From time to time, the CRA will review transactions and impose a tax not contemplated when people make a deal. Usually the reason they do so is the failure to take into account a provision of the Tax Code which levies an unintended tax.
In some cases it is possible to obtain a court order to retroactively fix the transaction that caused the tax liability and thus solve the problem. The legal tool used for this is called the equitable doctrine of rectification.
Snell’s Equity describes this remedy as follows:
If by mistake a written instrument does not accord with the true agreement between the parties, equity has the power to reform, or rectify, that instrument so as to make it accord with the true agreement. What is rectified is not a mistake in the transaction itself, but a mistake in the way in which that transaction has been expressed in writing.
Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of the contract.
Rectification may be granted by the court if the taxpayers are able to show that the following factors were present:
- Prior agreement
- Common intention
- The final document did not properly record the intention of the parties; and
- Common or mutual mistake.
The CRA’s policy on rectification has been expressed as follows:
“Our general policy is that where the amendments are integral to achieving the original intention of the parties, the application for rectification will not be opposed.”
In other words, they will usually accept rectification when it is “merely” a means of implementing the original tax plan gone awry, but not if it is designed to retroactively create a tax plan not contemplated at the time the transaction was implemented.
The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.
