Rectification in Law
Rectification is a process whereby a court can allow the correction of mistakes in legal agreements. Pursuant to certain conditions, if a mistake in a document leads to an unintended tax consequence a taxpayer has the right to request the court to correct the error to ensure the tax consequences are as intended. Rectification applications are initially considered by provincial courts and not the Tax Court of Canada.
Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56,  2 S.C.R. 720
Canada v. Fairmont Hotels Inc., 2016 SCC 56 (CanLII),  2 SCR 720 is a leading decision on rectification. In that case, the appellant’s intention was to complete a tax neutral transaction. However, the result was an unintended tax liability. The lower courts allowed the appeal and the correction of the transaction to achieve tax neutrality. However, the Supreme Court of Canada (“SCC”) disagreed. According to the SCC, the Appellants were asking the court to fix an unintended consequence of their transaction versus “correcting errors in the recording of terms in written legal instruments” that resulted in unintended consequences.
Balance of Probabilities
Rectification is permitted if, on a balance of probabilities, it can be proven that a mistake existed in the written terms of the respective agreement which differed from the agreement the parties intended. According to the SCC, permitting the rectification of a “written legal instrument…entails inquiring into the nature and particularity of the terms which the taxpayer had intended to record in the instrument, whether the instrument contains those intended terms and, if not, whether those intended terms are sufficiently precise such that they may now be included in the instrument.”
Mistake in the Legal Instrument
In order for rectification to be granted, the mistake in the legal instrument must fail to reflect the intention of the agreement through a missing or unwanted term, or incorrect expression. The intention of the parties must have been incorrectly recorded versus a mistake in the making of the agreement leading to unintended consequences.
Rectification is available for Two Types of Errors
According to the decision in Fairmont, rectification is available for two types of errors. First, both parties are mistaken that the written agreement accurately documents the agreement the parties came to. Second, the mistake is unilateral and the parties disagree on what was intended. Rectification would be available to ensure one party did not take advantage of the mistake.
In Fairmont, the parties could not prove that they had not just failed to structure the agreement correctly to achieve their objectives. According to the SCC, “[t]he court’s task in a rectification case is . . . to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other”.
The SCC expanded on this point by rejecting the reasoning of the Ontario Court of Appeal in Attorney General of Canada v. Juliar, 2000 CanLII 16883 (ON CA). In Juliar, according to the SCC, the Ontario Court of Appeal essentially broadened the scope of rectification to allow the parties to correct bad advice leading to unintended consequences.
Contact us for to schedule a free consultation with a Tax Lawyer. We will review your facts and circumstances and advise if rectification is a viable option.
SpenceDrake Tax Law