Attorney General of Canada v. Fairmont Hotels Inc., et al.

(Ontario) (Civil) (By Leave)




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Commercial law – Corporations – Taxation – Rectification of corporate records – Rectification to change documentation relating to internal unilateral share redemption – Whether the equitable remedy of rectification may be used to replace one transaction with another to obtain intended tax consequences.

The Respondents were involved in the financing of Legacy Hotel’s purchase of two American hotels in return for obtaining management rights. The arrangement resulted in reciprocal loans rendered neutral for accounting purposes and Fairmont’s global operations were acquired and its shares ceased to be publicly traded. As the acquisition would cause Fairmont to realize a deemed foreign exchange loss, the purchasers agreed to a modified plan in which Fairmont realized its accrued foreign exchange gains and losses and allowed its foreign exchange exposure to be hedged. The plan, however, did not address the foreign exchange exposure of the Canadian affiliates. In 2007, Legacy wished to terminate the reciprocal loan arrangements to allow the sale of the hotels. Consequently, the Respondents redeemed their preferred shares under the mistaken assumption that the original arrangement was still in place. The redemptions triggered taxable foreign exchange gains. The transactions were reported as if the original 2006 foreign exchange plan had been implemented. The mistake was learned after the CRA undertook an audit. The Respondents sought the equitable remedy of rectification to change the documentation relating to the share redemption to reflect that the transaction was intended to occur on a tax-free basis without the triggering of a taxable foreign exchange gain.

Lower Court Rulings

December 19, 2014
Ontario Superior Court of Justice

CV-13-10004-00CL, 2014 ONSC 73
Equitable remedy of rectification granted to the Respondents.
June 17, 2015
Court of Appeal for Ontario

C59942, 2015 ONCA 441
Appeal dismissed.