Speculation on the Application of AES to Common-Law Rectification
As described in Nathalie Perron’s article above, the SCC recently affirmed in Quebec (Agence du Revenu) v. Services Environnementaux AES Inc. (2013 SCC 65)
that rectification is available under the Civil Code of Québec (CCQ).
The Attorney General of Canada (AG) intervened in both appeals and
requested that the court consider and reject a common-law line of
authority that has applied the doctrine of rectification in tax cases
since Attorney General of Canada v. Juliar ((2000), 50 OR (3d) 728 (CA)).
The AG argued that those cases are inconsistent with the conditions for
rectification laid out by the SCC in non-tax cases (for example, Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6).
In AES, the court refused to comment on the common-law rectification cases on the basis that the appeals in AES
were governed by Quebec civil law, and therefore it would be
inappropriate to consider the common-law doctrine of rectification.
Nevertheless, one can speculate about how certain aspects of the
judgment might be applied in the common-law context, although it remains
to be seen how open courts will be to drawing inferences from the
principles set out in AES and applying them to common-law rectification.
In AES, the court clearly accepted that the tax consequences
of a transaction may be a fundamental aspect of contract formation.
This finding is helpful to taxpayers inasmuch as common-law
rectification requires the demonstration of a common, specific intention
to accomplish a particular result. If, as the AG argued, rectification
has been inappropriately extended in certain tax cases, then it might be
argued that a specific intention to achieve a particular tax result is
an insufficient basis on which to grant rectification when all other
elements of the transaction have been implemented properly. However, the
court in AES was satisfied that in the civil-law context, the
tax consequences of a transaction may be important enough to be
considered a fundamental element of the transaction. The same principle
should exist in common-law rectification cases (if it does not already).
Another helpful aspect of the judgment is the court’s comment that
once an error is proved in accordance with the rules of evidence, the
court must note the error and ensure that it is remedied. Thus, in civil
law, tax authorities do not have the right to benefit from an error
made in written instruments if it has been established that the
documents relied on by the tax authorities are inconsistent with the
parties’ true intentions. Although the court’s focus was on the civil
law, the same principles should apply to errors that have been shown to
be capable of being rectified under the common law. Indeed, the court
appears to accept in principle the application of rectification to tax
cases, although its boundaries are not limitless. In particular, the
court made it clear that a general intention to reduce tax, in and of
itself, does not “constitute the object of an obligation within the
meaning of [CCQ article 1373], since it would not be sufficiently
determinate or determinable.” The court’s conclusion in this regard is
consistent with common-law cases in which rectification was not granted
when, for example, the parties did not contemplate a specific type of
tax result at the time they entered into the transaction.
Bennett Jones LLP, Calgary