Juridical acts (e.g., contracts) implementing commercial
transactions or corporate restructuring sometimes trigger tax
consequences that conflict with the intentions of the parties. The
judicial correction of such juridical acts (their
"rectification" in Common Law) may be the only
means available to taxpayers to avoid such consequences.
On March 4, 2011, the Québec Court of Appeal rendered
an important decision in Revenu Québec and the
Canada Revenue Agency v. Services Environnementaux AES Inc. et
al., relying for the first time upon the Civil Code of
Québec to correct a juridical act vitiated by a
substantive error causing unexpected tax consequences.
The facts of the case were not contested. The taxpayers, a
corporation and its wholly owned subsidiary, exchanged shares as
part of a reorganization of capital which resulted in unexpected
tax consequences due to an error in the computation of the adjusted
cost base of the subsidiary's shares. The taxpayers' intent
was always to effect the reorganization on a tax-deferred basis,
that is, without immediate tax consequences.
The taxpayers sought the rectification of the relevant juridical
acts in order to implement their intention to carry out the
reorganization without immediate tax consequences and to render it
enforceable against the tax authorities.
The main issue before the Court of Appeal was whether
Québec civil law or the inherent powers of the Superior
Court authorized the rectification. The Court of Appeal held that,
where a contract does not contain an error vitiating the consent of
the parties, but gives rise to a result that is inconsistent with
their intentions, the articles of the Civil Code of
Québec dealing with the interpretation of contracts
authorize the Superior Court to give effect to those intentions by
correcting the wording of the contract insofar as the rights of
third parties are not adversely affected.
The Court of Appeal upheld the judgment of the Superior Court
granting the correction and held that the tax authorities would not
be adversely affected by the correction, as the tax legislation
provided a mechanism allowing for share exchanges without immediate
tax impact, from which the taxpayers would have benefited, had they
not made an error in the computation of the adjusted cost base of
These findings mark a major departure from the earlier dominant
interpretation of Québec law on the issue, which only
permitted the correction of a juridical act when vitiated by a
clerical error or an error in a calculation or designation, but not
by an error of substance. The decision confirms the existence, in
Québec civil law, of a broad judicial discretion for the
correction of juridical acts, without introducing the common law
notion of rectification into Québec law.
It should also be noted that the Québec Business
Corporations Act, like the previous Companies Act,
allows for the rectification of juridical acts governed by such
legislation, including certificates of amalgamation or dissolution,
in case they were obtained in error as a result of the ignorance of
some material fact. The recent Superior Court decision in Remer
Holdings confirms that an error concerning the tax consequences of
a corporate restructuring can be characterized as a material fact
and allowed the Superior Court to rectify certain juridical acts to
give effect to the intentions of the parties.
In conclusion, the decision of the Québec Court of
Appeal in Services Environnementaux AES Inc. completes the
arsenal belonging to taxpayers seeking the correction of juridical
acts that have resulted in unexpected tax consequences by giving
full effect to the intentions of the parties, despite their errors,
where the relevant tax legislation would have permitted the
conclusion sought by the parties had the errors not been
It will be interesting to see whether the taxation authorities
will attempt to appeal this decision to the Supreme Court of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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