S & D International Group Inc. v. Canada (Attorney General), 2011 ABQB 230

Court of Queen ’ s Bench of Alberta Citation: S & D International Group Inc. v. Canada (Attorney General), 2011 ABQB 230 Date: 20110406 Docket: 1003 03372 Registry: Edmonton Between: S & D International Group Inc. Applicant - and - Attorney General of Canada, 1241875 Alberta Ltd., Sana Ahmed, Tinna Chan-Yee and Wen Chen Respondents Corrected judgment: A corrigendum was issued on May 12, 2011; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Robert A.

Graesser _______________________________________________________ Nature of Application [ 1 ] This is an application by the Applicants for an order for rectification of a share repurchase and real estate transfer to avoid unforeseen income tax consequences. Alternatively, the Applicants seek to rescind the transactions entirely.

Background [ 2 ] The facts are not much in dispute in the application. The evidence consists of affidavits from employees of the Canada Revenue Agency in the Edmonton Tax Services branch. Their evidence is a compendium of the documents relevant to a tax audit conducted on the Applicants in relation to transactions among S & D International Group Inc. and its shareholders.

David Yee, the "authorized representative" of the Applicants, swore an affidavit in support of the Application, and he was cross-examined on his affidavit. [ 3 ] S & D International Group Inc. is a corporation (the “Corporation”) involved in the development of real estate in Alberta. Essentially, it acquires real estate, markets interests in the real estate to third parties (often foreign investors) and resells or develops the real estate.

The Corporation generally retains an interest in each of the properties it acquires so that it is developing the real estate for itself as well as for its investors. [ 4 ] The Corporation is owned by three businessmen and their spouses. The spouses each own one quarter of the common shares. The three businessmen own the remaining shares through other corporations, which collectively own one quarter of the common shares in the Corporation.

There is a unanimous shareholders agreement affecting the Corporation dated April 1, 2007, signed by the Corporation, the wives, and the husbands' corporations. [ 5 ] The evidence established that in early 2007, the Corporation was being investigated by the Alberta Securities Commission in relation to the sale of interests in land to various investors.

The three businessmen wanted to isolate their wives from the investigation and determined that it would be best if the wives were no longer shareholders in the Corporation. [ 6 ] They sought legal advice, and an Agreement to Sell Shares (the “Argeement) was drawn up by their lawyer (from a different firm than the firm representing the Applicants on this application). The Agreement, dated May 22, 2007, has each of Sana B. Ahmed, Tinna Chan-Yee and Wen Chen agreeing to sell 2500 Class A shares to the Corporation for $1,864,778.75. [ 7 ] Accompanying the Agreement, but not referred to in the Agreement or marked as a

schedule or appendix to it, is a list of properties, entitled "Land owned by S&D International Group Inc.". The list describes some twenty five projects with legal descriptions, acreage, costs per acre and S & D's total cost with respect to each project. There is a subtotal of $6,754,546. The unexplained sum of $704,569 is then added, for a grand total of $7,459,115. Beside that figure is the notation "$1,864,778.75 1/4 each" a signature identified as Mr.

Yee's, and a further notation "for each Shareholder". $1,864,778.75 is one quarter of the grand total. [ 8 ] The Agreement provides in para. 4.01: "the full amount of the Purchase Price...shall be paid by the Purchaser on or before Closing in cash or certified funds." [ 9 ] Paragraph 7.01 provides: . . . (

c) The Purchaser may pay the Price by way of transferring to each of the Vendors interest in lands of same value owned by it. (

d) Each of the Vendors has the Option of transferring back to the Purchaser the Purchase Price in cash or in interest in lands within 5 years of the date of the transaction, and regain her position as shareholder and director and officer in the Purchaser Corporation as the same situation of the date of transaction. If the Option is exercised and the interest in lands is transferred to the Purchaser and the market value on the date of exercise of Option is greater than $1,864,778.75 such that capital gain tax is payable by the Vendor, such capital gain tax is to be borne by the Purchaser Corporation. [ 10 ] Closing of the Agreement was to take place on May 22, 2007.

[ 11 ] Following execution of the Agreement, the Corporation transferred all its interest in the lands described in the list to 1241875 Alberta Ltd., a corporation owned by the three wives. [ 12 ] The evidence of David Yee, which was not shaken on cross-examination, was that the directors of the Corporation believed that the value of the lands being transferred was equal to its adjusted cost base.

He deposed that "If the fair market value of the Land Consideration was in excess of its adjusted cost base, then S & D would have paid for the purchase of the S & D Shares in cash in order to avoid a gain on disposition” (para. 32). [ 13 ] It seems clear that the transfer of all of S & D's interest in the lands to 1241875 was done in error. S & D should have retained a one quarter interest, representing the $1,864,778.75 which reflected the value of the husbands' corporations’ shares.

The wives (or their company 1241875) were only to get $5,594,336.25 and not the full value of the lands shown on the list. [ 14 ] The Canada Revenue Agency (“CRA”) began an audit of S & D in October, 2008. CRA was interested in the fiscal periods from April 1, 2005 to March 31, 2008, which included the period during which the transfer of the lands to 1241875 took place. On May 11, 2009, the Minister of National Revenue reassessed S & D alleging that it owed $19,234,050.76 in income taxes.

Part of those taxes resulted from CRA determining that the fair market value of the transferred lands was $25,063,038 and not the $5,594,336.25 specified in the Agreement. [ 15 ] Some of the corporate tax resulted from the deemed disposition of the lands at fair market value when the lands were transferred to the wives.

Additionally, the wives were reassessed in the process, and they were required to each declare the $1,864,778.75 purchase price for their shares as a deemed dividend from the Corporation, resulting in significant tax liabilities for them. [ 16 ] CRA had advised the directors of its position that the lands had been transferred for significantly less than their fair market value several months before the May 11, 2009 reassessment. As a result of that position, S & D and the wives entered into a "Mutual Cancellation of Agreement to Sell Shares" (the “Cancellation Agreement”) dated March 16, 2009.

It appears this was done without tax advice, and the Cancellation Agreement was described by the Applicants' counsel as a "self-help" remedy. [ 17 ] The Cancellation Agreement provides: B. The parties to that "Agreement to Sell Shares" and to this Agreement of Mutual Cancellation desire to rescind that "Agreement to Sell Shares" ...

The above-mentioned Agreement is hereby rescinded as of this day first above written, and neither party shall have any further rights or duties thereunder. [ 18 ] Following execution of the Cancellation Agreement, 1241875 transferred the lands back to S & D, and the wives re-acquired (or are entitled to re-acquire) their shares in the Corporation. [ 19 ] The transfer back to S & D, however, did not have the desired result from a tax perspective.

The Corporation was still deemed to have disposed of its interest in the lands at fair market value after it transferred them to the wives’ corporation, and the wives were still deemed to have received dividends in the amount of the sale price attributed to them when their corporation got the lands. [ 20 ] The actual tax consequences of the Cancellation Agreement are not before me.

[ 21 ] The issues resulting from the repurchase of the wives' shares by the Corporation and transfer of lands to the wives' corporation and the transfer of the lands back to the Corporation by 1241875 are only some of the tax issues facing the Corporation. Other matters are described in Canada (National Revenue) v. S & D International Group Inc. , 2009 ABQB 536 . However, only the transactions described above are relevant for the purposes of this application. [ 22 ] Several things are clear on the evidence before me: 1. The manner in which the Agreement was closed led to unintended income tax consequences; 2.

The transfer of all of the Corporation's interest in the lands was in error; the wives were never intended to receive lands worth (or with an adjusted cost base of) $7,459,115. Only three quarters of the land should have been transferred at an ascribed value of $5,594,336.25; 3. None of the Corporation, its directors or the wives intended to trigger any income tax consequences as a result of the share repurchase by the Corporation and the transfer of lands to the wives as payment; and 4.

The Cancellation Agreement was ineffective to "fix" the unintended income tax consequences. [ 23 ] It is unclear whether the repurchase of the wives' shares could have been structured in a way to defer any tax consequences. Mr.

Yee deposed that if the cost base of the lands was not the correct value to use for the purposes of transferring the lands to the wives, the Corporation would have paid cash instead. [ 24 ] It is clear that despite the wording in the Agreement giving the purchaser the option of paying cash or transferring land to the wives, the Agreement was entered into with the intent of transferring the lands. The Agreement was dated and closed on the same day, and the lands were transferred immediately thereafter.

There was no interval between the making of the Agreement and closing for the Corporation to consider land value, seek other advice, or gather up the necessary cash. [ 25 ] CRA considers it significant that at no time between February 1, 2007 and December 31, 2007 did S & D have sufficient cash to pay out $5,594,336.25 to the wives. However, that position does not take into account the possibility of the Corporation borrowing to effect the transactions.

Financial statements for the Corporation for 2008 (which include 2007 figures for comparision) show that the Corporation had significant assets, with little third-party debt and well over 50% of its liabilities being directors' fees payable. [ 26 ] S & D has filed notices of objection to the corporate reassessments, and has arguments relating to CRA's valuation of the lands. It notes that the lands have never been sold to an arms' length party, and they are all now back in the name of S & D.

One of the arguments in support of their application is essentially "no harm no foul" - no one has profited from any transactions; the lands are back with the Corporation and any tax consequences are unintended. Paying tax in these circumstances would result in a windfall for CRA. [ 27 ] The Corporation and shareholders seek: 1. Rescission, declaring the Agreement void ab initio , directing the Registrar for Land Titles to register the lands in the name of S & D, and declaring void ab initio all subsequent transactions as between the Applicants; 2.

Alternatively, a rectification order substituting the lands as consideration with a cash payment of $5,594,336.25; or 3. Alternatively, a rectification order reducing the land consideration to such lesser number of acres of land or parcels to reflect a fair market value for such lands to the agreed purchase price of $5,594,336.25.

[ 28 ] CRA takes the position that the Applicants did what they did and they are liable for the consequences resulting from those deliberate transactions.

CRA's position is that the Corporation intended to transfer the lands to the wives for the value shown in the list attached to the Agreement, and the parties are essentially now stuck with the consequences of their transaction. [ 29 ] That the transaction may have been ill-advised from a tax point of view, and had unintended income tax consequences, are not valid bases to set it aside, or embark on what the Crown describes as retroactive tax planning. [ 30 ] The Crown takes exception to the characterization of the tax liabilities resulting from these transactions as a "windfall", arguing that the calculation and collection of tax under the Income Tax Act is governed by statute, and it is not a windfall for tax to be assessed in accordance with the applicable legislation.

Issues 1. Does the Court have the ability to grant rescission in these circumstances? 2. Alternatively, does the Court have the ability to rectify the Agreement to either allow the Corporation to pay cash, or transfer lands worth (at fair market value) $5,594,336.25? Law

a) Rescission [ 31 ] The Applicants argue that equitable rescission is available in circumstances including where there is a fundamental mistake by a contracting party as to the facts or as to the rights under the contract, citing Sir Robert Megarry and P.V. Baker, Snell's Principles of Equity , 27th ed. (London: Sweet & Maxwell Ltd., 1973) at p. 605. This allows the parties to be restored to the position they would have been in had the contract not been made (607). Limits on the availability of equitable rescission have not been fixed: G.H.L. Fridman, The Law of Contract in Canada , 5th ed. (Toronto: Thomson Carswell, 2006) at 812.

b) Rectification [ 32 ] The Applicants submit that when there is a mistake in a written instrument such that it does not accord with the true agreement between the parties, the agreement can be rectified by a court of equity to reflect the true agreement ( Megarry , at 610). The agreement itself is not rectified; rather instruments purporting to have been made in pursuance of the terms of the mistaken contract are rectified: Mackenzie v. Coulson , (1869), L.R. 8 Eq. 368. (Ch. Div.) [ 33 ] In rectification, substance is to prevail over form: Re G.T. Group Telecom (2004), 5 C.P.R. (5th) 230 (Ont. S.C.J.).

c) Mistake

[34] The Applicants argue that common law mistake so as to render a contract void ab initio requires that there be an error ormistake that is fundamental in character and which goes to the root of the contract: Fridman, note 12 at 239-243. [35] Common law mistake must go to the intent to contract, and not to the motive for contracting: Fridman, at 258-259. [36] Equitable mistake may be available in situations where common law mistake does not invalidate the contract, but where therehas been a fundamental honest but inadvertent mistake, and it would be unfair, unjust or unconscionable not to correct the mistake:Fridman at 257-259; and McMaster University v.

Wilchar Construction Ltd., (1971), (ON SC), 22 D.L.R. (3d) 9 at18-19 (Ont. H.C.), aff'd (1973), (ON SC), 69 D.L.R. (3d) 400n (Ont. C.A.).

d) Rescission and Rectification in a Tax Context [37] There are two significant cases from Ontario dealing with these issues. In Juliar v. Canada (Attorney General), (2000), (ON CA), 50 O.R. (3d) 728 (C.A.), leave to appeal refused, (2001, 153 O.A.C. 195n (S.C.C.), the courts considered afailed corporate reorganization which had been effected with the intent that the transaction result in a tax deferral (a "butterfly"reorganization).

The trial judge characterized the deferral of income tax as being a "primary and continuing objective of thetransactions" and that other considerations would have "fallen away" if the real tax implications had been known (at paras. 46, 48 and52). There, the taxpayers and their accountant had mistakenly assumed that the shares had been acquired for value as opposed to havingbeen acquired on an already-tax deferred basis.

The transaction was thus structured incorrectly to obtain the intended tax deferral. [38] The Crown argued that the evidence as to tax deferral intention was weak, but Austin J.A. noted at paras. 26-27 that "(t)heplain and obvious fact, however, is that the proposed division had to be carried out on a no immediate tax basis or not at all." Herecognized that tax may have not even been discussed among the taxpayers. [39] Austin J.A. cited Re Slocock's Will Trusts, [1979] 1 All E.R. 358 (Ch. Div.), recognizing that while rectification is adiscretionary remedy: 1.

Parties are entitled to organize their affairs to avoid payment of tax if they legitimately can; 2. If a mistake is made in a document legitimately designed to avoid the payment of tax, there is no reason why it should not becorrected; and 3.

Rectification should not be refused merely because the Crown would be deprived of an accidental and unexpected windfall. [40] In Juliar, the Court of Appeal upheld the trial judge's remedy: the substitution of shares as consideration instead of debt.Leave to the Supreme Court was refused. [41] To achieve this result, the trial judge and Court of Appeal had to distinguish 771225 Ontario Inc. v. Bramco Holdings Co.,(1995), (ON CA), 21 O.R. (3d) 739 (Ont.

C.A.), leave to appeal refused, (1995), 48 R.P.R. (2d) 320n (S.C.C.). [42] In Bramco, the Courts refused to rectify documents to eliminate unanticipated Ontario land transfer tax. There, the principalof two companies had purchased a large tract of farmland in the name of one company, but registered the transfer on title in the name ofthe other company. The transfer to that company was done in the mistaken belief that the company was resident, and subject only to a2% land transfer tax. In fact, the company was non-resident, and had to pay tax at 20%. The purchasing company could have taken titleat the 2% rate.

[43] As a result of this error, the tax liability was $1.7 million, rather than $85,000. The companies sought to rectify the error byhaving the lands transferred to the resident company. Rectification was disallowed by the majority of the Court of Appeal. [44] Galligan J.A., for the majority, noted that the plaintiff had already unsuccessfully sought relief from the tax burden under theprovisions of the Land Transfer Tax Act, R.S.O. 1980, c. 23. The Act allowed the Minister to provide relief against inequitable demandsfor tax.

The plaintiff had tried that avenue of recourse, but failed. [45] Citing the principle that "if an adequate legal remedy exists, equity will not grant relief" (at para. 4), he stated at para. 8: I would not be prepared to exercise an equitable discretion to enable a person to obtain relief through equitable remedies which she wasnot able to obtain by the remedy which the law afforded her. I do not think equitable discretion ought to be exercised in order to give aperson another chance at the same relief by a different route. [46] He cited with approval at para. 10 Assaly v.

Ontario (Minister of Revenue), (1986), (ON SC), 56 O.R.(2d) 30 (Ont.

H.C.J.): The law is quite clear that when a taxpayer orders his affairs in a manner that attracts a tax in one amount, he cannot subsequently claimthat he should be taxed as if he had ordered his affairs in a different manner, which would have attracted less tax. [47] Ultimately, Galligan J.A. stated at para. 13: In my opinion, an equitable discretion should not be exercised in order to allow a taxpayer to reorder her affairs so that she can avoid atax disadvantage which she suffered under the Land Transfer Tax Act as the direct result of a deliberate decision on her part to obtain atax advantage under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).

To afford such relief would fly in the face of a long line ofauthority based upon the need for finality and consistency in matters of taxation. [48] In Juliar, Austin J.A. stated that he agreed entirely with the reasons and conclusions of the trial judge (at par. 24). CameronJ. had distinguished Bramco on two bases. Firstly that in Bramco, the transaction had been deliberately structured to avoid income taxand that intention continued until the land transfer tax issue arose.

In Juliar, the intention to avoid income tax was a "primary andcontinuing objective of the applicants from the inception of the transaction." [49] Secondly, that the asset protection intent in Juliar was collateral to and subordinate to the objective of tax avoidance.Cameron J. had held that there was a common and continuing intention from the outset to transfer half of the interest in the business on abasis which would not attract immediate liability for tax on the transaction.

He concluded (quoted at para. 22 of the Court of Appealdecision): I am convinced that the asset protection would have been quickly sacrificed to the dominant objective of avoiding tax on the sharetransfer as noted earlier." [50] Distinguishing Bramco, Cameron J. had held that the intent there changed when the land transfer tax issue arose such that theincome tax considerations fell aside and avoiding the higher land transfer tax became more important. [51] Strekaf J. considered these decisions in Stone's Jewellery Ltd. v. Arora, 2009 ABQB 656. Stone's Jewellery acquired a parcelof land in 1996.

Following tax advice, title was taken some eight years later in 2004 by siblings of the directors and shareholders ofStone's Jewellery. By that time, the value of the lands had increased significantly. In 2006, the siblings transferred the lands to acompany owned by them. Again, they had tax advice. That transaction proceeded as a s. 85(1) rollover. Subsequently, the CanadaRevenue Agency assessed Stone's Jewellery for unreported income on the disposal of the lands to the siblings in 2004, and assessed the

siblings for having received the lands. CRA disallowed the rollover in 2006, and assessed the siblings for disposing of their interest in the lands at then-fair market value. As a result of the reassessments, CRA claimed that Stone's Jewellery and the siblings owed more than $6 million in taxes, GST and interest. [ 52 ] In addition to suing the lawyer involved, Stone's Jewellery, the siblings and their company sought rescission or rectification.

CRA opposed the application on the basis that rectification is not available to cancel transactions, and rescission is not available where there are adequate legal remedies or the effect would be to effect retroactive tax planning. [ 53 ] Strekaf J. found that there was a fundamental mistake in relation to the 2004 transaction, in that everyone involved believed that the siblings could take title to the lands instead of Stone's Jewellery and there would be no tax consequences.

She held that the mistake went to the identity of the parties to the contract and the essence of the agreement, thus rendering the transfer void ab initio at common law.

The result was that the lands were directed to be registered in Stone Jewellery's name, and the 2004 and 2006 transactions were set aside. [ 54 ] The essence of her decision is found at para. 64: 64 I am satisfied that the appropriate inference to be drawn from the evidence in this case is that the Applicants were proceeding on the mistaken assumption, based upon the advice of their solicitor and accountant that they could take title in their own names, that doing so would not have adverse tax consequences and that such an assumption was reasonable having regard to what they had been told by their advisors.

Stone's accounting records are consistent with the parties' mistaken belief that the Aroras could take title in their own names directly from the vendor, without the transaction being treated as involving an intermediate purchase and subsequent sale of the Lands by Stone's. [ 55 ] At para. 66, she approved Cameron J.'s statement at para. 45 of Juliar : 66 I find the following comments of Cameron J. in Juliar at para. 45 , to be equally applicable to transactions between individuals and the corporations owned and controlled by them: It is a fact of modern day commercial life and high tax rates that tax consequences are an essential consideration in most commercial transactions.

Adverse tax consequences are often a "deal breaker" to effecting the transaction. Division of a family business among the children of the founder of the business is not an uncommon occurrence and is invariably intended to be effected with little or no cash and on a basis that does not attract immediate liability for income tax.

A liability for tax would deprive either the taxpayer or the business of cash and its earning opportunities or force a sale of productive assets to realize the cash necessary to pay the tax. [ 56 ] In Stone's Jewellery , rectification would have been of no assistance to the applicants, as the 2004 and 2006 transactions had to be set aside to avoid the unanticipated tax consequences. [ 57 ] At paras. 70 - 74, Strekaf J. indicated that she would alternatively have rescinded the 2004 and 2006 transactions on the basis of her equitable discretion, recognizing that the Court has an equitable discretion to grant rescission when the court considers, on equitable grounds, that the contract should not be allowed to stand, doing what is "practically just" (at para. 29). [ 58 ] She essentially found that the mistakes made by Stone's Jewellery and the siblings fell within common law mistake entitling the court to rescind the contracts because the mistake was "as to the effect of the transaction and not merely as to its consequences or the advantages to be gained by entering into it." (at para. 50, following Gibbon v.

Mitchell , [1990] 1 W.L.R. 1304 (Ch. Div.) ). [ 59 ] In her analysis, the 2004 transfer was void ab initio because the applicants were of the mistaken belief that the siblings could take title in their own names directly from the vendor, without the transaction being treated as involving an intermediate purchase and

subsequent sale of the lands by Stone's Jewellery (a mistake as to the nature of the transaction - a direct transfer instead of anintermediate transaction). The 2006 transaction was also void ab initio because the parties intended a s. 85 rollover, which was notavailable to them in the circumstances. [60] She indicated at para. 48 that she, unlike Galligan J.A. in Bramco, would have been prepared to exercise her equitablediscretion to grant rescission in that case. [61] The Applicants cite other cases where rescission or rectification have been used in tax cases to enable the taxpayer to avoidunintended (mistaken) consequences of various transactions. [62] In Re Amalgamation of Aylwards

(1975) Ltd., (2001) (NL SC), CarswellNfld 193 (S.C.T.D.), Green J.approved the approach in Juliar recognizing it as permitting rectification to be used where the mechanism chosen to reach an intendedresult was mistakenly used, and the transaction was accordingly restructured. [63] He held at para. 42: 42 To justify rectification, there must be (

i) a common intention among the creators of the instruments effectuating the transaction toaccomplish a certain result; and (ii) a common mutual mistake that results in an instrument that does not comport with the commonintentions of the parties. There is no need to show that there was a prior concluded agreement showing the true intent of the parties,antecedent to the instrument being sought to be rectified. An intention that is common to the parties and continues down to the date ofcreation of the original instrument is sufficient. See Dynamex.

Position of Crown [64] The Crown notes that the Cancellation Agreement purporting to undo the earlier transaction was only done after CRA hadnotified the Applicants that they were being reassessed on the basis of a much higher land value. [65] The Crown also argues that the Agreement prohibits price adjustments in

section 4.02 and that the parties should not now beable to retroactively vary that agreement. Tax consequences were expressly contemplated, but only in the circumstances of the wivesrequiring the Corporation to take the lands back. That is not the case here. [66] As to rescission, the Crown submits that there has been no fundamental mistake. The purpose of the transaction was a shareredemption with land as consideration, and that is what happened. Mr.

Yee, on behalf of the Applicants, confirmed that it was thecommon intention at the outset to have the lands transferred to the wives: Transcript page 11, lines10 - 20 Q Ms. Mah: Then at paragraph 27 you stated that S & D chose to pay the purchase price by transferring 402.8 acres of land,right, and I understand that a list of that land was actually attached to the Share Redemption Agreement, which you did attach as anexhibit to the Affidavit. S & D intended to transfer the specific land attached to the Share Redemption Agreement at the time of entering into this agreement,isn’t that correct? A Yes.

That is correct, at that time, yes.

[ 67 ] The Crown submits that there can be no finding of an honest mistake in entering into the agreement to redeem shares. The Corporation and the wives intended to have their shares redeemed in consideration of a transfer of the lands; cash for the transaction was not readily available to the Corporation; there was no mistake at all about who was transferring the lands, who it was being transferred to, or why it was being transferred.

Further, the reason for the transfer was to avoid liability to the Alberta Securities Commission, and that purpose was accomplished as the investigation did not proceed and the wives faced no jeopardy. [ 68 ] The Crown submits that there was no evidence that the Corporation intended a s. 85 rollover (as was the case in Stone's Jewellery ). [ 69 ] As such, the Crown argues that the Applicants have not made out a case for mistake entitling them to common law rescission. It cites Schmidt v. Guarantee RV Centre Inc. , 2007 CarswellAlta 326 (C.A.) , at para. 4 , Miller Paving Ltd. v. B.

Gottardo Construction Ltd. , 2007 CarswellOnt 3584 (C.A.) , at paras 23-23 and 27 , Andrews v. Coxe , 2003 CarswellAlta 230 (C.A.) , at paras. 12 and 15 , and Ron Ghitter Property Consultants v. Beaver Lumber Co.

Ltd. , 2003 ABCA 221 , at paras. 8 and 11 . [ 70 ] As described in Miller Paving , the test for common law mistake is whether the subject matter of the contract has become something essentially different from what it was believed to be (at para. 22). [ 71 ] Equitable mistake, however, requires that the parties be "under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault", quoting from Denning L.J. in Solle v.

Butcher , [1950] 1 K.B. 671 (C.A.) . [ 72 ] The Crown also relies on Bramco , arguing that case is closer to the circumstances here than is Juliar . In its submission, clear evidence of an intention that the transaction be carried out on a no-tax basis or not at all is required for there to be a finding of a fundamental mistake. That evidence was lacking in Bramco , and it is lacking here.

Re Aboriginal Diamonds Group Ltd. , 2007 NWTSC 42 , is cited. [ 73 ] Additionally, the Crown distinguishes Stone's Jewellery on the bases that in that case, Strekaf J. found that there was a mistake as to the parties (direct transferee as opposed to intermediate transferee) relating to the 2004 transaction and there was a mistake as to the nature of the transaction (a s. 85 rollover) relating to the 2006 transaction.

Stone's Jewellery should be limited to its facts, and those types of mistake are not present here. [ 74 ] Finally, the Crown argues that rectification is to be granted cautiously, and is not intended as a remedy to allow the parties to re-write the contract: Shafron v. K.R.G. Insurance Brokers (Western) Inc. , 2009 SCC 6 . Additionally, as noted in Bramco , rectification and rescission should not be used as a means of effecting retroactive tax planning. Analysis [ 75 ] It is clear to me on the evidence that the transactions proceeded with the Applicants being under various common mistakes. Mr.

Yee (and presumably the other Applicants) were mistaken either as to the value of the lands being transferred - that their fair market value was a total of $7,459,115 - or that the lands could be transferred at their book value without attracting corporate tax. [ 76 ] Additionally, the Applicants transferred all of the lands to the wives, rather than retaining 25% of the lands in relation to the interests of the other shareholders. There was no intention for the wives to get all of the lands to the exclusion of the other shareholders.

The lands had a total value on the books of the Corporation at $7,459,115 and the wives were only entitled to receive $5,594,336.25 in consideration of the redemption of their shares. [ 77 ] Further, the Applicants were mistaken as to the effect of the Cancellation Agreement. It was ineffective to reverse the tax consequences of the Agreement and the manner in which the share redemption closed.

[78] The question to be determined is whether any of these mistakes entitles the Applicants to any of the remedies they seek. [79] It is clear from an analysis of the cases cited that the while common law of mistake voiding a contract has not moved muchfrom the strictness of the doctrine as expressed some 80 years ago in Bell v. Lever Bros.

Ltd., [1932] A.C. 161 (H.L.), while remedies forequitable mistake have developed, and are continuing to expand. [80] I concur with the conclusions of Farley J. in Re GT Group Telecom Inc., (ON SC), 2004 CarswellOnt 4262, 5 C.B.R. (5th) 230, at para. 5: 5 Given the difficulty posed by the subsequent tax documentation filed, it is proposed that the arrangement proceed in a somewhat andslightly different route to achieve the same result - a surviving GT Services which enjoys the tax benefits by virtue of a merger byamalgamation as opposed to a merger by wind-up.

Substance should prevail over form in any equitable relief situation. Re Aylwards(1975) Ltd., (NL SC), [2001] N.J. No. 195 (N.S.C.T.D.) and Re Razzaq Holdings Ltd., 2000 BCSC 1829 ,[2000] B.C.J. No. 2573 (B.C.S.C.) were cited as authority for the proposition that the court has jurisdiction to rectify transactions,including amalgamation and other corporate transactions, with a retroactive effect in order to effectuate justice and fulfil the bona fideintention of the parties.

In addition I would be of the view that this court may rely upon its inherent jurisdiction to do substantive justiceas between and for the parties involved: see 80 Wellesley St. East Ltd. v. Fundy Bay Builders Ltd. et al., (ON CA),[1972] 2 O.R. 280 (C.A.). [81] I also concur with the comments of Green J. as to equitable rectification in Re Amalgamation of Aylwards

(1975) Ltd., supraat para. 37: 37 I have concluded that the scope of the equitable doctrine of rectification is not so restricted in Canadian law as it may have appearedto be in England between fifty and a hundred years ago. Even under the classical law, the doctrine was not restricted to rectification ofcontractual documents, but did extend to the rectification of other types of written instruments.

In principle, there is no reason why,provided the requirements for its application are met, the doctrine of rectification could not be availed of to rectify corporate instrumentslike articles of amalgamation. [82] It is difficult to reconcile Juliar and Bramco. Neither is binding on me. The Court of Appeal agreed with the manner inwhich Cameron J. distinguished Bramco in Juliar. In my view, the continuing strength of Bramco is the conclusion that equitableremedies should not be used where there are adequate legal remedies.

There, the applicants had the opportunity to seek relief from theProvince, and had done so but failed. They then sought equitable relief in Court, and the Court declined to exercise its equitablediscretion in their favour, despite the case being sympathetic. The courts have been unwilling to characterize negligence claims againstsolicitors as an adequate legal remedy. [83] I hesitate to place the same strictures around equitable remedies for mistake as there are for common law mistake. Undercommon law mistake, a party is entitled to a legal remedy in the appropriate circumstances.

Equitable relief is always discretionary. Ithus think it is artificial to interpret Juliar as requiring that the parties demonstrate that the mistake was a "primary and continuingobjective of the applicants from the inception of the transaction".

That circumstance might make the case for equitable relief stronger,but is not a pre-condition to the court granting equitable relief if it had been necessary to achieve a just result. [84] Strekaf J. noted in Stone's Jewellery that she would have exercised her discretion differently than the majority of the Court ofAppeal in Bramco (consistent with Grange J.A.'s dissent there). Her decision recognizes the ability of the Court to make inferences fromthe evidence (at para. 64).

While she found there that the applicants had made out their case for common law rescission based oncommon, fundamental mistake, she would have granted equitable relief too. [85] I am mindful that the courts should be slow to interfere with the contracts made by the parties. The courts should be slow touse its equitable jurisdiction as a way of allowing the parties to change the bargain they made, or use that jurisdiction as a means ofeffecting retroactive tax planning. Hence the discretion given to the courts in the granting, or denial, or equitable relief.

[ 86 ] Here, there is no evidence to suggest that the mistakes made by the Applicants were anything but honest. The extent of expert tax advice in advance of any of the transactions involved is not known. [ 87 ] The transactions were not entered into for any improper purpose. Tax planning does not seem to be one of the purposes; rather there was a common desire to extract the wives from the Corporation to shield them from the Alberta Securities Commission investigation. [ 88 ] There has been no advantage gained by the Applicants in relation to the transactions.

The fact that the investigation has ended is not connected in the evidence to the transfer of the lands to the wives, or the redemption of their shares. In any event, the lands are now back in the name of the Corporation, and the wives have, or are entitled to have, their shares back. [ 89 ] There is no alternative remedy available to the Applicants, as was the case in Bramco .

The Applicants are not trying to do an end run around another process, or indirectly challenge the decision of another body that could grant them the remedies they seek here. [ 90 ] There is no fault attributed to the Applicants or any of them. The conduct here is not blameworthy and there is no absence of clean hands.

I see nothing sinister or improper about the Applicants doing nothing to undo or correct the transactions until they were advised by CRA as to the tax consequences resulting from the transactions. [ 91 ] Thus there are no impediments to the granting of equitable relief. [ 92 ] The common mistake as to the value of the lands really goes to the effect of the transaction. The Applicants intended to transfer the lands (or at least 75% of the lands) to the wives. There was no valuation of the lands on a fair market value basis.

The Applicants proceeded on the assumption that either the lands were only worth their book value so there would be no gain in the hands of the Corporation, or that they could be transferred at book value without attracting tax in the hands of the Corporation. [ 93 ] There was no mistake as to the nature of the transaction. All of the Applicants intended that the wives' shares be redeemed and that they get some of the Corporation's land as consideration for the transfer.

As in Juliar , there is very little evidence to support a finding that the fundamental nature of the Agreement was to redeem the wives' shares on a tax effective basis, or on a basis that would attract no tax in the hands of the Corporation. [ 94 ] The Agreement is being interpreted by CRA as obliging the Corporation to transfer 75% of the lands to the wives. However, the Agreement does not say that. Paragraph 7.01(

c) allows the Corporation to pay the redemption price "by way of transferring to each of the Vendors interest in lands of same value owned by it ". (emphasis mine) [ 95 ] That obliged the Corporation to transfer $1,864,778.75 worth of lands to each of the wives. Mr. Yee deposed that the Corporation did not intend to trigger a gain on the disposition of the lands to the wives, "as its fair market value was believed by the directors to be equal to its adjusted cost base".

Cross-examination clarified that the transfer to the wives was considered to be an internal transfer, and that the Corporation was not in a position to sell the lands to a third party because of its relationship with its investors. [ 96 ] There is no evidence that the Corporation did anything to investigate what the lands' fair market value for tax purposes was at the time. If the directors believed that the fair market value of the lands was their book value, CRA says they were mistaken. The transaction proceeded on the basis that the transfer to the wives could be carried out without triggering a gain.

Again, if CRA is correct about the value of the lands, the transaction proceeded on a mistaken assumption. [ 97 ] It is difficult to distinguish the mistakes here from the mistakes in Stone's Jewellery and Juliar . In Juliar , the applicants were of the mistaken belief that the share transfer could be accomplished by a debt instrument rather than taking back new shares because they thought an initial transfer had proceeded on a tax-paid basis. In Stone's Jewellery , the siblings could take title as if they were the original purchaser and not as a subsequent purchaser from Stone's Jewellery .

[ 98 ] In both cases, and on scant evidence, the courts were prepared to infer that the transactions would not have proceeded in the manner in which they did, had the parties not been operating under mistake. [ 99 ] I think it is a reasonable inference to make here that if the directors had not mistakenly believed that the fair market value of the lands was equal to their adjusted cost base, or that the lands could not be transferred to the shareholders at their adjusted cost base without triggering a present gain, that the transaction would have been structured differently.

One must ask the question "what would the Applicants have done had they understood that the adjusted cost base did not equal fair market value for the share redemption from the wives, or that the transfer to the wives could not be accomplished at the lands' adjusted cost base?" [ 100 ] The answer to the question would clearly be "something else". Mr. Yee says the Corporation would have paid cash. Even though the Corporation did not have sufficient cash on hand, having regard to the financial statements in evidence, that is not fanciful.

Significant assets are shown; more than half of the liabilities are related (directors' fees) obligations. [ 101 ] For common law mistake, it would appear to be necessary to find that the Agreement was in essence a "share redemption that would attract no tax in the Corporation".

That would make this case similar to Strekaf J.'s finding that the first Stone's Jewellery transaction was "a transfer that would be treated as if it were to the original contracting party" instead of "a transfer from an intermediate purchaser" and thus going to the identity of the parties, and "a s. 85 rollover" instead of a "non-section 85 rollover" (as to the second transaction) and as was the case with the transaction in Juliar . [ 102 ] To make such a finding here would, in my view, be artificial, and an exercise in ingenuity. The transaction was a share redemption.

The primary purpose was the shelter the wives from a Securities Commission investigation. There was no mistake as to the parties or the subject matter. There were mistakes as to the value of the subject matter or the tax consequences of the transaction. My equitable jurisdiction is triggered by finding that there are no bars to granting equitable relief, as noted above, and that common mistakes fundamental to the transaction were made. I am satisfied that the mistakes made were fundamental, and but for them, the transactions would not have occurred, at least in the fashion they did.

Equitable mistake does not preclude remedies in the event the mistake relates to the effect of the transaction. [ 103 ] I glean from the Agreement that the intention of the Applicants was that each wife would sell their shares back to the Corporation and get $1,864,778.75.

The Corporation intended to transfer lands worth $5,599,336.25 to the wives and redeem their shares. [ 104 ] Under clause 7.01, if the Corporation exercised its option to pay the wives by way of transferring land, the wives had the option of putting the lands back to the Corporation and getting their shares back, in which case the Corporation would be liable for any resulting capital gains tax. That suggests that parties proceeded to close the Agreement on the understanding that the wives would continue to hold the lands.

It also suggests that the Applicants did not expect any tax consequences to result from transferring the lands to the wives, but whether the wives intended to have to pay tax on the redemption price is not before me. [ 105 ] In any event, there is support in the Agreement for Mr.

Yee's assertion that the Corporation did not expect to have any tax obligations resulting from the transfer of the lands to the wives. [ 106 ] It would be equally artificial for me to find that the Cancellation Agreement should be characterized as "an agreement to cancel the tax effects of the earlier agreement" instead of a "reconveyance of the lands and shares". The Applicants were clearly mistaken as to the effect of that transaction, not its basic nature, who the parties were or what the subject matter was. That is sufficient to trigger equitable jurisdiction. Remedy

[ 107 ] Having found that there were common, fundamental mistakes with respect to the Agreement and the Cancellation Agreement, what are the appropriate remedies? Rescission [ 108 ] It would be possible to put the parties back in the position they were in but for the Agreement. They have done that themselves through the Cancellation Agreement, although that was ineffective to achieve its main purpose: undoing the unexpected tax consequences of the Agreement. [ 109 ] However, I do not see this as a case where rescission should be used as a remedy in relation to the closing of the Agreement.

Firstly, there is no basis for common law rescission on the facts before me. The Applicants intended that the wives' share be redeemed, and that the lands be used as consideration for the redemption. They intended that the wives each get $1,884,778.75 for their shares. The Corporation had the choice of paying cash or transferring land.

If the Corporation elected to transfer lands, the wives were protected that they could, for five years, get their shares back by transferring the lands back to the Corporation, and they would not bear any tax consequences of the reconveyance. [ 110 ] Rescission is not necessary to address the mistakes in closing made by the Applicants. Rather, this is an appropriate case for equitable rectification. What needs rectifying is the manner in which the Applicants closed the Agreement. The Corporation could have paid cash if it could have made those arrangements.

The Corporation could have transferred lands worth $1,884,778.75 to each of the wives. It now understands that if it transfers lands, the transfer must be done at fair market value. Otherwise, there will be a deemed disposition at that value and tax paid (if CRA's valuation is correct that the lands were worth more than their adjusted cost base). Equitable rescission is necessary in relation to the Cancellation Agreement. [ 111 ] The Corporation seeks alternative relief: payment of cash or the transfer of lands worth $5,594,336.25 to the wives. Despite Mr.

Yee’s after-the-fact evidence that the Corporation would have paid cash, the Corporation intended to transfer lands to the wives. A fair

interpretation of the Agreement is that it only intended to transfer $5,594,336.25 worth of land to the wives. [ 112 ] As a result, I am satisfied that the appropriate remedy here is to set aside the transfer of the lands from the wives back to the Corporation in March, 2009 with respect to the excess of lands worth, at fair market value, $5,594,336.25 as at May 22, 2007. The Corporation shall select the lands to be retained by the wives and the lands to be reconveyed to the Corporation. The Cancellation Agreement is declared void ab inito .

The wives shares are to be cancelled. [ 113 ] That will have the effect of having the wives receive, as at May 22, 2007, lands worth what they were entitled to receive for their shares. The Corporation will be entitled to retain the number of acres of land worth more than the $5,594,336.25 the wives were entitled to receive. Costs [ 114 ] The Applicants have not established a case for common law remedies, or remedies to which they are entitled at law. They have instead invoked the equitable jurisdiction of the Court. In such circumstances, it was not unreasonable for the Crown to oppose such relief.

The Applicants have not succeeded with respect to rescission of all transactions; they have succeeded in persuading me to grant equitable rectification and rescission as described above. In these circumstances, it is appropriate for each party to bear its own costs. Conclusion

[ 115 ] I am grateful to counsel for their able and thorough arguments. Heard on the 24 th day of February, 2011. Dated at the City of Edmonton, Alberta this 6 th day of April, 2011. Robert A. Graesser J.C.Q.B.A. Appearances: Donald Cherniawsky, Q.C. and Chad J. Brown Felesky Flynn LLP for the Applicants Connie L. Mah Department of Justice Canada for the Respondent _______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Mr. Justice Robert A. Graesser _______________________________________________________ ∙ The style of cause has been corrected from:

“ S & D International Group Inc., 1241875 Alberta Ltd., Sana Ahmed, Tinna Chan-Yee, and Wen Chen v. Attorney General of Canada ” to “ S & D International Group Inc. v. Attorney General of Canada, 1241875 Alberta Ltd., Sana Ahmed, Tinna Chan-Yee and Wen Chen ”. ∙ The 2 nd sentence of the 2 nd paragraph has been modified to read: “The evidence consists of affidavits from employees of the Canada Revenue Agency in the Edmonton Tax Services branch.”