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Published: April 10, 2020

Last Updated: October 25, 2021

Anderson v. Benson Trithardt Noren LLP –Update on Tax Rectification – Toronto Tax Lawyer Case Comment


Background – Rectification and Taxation

Rectification is a remedy that can be sought when a legal document fails to reflect the intent of the parties to that document. When a court grants a request for rectification, the court will issue an order which retroactively alters the text of the document to reflect the original intentions of the parties. Rectification has been used extensively for the purposes of fixing tax problems by having the court alter the documents which gave rise to the problem. It should also be noted that although the parties to an agreement can agree to amend the agreement, that amendment is not effective retroactively against the CRA unless an order from the court granting rectification is obtained. If you have a tax problem relating to errors in a transaction, please contact one of our experienced Toronto tax lawyers to discuss if rectification may be available to provide you with tax help.

Facts – Anderson v. Benson Trithardt Noren LLP

The Appellant, Lonnie Anderson, was a farmer who ran his business though a corporation, Anderson Farms Ltd, of which he was the sole shareholder. Anderson was the recipient of a large shareholder loan Read More . When a shareholder loan is not repaid within 2 years, the Canadian Income Tax Act will treat the amount of the loan still outstanding at that time to be income for the shareholder under subsection 15(2) of the Canadian Income Tax Act. Mr. Anderson’s accountants were concerned about his loan being deemed to be income, so on October 6, 2011 they advised him to transfer farming equipment and land being used by the business but owned by him personally to Anderson Farms Ltd in satisfaction of the loan. The transaction was to be arranged such that it would qualify for rollover treatment under section 85 of the Canadian Income Tax Act Read More. This would allow Mr. Anderson to defer the capital gains that would otherwise have been realized when Mr. Anderson transferred the equipment and land to Anderson Farms Ltd. If you have a shareholder loan and want to know more about the potential tax consequences, please consider consulting one of our top Toronto tax lawyers.

Although Mr. Anderson agreed to the transaction, and his accountants filed the required section 85 rollover form T2057 with the Canada Revenue Agency, neither Mr. Anderson nor his accountants instructed Mr. Anderson’s lawyers to prepare the rollover agreement or director’s resolution necessary to give legal effect to the transaction. In 2013, the Canada Revenue Agency audited Mr. Anderson and discovered that not all the documentation required to complete the section 85 rollover had been prepared. When this was brought up, Mr. Anderson instructed his lawyers to prepare the necessary documentation. The lawyers prepared the missing documentation, but dated the rollover agreement January 1, 2011 and the dated resolutions of the corporation on June 6, 2013. The Canada Revenue Agency concluded that Mr. Anderson had not successfully accomplished a section 85 rollover and advised him they would be issuing a reassessment that would raise his taxable income for 2011 by $3,414,595. Our expert Toronto Tax Lawyers can help in properly implementing a section 85 rollover which this case shows is critical.

Trial Decision at Saskatchewan Court of Queen’s Bench – Anderson v. Benson Trithardt Noren LLP

Mr. Anderson sought to have the rollover documentation prepared in 2013 rectified to match what he intended on October 6, 2011 and for the rectified document to be retroactively effective against CRA to that date. Mr. Anderson also asked the court to exercise its equitable jurisdiction to issue declarations as to what occurred on October 6, 2011.

See also
Tax Court of Canada says cannot late file Notice of Objection because Accountant busy

The Court granted Mr. Anderson’s application for rectification, but refused to make the rectified documents retroactively effective. The Court was persuaded by the supporting documentation and affidavit evidence provided by Mr. Anderson that the rollover documentation prepared in 2013 did not correctly capture his intentions as of the meeting in 2011. Included among those changes was correcting the specified effective date on the rollover agreement to October 6, 2011 instead of January 1, 2011. The Court also found that it could rectify the corporate documents necessary to implement the roll over by virtue of section 236 of The Business Corporations Act. However, the Court refused to order that the documentation be made retroactively effective against the CRA. This left Mr. Anderson in the same situation he was before, since the rectified documents still come into effective after the capital gains on the equipment and property were realized. The Court refused Mr. Anderson’s request for declaratory relief on the grounds that no declaration was required to resolve any issues between Mr. Anderson and his corporation. The Court was not willing to use its equitable jurisdiction regarding declarations to assist Mr. Anderson in his tax dispute with Canada Revenue Agency.

Saskatchewan Court of Appeal – Anderson v. Benson Trithardt Noren LLP

The Saskatchewan Court of Appeal dismissed Mr. Anderson’s appeal. The Court of Appeal’s primary concern was that the essential nature of Mr. Anderson’s appeal was an attempt to bind the hands of the Tax Court of Canada. This was improper according to the Court of Appeal because Parliament has given the Tax Court of Canada exclusive original jurisdiction over appeals relating to income tax assessments. A necessary part of that jurisdiction is the power to make any incidental or ancillary findings necessary to resolve the appeal of an income tax assessment. As such, the Court of Appeal agreed with the lower court that the correct approach to Mr. Anderson’s situation was to rectify the documentation so that it was backdated to the date of Mr. Anderson’s meeting with his accountants, but not to declare that the documentation was legally effective at that date. This frees the hands of the Tax Court of Canada to decide whether the rectified backdated documentation is sufficient to allow Mr. Anderson to qualify for the rollover. Mr. Anderson argued that rectification is an inherently retroactive remedy and that the lower court failed to appreciate that in making its decision. The Court of Appeal was not persuaded by that argument. The Court of Appeal preferred to view the fact that the documentation was not prepared contemporaneously with Mr. Anderson’s intention to proceed with the rollover as a distinct issue from whether errors were made in recording a written instrument lead to it failing to reflect the intentions of the parties to it. Rectification is an appropriate remedy for the later, but not the former. The Court of Appeal decided it was not necessary to determine whether courts need to rely on The Business Corporations Act to rectify corporate documents to resolve the case, and therefore did not shed further light on this question.

See also
Burden of Proof in Tax Litigation

Supreme Court of Canada – Anderson v. Benson Trithardt Noren LLP

In civil matters like applications for rectification or declaratory relief, litigants must apply to have the Supreme Court of Canada hear their case. The Supreme Court Act establishes that applications for leave should be decided on the basis of public importance of the questions of law or mixed law and fact raised by the case. The Supreme Court of Canada rejects most of these applications for leave.

Mr. Anderson applied for leave to appeal to the Supreme Court of Canada and his application was denied. The Supreme Court of Canada does not provide reasons for its decisions to deny leave, however the denial was unsurprising in light of recent Supreme Court of Canada decision in Canada (Attorney General) v. Fairmont Hotels Inc which also dealt with rectification and significantly narrowed scope for rectification in the Canadian tax context Read More . That case involved a taxpayer who had clear tax objectives they sought to achieve but failed to come up with a definite and ascertainable plan for achieving them. The Fairmount decision emphasized that the role of rectification is to correct errors in the recording of an agreement not to fix any situation were the taxpayer failed to achieve their intended tax objectives. Similarly, in the Anderson case, the court rectified the date that was incorrectly recorded, but failed to provide relief addressing the fact that the documentation was prepared several years late. Our Toronto Tax lawyers can help you determine how the rapidly changing Canadian tax rectification case law will affect your interests.

Lessons for Taxpayers – Anderson v. Benson Trithardt Noren LLP

It is vitally important to make sure a qualified Toronto tax lawyer implements your tax transactions, and without excessive delay. In order to give legal effect to transactions, the proper documentation must be prepared, and errors can have significant tax costs. Proper and timely tax documentation will remove any need to pursue applications for rectification or declaratory relief. The current state of tax rectification law is that if there is a problem, taxpayers cannot rectify mistakes in their written agreements absent a written agreement in place at the right time for the Courts to rectify. Even contemporaneous documentation that needs to be rectified is better than no documentation at all, as in Anderson. If you need assistance planning, implementing, or rectifying a tax motivated transaction, our top Toronto tax lawyers are available to provide you with tax help.

Another lesson to be drawn is that it is important to consider whether applying for rectification is the best approach for recovering from a tax mistake. Given the reduced scope for rectification established by Anderson v. Benson Trithardt Noren LLP and Canada (Attorney General) v. Fairmont Hotels Inc, some taxpayers who would have been able to obtain rectification orders to correct their situations will no longer be able to do so. If these taxpayers discover their mistakes before the Canada Revenue Agency, they may be better off pursuing a voluntary disclosure (VDP or tax amnesty) than applying for rectification Read More. If they meet all of the eligibility requirements for a VDP, they will be able to soften the monetary blow of their mistakes by eliminating penalties and reducing the interest they would otherwise owe.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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