Uninteded tax consequences of a contract can be avoided by
rectification, the Supreme Court of Canada ruled in
Québec v Services Environnementaux AES inc.,
2013 SCC 65 (AES).
AES is the first substantive decision of the Supreme
Court on rectification in the tax context. The issue before
the Court was whether the Superior Court of Québec could
correct a written instrument that did not reflect the parties'
intentions. While decided under the Civil Code of
Québec (C.C.Q.), the principles articulated by
the Court should be relevant to the common law doctrine of
rectification applicable in other provinces.
AES involved corporate reorganizations that were
intended by the parties to be implemented on a tax deferred
basis. Certain errors in carrying out the reorganizations
resulted in unintended tax consequences. In both cases, the
taxpayers filed applications in the Québec Superior Court
seeking rectification of the written instruments for the
transactions to accord with their true intentions, which would
result in implementing the reorganization without any immediate tax
consequences. The conflicting decisions of the Québec
Superior Court were appealed to the Québec Court of Appeal,
which granted rectification in both cases.
The Supreme Court of Canada dismissed the taxing authority's
appeal of the rectification order. Writing for the Court,
Justice LeBel confirmed that parties to a transaction are entitled
to correct an error by mutual consent and amend or annul the
contract and the documents recording it. The Court held that
in a rectification application under the C.C.Q., the court is to
determine the common intention of the parties and to intervene and
remedy any errors. Tax authorities do not have the right to
have an erroneous document continue to apply in the face of the
existence of an established error where it has been shown that the
document relied on by the tax authorities are inconsistent with the
parties' true intention. Justice LeBel confirmed that
unless otherwise provided for in the taxing legislation, tax law is
based in the underlying commercial principles established by the
common law and civil law. Consequently, in common law
jurisdictions, taxpayers should continue to have recourse to the
equitable doctrine of rectification to correct any errors in the
written instruments underlying a transaction in order to eliminate
any unintended negative tax consequences.
With the Supreme Court's decision in AES, taxpayers
can feel some comfort that any errors in the implementation of a
transaction that results in unintended tax consequences can be
remedied by having counsel make an application to the court.
However, in bringing this application, taxpayers and their
counsel must ensure that they have put before the court sufficient
evidence to prove that the parties had a common intention to
implement the transaction on a tax effective basis before the
transaction was carried out. As stated by Justice LeBel:
"Taxpayers should not view this recognition of the primacy of
the parties'...common intention...as an invitation to
engage in bold tax planning on the assumption that it will always
be possible for them to undo their contracts retroactively should
that planning fail."
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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