In Fairmont Hotels Inc. et al v. A.G. Canada, the Applicants, Fairmont and affiliated companies (“Fairmont”), redeemed shares which Fairmont said mistakenly triggered a foreign exchange gain and tax assessment. Fairmont applied for rectification of the share redemption. The respondent, the Attorney General of Canada, opposed Fairmont’s application, which it characterized as retroactive tax planning.
In brief, Fairmont had financed the purchase of two US hotels by Legacy, an investment trust, through reciprocal loans. Legacy routed the financing through Fairmont and a US Fairmont affiliate, which received preferred shares in a US affiliate. The financing was in US dollars, representing a potential foreign exchange tax exposure. Fairmont stated that it had structured the loan transaction to be accounting neutral to fully hedge its foreign exchange exposure. However, that intention was frustrated a some years later when another company purchased Fairmont, triggering deemed foreign exchange losses which could not be carried forward to offset the eventual foreign exchange gains. A plan was prepared, but never implemented, to address the issue. As a result, when the loan to Legacy was unwound, Fairmont was exposed to foreign exchange gains when its redeemed its shares in the US affiliate. Fairmont stated that the share redemption was based on a mistaken belief that the foreign exchange exposure was hedged.
Fairmont argued that the share redemption should be rectified because their intention was always that the loan to Legacy would be tax neutral. The Attorney General argued that the equitable remedy of rectification only applies to correct a written instrument when it does not accurately reflect what the parties intended to record; the share redemption was not a mistake, and should not be rectified. Rather, Fairmont’s mistake was the failure to develop a plan to hedge its foreign exchange exposure. The Judge cited the Supreme Court’s statement on rectification, which stated that the remedy is meant to “restore the parties to their original bargain”. The Judge accepted that Fairmont had always intended to unwind the shares on a tax free basis. As a result, the Judge allowed the application to rectify the share redemption.
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