Court of Appeal Decision of the Week

Rectification to Avoid Adverse Tax Consequences: A “Hail Mary Request”?

Case: Harvest Operations Corp. v. Attorney General of Canada, 2017 ABCA 393 (CanLII)

Keywords: Rectification; Corporate Law; Share Acquisition and Reorganization Transactions; “Hail Mary”; Canada (Attorney General) v. Fairmont Hotels Inc., [2016] 2 SCR 720, 2016 SCC 56 (CanLII)

Synopsis:

Viking Holdings Inc., a predecessor in interest to the Appellant, Harvest Operations Corp., enters into share acquisition and reorganization transactions. (For a complete summary of the transaction, see paras. 15-37). Tax experts produce a plan to accomplish this business objective on a tax-neutral basis.

The plan is not implemented. The result: significant adverse tax consequence (including a significant taxable capital gain) for the amalgamated company. (For a description of the tax problem, see para. 27).

The Appellants apply for rectification of the problem instruments. The Chambers Judge declines to grant the application when the Appellants fail to identify any documents containing “terms the parties did not intend them to have”. (See para. 6).

The Appellants then appeal the Chambers Judge’s decision. The questions before the Court of Appeal:

  • Has the appellant identified any legal instruments that have the characteristics that make them candidates for rectification?
  • If so, is there any compelling reason why the rectification doctrine should not be utilized?

The Court of Appeal agrees with the Chambers Judge, finding no transaction instrument containing terms “different than those to which the parties agreed” and referring to the Appellants’ argument as a “Hail Mary request”. (See paras. 12, 14). The appeal is dismissed.

Importance:

This decision provides a helpful summary and application of the rectification doctrine post-Canada v. Fairmont Hotels Inc. The Court of Appeal found rectification is not a doctrine that allows a court to revise a party’s document simply because it has produced unanticipated adverse consequences. (See para. 45).

Rather, the doctrine of rectification is available only if “the terms of any document that is the subject of a rectification application are not the terms that the party or parties believed were incorporated in the document when the party or parties signed the document.” (See para. 46).

Referring to the decision of Justice Brown in Canada v. Fairmont Hotels Inc. and citing the earlier decision of Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 (CanLII), the Court of Appeal affirmed that the purpose of rectification is to restore the parties to their original bargain, not to set right an error of judgment. (See para. 48).

The rectification test requires that parties establish, on a balance of probabilities:

  • 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. (See para. 49).

The Court of Appeal confirmed that rectification is “an extraordinary remedy to be sparingly granted”, and explained its reticence to apply the doctrine on the basis that persons who sign legal documents are presumed to have chosen their words with care. In other words, unless there is a compelling reason to modify a legal document, the Courts will be expected to uphold the rights and responsibilities of signatories as actually set out – and not based on what could have been. (See paras. 50-51).

As a final comment, notwithstanding the error noted by the Court of Appeal (“In the normal course, someone on the acquisition team would have been assigned responsibility for determining whether financial instruments that gave a lender the right to veto a change-of-control existed and, if there were, communicating with the lender to ascertain its position”) (see para. 22, FN 18), the Court acknowledged counsel’s “excellent” oral and written submissions on appeal – even stating that the interests of the parties “could not have been better served”. (See at para. 77).

Counsel for the Appellant: Roger Smith, Lara Mason, and C. Feik (Norton Rose Fulbright, Calgary)

Counsel for the Respondent: Valerie Meier (Justice Canada, Edmonton)

Discuss on CanLii Connects

Posted: Wednesday, November 29, 2017