Stone's Jewellery Ltd. v. Arora et al., 2009 ABQB 656

• Judge: Strekaf, J.
• Court: Court of Queen's Bench of Alberta (Canada)
• Case Date: October 08, 2009
• Citations: 2009 ABQB 656;(2009), 484 A.R. 286 (QB)

Stone's Jewellery Ltd. v. Arora (2009), 484 A.R. 286 (QB)

MLB headnote and full text

Temp. Cite: [2009] A.R. TBEd. NO.118

Stone's Jewellery Ltd. (plaintiff) v. Ashok Arora, Saroj Arora, Prakash Arora, Rakesh Arora, and 1204391 Alberta Ltd. (defendants) and Attorney General of Canada (added defendant per order of June 29, 2009)

(0901 04362; 2009 ABQB 656)

Indexed As: Stone's Jewellery Ltd. v. Arora et al.

Alberta Court of Queen's Bench

Judicial District of Calgary

Strekaf, J.

November 18, 2009.

Summary:

Stone's Jewellery Ltd. was owned by the Arora siblings. In 1996, Stone's agreed to purchase 112 acres of land for $500,000 for development. In 2004, when the deal closed, the land was worth $4 million. The siblings were advised that it was preferable for the lands to be held by an entity other than Stone's, which had significant assets, as the development involved financial risk. Title was registered in the siblings' names (the 2004 transfer). In 2006, when the land was worth $6 million, the siblings transferred title to 1204391 Alberta Ltd., which was also owned by the siblings (the 2006 transfer). The transfer agreement stated that the parties intended s. 85(1) of the Income Tax Act, which permitted a tax-free rollover or transfer of property in certain conditions, to apply to the transfer. The Canada Revenue Agency (CRA) assessed Stone's as having unreported income from the 2004 transfer and two of the siblings were reassessed as having unreported taxable benefits. Regarding the 2006 transfer, CRA took the position that the land did not qualify as "eligible property" and issued reassessments on the sale to 1204391. The result was that Stone's and the siblings owed just under $6.5 million in tax and interest. Stone's sought to rectify or rescind both transfers. The CRA opposed the application.

The Alberta Court of Queen's Bench allowed the application, granting rescission on the basis of mistake. The court directed the registrar of the Land Titles Office to cancel the title to the land in the name of 1204391 and reissue title to the land in the name of Stone's.

Deeds and Documents - Topic 5057

Rectification - When available - Mistake - Mutual - Stone's Jewellery Ltd. was owned by the Arora siblings - In 1996, Stone's agreed to purchase 112 acres of land for $500,000 for development - In 2004, when the deal closed, the land was worth $4 million - The siblings were advised that it was preferable for the lands to be held by an entity other than Stone's, which had significant assets, as the development involved financial risk - Title was registered in the siblings' names (the 2004 transfer) - In 2006, when the land was worth $6 million, the siblings transferred title to 1204391 Alberta Ltd., which was also owned by the siblings (the 2006 transfer) - The transfer agreement stated that the parties intended s. 85(1) of the Income Tax Act, which permitted a tax-free rollover or transfer of property in certain conditions, to apply to the transfer - The Canada Revenue Agency (CRA) assessed Stone's as having unreported income from the 2004 transfer and two of the siblings were reassessed as having unreported taxable benefits - Regarding the 2006 transfer, CRA took the position that the land did not qualify as "eligible property" and issued reassessments on the sale to 1204391 - The result was that Stone's and the siblings owed just under $6.5 million in tax and interest - Stone's sought, inter alia, to rectify both transfers - The Alberta Court of Queen's Bench held that rectification was not available - Rectification was an equitable remedy that was available to correct a written agreement where the parties were in agreement on the terms of their contract, but, by mistake, wrote them down incorrectly - See paragraphs 24 and 25 - The 2006 transfer was carried out under the mistaken belief that it could be done on a tax free basis under s. 85(1) - Rectification was not available regarding that transfer as the court did not have the power to direct that the 2006 transfer was to proceed on a tax free basis - See paragraph 45 - Regarding the 2004 transfer, rectification was not available as the court was not being asked to rectify the transaction back to its original form, but to undo it - See paragraph 68.

Deeds and Documents - Topic 5504

Cancellation - General principles - When available - Rescission - Stone's Jewellery Ltd. was owned by the Arora siblings - In 1996, Stone's agreed to purchase 112 acres of land for $500,000 for development - In 2004, when the deal closed, the land was worth $4 million - Title was registered in the siblings' names (the 2004 transfer) - In 2006, when the land was worth $6 million, the siblings transferred title to 1204391 Alberta Ltd., which was also owned by the siblings (the 2006 transfer) - The transfer agreement stated that the parties intended s. 85(1) of the Income Tax Act, which permitted a tax-free rollover or transfer of property in certain conditions, to apply to the transfer - The Canada Revenue Agency (CRA) assessed Stone's as having unreported income from the 2004 transfer and two of the siblings were reassessed as having unreported taxable benefits - Regarding the 2006 transfer, CRA took the position that the land did not qualify as "eligible property" and issued reassessments on the sale to 1204391 - The result was that Stone's and the siblings owed just under $6.5 million in tax and interest - Stone's sought, inter alia, to rescind both transfers - The CRA opposed the application - The Alberta Court of Queen's Bench allowed the application, granting rescission on the basis of mistake - The 2006 transfer was carried out under the mistaken belief that it could be done on a tax free basis under s. 85(1) - The mistake (that the land was "eligible property") was a fundamental mistake that went to the contract's root - Therefore, at common law, the 2006 transfer was void ab initio - The title was to be returned to the siblings' names - Even if the 2006 transfer was not void at common law, the court would have exercised its equitable discretion to grant rescission - The mistake was as to the legal effect of the transaction, not merely its consequences - There was no adequate legal remedy that barred equitable relief - The result did not constitute "retroactive tax planning under the guise of seeking equitable relief" - Nor did it result in any prejudice to third parties who were not involved in the original transaction - See paragraphs 43 to 57.

Deeds and Documents - Topic 5504

Cancellation - General principles - When available - Rescission - Stone's Jewellery Ltd. was owned by the Arora siblings - In 1996, Stone's agreed to purchase 112 acres of land for $500,000 for development - In 2004, when the deal closed, the land was worth $4 million - The siblings were advised that it was preferable for the lands to be held by an entity other than Stone's, which had significant assets, as the development involved financial risk - Title was registered in the siblings' names (the 2004 transfer) - In 2006, when the land was worth $6 million, the siblings transferred title to 1204391 Alberta Ltd., which was also owned by the siblings (the 2006 transfer) - The Canada Revenue Agency (CRA) assessed Stone's as having unreported income from the 2004 transfer and two of the siblings were reassessed as having unreported taxable benefits - Regarding the 2006 transfer, CRA took the position that the land did not qualify as "eligible property" and issued reassessments on the sale to 1204391 - The result was that Stone's and the siblings owed just under $6.5 million in tax and interest - Stone's sought, inter alia, to rescind both transfers - The CRA opposed the application - The Alberta Court of Queen's Bench allowed the application, granting rescission on the basis of mistake - The mistake regarding the 2004 transfer was that the siblings could have title registered in their names directly, effectively bypassing Stone's participation - This constituted a fundamental mistake that went to identity of the parties to the contract and the agreement's essence - Therefore, at common law, the 2004 transfer was void ab initio - The title was to be registered in the name of Stone's as the purchaser - Even if the transaction was not void at common law, the court would have exercised its equitable discretion to rescind the agreement - The mistake was as to the legal effect of the transaction, not merely its consequences - This met the strict confines of the rule for granting such relief - There was no adequate legal remedy - There were no third parties not involved in the original transaction who would suffer prejudice - See paragraphs 58 to 74.

Equity - Topic 1106

Equitable relief - Contracts - Rescission - When available - [See both Deeds and Documents - Topic 5504 ].

Equity - Topic 1108

Equitable relief - Contracts - Rectification - [See Deeds and Documents - Topic 5057 ].

Mistake - Topic 646

Mistake of fact - Mistake as to identity - Party to a contract - [See second Deeds and Documents - Topic 5504 ].

Mistake - Topic 4005

Relief - General - Circumstances when granted - [See Deeds and Documents - Topic 5057 and both Deeds and Documents - Topic 5504 ].

Mistake - Topic 4005

Relief - General - Circumstances when granted - The Alberta Court of Queen's Bench stated that "[b]oth the common law and equity provide remedies in certain circumstances for contracts that were entered into as a result of a common mistake shared by the parties to a contract. At common law, a distinction was drawn between a mistake that constituted an error which went to the identity of the contract and caused the contracting party to obtain something other than what they had intended and a lesser error where the contracting party obtained what they had intended but it turned out to be less valuable. Only the former was considered to be a fundamental mistake which went to the root of the contract, or the intention to contract, so as to render the contract void ab initio. Any lesser mistake that went only to the motivation to contract or to questions of quality would only give rise to damages. However, equitable remedies such as rectification or rescission might still be available where the mistake was insufficient to void the contract at common law." - See paragraphs 26 to 30.

Sale of Land - Topic 3757

Contract - Discharge, rescission or annulment - Grounds - Mistake - [See both Deeds and Documents - Topic 5504 ].

Sale of Land - Topic 6029

Completion - Conditions precedent and subsequent - What constitutes a condition precedent - Stone's Jewellery Ltd. was owned by the Arora siblings - In 1996, Stone's agreed to purchase 112 acres of land for $500,000 for development - In 2004, when the deal closed, the land was worth $4 million - The siblings were advised that it was preferable for the lands to be held by an entity other than Stone's, which had significant assets, as the development involved financial risk - Title was registered in the siblings' names (the 2004 transfer) - In 2006, when the land was worth $6 million, the siblings transferred title to 1204391 Alberta Ltd., which was also owned by the siblings (the 2006 transfer) - The transfer agreement stated that the parties intended s. 85(1) of the Income Tax Act, which permitted a tax-free rollover or transfer of property in certain conditions, to apply to the transfer - The Canada Revenue Agency (CRA) assessed Stone's as having unreported income from the 2004 transfer and two of the siblings were reassessed as having unreported taxable benefits - Regarding the 2006 transfer, CRA took the position that the land did not qualify as "eligible property" and issued reassessments on the sale to 1204391 - The result was that Stone's and the siblings owed just under $6.5 million in tax and interest - Stone's sought to rectify or rescind both transfers, asserting, inter alia, that both transfers were subject to the condition precedent that no adverse tax consequences would flow to any party involved and that this condition had failed - The Alberta Court of Queen's Bench allowed the application on the basis of mistake - The court rejected the applicants' argument based on failure of a condition precedent - The requirement that there be no adverse tax consequences was not a true condition precedent - See paragraph 23.

Cases Noticed:

Bertram v. Minister of National Revenue, [1996] 1 F.C. 756; 191 N.R. 218 (F.C.A.), dist. [para. 17].

Turney v. Zhilka, [1959] S.C.R. 578, refd to. [para. 23].

Thermidaire Corp. v. Clarke (H.F.) Ltd., [1973] 2 O.R. 57; 33 D.L.R.(3d) 13 (C.A.), affd. [1976] 1 S.C.R. 319; 3 N.R. 133, refd to. [para. 24].

Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd. and O'Connor (No. 2), [2002] 1 S.C.R. 678; 283 N.R. 233; 299 A.R. 201; 266 W.A.C. 201; 2002 SCC 19, refd to. [para. 25].

KRG Insurance Brokers (Western) Inc. v. Shafron et al. (2009), 383 N.R. 217; 265 B.C.A.C. 1; 446 W.A.C. 1; 301 D.L.R.(4th) 522; 2009 SCC 6, refd to. [para. 25].

McMaster University v. Wilchar Construction Ltd. et al., [1971] 3 O.R. 801; 22 D.L.R.(3d) 9 (H.C.), affd. (1973), 69 D.L.R.(3d) 400 (Ont. C.A.), refd to. [para. 28].

Great Peace Shipping Ltd. v. Tsavliris Salvage Ltd., [2003] EWCA Civ. 1407, refd to. [para. 30].

Andrews v. Coxe (2003), 320 A.R. 258; 288 W.A.C. 258; 2003 ABCA 52, refd to. [para. 30].

771225 Ontario Inc. et al. v. Bramco Holdings Co. et al. (1995), 77 O.A.C. 75; 21 O.R.(3d) 739 (C.A.), refd to. [para. 31].

Juliar v. Canada (Attorney General) et al. (2000), 136 O.A.C. 301; 50 O.R.(3d) 728 (C.A.), refd to. [para. 31].

Gibbon v. Mitchell, [1990] 1 W.L.R. 1304 (Ch. D.), refd to. [para. 32].

Slocock's Will Trust, Re, [1979] 1 All E.R. 358 (Ch. D.), refd to. [para. 32].

QL Hotel Service Ltd. v. Ontario (Minister of Finance), [2008] O.T.C. Uned. 731; 90 O.R.(3d) 760 (Sup. Ct.), affd. [2009] O.A.C. Uned. 469; 2009 ONCA 715, refd to. [para. 42].

Snow White Productions Inc. v. PMP Entertainment Inc. et al., [2004] B.C.T.C. 604; 2004 BCSC 604, refd to. [para. 42].

TCR Holding Corp. v. Ontario et al., [2009] O.T.C. Uned. K09 (Sup. Ct.), refd to. [para. 42].

Fraser Valley Refrigeration Ltd., Re, [2009] B.C.T.C. Uned. 848; 2009 BCSC 848, affd. (2009), 276 B.C.A.C. 257; 468 W.A.C. 257; 2009 BCCA 422, refd to. [para. 42].

Aboriginal Diamonds Group Ltd. et al., Re, [2007] Northwest Terr. Cases (SC) 37; 2007 NWTSC 37, refd to. [para. 42].

Binder v. Saffron Rouge Inc. et al., [2008] O.T.C. Uned. 140; 89 O.R.(3d) 54 (Sup. Ct.), refd to. [para. 42].

Authors and Works Noticed:

Fridman, Gerald Henry Louis, The Law of Contract in Canada (5th Ed. 2006), p. 812 [para. 29].

Counsel:

James Dunphy and D. Michael Ellery (Warren Tettensor Amantea LLP), for the plaintiff;

David E. Grossman, Q.C. (Demiantschuk Milley Burke & Hoffinger LLP), for the defendants;

Connie L. Mah (Attorney General), for the added defendant.

This application was heard on August 10 and October 8, 2009, by Strekaf, J., of the Alberta Court of Queen's Bench, Judicial District of Calgary, who delivered the following reasons for judgment on November 18, 2009.