The Supreme Court of Canada issued its judgment in Québec (Agence du revenu) v. Services environnementaux the Court AES inc. and Québec (Agence du revenu) v. Riopel, 2013 SCC 65, confirming that the Civil Code of Québec allows the rectification of contracts due to an error. In so deciding, the Supreme Court confirmed the judgments of the Québec Court of Appeal and allowed the correction of the taxpayer's transactions, denying the tax authorities revenues that would have otherwise resulted purely from the errors made by the parties and their representatives.
This judgment may have a significant impact on both the rectification of transactions which have unexpected or unwanted tax consequences and on the interpretation of contracts more generally.
By its decision, the Supreme Court confirmed the distinction between the common intention of the parties (negotium) and the expression thereof found in the impugned contract (the instrumentum). In case of conflict between the two, courts can now rely on the provisions of the Civil Code of Québec in respect of the interpretation of contracts in order to modify legal documents that do not reflect the common intention of the parties, thereby correcting errors. In short, courts can eliminate "the inconsistency between the parties' original agreement and the manner in which it had been expressed".
In these cases, the tax advisors of the taxpayers had made errors in the implementation of reorganizations that were to be without immediate tax consequences. The courts and the Supreme Court have allowed the rectification of the reorganizations in order to achieve this result.
The framework of analysis and conclusions of the Supreme Court could also be relied upon in other instances where the parties seek the correction of a contract that does not reflect their common intention, subject to the applicable rules of evidence.
In tax matters, the Supreme Court stressed that specific evidence of the common intention of the parties will be required. In the drafting of any contract, it would be advisable to clearly set out the common intention of the parties and, in particular, with respect to its tax implications.
This judgment of the Supreme Court may have a significant impact on the stability of contracts and their interpretation. It will be of great interest to monitor how this decision is followed by lower courts.
The Attorney General of Canada intervened in this case in an attempt to reverse the decisions of the Court of Appeal on the basis that rectification as applied in cases concerning taxes such as Juliar (Attorney General of Canada v Juliar, 50 OR (3d) 728; 2000 CanLII 16883 (Ont CA)) is not good law. Although LeBel J. declined to specifically comment on Juliar and common law rectification in cases concerning taxes, the decision in this case concluded that such rectification was acceptable for the purposes of the Civil Code of Québec. It would be most peculiar if such rectification was good law in Québec but not in the common law Provinces.
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