Canada: Using Contract Law To Fix Tax (And Other) Mistakes: The Supreme Court Of Canada Recognizes A Rectification-Like Remedy Under Quebec Law

Last Updated: December 3 2013
Article by Geoff R. Hall

Most Read Contributor in Canada, September 2018

The problem and the fix

A taxpayer intends to undertake a transaction on a tax-efficient basis. But the transaction gets papered wrong, and the intended tax treatment is not achieved. Can the law of contract save the taxpayer by allowing a court to rewrite the contract documents retroactively in order to achieve the original intention of tax efficiency?

For over a decade the answer in common law Canada has been yes, through the equitable doctrine of rectification. The basic concept underlying rectification is that where a written agreement has incorrectly recorded the parties' prior oral agreement, the court has the power in equity to correct the written agreement so that it accords with the parties' actual intentions. Since the 2000 decision of the Ontario Court of Appeal in Attorney General of Canada v. Juliar (2000), 50 O.R. (3d) 728 (C.A.), leave to appeal to S.C.C. refused May 24, 2001, it has been established that rectification is available to fix unintended tax consequences, provided of course that the requirements for rectification are met. Since Juliar, such applications have become relatively frequent in common law provinces, and at the federal level the Canada Revenue Agency has created a committee process to vet rectification proceedings and decide whether the CRA will oppose.

But the situation in Quebec has not been so clear. Until the decision of the Supreme Court of Canada in Québec (Agence du Revenu) v. Services Environnementaux AES inc., there was a vigorous debate as to whether the law of obligations in Quebec permitted a rectification-like remedy at all, much less in the tax context. AES has settled this debate by answering yes. Importantly, the common law doctrine of rectification has not been adopted into Quebec law; rather the decision is entirely based on civil law contract principles.

However, the results under both systems should be the same. In general and in matters of contractual interpretation in particular, Quebec courts and their common law counterparts often use different paths of reasoning to get to the same results. For example, in contractual interpretation the civil law focuses on the parties' subjective intentions while the common law focuses on their objective intentions – a major theoretical difference. But when it comes to actually interpreting contracts, the two approaches come to remarkably similar outcomes. AES is an example of that phenomenon.

The decision

AES involved two appeals. In both cases there had been a clear intention to undertake transactions on a tax efficient basis which had been defeated when the parties' advisors made errors in drafting the contracts to give effect to the transactions. In both cases, Quebec revenue authorities issued assessments adverse to the taxpayers, pointing to the tax outcome of the transactions as papered. In both cases, the taxpayers went to court seeking orders retroactively revising their contracts to achieve the originally intended tax results. Importantly, the evidence of the parties' common intention was clear in both cases. At the trial level, one taxpayer succeeded and the other failed; the divergence in results turned entirely on the question of whether the remedy that was sought existed under Quebec law. The cases were appealed separately, and in both cases the Quebec Court of Appeal found the remedy to be available at law and granted it on the evidence. The Supreme Court of Canada then heard both appeals together, unanimously affirming the decisions of the Court of Appeal in a decision authored by Justice LeBel.

The Supreme Court's analysis, firmly rooted in civil law principles, began with a discussion of the concept of a contract under Quebec law. A contract is an agreement of wills for the purpose of carrying out juridical operations. What is important is the common intention of the parties, which is not the same as the expression (either oral or written) of the declared will. A contract is formed by a meeting of the parties' minds, with the contract being distinct from its physical medium. The agreement lies in the common intention, despite the importance of the declaration of Thus where there is a divergence between the parties' common intention and the declaration of that intention – as was clearly established on the evidence – the former must prevail. Correction of the writing results in giving effect to the actual will of the parties. The fix works. Contract law can save taxpayers from inadvertent missteps causing them unintended tax bills.

But not always. Common law rectification cases often emphasize the extraordinary nature of the remedy, expressing concern not to open the floodgates to after-the-fact efforts to get out of a bad bargain (examples of this phenomenon include Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19 at paras. 35 and 40 and Royal Bank of Canada v. El-Bris Limited, 2008 ONCA 601 at paras. 35 and 36). AES did the same by expressing "certain reservations and a word of warning": "Taxpayers should not view this recognition of the primacy of the parties' internal will – or common intention – as an invitation to engage in bold tax planning on the assumption that if will always be possible for them to redo their contracts retroactively should that planning fail." In both Quebec and common law provinces, the fix only works if there truly has been an error in writing down the parties' intentions. The fix does not work to revise a transaction that turns out, in retrospect, was not structured in the best manner from a tax perspective.

The fate of Juliar

There is one further aspect of AES that is worth noting. The Attorney General of Canada intervened to argue that the common law Juliar line of cases permitting rectification in the tax context should be overruled on the basis that it is inconsistent with Supreme Court doctrine on rectification (in Juliar itself, leave to appeal was denied). The Court declined that invitation, holding that cases under Quebec law were not an appropriate forum for a reconsideration of the common law remedy of rectification.

Significance

AES is significant for three reasons.

First, AES eliminates all doubt that a rectification-like remedy exists under the law of obligations in Quebec.

Second, in the tax context, Quebec law is now aligned with the common law under Juliar, in outcome even if not in the exact path of reasoning. It is now the case that throughout Canada, written contracts that erroneously record the parties' common intentions and create unintended adverse tax consequences can be retroactively corrected by the courts to fix the tax problem and achieve the originally intended result.

Third, of interest for the future is the intervention of the Attorney General of Canada. The federal Department of Justice – defending the interests of the federal fisc – is clearly not happy with the development of the common law since Juliar. Having taken a run at that case law in AES, will they do so again in a common law case? Or, Quebec law having now recognized a remedy that is functionally although not theoretically the same as rectification, will the Department of Justice now accept that Juliar is here to stay?

Case information

Québec (Agence du Revenu) v. Services Environnementaux AES inc., 2013 SCC 65

To view original article, please click here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions