On November 28, 2013, the Supreme Court of Canada released one decision in two appeals concerning a taxpayer’s ability to correct an error in an agreement entered into for tax planning purposes. Although Quebec (Agencie du Revenu) v. Services Environnementaux AES inc., 2013 SCC 65 (“AES”), dealt with this issue under the Quebec Civil Code, it does have broader implications for the use of rectification in common law provinces in similar situations.
AES addressed two separate appeals. The first appellant’s advisors had erred in their valuation of the adjusted cost base of shares. The result of this error was to create an unintended taxable capital gain. The second appellant had approved a detailed tax plan which involved a transfer of shares followed by an amalgamation. The steps of the transaction were not performed in the correct order with the result being that the transaction was not tax neutral as originally intended. The Supreme Court of Canada dismissed both appeals thereby upholding the Quebec Court of Appeal’s decision to allow the use of the Civil Code to correct the taxpayers’ errors.
While the decision does not resort to the common law doctrine of rectification, it is instructive that the Court found that the contract between the parties was their common intention and not necessarily the actual written instrument. This even extended to the second appeal in which the Court found that the implementation of steps in a certain order was the contract between the parties and allowed it be corrected on that basis.
Importantly, the Court held that the corrective orders cannot circumvent the notices of assessment which must be dealt with according to the Income Tax Act. The courts reviewing the notices of assessment will have the ultimate authority to consider the consequences of other courts correcting the impugned transactions. Ultimately, the court found that the tax authorities did not have the right to insist on the contracts being left in a form that was unintended by the parties.
The Court was asked to consider and to reject a line of cases following Juliar, a decision of the Ontario Court of Appeal. Juliar is considered to be taxpayer friendly in terms of the use of the common law doctrine of rectification to correct errors in tax planning and implementation. The Court declined the invitation because these appeals concerned the Civil Code and, therefore, it was not considered the appropriate forum to determine issues dealing with the common law doctrine of rectification.
As a result, Juliar is likely to remain a flash point in common law provinces when issues of this type are litigated. It will now need to be considered in light of the directions suggested by the Supreme Court in AES. It also means that the tax authorities are likely to take a further run at Juliar in an effort to have the Supreme Court consider this issue.
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