in Attorney General of Canada v. Juliar, 2000 CanLII 16883 (ONCA) demonstrates the extent to which courts will apply rectification orders in the tax context. The taxpayers in Juliar intended to shift the ownership of a family corporation among family members without attracting immediate tax liability. This, if done correctly, should not attract any immediate capital gains tax. However, the taxpayers and their tax-advisers misunderstood the relevant facts and laws which led to substantial immediate tax on the transaction.
The Court, against the CRA’s strong opposition, decided that since the taxpayers intended that the transaction would not attract immediate tax liability, it may be corrected to reflect that intention. The CRA unsuccessfully appealed the decision and was denied leave to appeal to the Supreme Court of Canada.
The CRA aggressively opposed this decision because it suggests that courts will retroactively fix agreements to conform to the parties’ tax planning goals, even though the agreement itself was drafted exactly as the parties intended. It means that botched tax planning will be given a second chance. The Court in McPeake v. Canada (2012 BCSC 132), confirmed this position.
The recent decision in Fairmont Hotels Inc. et al v AGC (2015 ONCA 44) [Fairmont] shows that demonstrating a continuous and common intention is key when applying for a rectification order (specifically from the Ontario Superior Court). Furthermore taxpayers do not have to demonstrate that they have settled on a precise mechanism or a specific plan to meet the objectives. This case further confirms, as stated above, that the Ontario Court of Appeal’s 2010 pronouncement of the principles of rectification in Juliar , in the tax law context, remains good law in Ontario.
In Fairmont, the Ontario Appeal Court affirmed the Superior Court’s 2014 judgement allowing the Fairmont group of companies to retroactively rectify a preferred share redemption resolution made in 2007. The Ontario Court of Appeal relied heavily on the factual finding of the Superior Court’s application judge on the intention of the relevant parties to the corporate transactions.
Although it is always better to get your tax planning right the first time, a rectification order provides a safety net for taxpayers who do not. If you are subject to any adverse taxes from misguided tax planning or its implementation, a rectification order may be an appropriate remedy for you. Please contact us to speak with one of our experienced Canadian tax litigation lawyers.