SCC: Rectification Possible Under Civil Law

In Quebec (Agence du Revenu) v. Services Environnementaux AES Inc. (2013 SCC 65), the SCC unanimously held in two cases, per Lebel J, that the correction or amendment of contracts was permitted in Quebec civil law. Taxpayers on either side of the Ottawa River now have similar recourse when errors have been made in executing tax-planning documentation.

Revenu Québec argued that section 1425 of the Civil Code of Quebec (CCQ), on which the Quebec Court of Appeal (QCA) relied in granting the taxpayer’s request for rectification, allowed courts to correct only clerical errors, not the type of errors that occurred in the transactions in question. Those errors were the amount of the ACB (in the case of a section 86 reorganization by Services Environnementaux AES), and various particulars of a share sale and subsequent amalgamation with a holding corporation (in the case of Mr. Riopel and Ms. Archambault).

Borrowing the terms used by the QCA, the SCC made a distinction between the negotium (the parties’ common intention) and the instrumentum (the declared intention) and reiterated that “[t]he agreement lies in the common intention, despite the importance — as between the parties and in relation to third parties — of the declaration, oral or written, of that intention.” Lebel J also observed that the contract belongs to the parties and that, subject to rights acquired by third parties, they are free as between themselves to amend or annul the contract and the document recording it.

The SCC confirmed the existence of a tax-planning agreement where the parties, having in mind specific provisions of Quebec and federal tax legislation, had agreed to undertake a transaction. The intended effect of the agreement was to defer the tax payable, but errors were made in the implementation of the tax planning. The court concluded that the parties were allowed to correct the errors by amending the documents to restore the “integrity of their original agreement.” Agreeing with the QCA, the SCC ruled that an interpretation exercise under CCQ section 1425 could resolve the discrepancy between the parties’ common intention and the erroneously declared intention.

Some uncertainties remain. The SCC ruled that it was proper in the circumstances to bring a rectification motion before the Superior Court, since there was a dispute about the nature of the parties’ common intention and since it found no impediment to doing so under the Code of Civil Procedure. Yet the SCC stated that there was no need to rely on the “implicit powers of the Superior Court” to correct the acts, because the correction of the acts resulted from the actual will of the parties. This statement appears to suggest that taxpayers may not necessarily be required to obtain a rectification order from the Superior Court in order to correct an error in a contract; but the court was silent as to what, if any, other paths could lead to the same result.

Moreover, the SCC warned taxpayers not to consider rectification as permission to enter into “bold tax planning” on the assumption that if the tax consequences are not as envisioned they can simply amend their contracts retroactively. Although the SCC speculated that such “bold tax planning” would likely not be detailed enough to constitute a common intention, the new and potentially vague concept raises the question of whether certain types of tax planning cannot be rectified.

Nathalie Perron
Barsalou Lawson Rheault, Montreal

Canadian Tax Focus
Volume 4, Number 1, February 2014
©2014, Canadian Tax Foundation