Attorney General of Canada Appellant v. Fairmont Hotels Inc.,, 2016 SCC 56

SUPREME COURT OF CANADA Citation: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720 Appeal heard: May 18, 2016 Judgment rendered: December 9, 2016 Docket: 36606 Between: Attorney General of Canada Appellant and Fairmont Hotels Inc., FHIW Hotel Investments (Canada) Inc. and FHIS Hotel Investments (Canada) Inc. Respondents Coram: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.

Reasons for Judgment: (paras. 1 to 42) Dissenting Reasons: (paras. 43 to 92) Brown J. (McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner and Gascon JJ. concurring) Abella J. (Côté J. concurring) Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720 Attorney General of Canada Appellant v. Fairmont Hotels Inc., FHIW Hotel Investments (Canada) Inc. and FHIS Hotel Investments (Canada) Inc. Respondents

Indexed as: Canada ( Attorney General) v. Fairmont Hotels Inc. 2016 SCC 56 File No.: 36606. 2016: May 18; 2016: December 9.

Present: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ. on appeal from the court of appeal for ontario Contracts — Equity — Remedies — Rectification of written instrument recording prior agreement — Agreement intended by parties to operate on tax-neutral basis — Corporate resolutions effecting share redemption — Share redemption having unintended tax consequences — Whether courts below erred in holding parties’ intention can support grant of rectification — Whether equitable remedy of rectification available.

Commercial law — Corporations — Taxation — Whether rectification of contract amounts to retroactive tax planning. Fairmont Hotels Inc. was involved in the financing of Legacy Hotels’ purchase of two other hotels, in U.S. currency. The financing arrangement was intended to operate on a tax-neutral basis. When Fairmont was later acquired, that intention was frustrated, however, since the acquisition would cause Fairmont and its subsidiaries to realize a deemed foreign exchange loss.

The parties to Fairmont’s acquisition therefore agreed on a plan, which allowed Fairmont to hedge itself against any exposure to the foreign exchange tax liability, but not its subsidiaries. There was no plan for protecting them from such exposure because the plan was deferred. The following year, Legacy Hotels asked Fairmont to terminate their financing arrangement to allow for the sale of the two other hotels. Therefore, Fairmont redeemed its shares in its subsidiaries, by resolutions passed by their directors. This resulted however in an unanticipated tax liability.

Fairmont sought to avoid that liability by rectification of the directors’ resolutions. Both the application judge and the Court of Appeal granted that rectification on the basis of the parties’ intended tax neutrality. Held (Abella and Côté JJ. dissenting): The appeal should be allowed. Per McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ.: Both courts below erred in holding that the parties’ intention of tax neutrality could support a grant of rectification. A common continuing intention does not suffice.

Rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. It is limited to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement. In other words, rectification is not available where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself.

Where the error is said to result from a mistake common to both or all parties to the agreement, rectification of the instrument is available upon the court being satisfied that there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement.

It falls to a party seeking rectification to show not only the putative error in the instrument, but also the way in which the instrument should be rectified in order to correctly record what the parties intended to do. The applicable standard of proof to be applied to evidence adduced in support of a grant of rectification is the balance of probabilities. A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the parties’ true intended course of action.

On rectification, both equity and the civil law are ad idem , despite each legal system arriving at it by different paths — the former being concerned with correcting the document, and the latter focusing on its

interpretation. This convergence is undoubtedly desirable. These principles are to be applied in a tax context just as they are in a non-tax context. This is to avoid impermissible retroactive tax planning. In this case, the application of these principles leads unavoidably to the conclusion that Fairmont’s application for rectification should have been dismissed, since it could not demonstrate having reached a prior agreement with definite and ascertainable terms. It is clear that Fairmont intended to limit, if not avoid altogether, its tax liability in unwinding the financing arrangement.

And, by redeeming the shares, this intention was frustrated. Without more, however, these facts do not support a grant of rectification. Rectification is not equity’s version of a mulligan. Courts rectify instruments that do not correctly record agreements. Courts do not rectify agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome. Relatedly, Fairmont has not demonstrated how its intention, held in common and on a continuing basis with its subsidiaries, was to be achieved in definite and ascertainable terms while unwinding the financing arrangement.

Fairmont refers to a plan to protect its subsidiaries from foreign exchange tax liability, but that plan was not only imprecise. It really was not a plan at all, being at best an inchoate wish to protect the subsidiaries, by unspecified means. Per Abella and Côté JJ. (dissenting): There is no adjustment to the test for rectification in a tax case, and in this case the test has been met. The lower court’s decisions to grant rectification resulted from the factual finding that the parties had a continuing, ascertainable intention to pursue the transaction on a tax-free basis or not at all.

The majority’s approach however unduly narrows the doctrine of rectification’s scope. A common, continuing, definite and ascertainable intention to pursue a transaction in a tax-neutral manner has usually satisfied the threshold for granting rectification. The additional requirement that the parties clearly identify the precise mechanism by which they intended to achieve tax neutrality, and how that mechanism was mistakenly transcribed in a document, has the effect of raising the threshold and frustrating the purpose of the remedy.

Whether a mistake is unilateral or mutual, rectification is, ultimately, an equitable remedy that seeks to give effect to the true intention of the parties, and prevent errors from causing windfalls. The doctrine is also based on the principle of unjust enrichment, namely, that it would be unfair to rigidly enforce an error that enriches

one party at the expense of another. While rectification seems most often to have been granted in the context of agreed upon terms having been transcribedincorrectly, since unjust enrichment can result from a mistake in carrying out the intention of the parties, the remedy is also available tocorrect errors in implementation. Courts have, as a result, granted rectification where a corporate transaction was conducted in the wrongsequence, where an underlying calculation in a contract was incorrect, and where the requisite steps of an amalgamation were notcorrectly carried out.

Whether the errors are in transcription or in implementation, courts may refuse to exercise their discretion where allowingrectification would prejudice the rights of third parties. But the mere existence of a third party will not bar rectification. Only where thethird party has actually relied on the flawed agreement will rectification be barred. Just as rectification can prevent one party fromenforcing an error and being unjustly enriched by the other’s mistake, rectification can also prevent a third party who has not relied onthe agreement from enforcing a mistake and receiving a windfall.

Allowing the tax authorities, a third party, to profit from legitimate tax planning errors, when its own rights have not beenprejudiced in any way, amounts to unjust enrichment. Businesses and individuals are legally entitled to structure their affairs in a waythat minimizes their tax burden. The tax department is not entitled to play “Gotcha” any more than would any other third party who didnot rely to its detriment on the mistake. On the other hand, businesses and individuals should not be allowed to exploit rectification forpurposes of engaging in retroactive tax planning.

Civil law and common law rectification in the tax context are clearly based on analogous principles, namely, that the trueintention of the parties has primacy over errors in the transcription or implementation of that agreement, subject to a need for precisionand the rights of third parties who detrimentally rely on the agreement. That means that there is no principled basis in either legal systemfor a stricter standard in the tax context simply because it is the government that is positioned to benefit from a mistake.

In this case, Fairmont was found by the application judge to have always had a clear, continuing intention to unwind thefinancing arrangement on a tax-neutral basis and never to redeem the shares. Fairmont was not attempting to change its original intentionbecause of unanticipated tax consequences. It had anticipated the tax consequences of unwinding the arrangement with a shareredemption mechanism, and it specifically rejected this course of action. But, by mistake, the preferred share redemption terms wereincluded in the directors’ resolutions. This is exactly the kind of mistake rectification exists to remedy.

Once the application judge wassatisfied of the true intention of the parties, he was entitled to give effect to it by allowing rectification of the directors’ resolutions. To require an exhaustive account of how the unwinding was supposed to have proceeded would amount to imposing auniquely high threshold for rectification in the tax context and would give the Canada Revenue Agency, as the tax authorities, anunintended gain because of the mistake. There is no basis for permitting a windfall to the Canada Revenue Agency that no other thirdparty would have been entitled to. Cases Cited By Brown J.

Overruled: Juliar v. Canada (Attorney General) (1999), (ON SC), 46 O.R. (3d) 104, aff’d (2000), (ON CA), 50 O.R. (3d) 728; considered: Joscelyne v. Nissen, [1970] 2 Q.B. 86; referred to: Shafron v. KRG InsuranceBrokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157; Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002SCC 19, [2002] 1 S.C.R. 678; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368; Ship M. F. Whalen v. Pointe Anne Quarries Ltd. (1921), (SCC), 63 S.C.R. 109; Hart v. Boutilier (1916), (SCC), 56 D.L.R. 620; Re Slocock’s Will Trusts,[1979] 1 All E.R. 358; Racal Group Services Ltd. v.

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American Eagle Petroleums Ltd. (1981), 1981 ABCA1 , 27 A.R. 411; Prospera Credit Union, Re, 2002 BCSC 1806, 32 B.L.R. (3d) 145; Wise v. Axford, (ON CA),[1954] O.W.N. 822; Augdome Corp. v. Gray, (SCC), [1975] 2 S.C.R. 354; Consortium Capital Projects Inc. v. BlindRiver Veneer Ltd. (1988), (ON SC), 63 O.R. (2d) 761, aff’d (1990), (ON CA), 72 O.R. (2d) 703;

Kolias v. Owners: Condominium Plan 309 CDC, 2008 ABCA 379, 440 A.R. 389; Carlson, Carlson and Hettrick v. Big Bud Tractor ofCanada Ltd. (1981), (SK CA), 7 Sask. R. 337; Love v. Love, 2013 SKCA 31, [2013] 5 W.W.R. 662; CopthorneHoldings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721; Shell Canada Ltd. v. Canada, (SCC), [1999] 3 S.C.R.622; Kanji v. Canada (Attorney General), 2013 ONSC 781, 114 O.R. (3d) 1; Pallen Trust, Re, 2015 BCCA 222, 385 D.L.R. (4th) 499;771225 Ontario Inc. v. Bramco Holdings Co. (1995), (ON CA), 21 O.R. (3d) 739; Canada (Attorney General) v.

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Saskatchewan (Minister of Finance), 2014 SKQB 116, 443 Sask. R. 172; JAFT Corp. v. Jones, 2014 MBQB 59, 304 Man. R. (2d)86, aff’d 2015 MBCA 77, 323 Man. R. (2d) 57; Capstone Power Corp. v. 1177719 Alberta Ltd., 2016 BCSC 1274; Quebec (Agence durevenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838. Statutes and Regulations Cited Civil Code of Québec, art. 1425. Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 245. Authors Cited Berryman, Jeffrey. The Law of Equitable Remedies, 2nd ed. Toronto: Irwin Law, 2013.

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APPEAL from a judgment of the Ontario Court of Appeal (Simmons, Cronk and Blair JJ.A.), 2015 ONCA 441, 45 B.L.R.(5th) 230, 2015 DTC 5073, [2015] O.J. No. 3172 (QL), 2015 CarswellOnt 8955 (WL Can.), affirming a decision of Newbould J., 2014ONSC 7302, 123 O.R. (3d) 241, [2015] 3 C.T.C. 9, 2015 DTC 5019, 36 B.L.R. (5th) 215, [2014] O.J. No. 6086 (QL), 2014 CarswellOnt17975 (WL Can.). Appeal allowed, Abella and Côté JJ. dissenting. Daniel Bourgeois and Eric Noble, for the appellant.

Geoff R. Hall and Chia-yi Chua, for the respondents. The judgment of McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ. was delivered by Brown J. — I. Introduction [1] This appeal concerns the conditions under which a taxpayer may ask a court to exercise its equitable jurisdiction torectify a written legal instrument, where the effect of that instrument was to produce an unexpected tax consequence.

As I will explain,this entails inquiring into the nature and particularity of the terms which the taxpayer had intended to record in the instrument, whetherthe instrument contains those intended terms and, if not, whether those intended terms are sufficiently precise such that they may now beincluded in the instrument. [2] The present case arises from a financing arrangement which the parties had intended, both at its inception andongoing, to operate on a tax-neutral basis. Because of the particular financing mechanism chosen, an unanticipated tax liability wasincurred.

Both the chambers judge at the Ontario Superior Court of Justice and the Court of Appeal for Ontario granted rectification onthe grounds of the parties’ intended tax neutrality. [3] Without disputing that tax neutrality was the parties’ intention, for the reasons that follow it is my respectful viewthat both courts below erred in holding that this intention could support a grant of rectification. Rectification is limited to cases where theagreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement: A. Swanand J.

Adamski, Canadian Contract Law (3rd ed. 2012), at §8.229; M. McInnes, The Canadian Law of Unjust Enrichment andRestitution (2014), at p. 817. It does not undo unanticipated effects of that agreement. While, therefore, a court may rectify an instrumentwhich inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage whata party hoped to achieve. Moreover, these rules confining the availability of rectification are generally applicable, including where (ashere) the unanticipated effect takes the form of a tax liability.

To be clear, a court may not modify an instrument merely because a partyhas discovered that its operation generates an adverse and unplanned tax liability. I would therefore allow the appeal. II. Overview of Facts and Proceedings A. Background [4] The respondent Fairmont Hotels Inc. and its subsidiaries FHIW Hotel Investments (Canada) Inc. and FHIS HotelInvestments (Canada) Inc. ask the Court to rectify instruments recording a complex financing arrangement made in 2002 and 2003between Fairmont and Legacy Hotels REIT, a Canadian real estate investment trust in which Fairmont owned a minority interest.

WhileFairmont’s aim in participating in this financing arrangement was to obtain the management contract for the two hotels which Legacypurchased with the financing, its participation exposed it to a potential foreign exchange tax liability, since the financing was in U.S.currency.

With the goal of ensuring foreign exchange tax neutrality, Fairmont — through its subsidiaries FHIW and FHIS — enteredinto reciprocal loan agreements with Legacy, all of which were transacted in U.S. currency. [5] When Fairmont was acquired by Kingdom Hotels International and Colony Capital LLC in 2006, however, thatgoal of foreign exchange tax neutrality was frustrated, since this acquisition would cause Fairmont and its subsidiaries to realize adeemed foreign exchange loss, without corresponding foreign exchange gains, on the financing arrangement with Legacy.

Fairmont,Kingdom Hotels and Colony Capital agreed on a “modified plan” which allowed Fairmont (but not its subsidiaries) to realize both itsgains and losses in 2006, thereby fully hedging it against exposure to prospective foreign exchange tax liability. The matter of similarlyprotecting the subsidiaries from exposure was deferred, without any specific plan as to how that might be achieved. [6] In 2007, Legacy asked Fairmont to terminate the reciprocal loan arrangements “on an urgent basis” so as to allowfor the sale of the hotels.

Four days later, and on the incorrect assumption that the matter of the subsidiaries’ foreign exchange taxneutrality had been secured, Fairmont complied with Legacy’s request by redeeming its shares in its subsidiaries via resolutions passedby the directors of FHIW and FHIS.

This resulted in an unanticipated tax liability, discovered only after the Canada Revenue Agency(“CRA”) audited the 2007 tax returns of FHIW and FHIS and questioned Fairmont on those returns. [7] The respondents now seek to avoid that liability to Fairmont by asking the Court to rectify the 2007 resolutionspassed by the directors of FHIW and FHIS. Specifically, they wish to convert Fairmont’s share redemption into a loan whereby FHIWand FHIS will loan to Fairmont the same amount that they paid to Fairmont for the share redemption. B. Judicial History

(1) Superior Court of Justice — Newbould J. (2014 ONSC 7302, 123 O.R. (3d) 241) [8] Relying on the decision of the Ontario Court of Appeal in Juliar v. Canada (Attorney General) (1999), (ON SC), 46 O.R. (3d) 104 (S.C.J.), aff’d (2000), (ON CA), 50 O.R. (3d) 728 (C.A.), the chambersjudge allowed the application for rectification.

He found that, since 2002, Fairmont had intended that its financing arrangement withLegacy be tax-neutral in effect, and that this intention subsisted after Fairmont’s 2006 acquisition by Kingdom Hotels and Colony Capital(para. 32). [9] The chambers judge also found that, in light of the foreign exchange tax exposure presented to Fairmont’ssubsidiaries by that acquisition, Fairmont intended “at some point in the future” to address “the unhedged position of [FHIW] and [FHIS]in a way that would be tax . . . neutral although they had no specific plan as to how they would do that” (para. 33).

Observing (at para.42) that the tax liability arose as a result of inadvertence by a member of Fairmont’s senior management team, he said that this was not

“a case in which tax planning has been done on a retroactive basis after a CRA audit”, but rather a case in which a “redemption of thepreference shares was mistakenly chosen as the means” to “unwind the loans on a tax-free basis” (para. 43). “[D]enial of the applicationto rectify would”, he concluded, “result in a tax burden which Fairmont sought to avoid from the inception of the 2002 reciprocal loanarrangement” while “giv[ing] CRA an unintended gain” (para. 44). And, in any event, he noted that Juliar was binding on him in thecircumstances (para. 41).

(2) Court of Appeal — Simmons, Cronk and Blair JJ.A. (2015 ONCA 441, 45 B.L.R. (5th) 230) [10] In brief reasons for judgment, the Court of Appeal affirmed the chambers judge’s decision, taking note of hisfindings regarding Fairmont’s continuing intention from 2002 that its financing arrangement with Legacy would be carried out on a taxneutral basis; that this intention subsisted after Fairmont’s acquisition in 2006; that the adverse tax consequence was triggered by amistake in 2007 on the part of a member of Fairmont’s senior management; and that the purpose of the 2007 resolutions was not toredeem the shares, but rather “to unwind [the Legacy transactions] on a tax free basis” (para. 7). [11] The Court of Appeal also commented on the evidentiary burden resting on the party seeking rectification.

Juliar, itsaid, “does not require that the party seeking rectification must have determined the precise mechanics or means by which [its] settledintention to achieve a specific tax outcome would be realized” (para. 10). Rather, “Juliar holds, in effect, that the critical requirement forrectification is proof of a continuing specific intention to undertake a transaction or transactions on a particular tax basis” (para. 10).

Inthis case, then, it was in the court’s view unnecessary for Fairmont to prove that it had resolved to use “a specific transactional device —loans — to achieve the intended tax result” (para. 12). Rather, the chambers judge’s findings regarding Fairmont’s intention, coupledwith Juliar’s direction regarding the prerequisite intention to obtain rectification, were dispositive of the application in the respondents’favour. III. Analysis A.

General Principles and Operation of Rectification [12] If by mistake a legal instrument does not accord with the true agreement it was intended to record — because a termhas been omitted, an unwanted term included, or a term incorrectly expresses the parties’ agreement — a court may exercise its equitablejurisdiction to rectify the instrument so as to make it accord with the parties’ true agreement.

Alternatively put, rectification allows acourt to achieve correspondence between the parties’ agreement and the substance of a legal instrument intended to record thatagreement, when there is a discrepancy between the two. Its purpose is to give effect to the parties’ true intentions, rather than to anerroneous transcription of those true intentions (Swan and Adamski, at §8.229). [13] Because rectification allows courts to rewrite what the parties had originally intended to be the final expression oftheir agreement, it is “a potent remedy” (Snell’s Equity (33rd ed. 2015), by J. McGhee, at pp. 417-18).

It must, as this Court hasrepeatedly stated (Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157, at para. 56, citing PerformanceIndustries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at para. 31), be used “with great caution”,since a “relaxed approach to rectification as a substitute for due diligence at the time a document is signed would undermine theconfidence of the commercial world in written contracts”: Performance Industries, at para. 31.

It bears reiterating that rectification islimited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement (Swan and Adamski, at§8.229). It is not concerned with mistakes merely in the making of that antecedent agreement: E. Peel, The Law of Contract (14th ed.2015), at para. 8-059; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368, at p. 375 (“Courts of Equity do not rectify contracts; they may anddo rectify instruments”).

In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish toamend not the instrument recording their agreement, but the agreement itself. More to the point of this appeal, and as this Court said inPerformance Industries (at para. 31), “[t]he court’s task in a rectification case is . . . to restore the parties to their original bargain, not torectify a belatedly recognized error of judgment by one party or the other”. [14] Beyond these general guides, the nature of the mistake must be accounted for: Swan and Adamski, at §8.233.

Twotypes of error may support a grant of rectification. The first arises when both parties subscribe to an instrument under a common mistakethat it accurately records the terms of their antecedent agreement. In such a case, an order for rectification is predicated upon theapplicant showing that the parties had reached a prior agreement whose terms are definite and ascertainable; that the agreement was stilleffective when the instrument was executed; that the instrument fails to record accurately that prior agreement; and that, if rectified asproposed, the instrument would carry out the agreement: Ship M. F.

Whalen v. Pointe Anne Quarries Ltd. (1921), (SCC), 63 S.C.R. 109, at p. 126; McInnes, at p. 820; Snell’s Equity, at p. 424; Hanbury and Martin Modern Equity (20th ed. 2015), by J.Glister and J. Lee, at pp. 848-49; Hart v.

Boutilier (1916), (SCC), 56 D.L.R. 620 (S.C.C.), at p. 622. [15] In Performance Industries (at para. 31) and again in Shafron (at para. 53), this Court affirmed that rectification isalso available where the claimed mistake is unilateral — either because the instrument formalizes a unilateral act (such as the creation ofa trust), or where (as in Performance Industries and Shafron) the instrument was intended to record an agreement between parties, butone party says that the instrument does not accurately do so, while the other party says it does.

In Performance Industries (at para. 31),“certain demanding preconditions” were added to rectify a putative unilateral mistake: specifically, that the party resisting rectificationknew or ought to have known about the mistake; and that permitting that party to take advantage of the mistake would amount to “fraudor the equivalent of fraud” (para. 38). B. Juliar [16] As I have recounted, both courts below considered the Court of Appeal’s decision in Juliar, coupled with thechambers judge’s findings, to be dispositive.

In my respectful view, however, Juliar is irreconcilable with this Court’s jurisprudence andwith the narrowly confined circumstances to which this Court has restricted the availability of rectification. [17] In Juliar, the parties had, by a written agreement and in the course of the restructuring of a family business,transferred shares to a corporation in exchange for promissory notes for an amount equal to what the parties believed to be the value ofthe shares. Upon discovering that the promissory notes were worth more than the shares’ value (resulting in the taxpaying party being

assessed as having received a taxable deemed dividend), the parties sought rectification in order to convert what had originally beenstructured as a shares-for-promissory notes transfer into a shares-for-shares transfer (which would have been tax-deferred). For the Courtof Appeal, and citing the decision of Re Slocock’s Will Trusts, [1979] 1 All E.R. 358 (Ch. D.), Austin J.A. held that the writtenagreement could be rectified as sought, citing the trial judge’s finding that the parties had “a common . . . continuing intention” totransfer shares in a way that would avoid immediate tax liability (para. 19).

In order to achieve that objective, Austin J.A. said, the deal“had to be . . . a shares for shares transaction” (para. 25). [18] This reasoning presents several difficulties. First, as many commentators have observed, it is indisputable that Juliarhas relaxed the requirements for obtaining rectification, and correspondingly expanded the scope of cases in which rectification may besought and granted beyond that which the governing principles allow (C. Brown and A. J. Cockfield, “Rectification of Tax MistakesVersus Retroactive Tax Laws: Reconciling Competing Visions of the Rule of Law” (2013), 61 Can.

Tax J. 563, at p. 571; N. Brooksand K. Brooks, “The Supreme Court’s 2013 Tax Cases: Side-Stepping the Interesting, Important and Difficult Issues” (2015), 68S.C.L.R. (2d) 335, at p. 385; K. Janke-Curliss et al., “Rectification in Tax Law: An Overview of Current Cases”, in Tax DisputeResolution, Compliance, and Administration in Canada (2013), 21:1, at pp. 21:8 and 21:9). [19] I agree with this observation. As I have stressed, rectification is available not to cure a party’s error in judgment inentering into a particular agreement, but an error in the recording of that agreement in a legal instrument.

Alternatively put, rectificationaligns the instrument with what the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do. Theparties’ mistake in Juliar, however, was not in the recording of their intended agreement to transfer shares for a promissory note, but inselecting that mechanism instead of a shares-for-shares transfer.

By granting the sought-after change of mechanism, the Court of Appealin Juliar purported to “rectify” not merely the instrument recording the parties’ antecedent agreement, but that agreement itself where itfailed to achieve the desired result or produced an unanticipated adverse consequence — that is, where it was the product of an error injudgment. As J. Berryman observed (in The Law of Equitable Remedies (2nd ed. 2013), at p. 510): In Juliar, the applicants had acted directly on the advice of their accountant.

The accountant made a mistake as to the nature of thebusiness ownership and the taxes that were paid prior to the arrangement he advised his clients to pursue. This is not a case forrectification. The clients intended to use the instrument given to them by their accountant. Their motive may have been to avoid tax butthat is different from their intent which was to use the very form in front of them. [20] Secondly, even on its own terms, Juliar’s expansion of the availability of rectification cannot be justified.

By way ofexplanation, in the case upon which Austin J.A. relied, Re Slocock’s Will Trusts, the plaintiff was the life beneficiary of her father’sresiduary estate, with the capital and income after her death to be paid to her issue as she should appoint. She appointed her children totake after her death. Later, lands owned by her father’s family were sold to a development company, with the proceeds to be receivedand distributed by a management company in which the plaintiff received an allotment of shares, proportionate to her interest in theproceeds.

After taking legal advice, the plaintiff and her children decided that she should surrender by deed her life interest in thoseproceeds as well as her shares in the management company (pp. 359-60).

The deed, however, did not faithfully record the parties’agreement, because it released only the plaintiff’s shares in the management company, and not her beneficial interest in the proceeds ofsale (p. 360). [21] While the outcome sought by the plaintiff and her children would have also secured a tax advantage for the children(specifically, avoidance of capital transfer tax upon the plaintiff’s death), Graham J. granted rectification not to secure that taxadvantage, but on the strength of his finding (Re Slocock’s Will Trusts, at p. 361) that the deed as recorded omitted the proceeds of thesale of the lands, thereby failing to record fully the terms of the parties’ original agreement.

This was, therefore, an unremarkableapplication of rectification to cure an omission in the instrument recording an antecedent agreement. Nothing in Re Slocock’s Will Trustsjustifies Juliar’s modified threshold for granting rectification solely to avoid an unanticipated tax liability. Re Slocock’s Will Trustssimply confirmed that, provided that the underlying mechanism by which the parties had agreed to seek a particular tax outcome wasomitted or incorrectly recorded, and provided that all other conditions for granting rectification are satisfied, a court retains discretion togrant rectification.

The focus of the inquiry remained properly fixed on whether that originally intended mechanism was properlyrecorded, and not on whether it achieved the desired tax outcome or resulted in a party incurring an undesired or unexpected taxoutcome. [22] Subsequent English authorities confirm that Re Slocock’s Will Trusts created no distinct threshold for grantingrectification in the tax context. In Racal Group Services Ltd. v.

Ashmore (1995), 68 T.C. 86 (C.A.), the English Court of Appeal madeclear that a mere intention to obtain a fiscal objective is insufficient to ground a claim in rectification: “. . . the court cannot rectify adocument merely on the ground that it failed to achieve the grantor’s fiscal objective. The specific intention of the grantor as to how theobjective was to be achieved must be shown if the court is to order rectification” (p. 106). Similarly, the court in Ashcroft v. Barnsdale,[2010] EWHC 1948, [2010] S.T.C. 2544 (Ch.

D.), held that it could not rectify an instrument “merely because it fails to achieve thefiscal objectives of the parties to it”: para. 17 (emphasis in original). See also D. Hodge, Rectification: The Modern Law and PracticeGoverning Claims for Rectification for Mistake (2nd ed. 2016), at para. 4-145: A mere misapprehension as to the tax consequences of executing a particular document will not justify an order for its rectification.

Thespecific intention of the parties (or the grantor or covenantor) as to how the objective was to be achieved must be shown if the court is toorder rectification. [Emphasis deleted.] [23] Finally, Juliar does not account for this Court’s direction, in Shell Canada Ltd. v. Canada, (SCC),[1999] 3 S.C.R. 622, at para. 45, that a taxpayer should expect to be taxed “based on what it actually did, not based on what it could havedone”.

While this statement in Shell Canada was applied to support the proposition that a taxpayer should not be denied a sought-afterfiscal objective merely because others had not availed themselves of the same advantage, it cuts the other way, too: taxpayers should notbe judicially accorded a benefit based solely on what they would have done had they known better. [24] This point goes to the respondents’ submission that “[r]ectification is necessary to . . . avoid unjust enrichment of theCrown” (R.F., at para. 76), echoing the Court of Appeal’s concern in Juliar (at paras. 33-34, quoting Re Slocock’s Will Trusts, at p. 363)for the Crown’s “accidental and unexpected windfall” and the chambers judge’s concern in the present appeal (at para. 44) about the

CRA’s “unintended gain” and (at para. 52) the Crown’s “tax windfall”. With respect, the premise underlying such concerns misses thepoint of the inquiry, inasmuch as it concerns the CRA. Tax consequences, including those which follow an assessment by the CRA, flowfrom freely chosen legal arrangements, not from the intended or unintended effects of those arrangements, whether upon the taxpayer orupon the public treasury. The proper inquiry is no more into the “windfall” for the public treasury when a taxpayer loses a benefit than itis into the “windfall” for the taxpayer when that taxpayer secures a benefit.

The inquiry, rather, is into what the taxpayer agreed to do.Juliar erroneously departed from this principle, and in so doing allowed for impermissible retroactive tax planning: Harvest OperationsCorp. v. Canada (Attorney General), 2015 ABQB 327, [2015] 6 C.T.C. 78, at para. 49. C.

Two Further Concerns [25] Before applying the test for rectification — which test, I emphasize, is to be applied in a tax context just as it is in anon-tax context — to the facts of this appeal, I turn to two matters in need of clarification, the first of which was raised by therespondents. (1) “Common Continuing Intention” to Avoid Tax Liability [26] The respondents argue that, in the case of a common mistake, it is unnecessary for the party seeking rectification toprove a prior agreement concerning the term or terms for which rectification is sought.

Rather, they say that evidence of a “commoncontinuing intention” — in this case, their common continuing intention that the value of the shares in FHIW and FHIS should betransferred in a way that would avoid immediate tax liability — should suffice to ground a grant of rectification. [27] This was, of course, the view of the Court of Appeal, both in Juliar and in the present appeal. The respondents alsorely upon the decision of the English Court of Appeal in Joscelyne v. Nissen, [1970] 2 Q.B. 86, in which the court (at p. 95) approved ofthis statement of Simonds J. in Crane v.

Hegeman-Harris Co., [1939] 1 All E.R. 662: . . . in order that this court may exercise its jurisdiction to rectify a written instrument, it is not necessary to find a concluded and bindingcontract between the parties antecedent to the agreement which it is sought to rectify. . . . [I]t is sufficient to find a common continuingintention in regard to a particular provision or aspect of the agreement.

If one finds that, in regard to a particular point, the parties were inagreement up to the moment when they executed their formal instrument, and the formal instrument does not conform with that commonagreement, then this court has jurisdiction to rectify, although it may be that there was, until the formal instrument was executed, noconcluded and binding contract between the parties. [p. 664] [28] Joscelyne’s statement on the sufficiency of a common continuing intention has been adopted by the Ontario Court ofAppeal in Wasauksing First Nation v.

Wasausink Lands Inc. (2004), (ON CA), 184 O.A.C. 84, at para. 77, and theNewfoundland and Labrador Supreme Court in Dynamex Canada Inc. v. Miller (1998), (NL CA), 161 Nfld. &P.E.I.R. 97 (C.A.), at paras. 23 and 27.

It is not immediately apparent, however, that it supports the respondents’ position here.Joscelyne’s reference to “a common continuing intention in regard to a particular provision or aspect of the agreement”, coupled with itsreference to the later discovery that “the formal instrument does not conform with that common agreement”, strongly suggests that —howsoever often Joscelyne has been taken as suggesting otherwise by Canadian courts — it does not posit that, in the case of a commonmistake, anything less than a prior agreement with respect to the term to be rectified is sufficient to support a grant of rectification.

WhileJoscelyne allows for situations in which a contract will be unenforceable until a corresponding written instrument is executed (forexample, in the case of a transfer of an interest in realty) and for situations in which there may not have been agreement on all essentialterms before the written instrument was executed, this does not detract from its implicit affirmation that rectification requires the partiesto show an antecedent agreement with respect to the term or terms for which rectification is sought. [29] In any event, Joscelyne should not be taken as authorizing any departure from this Court’s direction that a partyseeking to correct an erroneously drafted written instrument on the basis of a common mistake must first demonstrate its inconsistencywith an antecedent agreement with respect to that term.

In Shafron, this Court unambiguously rejected the sufficiency of showing mereintentions to ground a grant of rectification, insisting instead on erroneously recorded terms. As Denning L.J. said in Frederick E. Rose(London) Ld. v. William H. Pim Jnr. & Co., [1953] 2 Q.B. 450 (C.A.), at p. 461 (quoted in Shafron, at para. 52): Rectification is concerned with contracts and documents, not with intentions.

In order to get rectification it is necessary to show that theparties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in orderto ascertain the terms of their contract, you do not look into the inner minds of the parties — into their intentions — any more than youdo in the formation of any other contract. [30] This Court’s statement in Performance Industries (at para. 31) that “[r]ectification is predicated on the existence of aprior oral contract whose terms are definite and ascertainable” is to the same effect.

The point, again, is that rectification corrects therecording in an instrument of an agreement (here, to redeem shares).

Rectification does not operate simply because an agreement failed toachieve an intended effect (here, tax neutrality) — irrespective of whether the intention to achieve that effect was “common” and“continuing”. [31] In this regard, my colleague Justice Abella relies upon the chambers judge’s finding that “when the 2006 transactionwas undertaken, Fairmont had an intent that at some point in the future [it] would have to deal with the unhedged position of [FHIW andFHIS] in a way that would be tax and accounting neutral although [it] had no specific plan as to how [it] would do that” (para. 33, citedby Abella J. at para. 87).

In my respectful view, however, it was an error for the chambers judge to ascribe any significance to thatfinding. Rectification does not correct common mistakes in judgment that frustrate contracting parties’ aspirations or, as here, unspecified“plans”; it corrects common mistakes in instruments recording the terms by which parties, wisely or unwisely, agreed to pursue thoseaspirations.

While my colleague suggests that the jurisprudence of this Court undermines this reasoning (paras. 79-85), that veryjurisprudence requires the party seeking rectification of an instrument to show not merely an inchoate or otherwise undeveloped “intent”,but rather the term of an antecedent agreement which was not correctly recorded therein: Performance Industries, at para. 37. [32] It therefore falls to a party seeking rectification to show not only the putative error in the instrument, but also theway in which the instrument should be rectified in order to correctly record what the parties intended to do. “The court’s task in a

rectification case is corrective, not speculative”: Performance Industries , at para. 31. Where, therefore, an instrument recording an agreed-upon course of action is sought to be rectified, the party seeking rectification must identify terms which were omitted or recorded incorrectly and which, correctly recorded, are sufficiently precise to constitute the terms of an enforceable agreement. The inclusion of imprecise terms in an instrument is, on its own, not enough to obtain rectification; absent evidence of what the parties had specifically agreed to do, rectification is not available.

While imprecision may justify setting aside an instrument, it cannot invite courts to find an agreement where none is present. It was for this reason that the Court in Shafron declined to enforce the restrictive covenant covering the “Metropolitan City of Vancouver”. The term was imprecise, but there was “no indication that the parties agreed on something and then mistakenly included something else in the written contract”: Shafron , at para. 57 . [ 33 ] As is apparent from the reasons of my colleague Justice Wagner in Jean Coutu Group (PJC) Inc. v.

Canada (Attorney General) , 2016 SCC 55 , [2016] 2 S.C.R. 670, on this question both equity and the civil law are ad idem , despite each legal system arriving at that same conclusion via different paths — the former being concerned with correcting the document, and the latter focusing on its

interpretation. This convergence is undoubtedly desirable in the context of applying federal tax legislation. More particularly, the cautionary note struck by the Court in Quebec (Agence du revenu) v.

Services Environnementaux AES inc. , 2013 SCC 65 , [2013] 3 S.C.R. 838, at para. 54 , regarding “common intention” as a factor in rewriting parties’ agreements under art. 1425 of the Civil Code of Québec — which precaution is expressly relied upon by Wagner J. in Jean Coutu (at para. 21) — is equally apposite in applying the equitable doctrine of rectification: Taxpayers should not view this . . . as an invitation to engage in bold tax planning on the assumption that it will always be possible for them to redo their contracts retroactively should that planning fail.

A taxpayer’s intention to reduce his or her tax liability would not on its own constitute the object of an obligation within the meaning of art. 1373 C.C.Q. , since it would not be sufficiently determinate or determinable. Nor would it even constitute the object of a contract within the meaning of art. 1412 C.C.Q. Absent a more precise and more clearly defined object, no contract would be formed. In such a case, art. 1425 could not be relied on to justify seeking the common intention of the parties in order to give effect to that intention despite the words of the writings prepared to record it.

(2) Standard of Proof [ 34 ] The second point requiring clarification is the standard of proof. In Performance Industries , at para. 41, this Court held that a party seeking rectification will have to meet all elements of the test by “convincing proof”, which it described as “proof that may fall well short of the criminal standard, but which goes beyond the sort of proof that only reluctantly and with hesitation scrapes over the low end of the civil ‘more probable than not’ standard”.

This, as was observed in Performance Industries , was a relaxation of the standard from the Court’s earlier jurisprudence, in which the criminal standard of proof was applied: see Ship M. F. Whalen , at p. 127, and Hart , at p. 630, per Duff J. [ 35 ] In light, however, of this Court’s more recent statement in F.H. v.

McDougall , 2008 SCC 53 , [2008] 3 S.C.R. 41, at para. 40 , that there is “only one civil standard of proof at common law and that is proof on a balance of probabilities”, the question obviously arises of whether the Court’s description in Performance Industries of the standard to which the elements of the test for obtaining rectification must be proven is still applicable. [ 36 ] In my view, the applicable standard of proof to be applied to evidence adduced in support of a grant of rectification is that which McDougall identifies as the standard generally applicable to all civil cases: the balance of probabilities.

But this merely addresses the standard, and not the quality of evidence by which that standard is to be discharged. As the Court also said in McDougall (at para. 46 ), “evidence must always be sufficiently clear, convincing and cogent”. A party seeking rectification faces a difficult task in meeting this standard, because the evidence must satisfy a court that the true substance of its unilateral intention or agreement with another party was not accurately recorded in the instrument to which it nonetheless subscribed.

A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the party’s true, if only orally expressed, intended course of action. This idea was helpfully encapsulated, in the context of an application for rectification of a common mistake, by Brightman L.J. in Thomas Bates and Son Ltd. v.

Wyndham’s (Lingerie) Ltd. , [1981] 1 W.L.R. 505 (C.A.), at p. 521 : The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself.

It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties. [ 37 ] In brief, while the standard of proof is the balance of probabilities, the essential concern of Performance Industries remains applicable, being (at para. 42) “to promote the utility of written agreements by closing the ‘floodgate’ against marginal cases that dilute what are rightly seen to be demanding preconditions to rectification”.

D. Application to the Present Appeal [ 38 ] To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments.

Where the error is said to result from a mistake common to both or all parties to the agreement, rectification is available upon the court being satisfied that, on a balance of probabilities, there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement.

In the case of a unilateral mistake, the party seeking rectification must also show that the other party knew or ought to have known about the mistake and that permitting the defendant to take advantage of the erroneously drafted agreement would amount to fraud or the equivalent of fraud. [ 39 ] A straightforward application of these principles to the present appeal leads unavoidably to the conclusion that the respondents’ application for rectification should have been dismissed, since they could not show having reached a prior agreement with definite and ascertainable terms.

I have already noted (1) the chambers judge’s finding that, in 2006, Fairmont intended to address the

“unhedged position of [FHIW and FHIS] in a way that would be tax and accounting neutral although [it] had no specific plan as to how [it] would do that” (para. 33); and (2) the Court of Appeal’s description of Fairmont’s intention as being “to unwind [the Legacy transactions] on a tax free basis” (para. 7). It is therefore clear that Fairmont intended to limit, if not avoid altogether, its tax liability in unwinding the Legacy transactions. And, by redeeming the shares in 2007, this intention was frustrated. Without more, however, these facts do not support a grant of rectification.

The error in the courts below is of a piece with the principal flaw I have identified in the Court of Appeal’s earlier reasoning in Juliar . Rectification is not equity’s version of a mulligan. Courts rectify instruments which do not correctly record agreements.

Courts do not “rectify” agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome. [ 40 ] Relatedly, the respondents do not show how Fairmont’s intention, held in common and on a continuing basis with FHIW and FHIS, was to be achieved in definite and ascertainable terms while unwinding the Legacy transactions.

The respondents’ factum refers to “the original 2006 plan”, but that plan was not only imprecise: it really was not a plan at all, being at best an inchoate wish to protect, by unspecified means, FHIW and FHIS from foreign exchange tax liability. [ 41 ] The respondents’ application for rectification therefore fails at the first hurdle. They show no prior agreement whose terms were definite and ascertainable. IV. Conclusion and Disposition [ 42 ] I would allow the appeal, with costs in this Court and in the courts below.

The reasons of Abella and Côté JJ. were delivered by [ 43 ] Abella J. (dissenting) — I agree that there is no adjustment to the test for rectification if the context is a tax case. With respect, however, I do not agree that the test was not met in this case. [ 44 ] The doctrine of rectification has many strands. The jurisprudence addresses errors in the transcription and implementation of documents, different types of mistakes, the rights of third parties, and how the remedy applies in various legal contexts.

A coherent approach to all of these strands flows from the underlying theory that parties should not be prevented from having their true intentions implemented because of these errors. It is, after all, an equitable remedy that seeks to prevent the unfairness that results from enforcing a mistake, including the unfairness inherent in unjust enrichment and windfalls. [ 45 ] I see the approach applied by my colleague as unduly narrowing its scope.

A common, continuing, definite, and ascertainable intention to pursue a transaction in a tax-neutral manner has usually satisfied the threshold for granting rectification. The additional requirement that the parties clearly identify the precise mechanism by which they intended to achieve tax neutrality, and how that mechanism was mistakenly transcribed in a document, has the effect of raising the threshold and frustrating the purpose of the remedy.

It also has the regrettable effect of imposing a narrower remedy in the common law than exists under civil law. [ 46 ] The Application Judge concluded that the intention of the parties had been mistakenly implemented and that rectification was justified. The Court of Appeal agreed. As do I. Based on the factual findings and the applicable jurisprudence, the threshold has been met. I would dismiss the appeal. Background [ 47 ] Fairmont Hotels Inc. is a hotel management company.

In 2002 and 2003, Fairmont agreed to help Legacy Hotels REIT, a Canadian real estate investment trust in which it owned a minority interest, finance the purchase of two hotels in Washington, D.C. and Seattle, Washington. For tax reasons, Legacy did not directly purchase the hotels. Instead, Legacy and Fairmont created a complex reciprocal loan structure, set up in U.S. dollars, whereby Legacy and Fairmont loaned each other money through their subsidiary corporations. The reciprocal loan structure was designed so that no foreign exchange gains or losses would be realized by Fairmont or its subsidiaries.

It was expected to remain in place for 10 years. [ 48 ] In 2006, two companies, Kingdom Hotels International and Colony Capital LLC, purchased Fairmont. Fairmont’s tax advisors realized that the change of control would immediately cause Fairmont and its subsidiaries to experience net foreign exchange losses. Fairmont’s advisors, in a memo dated March 3, 2006, therefore initially proposed a plan to protect Fairmont and its subsidiaries from those losses. Under this plan, the reciprocal loan structure could later be unwound with a preferred share redemption without triggering any taxable foreign exchange gains.

But the tax advisors of Kingdom Hotels and Colony Capital expressed concern that this plan would create other tax problems. [ 49 ] Fairmont, Kingdom Hotels, and Colony Capital eventually agreed on a modified plan, described in a memo dated March 23, 2006, in which Fairmont would realize certain accrued foreign exchange gains and losses while protecting itself from new gains and losses going forward. This modified plan did not address Fairmont’s subsidiaries, which, due to the acquisition, would no longer be protected from foreign exchange exposure.

Fairmont was aware that its subsidiaries’ exposure would result in a taxable foreign exchange gain if the reciprocal loan structure was later unwound with a share redemption. Since the reciprocal loan structure was to remain in place for several more years, Fairmont decided that, at a later date, it would determine how to unwind the structure without a share redemption so that no accrued gains or losses would be triggered. [ 50 ] In 2007, Legacy asked Fairmont to end the reciprocal loan agreement ahead of

schedule so that it could sell the two hotels it had acquired in 2003. Fairmont’s Vice-President of Tax, under the mistaken impression that it was the initial March 3, 2006 plan that had been implemented, instructed the directors of Fairmont’s subsidiaries to pass resolutions that would unwind the reciprocal loan structure with a share redemption. The directors passed these resolutions implementing the redemption of the preferred shares on September 14, 2007. [ 51 ] The share redemption would have been tax-neutral if the initial plan had in fact been the plan that was implemented. The result of the mistake was to trigger a significantly larger tax liability.

[52] Fairmont learned of this mistake after an audit by the Canada Revenue Agency. It applied to the Ontario SuperiorCourt of Justice to rectify the September 14, 2007 directors’ resolutions that had authorized the preferred share redemption. Newbould J.allowed rectification of these resolutions on the grounds that Fairmont never intended to redeem the preferred shares and alwaysintended to unwind the reciprocal loan structure on a tax-neutral basis. [53] The Ontario Court of Appeal unanimously dismissed the appeal (Simmons, Cronk and Blair JJ.A.).

Analysis [54] Rectification is a centuries-old equitable remedy that gave courts discretion to correct “errors in integration” ifsigned documents did not reflect the true intention of the parties: see John D. McCamus, The Law of Contracts (2nd ed. 2012), at p. 589;see also Geoff R. Hall, Canadian Contractual

Interpretation Law (3rd ed. 2016), at pp. 188-89. Where such an error occurs, “[t]he courtwill therefore put the agreement right . . . to conform with the parties’ true intentions” (S. M.

Waddams, The Law of Contracts (6th ed.2010), at p. 240). [55] The available judicial discretion to retroactively implement the parties’ true intention has been described as follows: The Court will not write a contract for businessmen or others but rather through the exercise of its jurisdiction to grant rectification inappropriate circumstances, it will reproduce their contract in harmony with the intention clearly manifested by them, and so defeat claimsor defences which would otherwise unfairly succeed to the end that business may be fairly and ethically done . . . . (H. F. Clarke Ltd. v.

Thermidaire Corp., (ON CA), [1973] 2 O.R. 57 (C.A.), at p. 65, per Brooke J.A., rev’d on othergrounds, (SCC), [1976] 1 S.C.R. 319, at pp. 323-24. See also Waddams, at pp. 240-41; G. H. L. Fridman, The Law ofContract in Canada (6th ed. 2011), at p. 776; McCamus, at p. 587.) [56] While the remedy of rectification had been historically confined to cases of mutual mistake, in PerformanceIndustries Ltd. v.

Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 , [2002] 1 S.C.R. 678, this Court expanded its scope toinclude circumstances where the mistake was unilateral. [57] The rationale for the remedy is that no one should be allowed “to take unfair advantage of another’s mistake”: LordGoff of Chieveley and Gareth Jones, The Law of Restitution (7th ed. 2007), at p. 299; see also Hall, at pp. 190-91. In accordance withthis purpose, rectification “should not be circumscribed by anomalous or artificial rules, but should be applied where appropriate in orderto give better effect to equitable doctrines”: I. C. F.

Spry, The Principles of Equitable Remedies (9th ed. 2014), at p. 632. [58] The test for rectification requires courts to assess the true intention of the parties: In order for rectification to be available, it is necessary to identify a “true agreement” which precedes (and is not accurately recorded by)the written instrument. Such an agreement may itself be contained in a written instrument; but it may be oral, and need not itself havecontractual force. (Snell’s Equity (31st ed. 2005), by John McGhee, ed., at p. 332.

See also Mitchell McInnes, The Canadian Law of Unjust Enrichmentand Restitution (2014), at p. 820; Angela Swan and Jakub Adamski, Canadian Contract Law (3rd ed. 2012), at pp. 772-73; Goff andJones, at p. 295; Hart v. Boutilier (1916), 56 D.L.R. 20 (S.C.C.), at pp. 621-22 and 630; Mitchell v. MacMillan (1980), (SK CA), 5 Sask. R. 160 (C.A.), at para. 8; Reed Shaw Osler Ltd. v. Wilson (1981), 1981 ABCA 317 , 17 Alta. L.R. (2d)81 (C.A.), at p. 89; Bryndon Ventures Inc. v. Bragg (1991), (BC CA), 82 D.L.R. (4th) 383 (B.C.C.A.), at pp. 402-3;Dynamex Canada Inc. v. Miller (1998), (NL CA), 161 Nfld. & P.E.I.R. 97 (Nfld.

C.A.), at para. 23; WasauksingFirst Nation v. Wasausink Lands Inc. (2004), (ON CA), 184 O.A.C. 84, at para. 77.) [59] Nor does the parties’ prior intention have to amount to a fully enforceable agreement: Joscelyne v. Nissen, [1970] 2Q.B. 86 (C.A.), followed in Peter Pan Drive-In Ltd. v. Flambro Realty Ltd. (1978), (ON SC), 22 O.R. (2d) 291(H.C.J.), aff’d (1980), (ON CA), 26 O.R. (2d) 746 (C.A.). As Brown J. (as he then was) explained in GraymarEquipment

(2008) Inc. v. Canada (Attorney General) (2014), 2014 ABQB 154 , 97 Alta.

L.R. (5th) 288 (Q.B.): Rectification is available . . . even where the parties have not concluded an agreement, so long as there is sufficiently convincingevidence that the parties had arrived upon a common intention. [para. 36] (See also Snell’s Equity (33rd ed. 2015), by John McGhee, at pp. 424-25; McCamus, at p. 558; Waddams, at p. 243.) [60] But the intention does have to be sufficiently clear and certain that courts can correct the error without resorting tospeculation about what the parties had wanted to do in the first place: see I.C.R.V. Holdings Ltd. v.

Tri-Par Holdings Ltd. (1994), (BC CA), 53 B.C.A.C. 72. [61] While parties seeking rectification must provide evidence of what they actually intended, they are not required toprovide “an expressed antecedent agreement in order to found a successful claim”: Peter Pan Drive-In Ltd., at p. 296. Courts have longrecognized that “the exact form of words in which the common intention is to be expressed is immaterial” (McLean v. McLean (2013),2013 ONCA 788 , 118 O.R. (3d) 216 (C.A.), at para. 46, citing Swainland Builders Ltd. v.

Freehold Properties Ltd., [2002]EWCA Civ 560, at para. 34 (BAILII); see also Co-operative Insurance Society Ltd. v. Centremoor Ltd., [1983] 2 E.G.L.R. 52 (C.A.), atp. 54, per Dillon L.J.; Snell’s Equity (33rd ed. 2015), at pp. 426-37). In other words, as Professor Swan explains: . . . it is “sufficient if [the party] establishes a common continuing intention in regard to the particular provision in question”. There is no

need to hedge the remedy about with requirements that are no more than technical and to require precise agreement on every point in theactual agreement to prevent the court from giving relief where it is clearly justified in doing so to prevent injustice. [Footnote omitted; p.773.] [62] What matters instead is that the substance of the intention “can be ascertained with a reasonable level of comfort”:Performance Industries, at para. 47. In ascertaining these intentions, courts are free to make logical inferences based on the evidencebefore them.

In McLean, for example, a husband and wife transferred property to their son and daughter-in-law. The wife later soughtrectification of the memorandum of agreement that contained the terms of the transfer, claiming that the total purchase price wasincorrect. The Ontario Court of Appeal rectified the memorandum even though it was not immediately obvious what the correct pricewas supposed to be. The court deduced the correct price based on “the totality of the evidence”, noting that “[o]nly when the relateddocuments are considered as a whole does the intention of the parties emerge”: paras. 60 and 62.

Similarly, in Royal Bank of Canada v.El-Bris Ltd. (2008), 2008 ONCA 601 , 92 O.R. (3d) 779 (C.A.), a business owner mistakenly signed a personal guarantee for$700,000 and a collateral mortgage for the same amount, when he had only intended to create one debt obligation.

The Ontario Court ofAppeal allowed rectification of both the guaranteed loan and the mortgage based on the true intention of the parties, even though themechanics of the necessary corrective transactions had never been previously set out. [63] Whether a mistake is unilateral or mutual, rectification is, ultimately, an equitable remedy that seeks to give effect tothe true intention of the parties, and prevent errors from causing windfalls.

The doctrine is also “based on simple notions of relief againstunjust enrichment”, namely, that it would be unfair to rigidly enforce an error that enriches one party at the expense of another:Waddams, at p. 240. As Professor Waddams notes, “[t]he doctrine is a far-reaching and flexible tool of justice” (p. 243). (See alsoMcInnes, at pp. 820-21; Fridman, at pp. 782-83; El-Bris, at paras. 13 and 36; McLean, at para. 73; Patrick Hartford, “Clarifying theDoctrine of Rectification in Canada: A Comment on Shafron v. KRG Insurance Brokers (Western) Inc.” (2013), 54 Can. Bus.

L.J. 87, atp. 88.) [64] The common law principles of rectification were recently applied in Shafron v. KRG Insurance Brokers (Western)Inc., 2009 SCC 6 , [2009] 1 S.C.R. 157. Shafron involved an employment contract that included a restrictive covenant,prohibiting Mr. Shafron from working as an insurance broker in the “Metropolitan City of Vancouver” for three years after hisemployment with KRG Western ended. “Metropolitan City of Vancouver” was not a legally defined term, but Mr.

Shafron thought itreferred to the City of Vancouver, while KRG Western thought it referred to the larger Greater Vancouver Regional District. [65] KRG Western applied to rectify the contract by substituting “Greater Vancouver Regional District” for“Metropolitan City of Vancouver”, to prevent Mr. Shafron from working as an insurance broker in the suburb of Richmond.

The Courtheld that rectification was unavailable because KRG Western could not establish that there had been a prior agreement in which“Metropolitan City of Vancouver” was defined in sufficiently precise terms. [66] While I acknowledge that rectification seems most often to have been granted in the context of agreed upon termshaving been transcribed incorrectly, since unjust enrichment can also result from a mistake in carrying out the intention of the parties,the remedy is also available to correct errors in implementation.

Courts have, as a result, granted rectification where a corporatetransaction was conducted in the wrong sequence (GT Group Telecom Inc., Re (2004), (ON SC), 5 C.B.R. (5th) 230(Ont. S.C.J.)), where an underlying calculation in a contract was incorrect (Oriole Oil & Gas Ltd. v.

American Eagle Petroleums Ltd.(1981), 1981 ABCA 1 , 27 A.R. 411 (C.A.)), and where the requisite steps of an amalgamation were not correctly carried out(Prospera Credit Union, Re (2002), 2002 BCSC 1806 , 32 B.L.R. (3d) 145 (B.C.S.C.)). [67] Whether the errors are in transcription or in implementation, courts may refuse to exercise their discretion whereallowing rectification would prejudice the rights of third parties (Wise v. Axford, (ON CA), [1954] O.W.N. 822(C.A.)). But the mere existence of a third party will not bar rectification. In Augdome Corp. v.

Gray, (SCC), [1975] 2S.C.R. 354, this Court concluded that the presence of a third party is only a bar to rectification where the third party has actually relied onthe flawed agreement. This principle was subsequently explained by Gray J. in Consortium Capital Projects Inc. v. Blind River VeneerLtd. (1988), (ON SC), 63 O.R. (2d) 761 (H.C.J.), at p. 766, aff’d (1990), (ON CA), 72 O.R. (2d)703 (C.A.): “. . . the proper test is whether the third party relied on the document as executed and took action based on that document”.(See also McCamus, at p. 595; Spry, at pp. 630-31; Kolias v.

Owners: Condominium Plan 309 CDC (2008), 2008 ABCA 379 ,440 A.R. 389 (C.A.); Carlson, Carlson and Hettrick v. Big Bud Tractor of Canada Ltd. (1981), (SK CA), 7 Sask. R.337 (C.A.), at paras. 24-26.) [68] This is consistent with one of the underlying purposes of rectification, namely to prevent unjust enrichment:Waddams, at p. 240; El-Bris, at paras. 13 and 36; McLean, at para. 73.

Just as rectification can prevent one party from enforcing an errorand being unjustly enriched by the other’s mistake, rectification can also prevent a third party who has not relied on the agreement fromenforcing a mistake and receiving a windfall. This theory was on display in Love v. Love, 2013 SKCA 31 , [2013] 5 W.W.R.662 (Sask. C.A.). The Saskatchewan Court of Appeal allowed the rectification of a life insurance contract, in which a husband haddesignated his wife as the beneficiary of his life insurance policy.

When the couple divorced, the husband completed a new form todesignate his son as the policy’s beneficiary instead of his former wife. He filled the paperwork out incorrectly. After he died, theformer wife and the son both attempted to claim the proceeds of the insurance policy.

The court rectified the contract to reflect what itsaw as the husband’s true intention, namely to designate his son as the beneficiary. [69] This brings us to the tax context. [70] Allowing the tax authorities, a third party, to profit from legitimate tax planning errors, when its own rights have notbeen prejudiced in any way, amounts to unjust enrichment. Businesses and individuals are legally entitled to structure their affairs in away that minimizes their tax burden.

The General Anti-Avoidance Rule in s. 245 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.),for example, permits transactions that are primarily designed to avoid taxes so long as they do not circumvent the Act in an abusivemanner: Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 , [2011] 3 S.C.R. 721, at para. 32. There is, as a result, an inherentunfairness in enforcing errors in transcription or implementation that result in allowing the tax authorities to collect a windfall.

[71] It is true that a taxpayer should expect to be taxed based on what is actually done, not based on what could have beendone (Shell Canada Ltd. v. Canada, (SCC), [1999] 3 S.C.R. 622, at para. 45), but this principle does not deprive equityof a role where what a party or parties genuinely intended to do was transcribed or implemented incorrectly. [72] On the other hand, parties should not be given carte blanche to exploit rectification for purposes of engaging inretroactive tax planning. Courts will not permit parties to undo decisions simply because they have come to regret them later.

Allowingparties to rewrite documents and restructure their affairs based solely on a generalized and all-encompassing preference for paying lowertaxes is not consistent with the equitable principles that inform rectification. [73] As the trial judge noted in Kanji v. Canada (Attorney General) (2013), 2013 ONSC 781 , 114 O.R. (3d) 1(S.C.J.), “[t]ax-driven claims for rectification must be approached with care since common sense tells us that most taxpayers would liketo minimize the amount of tax they must pay to the government”: para. 36.

The British Columbia Court of Appeal expressed similarviews in Pallen Trust, Re (2015), 2015 BCCA 222 , 385 D.L.R. (4th) 499, when it said: Carrying out a fact-focussed analysis should ensure that the “social evil” of aggressive tax avoidance can, where it is just to do so, beappropriately disincentivized, and on the other hand that where the taxpayer’s conduct has been reasonable . . . he or she is not unfairlypenalized . . . . [para. 53] [74] How then should rectification be seen in the tax context?

In my view, the two most helpful common law cases onrectification in the tax context were decided by the Ontario Court of Appeal. In 771225 Ontario Inc. v. Bramco Holdings Co. (1995), (ON CA), 21 O.R. (3d) 739 (C.A.), a purchaser utilized a company she owned to buy property, intending to minimizeher personal income tax. She erroneously thought that her company was an Ontario company and assumed that she would pay theresidential land transfer tax rate of 2 percent. The company, it turned out, was subject to the higher rate of 20 percent. This mistakeresulted in a liability of $1.7 million instead of $84,745.

The court denied rectification on the grounds that this was an “attemp[t] torewrite history in order to obtain more favourable tax treatment” (p. 742). The purchaser intended the transaction to minimize her incometax — which it did — and was simply caught off-guard by land transfer tax consequences. [75] A different result occurred in Canada (Attorney General) v. Juliar (2000), (ON CA), 50 O.R.(3d) 728 (C.A.). Two couples co-owned a company through which they operated a convenience store chain. They decided to split thebusiness into two separate corporations so that each couple could operate independently.

They mistakenly believed, based on anerroneous assumption by their tax advisor, that this would not trigger any immediate income taxes. When it did, they applied forrectification. Austin J.A. granted the remedy, stating: . . . the true agreement between the parties here was the acquisition of the half interest in the . . . tobacco business . . . in a mannerthat would not attract immediate liability for income tax. . . . . . .

The plain and obvious fact . . . is that the proposed division had to be carried out on a no immediate tax basis or not at all. [paras. 25and 27] [76] The Court of Appeal distinguished this case from Bramco on the grounds that the couples’ intention to avoid incometax was a primary and continuing objective of the transaction, whereas in Bramco the concern over the land transfer tax arose only afterthe transaction had been completed. [77] I am aware that this distinction has attracted some negative commentary: Lionel Smith, “Can I Change My Mind?Undoing Trustee Decisions” (2008), 27 E.T.P.J. 284, at pp. 289-90; Swan and Adamski, at pp. 768-69.

But in my view, the Court ofAppeal’s decision to allow rectification in Juliar can easily be explained by — and flows seamlessly from — the factual findings of theApplication Judge in that case. In particular, the decision to grant rectification resulted from the factual finding that the Juliars had acontinuing, ascertainable intention to pursue the transaction on a tax-free basis or not at all. Seen in this way, Juliar did not relax thestandards for rectification in the tax context.

Rather, it represents a straightforward application of the test for rectification: see JoelNitikman, “Many Questions (and a Few Possible Answers) About the Application of Rectification in Tax Law” (2005), 53 Can. Tax J.941, at p. 963. [78] Nor do I accept the floodgates concern that courts will be unable to distinguish between

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