Tax Insights: Supreme Court of Canada rules in favour of taxpayers in Québec ‘rectification’ cases

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Issue 2013-22

Rectification cases are of interest to the tax community because the truth is, whether we like to acknowledge it or not, mistakes happen. Sometimes the only solution is to attempt to rectify the legal steps. At common law, rectification is an equitable remedy that may be available through the superior courts of the common law provinces. When a court rectifies the steps in a transaction, the steps as rectified become the steps that were legally taken. In Québec, the Civil Code of Québec (CCQ) governs private law and until now, it was not clear to what extent rectification or a similar remedy was available in Québec. Some argued that the only remedy available to address unintended tax consequences resulting from a transaction was to have it nullified pursuant to the rules in the CCQ. This meant that in Québec a provincial court would not (some say could not) correct a transaction that might be corrected in another province.

This changed in 2011 when the Québec Court of Appeal (QCCA) decided in two separate cases (Agence du Revenu du Québec v. Services Environnementaux AES Inc., et al. and Agence du Revenu du Québec v. Jean Riopel, et al.) to correct contractual documents that did not reflect the intentions of the parties.

Both cases were appealed to the Supreme Court of Canada (SCC) and were heard together by the SCC on November 8, 2012. The SCC released its decision on November 28, 2013, clarifying that the civil law did afford a remedy that was the equivalent of rectification of a contract.

The QCCA decisions marked a shift in the interpretation of the CCQ. As a result, many tax practitioners have been eagerly awaiting the SCC’s pronouncement on the availability of rectification in Québec.

 

The QCCA held that the courts have the power in Québec civil law to correct acts in order to give effect to the parties’ true common intentions on the basis of article 1425 of the CCQ. Article 1425 of the CCQ provides that the common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract. The QCCA further held that there is no need to import the common law doctrine of rectification into Québec’s civil law.