Involving the CRA in Rectification and Declaratory Proceedings

Multiple court decisions have addressed the circumstances in which an error in the execution of a transaction may be rectified through a court order, but many key questions remain. The TCC has now addressed one of these, ruling in Bourgault (2019 CCI 6, available in French only) that tax authorities must be impleaded (made a party to a court action) in order to be bound by the rectification or declaratory decision. However, this might apply only where the CRA has become a creditor.

The taxpayer had purchased shares of Développement Quatre Saisons Inc. (DQS) but had not paid for the shares at the time of the sale. The taxpayer was to pay the seller a certain amount upon the sale of land that DQS owned, and DQS (not the taxpayer) made these payments during the 2002 to 2004 fiscal years. Owing to ambiguity in the wording of the contractual provisions of the share purchase agreement, differences of opinion arose regarding the nature of these payments. The taxpayer considered the payments to be commissions for the services rendered by the seller for the sale of the land, but the minister determined that the payments were made in consideration for the purchase of the shares. As a result, notices of reassessment were issued against the taxpayer. The taxpayer filed an application for a declaratory judgment with the Quebec Superior Court (file number 450-17-001882-068), with the objective of rectifying the agreement to reflect the true intention of the parties. The taxpayer did not implead the tax authorities, but had informed them.

The Quebec Superior Court judge determined that the parties' actual intentions were that the payments were commissions paid for the sale of the land and were not part of the sale price of the shares. Despite this judgment, the minister did not adjust the assessments, arguing that he was not bound by the judgment of an application in which he had not been impleaded.

The TCC ruled in favour of the minister. Because the tax authorities had not been impleaded, this matter could not be considered res judicata (a matter that has already been adjudicated by a competent court). The TCC thus had to determine the intention of the parties again, although the Quebec Superior Court judgment remained an element that had to be taken into consideration. The TCC judge concluded, as the Quebec Superior Court judge had, that the intention of the parties when selling the shares was that the commissions would not be part of the sale price of the shares. As a result, the court allowed the appeal of the assessments, which were then cancelled. The decision has not been appealed.

This decision may be contrasted with Brogan Family Trust (2014 ONSC 6354), in which the Ontario Superior Court of Justice held that the CRA was bound by the declaratory order even though the CRA was not impleaded in that case. The distinction appears to be whether the CRA had established a legal interest by issuing a notice of assessment and becoming a creditor. This had occurred in Bourgault, and thus the taxpayer was required to notify the CRA of the declaratory proceedings; in Brogan, no such legal interest had been established.

Many aspects and arguments were not addressed in Bourgault: Does judicial courtesy between the courts not exist? Is there an abuse of process when the courts deal with the same issue several times or when a party collaterally attacks a court decision? In addition, the TCC did not address the issue of fairness to the taxpayer; since the tax authorities had been informed of the proceedings before the Quebec Superior Court, they could have intervened at that stage.

Lauzanne Bernard-Normand
BCF LLP, Montreal

Canadian Tax Focus
Volume 9, Number 2, May 2019
©2019, Canadian Tax Foundation