Alberta Court Of Appeal Denies Equitable 'Hail Mary' In Harvest Operations Corp. v Attorney General Of Canada

On November 23, 2017, the Alberta Court of Appeal issued a Memorandum of Judgment in Harvest Operations Corp. v Attorney General of Canada, 2017 ABCA 393. In the first appellate-level rectification decision since the Supreme Court of Canada released its companion judgments in Canada v Fairmont Hotels Inc.1 and Jean-Coutu Group (PJC) Inc. v Attorney General of Canada,2 the Court upheld the decision of the trial judge denying an application for rectification on the basis that a general intention to implement a transaction on a tax-neutral basis was not sufficient to justify rectification.

In 2005, the taxpayer (a predecessor in interest to Harvest Operations) entered into share acquisition and reorganization transactions. Although the general intention of the parties was to complete the plan on a tax-neutral basis, due to certain unforeseen occurrences (including a demand for repayment of certain debt obligations of one of the target companies) and errors that were discovered by the Canada Revenue Agency in 2008 in the course of an audit, the transaction ultimately resulted in additional tax obligations.

On April 30, 2013, the taxpayer filed an originating application seeking to rectify certain instruments prepared in the course of the share acquisition and reorganization. In denying rectification, the chambers judge followed Graymar Equipment (2008) Inc. v Canada3 and concluded that "it is not enough that there be a general desire to minimize tax consequences of a transaction."4

The taxpayer appealed. On appeal, the Court applied the principles set out by the Supreme Court of Canada in Fairmont Hotels and determined that in order to obtain rectification of an instrument, the party seeking rectification must establish on a balance of probabilities that:

There was a prior agreement between the parties, whose terms are "definite and ascertainable"; That the agreement remained in effect at the time that the instrument was signed; That the instrument does not accurately record the agreement between the parties; and That the instrument, if rectified, would properly reflect and carry out the intentions of the parties. Citing the principle that persons who sign legal documents "are supposed to have chosen their words with care," the Court remarked that rectification is "an extraordinary remedy to be sparingly granted."5 As a result, Courts should enforce written agreements unless there is a compelling reason to permit them to be altered.

In...