Legal Alert: SCC Sympathetic To Taxpayers’ Mistakes – And Unexpected Taxes
November 29, 2013
On November 28, 2013 the Supreme Court of Canada delivered its first decision on the availability of contractual rectification in a tax context. The SCC expressly limited its decision to Quebec law but taxpayers elsewhere in Canada can take some comfort from the SCC’s sympathetic approach to the plight of taxpayers facing unexpected tax consequences because of mistakes in the implementation of planning arrangements.
Two unrelated taxpayers obtained professional tax planning advice intended to avoid adverse tax consequences. Following that advice, they completed non-arm’s length contractual transactions in Quebec. However, the advice was mistaken and the steps the taxpayers followed resulted in unanticipated tax:
- in one case, there was a mistake respecting the adjusted cost base of shares being transferred in exchange for a note and shares issued by the transferee, leading to the issuance of the note in too large an amount; and
- in the other case, a sale of shares mistakenly occurred after – instead of before – an amalgamation.
In both cases, the taxpayers discovered the mistake after the transactions were completed. They attempted to retroactively rectify the contracts to correct the mistakes but the Agence du Revenu du Québec refused to give them effect. The taxpayers then asked the Quebec court to give effect to the corrections. The Agence du Revenu du Québec and the Canada Revenue Agency argued that under the Quebec Civil Code, a court does not have authority to approve a change in a completed transaction that has the effect of altering the tax consequences.
In a single decision dealing with both cases, the SCC approved the rectifications:
- Quebec Law of Rectification. The Quebec Civil Code does authorize the court to rectify mistakes to give effect to the intention of contractual parties where – as here – their objectives were clear and the required amendments would not change the nature of the contemplated transaction structures.
- Tax Consequences of Rectified Transaction. The court’s jurisdiction ends when it approves the corrective steps; the tax consequences of its decision depend on the normal procedures for reassessment and, if necessary, objection and appeal under the governing tax law – but based on the rectified transactions.
- Rectification Outside of Quebec. The SCC was clear it based its decision on Quebec’s Civil Code – not on the common law of rectification, which applies in all other Canadian Provinces. Despite this, the SCC’s decision is consistent with one of the leading Canadian cases (outside Quebec) on the issue (Attorney General of Canada v. Juliar). suggesting the SCC would take a similarly sympathetic approach to Canadian taxpayers outside Quebec who attempt to rectify contracts to fix mistakes in the implementation of planning arrangements resulting in unexpected tax consequences.
Click here to read the SCC’s decisions in Quebec v. Services Environnementaux AES inc.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Tax Solutions Team to discuss this topic or any other legal issue.
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