Abattle of wills ensued in Langford, BC recently, as a local business owner fought to keep his medical cannabis dispensary open despite the municipality’s refusal to grant him a business license (and frequent police raids). The business owner’s position was simple: people need the product and it will be legal soon anyway, so let me run my business. Many cannabis businesses have been opened around BC in similar circumstances, ignoring the requirements for a municipal business license with the expectation that legalization would remove many obstacles.

When the proposed federal Cannabis Act was introduced on April 13, 2017, it became clear that it would be left to the provinces and territories to create the regulatory framework for the distribution and sale of cannabis in their respective jurisdictions. Much of what that regulation will look like for British Columbia has been answered in recent months, culminating in April 2018 with the introduction of the proposed Cannabis Distribution Act1 and Cannabis Control and Licensing Act(the “CCLA”)2.

Of great note (and much to the chagrin of entrepreneurs like the one noted above) is the amount of control that has been left in the hands of local government when it comes to the control of retail cannabis.

Licensing for cannabis businesses will fall under the purview of BC’s Liquor Control and Management Branch. The province will have a public wholesale distribution monopoly and operate public retail stores, while the CCLA will also create a private retail licensing scheme, similar to the current liquor system. Local governments, including First Nations, will play a significant role, with control over business licensing, zoning, public consumption, and distance requirements.3 More importantly, local governments will be able to cap the number of cannabis stores or even prevent cannabis sales within their respective jurisdictions altogether.

Section 33 of the CCLA provides that a license must not be issued to a cannabis retailer unless the local government for the relevant area “gives… a recommendation that the licence be issued.”4 In giving said recommendation, the local government must gauge the public’s interest in the cannabis business being opened in their region, potentially by referendum or public hearing; however, there is no requirement that the local government gauge public interest when refusing to recommend a licence or that it take any action at all, meaning a board or council could unilaterally block any licensing applications.

Unfortunately for those who rushed to open a retail store prior to legalization (throw a rock in Victoria if you want to find one), the province will not be “listening” to the local governments in every sense, as a recommendation to grant a license need only be “taken into account” by the province, and businesses with pre-existing licenses unlikely to be given favourable treatment in the application process. Existing cannabis stores should also expect increased license fees and more stringent requirements for security and public safety, among other things. Certainly, applicants should expect to bear the cost of whatever public hearing a local government holds.

As the province prepares for cannabis legalization in the summer, there will be a scramble at the local government level as councils and boards develop their own bylaws and policies surrounding the sale of cannabis in their communities. In doing so, it seems inevitable that clashes like the one in Langford will continue.

  1. 1 Bill 31, Cannabis Distribution Act, 3rd Sess, 41st Leg, British Columbia, 2018.
  2. 2 Bill 30, Cannabis Control and Licensing Act, 3rd Sess, 41st Leg, British Columbia, 2018.
  3. 3 For a clear indication that some local governments intend to enforce minimum distance requirements, see Green Dragon Medicinal Society v. Victoria (City), 2018 BCSC 116.
  4. CCLA, cl 33. See note 2.

In recent years, rectification has become a useful tool for correcting mistakes that create unintended tax consequences for taxpayers. In December, however, the Supreme Court of Canada released two decisions that greatly restrict the application of rectification and could prove costly for lawyers.

Rectification is a long-standing equitable remedy in contract law. It enables a court to reform a written instrument that, by mistake, does not properly represent the agreement intended by the parties.

Following a decision of the Ontario Court of Appeal in 2000, Juliar 1, rectification has been increasingly used in Canadian tax cases as some courts have allowed parties to rectify situations where a recorded transaction, though effected as intended, did not properly carry out the parties’ intentions from a tax perspective (that is, to avoid or reduce taxes).

In Juliar, the Court upheld a rectification order for taxpayers who were reassessed for deemed dividends on a share transfer. The Court rejected the idea that “intention” refers only to the purpose of the transaction and not its consequences, finding the parties’ underlying intention was to avoid income tax on the transfer and that the transaction itself, not just the documents, could be reformed. In other words, the parties merely required proof of an intention to effect a transaction on a particular tax basis, therefore widening the scope of rectification.

The Supreme Court of Canada refused leave to appeal Juliar, and later cases of that Court, Performance Industries 2 and Shafron 3, addressed rectification but not in a tax law context – neither decision mentioned Juliar.

On December 9, 2016, the Supreme Court of Canada released Fairmont 4 clarifying and narrowing rectification at common law. In Fairmont, the majority (7–2) overturned Juliar, finding that it wrongly expanded the availability of rectification beyond cases where the written documents incorrectly recorded the parties’ agreement. The Court stated: “Rectification is not equity’s version of a mulligan. Courts rectify instruments which do not correctly record agreements. Courts do not “rectify” agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome. 5

Following Fairmont, it will no longer be possible to obtain orders rectifying transactions based on the parties’ intention to avoid or limit taxes. Instead, the onus will be on the taxpayers to show that the signed instruments contain errors that do not properly reflect the intended agreement. Jean Coutu 6, released concurrently, set out the same principles under Quebec civil law.

What does this mean for lawyers? The Income Tax Act is complex. Rectification has been an effective tool for correcting mistakes – it seems that will no longer be the case. Fairmont highlights a need for lawyers to draft carefully and to understand the mechanisms they are using for their clients. The best practice for lawyers not specializing in tax law will be to clearly inform their clients of such and recommend they seek tax advice. The Court has stated it will no longer act as an insurer for lawyers who improperly advise their clients on the tax consequences of a given transaction. The potential cost of providing erroneous tax advice, therefore, has just increased.

Attorney General of Canada v. Juliar (2000), 50 OR (3d) 728 (ONCA) | ↩
Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19. | ↩
Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6. | ↩
Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56. | ↩
Fairmont, at para 39. See note 4. | ↩
Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55. | ↩

April 01, 2017 By Ryan Green

Income tax considerations motivate the founder of a private corporation to allow family members to acquire common shares in the corporation. For example, a capital gain that is deemed to arise on the death of the founder will be reduced to the extent that the value of the corporation has accrued to shares held by surviving family members.

While founders may want family members to acquire shares, founders will frequently insist upon maintaining control of their corporations. For this reason, a founder will frequently hold all shares entitled to vote, while family members hold non-voting common shares. If the founder wishes to participate in the corporation’s growth in value, the founder will hold voting common shares or non-voting common shares and “skinny” voting shares – i.e. shares which do not carry any rights other than the right to vote. If the founder has sought to cap the value of his or her interest in the corporation by implementing an estate freeze, the founder will typically hold preferred shares and skinny voting shares.

For a family-owned corporation, all shareholders usually expect that shares will be valued in accordance with how the corporation’s articles require assets to be distributed on liquidation. Consistently with this expectation, the capital gain on a founder’s shares that arises on death may be calculated based on the shares’ entitlement on liquidation, without consideration of voting rights. Such a filing position may be disputed by the Canada Revenue Agency (the “CRA”).

In a 2007 policy statement, the CRA stated that it considered it appropriate to attribute value to a share’s voting rights when the holder of the shares can control the corporation. In a 2009 policy statement, the CRA narrowed the impact of the 2007 policy statement by advising that, in the context of an estate freeze, the CRA would typically not attribute value to a skinny voting share. However, the CRA did note that value could be attributed to voting shares if shareholders had acted in a manner that was consistent with the voting rights having value.

The 2009 policy statement is a positive indication that the CRA does not intend to begin challenging the estate freeze. However, the policy statement leaves open many circumstances in which the value of a voting right could cause unanticipated tax consequences.

Where necessary, steps can be taken to address the potential for value being attributed to voting rights. If one shareholder will hold shares that provide control of a corporation, this should not be accomplished through ownership of voting common shares. Instead, it is preferable that the shareholder hold non-voting common shares and skinny voting shares that are redeemable by the corporation. While value may still be attributed to the voting shares, the fact that the voting shares are non-participating and redeemable strengthens the argument that little value should be attributed to the voting shares.

Alternatively, a founder may hold voting shares as the trustee of a family trust. While this requires the founder to abide with fiduciary obligations, the trust will be treated as a separate taxpayer from the founder for income tax purposes. Accordingly, the voting shares will not be taxed as property of the founder.

If the founder of a family corporation insists on maintaining voting control of a corporation, it will not be possible to eliminate the risk of value being allocated to that voting control. However, careful planning can assist in addressing this risk.