On November 28, 2013, the Supreme Court of Canada released its decision in Québec (Agence du revenu) v. Services environnementaux AES inc. (AES), allowing the rectification of contractual documents that, through error, did not reflect the common intention of the parties, and made those rectified documents enforceable against tax authorities. The AES decision confirms, in the civil law context, the availability of a remedy to address mistakes in transaction documents having tax-related consequences, a remedy that has been previously accepted in the common law provinces.
Two cases came before the Supreme Court from the Québec Court of Appeal. In both cases, tax advisers made errors in documents prepared to carry out corporate transactions. The parties intended for income tax to be deferred. As a result of an error in the sequencing of amalgamation steps in one case, and an error in the calculation of the adjusted cost base of shares in the other case, the transactions did not achieve the intended tax result. The provincial and federal tax authorities issued notices of assessment. To address this unexpected outcome, the taxpayers applied to the Québec Superior Court for orders rectifying their contractual documents, arguing that they did not reflect their true intentions. The Superior Court rendered contradictory decisions in the two cases, allowing rectification in one case while denying it in the other. The Court of Appeal allowed rectification in both cases, and the provincial tax authority appealed to the Supreme Court. The Attorney General of Canada intervened in support of the appellant.
The Procedural Issue: Motions Seeking Rectification at Civil Law
The provincial tax authority argued that the proceedings instituted by the taxpayers were inconsistent with Québec's rules of civil procedure which, it argued, do not permit the Superior Court to consider motions seeking rectification. Moreover, the tax authority also argued that the jurisdiction to retroactively correct a contract cannot be found in the Civil Code of Québec since the power relied on – to interpret contracts and modify them pursuant to art. 1425 – only applies to correct clerical errors. The Supreme Court rejected these procedural arguments, concluding that a motion seeking rectification was the correct way to seize the Superior Court with the issues in dispute, and that the Superior Court had the jurisdiction to consider the remedy requested by the taxpayers.
The Circumstances in Which Rectification is Permitted at Civil Law
The Supreme Court considered the circumstances in which rectification may be appropriate at civil law, holding that the Superior Court has the authority under the Civil Code of Québec to correct contractual documents that do not reflect the true intention of the parties, on the basis that the determination of the parties’ common intention represents an interpretation exercise.
The Supreme Court acknowledged that the validity of an assessment must be dealt with before the Tax Court, but held that "tax law applies to transactions governed by, and the nature and consequences of which are determined by reference to, the common law or the civil law." The Supreme Court found that tax authorities do not have the right to benefit from contractual documents that do not reflect the common intention of the parties due to an error in the preparation of documents if the parties agree to correct the error, and the court has been convinced that the impugned documents were truly inconsistent with the parties’ common intention. At the same time, the Supreme Court expressed certain reservations and warnings to taxpayers about the availability of rectification.
In the cases before the Supreme Court, the tax authority did not contest the fact that the contractual documents failed to reflect the parties’ common intention. However, taxpayers should not view the decision as an invitation to seek rectification of documents to remedy adverse tax consequences in other cases where no such mistake in the contractual documentation can be demonstrated.
The Supreme Court’s decision on the availability of rectification at civil law is consistent with the common law approach to the remedy of rectification in the Ontario Court of Appeal’s decision in Attorney General of Canada v. Juliar. In cases following Juliar, courts across the common law provinces have permitted rectification to contracts and other documents where these documents do not reflect the common intention of the parties, despite the fact that rectification deprives tax authorities of revenue. This jurisprudence confirms that rectification is available to correct mistakes but is not available for retroactive tax planning.
As intervener, the Attorney General argued that the Supreme Court should consider and reject the common law jurisprudence developed after Juliar. However, since the cases before the Supreme Court were governed by Québec civil law, the Supreme Court considered that it was not appropriate to address this issue.
The AES decision constitutes an important development in Québec’s jurisprudence on the stability and interpretation of contracts as well as on the tax implications of rectification. Considering the reservations and warnings expressed by the Supreme Court, it will be important to monitor how lower courts will apply this decision going forward. And even though the Supreme Court declined to comment on Juliar and the common law remedy of rectification, AES supports the recognition of this remedy across Canada’s legal systems in appropriate cases.
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