On October 13, 2011, the Supreme Court of Canada (SCC) granted leave to appeal in Agence du Revenu du Québec (formerly the Deputy Minister of Revenue of Quebec) v. Services Environnementaux AES Inc., Centre Technologique AES Inc. The central issue in this case is rectification, which is a means through which an individual can apply to a court to have a transaction re-characterized so as to remedy unintended negative tax consequences.
The case involved an exchange of shares pursuant to a reorganization agreement. The purpose of the exchange of shares was to take advantage of the applicable tax provisions of the Income Tax Act which would enable a deferral of tax provided that, among other things, any consideration other than shares received at the time of the transfer did not exceed the adjusted cost base of the shares. Unfortunately, as a result of a computation error, the company overstated the adjusted cost base of the shares in the reorganization agreement (and later in its tax return). The CRA consequently assessed the company, adding a capital gain of $840,770 to the company’s revenue
for the taxation year.
The company filed a motion in the Superior Court for rectification and for declaratory judgment, asking that it be allowed to amend the documents relating to the transaction to reflect its true intentions at the time of the transaction. The Superior Court allowed the motion.
The Quebec Court of Appeal (QCA) upheld the decision of the Superior Court, finding that rectification was justified because there was a divergence between the common intention of the parties and the reorganization agreement. Of particular interest is the fact the QCA essentially held that there were two mechanisms under Quebec law by which to achieve rectification: (1) an error vitiating consent; or (2) a divergence between the common intention of the parties and the contract. If there is an error, which is effectively equivalent to the common law doctrine of mistake, then, in accordance with the Civil Code (art. 1400), the contract may only be nullified. If there is a divergence between the intention and the contract, then, in accordance with the Civil Code (art. 1425), the contract may be interpreted so as to accord with the intention, so long as the request is legitimate and the requested correction does not affect the rights of third parties.
Having only just granted leave to appeal, the SCC’s perspective is yet to be seen. Whatever their perspective, this decision has the potential to be all the more interesting because their comments regarding “common intention” and the extent of relief available under art. 1425 may also be relevant in a common law context.