SUPREME
COURT OF CANADA
Between:
Agence
du Revenu du Québec (formerly the Deputy Minister of Revenue of Quebec)
Appellant
and
Services
Environnementaux AES inc. and Centre Technologique AES inc.
Respondents
-
and -
Attorney
General of Canada
Intervener
And
Between:
Agence
du Revenu du Québec
Appellant
and
Jean Riopel,
Christiane Archambault and Entreprise J.P.F. Riopel inc.
Respondents
-
and -
Attorney
General of Canada
Intervener
Official English Translation
Coram: McLachlin C.J. and LeBel, Fish, Abella, Rothstein, Cromwell
and Karakatsanis JJ.
|
Reasons for
Judgment:
(paras. 1 to 56)
|
LeBel J. (McLachlin C.J. and Fish, Abella, Rothstein,
Cromwell and Karakatsanis JJ. concurring)
|
Quebec
(Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65,
[2013] 3 S.C.R. 838
Agence du revenu du Québec (formerly the
Deputy Minister of Revenue of Quebec) Appellant
v.
Services Environnementaux AES inc. and
Centre Technologique AES inc. Respondents
and
Attorney General of Canada Intervener
‑ and ‑
Agence du revenu du Québec (formerly the
Deputy Minister of Revenue of Quebec) Appellant
v.
Jean Riopel, Christiane Archambault and
Entreprise J.P.F. Riopel inc. Respondents
and
Attorney General of Canada Intervener
Indexed as: Quebec (Agence du revenu)
v. Services Environnementaux
AES inc.
2013 SCC 65
File Nos.:
34235, 34393.
2012: November 8; 2013: November 28.
Present: McLachlin C.J. and LeBel, Fish, Abella, Rothstein,
Cromwell and Karakatsanis JJ.
on appeal from the court of appeal for quebec
Contracts
— Interpretation — Intention of parties — Intention declared in documents
relating to transactions not reflecting common intention of parties because of
errors made by professional advisors — Transactions having unforeseen tax
consequences — Whether it is open to courts to intervene to find that
amendments made by parties to documents associated with transactions were
legitimate and necessary — Civil Code of Québec, S.Q. 1991, c. 64, art. 1425.
Shareholders of corporations engaged in transactions to reorganize
the corporations without tax consequences. As a result of errors made by the
shareholders’ tax advisors, the tax authorities issued notices of assessment in
which they claimed tax amounts these taxpayers had not expected to pay. In the AES case, the parties had agreed on share transfers
involving a rollover transaction that would be conducted in accordance with the
procedures provided for in the relevant tax legislation and was based on a
calculation of the adjusted cost base (“ACB”) of the transferred shares. One
aspect of the consideration paid for the transferred shares was the issuance
and delivery of a note for an amount equal to that of their ACB. The
agreement, the intended effect of which was to defer the tax payable, was
vitiated by an error made in calculating the ACB of the shares. Rather than
seeking to annul the contract, the parties agreed to
correct the error by amending the documents that recorded and implemented their
agreement, including the necessary tax forms, after
which they took their case to the Superior Court by means of a motion for
rectification. In the Riopel case, the parties had reached a verbal
agreement to carry out a detailed tax plan, the essential terms of which had
been recommended to them by their advisors. The agreement provided for a
series of operations and acts to be completed, with precise timelines, to carry out share transfers and a corporate amalgamation in such a
way as to defer the tax liability associated with those transactions by
following procedures provided for in tax legislation. The parties’ advisors reversed the order of the corporate
amalgamation and the share transfer. Because that error prevented the deferral
of tax, they tried to correct it by amending the original acts and having their
clients sign the amended acts without explaining the nature of the amendments
to them. After the tax
authorities issued the notices of assessment and the errors made in drafting
the writings associated with the transaction were discovered, the parties
agreed to give effect to their original agreement by amending the defective
acts.
The
Superior Court granted the application for rectification in AES but
dismissed the one in Riopel. The Quebec Court of Appeal granted both
applications for rectification, holding that art. 1425 C.C.Q.
authorized the correction of the discrepancies between the common intentions of
the parties and the intentions declared in the acts, because the applications
were legitimate and neither correction affected the rights of
third parties.
Held:
The appeals should be dismissed.
The interplay of the civil law and tax law limits the scope of
intervention of the courts. In principle, the nature
and the legal consequences of transactions to which tax law applies are
determined by reference to the common law and the civil law, although a court dealing with a challenge relating to civil aspects of a
transaction with tax implications does not have the authority to rule on notices
of assessment that were issued or notices of objection that were filed in
respect of that transaction. The validity and effects of the notices in
question must instead be determined, if necessary, by the courts that have been
assigned jurisdiction over such matters, and those courts must also consider
the consequences of judgments rendered by the civil courts with respect to the
transactions that led to the issuance of the notices of assessment.
In
the civil law, the law of contracts is premised on a principle of
consensualism, and a fundamental distinction exists between the exchange of
consents and the written expression of that exchange. The
parties are free as between themselves, although this is subject to any rights
acquired by third parties, to amend or annul the contract and the documents
recording it. There is nothing to prevent them from acknowledging the
existence of a common error and agreeing to correct it by mutual consent. The determination by the courts of the
common intention, or will, of the parties represents a true exercise of
interpretation, and it was open to the courts to
intervene for that purpose under art. 1425 C.C.Q. If a private
writing contains an error, the court must, once the
error is proved in accordance with the rules of evidence in civil matters, note
the error and ensure that it is remedied. In the civil law, the tax
authorities do not have an acquired right to benefit from an error made by the
parties to a contract after the parties have corrected the error by mutual
consent.
In
these cases, the common intention of the parties was
expressed erroneously in all the writings prepared to carry out the tax plans
on which they had agreed. It
was open to the courts to intervene to find that the amendments made by the
parties to the acts at issue were legitimate and necessary. Their intervention
was justified by the substantive law and was not precluded by Quebec’s rules of
civil procedure. The issue was argued in an adversarial process. The tax
authorities were impleaded, as they had to be, and a motion for rectification
was the normal way to bring the issue before the Superior Court and ask it to
intervene to consider conclusions that were, first and foremost, declaratory.
Cases Cited
Referred
to: Canada (Attorney General) v. Juliar (2000), 50 O.R. (3d) 728; Bank
of Nova Scotia v. Angelica‑Whitewear Ltd., [1987] 1 S.C.R. 59;
Banque de Montréal v. Européenne de Condiments S.A., [1989]
R.J.Q. 246; Canada v. Addison & Leyen Ltd., 2007 SCC 33, [2007] 2 S.C.R. 793;
Sobeys Québec inc. v. Coopérative des consommateurs de Sainte-Foy, 2005
QCCA 1172, [2006] R.J.Q. 100; Shafron v. KRG Insurance Brokers (Western)
Inc., 2009 SCC 6, [2009] 1 S.C.R. 157; Performance Industries Ltd. v. Sylvan Lake
Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R.
678.
Statutes and Regulations Cited
Civil Code of Québec, S.Q. 1991, c. 64,
arts. 1372, 1373, 1374, 1378, 1385, 1412, 1425,
1439, 2818, 2829.
Code
of Civil Procedure, R.S.Q., c. C‑25, art. 5.
Companies
Act, R.S.Q., c. C‑38, Part 1A.
Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 86 .
Taxation
Act, R.S.Q., c. I‑3, ss. 541 to 543.
Authors Cited
Baudouin, Jean‑Louis, et Pierre‑Gabriel Jobin. Les
obligations, 7e éd. par Pierre‑Gabriel Jobin et Nathalie
Vézina, dir. Cowansville, Qué.: Yvon Blais, 2013.
Campbell, Colin. Administration of Income Tax 2013. Toronto:
Thomson/Carswell, 2013.
Cresp, Marie. Le temps juridique en
droit privé, essai d’une théorie générale. Aix‑en‑Provence,
France: Presses universitaires d’Aix‑Marseille, 2013.
Deslauriers, Jacques. Vente, louage, contrat d’entreprise ou de
service, 2e éd. Montréal: Wilson & Lafleur, 2013.
Gendron, François. L’interprétation des contrats.
Montréal: Wilson & Lafleur, 2002.
Ghestin, Jacques. “La notion de contrat” (1990), 12 Droits
7.
Krishna,
Vern. The Fundamentals of Canadian Income Tax, 9th ed. Toronto: Thomson/Carswell, 2006.
L’Heureux, Nicole, Édith Fortin et Marc Lacoursière. Droit
bancaire, 4e éd. Cowansville, Qué.: Yvon Blais, 2004.
Lluelles, Didier, et Benoît Moore. Droit des obligations,
2e éd. Montréal: Thémis, 2012.
Marquis, Paul‑Yvan. “L’inscription de faux et la correction
des actes notariés” (1990), 92 R. du N. 407.
Moore, Benoît. “Flexible contrat”, dans Benoît Moore, dir., Mélanges
Jean‑Louis Baudouin. Cowansville, Qué.: Yvon Blais, 2012, 569.
Moore, Benoît. JurisClasseur — Collection droit civil —
Obligations et responsabilité civile, par Pierre‑Claude Lafond, dir.
Montréal: LexisNexis, 2008 (feuilles mobiles mises à jour mars 2013, envoi no
8).
Pineau, Jean, Danielle Burman et Serge Gaudet. Théorie des
obligations, 4e éd. par Jean Pineau et Serge
Gaudet. Montréal: Thémis, 2001.
Swan,
Angela, and Jakub Adamski. Canadian Contract Law, 3rd ed. Markham, Ont.: LexisNexis, 2012.
APPEAL
from a judgment of the Quebec Court of Appeal (Chamberland, Morissette and
Kasirer JJ.A.), 2011 QCCA 394, 2011 D.T.C. 5045, [2011] Q.J. No. 1911
(QL), 2011 CarswellQue 11969, SOQUIJ AZ‑50727855, affirming a decision of Borenstein J., 2009 QCCS 790, [2009] J.Q. no
1554 (QL), 2009 CarswellQue 1643, SOQUIJ AZ‑50541289. Appeal dismissed.
APPEAL
from a judgment of the Quebec Court of Appeal (Bich, Kasirer and Wagner JJ.A.),
2011 QCCA 954, [2011] J.Q. no 5720 (QL), 2011 CarswellQue 5360,
SOQUIJ AZ‑50755104, setting aside a decision of
Nantel J., 2010 QCCS 1576, [2010] J.Q. no 3418 (QL), 2010
CarswellQue 3545, SOQUIJ AZ‑50628627. Appeal
dismissed.
Pierre Zemaitis, Christian Boutin and Khashayar Haghgouyan, for the appellant.
Dominic C. Belley, for the respondents Services
Environnementaux AES inc. and Centre Technologique AES inc.
Bruno Racine and Marc‑Antoine St‑Pierre, for the respondents Jean Riopel, Christiane Archambault and Entreprise J.P.F. Riopel inc.
Pierre Cossette and Susan Shaughnessy, for the intervener.
English version of the
judgment of the Court delivered by
LeBel J.
—
I. Introduction
[1]
The issues raised by these appeals relate to the
nature and scope of agreements between taxpayers concerning corporate
reorganizations, tax planning and the tax consequences thereof. Briefly, in
these two cases, shareholders of corporations engaged in various
transactions to reorganize the corporations in question and transfer interests
in them. The intention was that their agreements would have no tax
consequences. As a result of errors made by the shareholders’ tax advisors,
the Agence du revenu du Québec (“ARQ”) and the Canada Revenue Agency (“CRA”)
issued notices of assessment in which they claimed tax amounts these taxpayers
had not expected to pay.
[2]
After the notices of assessment were issued in
these two cases, those involved agreed to correct the documents relating to
their agreements in order to attain the intended tax neutrality. They applied
to the Quebec Superior Court for rectification of their original documents,
which, they argued, did not reflect their true agreements. The Superior Court
rendered contradictory judgments in the two cases, granting one of the
applications for rectification (2009 QCCS 790 (CanLII)) but dismissing the
other (2010 QCCS 1576 (CanLII)). The Quebec Court of Appeal granted both
applications for rectification to give effect to the true intentions of the
parties to the agreements (2011 QCCA 394, 2011 D.T.C. 5045; 2011 QCCA 954
(CanLII)). For reasons that differ in part from those of the Court of Appeal,
I would dismiss the ARQ’s appeals, declare that it was open to the respondents
to amend their agreements, and recognize their amendments.
II. Origins of the Cases
A. Services Environnementaux AES
inc.
[3]
The first appeal is that of Services
Environnementaux AES inc. (“AES”) and Centre
technologique AES inc. (“Centre technologique”). The
evidence concerning the transactions that gave rise to the dispute between the
tax authorities and AES is summarized in admissions the parties agreed on and
filed in the Superior Court.
[4]
AES is a corporation that was constituted in
1993 under Part IA of the Companies Act, R.S.Q., c. C‑38.
Centre technologique was created in 1997 under the same statute as a wholly
owned subsidiary of AES. In 1998, in a reorganization of the business, AES
agreed to transfer 25 percent of its shares in Centre technologique’s
capital stock to an investor, Groupe Sani‑Gestion. For the purposes
of that investment, AES and Centre technologique entered into a reorganization
and tax planning agreement and instructed their tax advisors to implement it.
To ensure that the agreement would be tax‑neutral, AES and Centre
technologique made use of certain provisions on exchanges of shares set out in
s. 86 of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp .), and ss. 541 to 543 of the Taxation Act, R.S.Q.,
c. I‑3. Under those provisions, a taxpayer may defer the tax impact
of an exchange of shares on condition, inter alia, that the
consideration other than shares does not exceed the adjusted cost base (“ACB”)
of the shares received.
[5]
An error, attributed to AES’s advisors, was made
in valuing the ACB of the transferred shares: it was valued at $1,217,029,
whereas its actual value was only $96,001. Relying on that incorrect
valuation, AES exchanged its 1,217,029 voting shares in Centre
technologique’s capital stock for 4,500,000 voting participating shares in
Centre technologique and a demand note from Centre technologique for
$1,217,028. Centre technologique repaid the amount of that note to AES between
December 18, 1998 and September 30, 1999. In 2000, the tax authorities
added a taxable capital gain of $840,770 to the income reported by AES for the
taxation year ending on September 30, 1999.
[6]
Notices of assessment were issued, and notices
of objection were filed. That aspect of the case is not before this Court,
which must consider the consequences of the attempt made by AES and Centre
technologique to correct a transaction that could not be tax‑neutral as
the parties had intended, because of the error made in carrying it out. On
November 1, 2001, after AES had objected to the notices of assessment, the
parties agreed to cancel and take back the note for $1,217,028. A new note
dated December 11, 1998 was to be issued in the amount of $95,000 together
with 1,122,029 Class C shares with a value of $1,122,029. AES and Centre
technologique then presented a motion in the Quebec Superior Court for
rectification and for a declaratory judgment. They asked that court to amend
the original agreements so that they would reflect the parties’ original
intention, to make them retroactive to the original transaction date, that is,
to December 1998, and to declare that the amendments could be set up against
third parties. The Deputy Minister of Revenue of Quebec, who has now been
succeeded by the ARQ, contested the motion and asked that it be dismissed, as
did the CRA.
B. Riopel
[7]
In 2004, the respondents Jean Riopel and
Christiane Archambault, who had been married since 1984, owned 60 percent
and 40 percent, respectively, of the shares of a corporation called
Déchiquetage Mobile JR inc. (“Déchiquetage Mobile”). In July 2004, all
Déchiquetage Mobile’s assets were sold to third parties. The only asset
then consisted of the proceeds of the sale of those assets. At the time,
Mr. Riopel was also the sole shareholder in a holding company, Entreprise
J.P.F. Riopel inc. (“JPF”).
[8]
On the recommendation of their accountant,
Mr. Riopel and Ms. Archambault agreed to amalgamate Déchiquetage
Mobile and JPF. Mr. Riopel was to become the sole shareholder of the
company that would result from the amalgamation, as Ms. Archambault was to
transfer all her interests in Déchiquetage Mobile to him for an agreed price.
The intention was that the transaction would have no tax consequences for
Ms. Archambault. The accountant and a tax lawyer were instructed to carry
out this plan.
[9]
On September 1, 2004, the advisors of
Ms. Archambault and Mr. Riopel presented them with a detailed plan
for the amalgamation of the two companies and the transfer of interests and for
the deferral of the tax impact of the transaction. First of all, on
October 30, 2004, Ms. Archambault was to sell her shares in
Déchiquetage Mobile to Mr. Riopel for $720,000. That price was to be paid
in part with a note for $335,000, which corresponded to the ACB of
Ms. Archambault’s shares. The balance of the sale price, which was equal
to the difference between the fair market value of the shares and their ACB, or
$385,000, was to be paid by issuing 385,000 preferred shares in JPF with a
redemption price of $385,000. On November 1, 2004, the articles of
amalgamation and certificate of amalgamation of Déchiquetage Mobile and JPF
were to be completed and the two companies were to be amalgamated; the new
company’s name was to be Entreprise J.P.F. Riopel inc. (“JPF‑2”). On
November 4, 2004, JPF‑2 was to repay the amount of the $335,000 note
to Ms. Archambault and redeem her preferred shares, whose total value was
$385,000. According to the tax lawyer, that redemption would generate a deemed
dividend of $385,000, but the dividend would have no tax consequences, because
it was to be paid out of JPF‑2’s capital dividend account.
[10]
Unfortunately, the transaction did not unfold as
planned. The parties’ advisors made a series of errors in preparing the
juridical acts required to implement the plan they had recommended to their
clients. The articles of amalgamation filed with the Inspector General of
Financial Institutions, which were dated November 1, 2004, made no mention
of the transfer of Ms. Archambault’s shares, which was supposed to have
taken place on October 30. The amalgamation therefore preceded the sale
of the shares, contrary to what had been planned, which meant that the
transaction was not tax‑neutral as the parties had intended.
[11]
To correct the situation and preserve the
transaction’s tax effectiveness, the accountant and the tax lawyer decided on
October 27, 2004 to change the legal documentation that had already been
prepared, but they did not breathe a word of this to their clients. They kept
November 1, 2004 as the formal amalgamation date, but restructured the
planned transaction in the documents they prepared. Ms. Archambault’s
shares in Déchiquetage Mobile were converted to 720 common shares in JPF‑2.
On November 2, 2004, after the amalgamation, JPF‑2 redeemed
Ms. Archambault’s 720 shares using the rollover provisions in the tax
legislation. To pay the purchase price, JPF‑2 provided a $335,000 demand
note and issued 385,000 redeemable no par value preferred shares. On
November 2, Mr. Riopel and Ms. Archambault signed all the necessary contracts
and documents, but their advisors did not explain to them the nature of the
changes that had been made to the original plan. Moreover, they acknowledged
that they had not read the documents at the time of the closing of the
transaction. JPF‑2 subsequently repaid the note owed to
Ms. Archambault and redeemed her preferred shares for $385,000.
[12]
Suddenly, in January 2007,
Ms. Archambault received notices of assessment from the CRA and from
Quebec’s Ministère du Revenu. Ms. Archambault was deemed to have been
paid a $335,000 taxable dividend, and an amount of about $150,000 in tax
arrears was claimed from her, plus the usual interest. These notices of
assessment meant that, in the tax authorities’ opinion, the tax plan contained
errors and could not meet its objective.
[13]
The respondents filed a notice of objection to
the notices of assessment in accordance with the applicable tax legislation.
That aspect of the case remains unresolved. After receiving the notices of
assessment, the respondents began, in the Quebec Superior Court, a proceeding
called a [translation] “Motion to
institute a proceeding in rectification of contract”. According to them, the
purpose of the proceeding was to obtain recognition of the agreement they had
actually reached so that the documents would reflect their true intention. In
bringing the proceeding, they intended to give effect to the original terms of
the transaction by amending or replacing the documents signed on
November 2, 2004 at their tax advisors’ office.
[14]
The respondents asked, first, that the date of
the sale of their shares be changed retroactively from November 2 to
October 30, 2004. The sale would thus be deemed to have taken place on
the latter date, that is, before the amalgamation. They also asked in their
motion for changes to the schedules to the articles of amalgamation that would
modify the share classes established on November 2. In addition, they
requested consequential changes to the T2057 and TP‑518 tax forms they
had filed after the amalgamation. Finally, they asked for a change to the
price of the transferred shares, as well as to the classes and numbers of those
shares, to make these terms consistent with the tax plan that had originally
been agreed upon. The purpose of all these changes was to ensure that the
respondent Archambault would not be deemed to have been paid a taxable dividend
as a result of the transfer of the shares.
[15]
In the respondents’ view, their motion
represented a simple request for rectification of a contract in order to correct
writings that were inconsistent with their actual agreement. Both the ARQ and
the CRA contested the admissibility of and basis for the respondents’ motion.
They argued that the possibility of making such a motion in the Superior Court
was not provided for in Quebec’s rules of civil procedure and that the so‑called
application for rectification was completely foreign to Quebec’s law of
obligations.
III. Judicial History
[16]
The two cases, which this Court heard together,
were conducted independently of one another in the Quebec courts. They were
heard and decided separately both in the Superior Court and in the Court of
Appeal. I will summarize the judgments rendered in the AES case
first, followed by the judgments in the Riopel case.
A. AES
(1) Quebec Superior
Court, Borenstein J., 2009 QCCS 790 (CanLII)
[17]
On the basis of admissions of fact filed by the
parties, the Superior Court granted the motion for rectification, finding that
the respondents’ proceeding was not prohibited under Quebec’s rules of civil
procedure. Borenstein J. held that Quebec civil law authorizes a certain
form of rectification to reflect the true intention of the parties to a
contract. She therefore authorized the modification of all the documents
relating to the transaction, declared that the amendments could be set up
against the tax authorities and made them retroactive to the date originally
intended for the transaction.
(2) Quebec
Court of Appeal, Chamberland, Morissette and Kasirer JJ.A., 2011 QCCA 394,
2011 D.T.C. 5045
[18]
In a unanimous decision, the Court of Appeal
affirmed the Superior Court’s judgment. The Court of Appeal saw no impediment
to the respondents’ motion in Quebec’s rules of civil procedure. According to
the Court of Appeal, the courts have the power in Quebec civil law to correct
acts in order to give effect to the parties’ true common intention, and there
is no need to import the common law doctrine of rectification into Quebec’s law
of obligations. In its opinion, art. 1425 of the Civil Code of Québec,
S.Q. 1991, c. 64 (“C.C.Q.”), authorizes the correction of a
discrepancy between the common intention of the parties and the intention
declared in the acts, provided that the application is legitimate and that the
correction does not affect the rights of third parties (paras. 17‑20).
The Court of Appeal concluded that the application was legitimate and did not
affect the rights of the tax authorities.
B. Riopel
(1) Quebec
Superior Court, Nantel J., 2010 QCCS 1576 (CanLII)
[19]
The trial judge found, first, that no agreement
of wills that would have led to the formation of a contract had resulted from
the meeting of September 1, 2004 between the parties and their advisors.
Furthermore, in any event, the alleged error was more than just a clerical
error, which is the only type of error a court can correct. What was in fact
being sought was a substantive restructuring of the transaction, which the
Superior Court did not have the power to authorize, since the common law
doctrine of rectification does not apply in Quebec civil law.
(2) Quebec
Court of Appeal, Bich, Kasirer and Wagner JJ.A., 2011 QCCA 954 (CanLII)
[20]
The Court of Appeal set aside the Superior
Court’s judgment and granted the conclusions sought by the respondents with
regard to rectification, giving them retroactive effect and declaring that they
could be set up against the tax authorities. It based its judgment on the
principles that had been laid down in AES, finding that the type of
motion filed by the respondents is available under Quebec’s rules of civil
procedure. A court may, without applying the common law doctrine of
rectification but by way of interpretation in accordance with art. 1425 C.C.Q.,
recognize the parties’ true agreement and find that it does not correspond
to their declared will. The Court of Appeal held that, in light of the
evidence, it was therefore open to the Superior Court to correct the identified errors in the documents.
IV. Analysis
A. Issues and Positions of the
Parties
[21]
The issues raised by these two appeals lie on
the line between the law of obligations and tax law. To resolve them, it will
be important to properly identify the legal nature of the parties’ transactions
and the instruments they used to conduct them. First, however, I must consider
how the parties identify and frame the issues and how they propose to resolve
them. I will then explain how I define and characterize the issues raised by
these cases and how I would resolve them.
[22]
The ARQ takes the same position in both AES
and Riopel while noting the distinctive features of their respective
fact situations. In brief, the ARQ first argues that there is nothing in the Code
of Civil Procedure, R.S.Q., c. C-25 (“C.C.P.”), that authorizes the
Superior Court to consider the type of motion the respondents have made. The C.C.P. does
not authorize a court to rectify or amend a contract. The basis for a power to
do so would have to be found in the substantive law established in the C.C.Q.
However, the ARQ argues, the power to interpret contracts provided for in
art. 1425, on which the Court of Appeal relied in granting the
applications, does not apply in these cases, since they do not involve
interpretation in the true sense. Only “clerical” errors can be corrected
under art. 1425, but the errors relied on by the respondents are not
clerical errors. According to the ARQ, the errors alleged by the taxpayers
relate only to the economic consequences of their transactions and do not even
form a basis for an action to annul for one of the causes provided for in the C.C.Q.
Thus, the ARQ submits that it can still rely on the agreements in the form in
which they were originally set down in writing and that the changes
subsequently made to their wording to record the “original” agreement may not
be set up against it.
[23]
The Attorney General of Canada has intervened in
both the appeals in support of the ARQ. According to him, the power of the
courts to correct supposedly defective writings is limited in Quebec civil law
to the correction of clerical errors. Thus, the proceedings instituted
in Riopel and in AES have no basis in the civil law. He
agrees with the ARQ that the Court of Appeal gave too broad a scope to the
power to interpret contracts provided for in art. 1425 C.C.Q. Finally,
the Attorney General of Canada criticizes the common law courts for unduly
extending the concept of rectification in tax cases since the Ontario Court of
Appeal’s decision in Canada (Attorney General) v. Juliar (2000), 50 O.R.
(3d) 728. In any event, he argues, this concept of rectification does not
apply in the civil law context. In his view, this Court should even intervene
to correct that part of the case law and bring it into line with the Court’s
most recent decisions in this regard.
[24]
The respondents in AES and in Riopel
advance arguments that are substantially similar despite the significant
differences in their respective fact situations. They submit, first, that
their proceedings are not precluded by Quebec’s rules of civil procedure. AES
and Centre technologique even seem to suggest that the Superior Court’s
implicit powers could form one legal basis for a procedure for the correction
of contracts. In oral argument, the respondents in AES and in Riopel
forcefully stressed that they are not asking for the annulment of the contracts
at issue. On the contrary, far from seeking to amend their agreements, they
want the true nature of the agreements to be established and recognized so as
to ensure that their declared will, as expressed in their written documents, is
consistent with their true intention. In their view, that would be an
interpretation exercise permitted by art. 1425 C.C.Q. Finally, the
respondents deny that they are trying to import the common law doctrine of
rectification into the civil law. Rather, the form of rectification they are
invoking is one for which a proper basis exists in the civil law of Quebec, in
the law of obligations, and that is consistent with the principles of that area
of the law. They argue that the correction of the writings can have
retroactive effect and can be set up against the tax authorities.
B. Nature of the Issues
[25]
Thus, the dispute between the parties raises
both procedural and substantive issues. First, are the proceedings instituted
by the respondents consistent with Quebec’s rules of civil procedure? And
second, are the respondents’ proceedings to amend or correct contracts, which
the Court of Appeal found to be acceptable, permitted in Quebec civil law? This
second issue is the main one. The procedural issues raised in these cases are
of only minor importance.
[26]
However, the way the evidence was adduced in
these cases certainly had a significant impact on the consideration of the
issues, as it facilitated proof of the taxpayers’ allegations. In AES,
the evidence consists of written admissions and exhibits filed jointly by the
parties at trial. In Riopel, the respondents presented extensive
documentary and testimonial evidence — to which no objections were made — in
the Superior Court in order to establish what they alleged to be the true
nature of their agreement and the errors made by their advisors in carrying it
out. The admissibility of that evidence was not at issue at trial. The
relevant questions of law must therefore be considered and decided on the basis
of that uncontested evidence establishing the nature of the agreements that
resulted from the exchanges of consents between the parties. Nevertheless, to
help in resolving similar cases in the future, I should, in view of how the
evidence was adduced, make a few comments on the possible impact of the rules
of evidence on the resolution of substantive issues. It must first be
determined whether the agreements in question are contracts in the civil law
sense.
C. Concept of Contract
[27]
Although the civil law concept of contract is,
generally speaking, clearly understood, these two cases show that there can
sometimes be disagreement, in a given situation, over whether a contract
legally exists and over the time at which the contract is formed and binds the
parties. The parties do not always agree on the content of the contract or on
the point at which it crossed the threshold of legal existence. In this
context, a review of some basic concepts will be helpful.
[28]
In Quebec civil law, the contract is defined in
the law of obligations as an agreement of wills for the purpose of carrying out
juridical operations. The formation of a contract is subject to the principle
of consensualism. A contract is formed by the exchange of consents. No
particular form is required except where the legislature intervenes to impose
one. The common intention of the parties is not equivalent to the expression —
oral or written — of their declared will. As a general rule, the writing is
not an autonomous act, unlike such documents as bills of exchange and certain
types of letters of guarantee, that in a sense become the undertaking and are
usually disconnected from the circumstances that led to their creation (Bank
of Nova Scotia v. Angelica‑Whitewear Ltd., [1987] 1 S.C.R. 59,
at pp. 70‑71; Banque de Montréal v. Européenne de Condiments S.A.,
[1989] R.J.Q. 246 (C.A.); N. L’Heureux, É. Fortin and
M. Lacoursière, Droit bancaire (4th ed. 2004), at pp. 290‑92).
[29]
These appeals will therefore require a
reflection on contracts. What is a contract and when does it come into
existence? What is the relationship between a contract and the expression
thereof?
[30]
Article 1378 C.C.Q. defines a
contract as “an agreement of wills by which one or several persons obligate
themselves to one or several other persons to perform a prestation”. A
contract is an agreement that is intended to produce legal effects
(D. Lluelles and B. Moore, Droit des obligations (2nd ed.
2012), at para. 53; J. Pineau, D. Burman and S. Gaudet, Théorie
des obligations (4th ed. 2001), at p. 51, § 20; P.‑G. Jobin
and N. Vézina, eds., Les obligations (7th ed. 2013), at
p. 82; J. Ghestin, “La notion de contrat” (1990), 12 Droits 7,
at p. 19). The creation of legal effects that bind the parties is the
distinctive function of the contract. The formation of a contract requires
agreement on an object, which is defined in art. 1412 C.C.Q. as
“the juridical operation envisaged by the parties” at the time of the
contract’s formation. Furthermore, the contract gives rise to an obligation
(art. 1372 C.C.Q.), the object of which is “the prestation that the
debtor is bound to render to the creditor” (art. 1373 C.C.Q.). The
prestation itself may relate to any property, but the property must be
sufficiently determinate or determinable in accordance with objectively
verifiable standards or practices of determination or calculation
(art. 1374 C.C.Q.; Jobin and Vézina, at pp. 34‑35;
J. Deslauriers, Vente, louage, contrat d’entreprise ou de service (2nd
ed. 2013), at para. 67; B. Moore, JurisClasseur
Québec — Collection droit civil — Obligations et responsabilité civile (loose‑leaf),
by P.‑C. Lafond, ed., fasc. 1, at
p. 26; B. Moore, “Flexible contrat”, in B. Moore, ed., Mélanges
Jean‑Louis Baudouin (2012), 569, at p. 574). Once an agreement of
wills is reached in accordance with these principles, the contract establishes
a set of rules applicable to the parties, which have legal authority for them,
for the purpose of carrying out what thereby becomes a common operation or
plan.
[31]
From this perspective, for a contract to exist
and become a legal reality, the parties’ undertakings must be sufficiently
precise to establish the details of the contemplated operation. In some cases,
the details of the operation will be clear immediately. In other cases, a plan
will take shape gradually and will come into legal existence as a contract that
is binding on the parties and represents the law applicable to them once its
details are sufficiently clear.
[32]
Moreover, as I mentioned above, the formation of
a contract is subject to the principle of consensualism. In principle, it does
not require a physical sign or medium. In Quebec civil law, a contract is
formed by a meeting of the parties’ minds, as is confirmed by art. 1385 C.C.Q.
As a rule, the formation of a contract does not depend on the adoption of
a particular form. It is true that agreements are often required by law to be
in writing, one example being the marriage contract, which must be in authentic
form and established by a notarial act. In other cases, particularly those
involving types of contracts that are highly regulated, as in the field of
consumer law, a writing is required and detailed formal requirements must be
met. Nevertheless, the principle remains the same. A contract is distinct
from its physical medium. In the Quebec law of obligations, a distinction is
maintained between the “negotium” and the “instrumentum”, to
repeat the words used by the Court of Appeal in the cases at bar, that is,
between the common intention and the declared will. The agreement lies in the
common intention, despite the importance — as between the parties and in
relation to third parties — of the declaration, oral or written, of that
intention.
[33]
The existence of formal requirements for acts
contributes to the complexity of the legal environment of contracts. The use
of a written instrument may also bring into play certain requirements of the
law of civil evidence that reflect a concern with protecting the legal
certainty and the stability of transactions. These requirements must be
considered when going beyond the intention declared in the writing to determine
the parties’ true intention. Evidentiary requirements will also have an impact
on the situations of third parties or assignees whose interests are alleged to
be affected by the contract.
[34]
In these two cases, therefore, this Court is
concerned with the relationship between what the parties claim to have been
their true intention and their declared will. Because the testimonial and
documentary evidence was adduced without any objections, the requirements of
the law of evidence are of no consequence in the analysis on this issue.
[35]
Obviously, the validity of consent depends on
its integrity. Various types of errors may vitiate consent. Moreover, the
contract belongs to the parties. They are free as between themselves, although
this is subject to any rights acquired by third parties, to amend or annul the
contract and the documents recording it. This means that there is nothing to
prevent them from acknowledging the existence of a common error and agreeing to
correct it by mutual consent. Although the contract as defined in the C.C.Q.
remains the law applicable to the parties, the parties are free to annul their
contract or modify its terms (art. 1439 C.C.Q.). In a sense, the
result is a new contract whose purpose is to modify or extinguish the existing
agreement. In light of these principles, I must now determine whether the
parties to the transactions at issue entered into contracts and, if they did,
inquire into the content of those contracts and of the acts and documents that
are alleged to have expressed the agreements of wills.
D. Nature of the Juridical
Operations in Riopel and AES
[36]
In Riopel, the fact situation is clear
and well established. It is not open to dispute that, on September 1,
2004, the parties reached a verbal agreement to carry out a detailed tax plan,
the essential terms of which had been recommended to them by their tax
advisors. That agreement was a contract within the meaning of the C.C.Q.
The agreement of wills defined all the operations and acts required to carry
out the share transfers and corporate amalgamation in such a way as to defer
the tax liability associated with those transactions by following procedures
provided for in tax legislation. The agreement established timeframes for
executing the acts and specified the order in which they were to be completed.
It required a variety of writings to be drawn up, including contracts, company
resolutions, articles of amalgamation, and tax forms that had to be prepared
and sent. Those writings gave effect to and recorded the agreement, but the
agreement itself nevertheless existed as of September 2004.
[37]
The agreement of wills was not implemented
properly, however. The parties’ advisors made two errors in succession.
First, they reversed the order of the corporate amalgamation and the transfer
of Ms. Archambault’s shares. Because that error prevented the deferral of
tax, they tried to correct it. To do so, they amended the original acts and
had their clients sign the amended acts without explaining the nature of the
amendments to them.
[38]
After the tax authorities issued the notices of
assessment and the errors made in drafting the writings associated with the
transaction were discovered, the parties agreed to give effect to their
original agreement by amending the defective acts that expressed it incorrectly.
[39]
Although the fact situation in AES is
different, the admissions in the record confirm the existence of a tax planning
agreement. The parties had agreed on share transfers involving a rollover
transaction that would be conducted in accordance with the procedures provided
for in the relevant tax legislation and was based on a supposedly accurate
calculation of the ACB of the transferred shares. The agreement, the intended
effect of which was to defer the tax payable, was vitiated by the error made in
calculating the ACB. One aspect of the consideration paid for the transferred
shares was the issuance and delivery of a note for an amount equal to that of
their ACB. The agreement with respect to this particular prestation was
dependent on the ACB being accurate, and therefore on its being consistent with
s. 86 of the Income Tax Act and the corresponding provisions of
Quebec’s Taxation Act. At the time of the agreement of wills, the ACB
was at the very least determinable by means of accepted accounting principles
and practices (V. Krishna, The Fundamentals of Canadian Income Tax (9th
ed. 2006), at pp. 1206‑7). Given the importance of this factor, the
error made in establishing or calculating the ACB could no doubt have served,
under the law of obligations, as a basis for annulling the contract at the
initiative of one of the parties.
[40]
Instead, the parties agreed to correct the error
by amending the documents that recorded and implemented their agreement,
including the necessary tax forms, thereby restoring the integrity of their
original agreement. The amendments made to the contract documents eliminated
the inconsistency between the parties’ original agreement and the manner in
which it had been expressed.
[41]
In light of these conclusions on the nature of
the parties’ agreements, and in view of the context established by the evidence
in this regard, it will be necessary to determine whether the proceedings
instituted by the respondents in AES and in Riopel are admissible
and whether the conclusions they seek are acceptable. It must be asked
whether, within the civil law’s legal framework for the law of obligations, the
tax authorities can rely on acts that have been proved to contain errors, or
whether such acts can be amended so that the taxpayers can have their tax
situation subsequently assessed on the basis of the amended acts.
E. Situation of the Revenue
Agencies
[42]
The appellant, the ARQ, and the intervener, the
Attorney General of Canada, find themselves engaged in a dispute regarding the
nature and effect of certain operations carried out by the respondents that
involve the application of Quebec civil law. As we have already seen, however,
the acts in question have tax consequences. This interplay of the civil law
and tax law limits the scope of this Court’s intervention, and of that of the
Court of Appeal and the Superior Court.
[43]
Actual challenges to the notices of assessment
issued in these cases would have to be raised in the courts on which the tax
legislation has conferred jurisdiction over such matters. As this Court
pointed out with regard to an attempt to use the judicial review process to
respond to the issuance of notices of assessment, the specific avenues
established by Parliament for tax appeals cannot be circumvented (Canada v.
Addison & Leyen Ltd., 2007
SCC 33, [2007] 2 S.C.R. 793, at para. 11; see also
C. Campbell, Administration of Income Tax 2013 (2013), at
pp. 564‑70). This means that a court dealing with a challenge
relating to civil aspects of a transaction with tax implications does not have
the authority to rule on notices of assessment that were issued or notices of
objection that were filed in respect of that transaction. The validity and
effects of the notices in question must instead be determined, if necessary, by
the courts that have been assigned jurisdiction over such matters. It would
also be up to those courts to consider the consequences of judgments rendered
by the civil courts with respect to the transactions that led to the issuance
of the notices of assessment.
[44]
Nevertheless, the dispute in the two appeals
before us necessarily concerns the ARQ and the CRA. Because of their
situations, it must be asked whether they can rely on acquired rights to have
an erroneous writing continue to apply even though the existence of an error
has been established and it has been shown that the documents filed with the
tax authorities are inconsistent with the parties’ true intention.
[45]
For such a conclusion to be reached, it would
have to be found that, once the respondents completed their operations, the
revenue agencies became special assignees that were entitled to collect part of
the economic proceeds of the transactions, and that they could rely forever on
the parties’ declared will. I do not dispute the fact that the tax collection
procedures, remedies and types of security established by law to facilitate the
recovery of tax debts give the agencies rights in the proceeds of a variety of
juridical operations. For example, they may become assignees of a series of
claims or holders of rights in a trust in respect of certain property affected
by transactions. Under the civil law itself, the agencies can also prove that
simulation existed and demonstrate the true nature of transactions they allege
to be shams. In addition, tax legislation may recharacterize contractual or
economic transactions for its own purposes by overriding the legal categories
established by the common law and the civil law. With the exception of such
situations, however, tax law applies to transactions governed by, and the
nature and legal consequences of which are determined by reference to, the
common law or the civil law.
[46]
But the parties are not yet at these later
stages of their respective cases. For now, therefore, what must be determined
is the true nature of the operations transacted in AES and Riopel.
The tax consequences of this determination will, if necessary, be decided in
another forum. This Court must decide whether the parties’ juridical acts,
which led to the notices of assessment, are consistent with their true common
intention and whether the tax authorities are entitled to have an erroneous
declaration of intention continue to apply. I will therefore consider whether
the respondents have a right to amend the acts and documents expressing their common
intention or to have them corrected, and to have the amended or corrected acts
and documents recognized.
F. Validity of Amendments to the
Acts
[47]
The ARQ argues emphatically that under Quebec
law the respondents cannot amend the documents associated with their tax
planning. Its argument focuses primarily on two grounds. First, the courts
should not have interpreted documents that were clear and unambiguous. It was
not open to them to intervene to correct those acts on the basis of the power
with respect to interpretation conferred on them in art. 1425 C.C.Q.
Second, if there was an error, it would have to serve as the basis for an
action to annul, not an attempt to correct the acts.
[48]
In the context of the application of
art. 1425 C.C.Q., I agree with the Court of Appeal that the
determination of the common intention, or will, of the parties represents a
true exercise of interpretation. The discrepancy seen in the evidence between
the common intention of the parties and the expression of that intention — or
the declared will — in itself raises an interpretation issue. It is necessary
to determine what the parties intended and where that intention can be found,
in the initial exchange of consents or in the written expression thereof. A
court must resolve this discrepancy, and under art. 1425, it is not
limited to determining what the parties intended, but can also determine where
their intention is to be found. Often, this will involve employing various
techniques of interpretation to ascertain the meaning of words or expressions
in an act in order, if necessary, to fill gaps in the text or find content in
it that can be well hidden.
[49]
In these two appeals, the determination of
meaning goes back to the root of the obligation. Which should prevail, the
proven common intention or the intention identified in the apparent act?
Although the interpretation exercise comes down to this basic choice, its
purpose nevertheless continues to be to seek the parties’ intention in
accordance with art. 1425 C.C.Q. (F. Gendron,
L’interprétation des contrats (2002), at p. 31). The situation that
emerges from the evidence in the case before the court is of critical
importance to this choice. If there had been a dispute between the parties
about the nature of their intention or if third parties had acquired
rights in relation to the legal situation created by the acts, the law of
evidence in civil matters would have placed certain obstacles in the way of
this interpretation exercise. For example, authentic acts and private writings
are proof of their content (arts. 2818 and 2829 C.C.Q.). Moreover,
the imperatives of certainty and stability of transactions and of protection of
the rights of third parties support this cautious approach dictated by the
law of evidence when it comes to contradicting or modifying the terms of a
writing (Sobeys Québec inc. v. Coopérative des consommateurs de Sainte-Foy,
2005 QCCA 1172, [2006] R.J.Q. 100 (C.A.), at para. 54, per Bich J.A.).
[50]
There is no such obstacle in the cases at bar.
It has been established that the true agreements of wills were as described by
the parties. The parties acknowledged the errors made in the writings giving
effect to their agreements and agreed to correct them. The correction of the
acts resulted from the actual will of the parties. There was no need to rely
for this purpose on a supposed power to correct based on the implicit powers of
the Superior Court. Moreover, since the parties could not turn back time, they
changed the “legal time” applicable to their agreements by, inter alia,
changing the dates originally contemplated for their performance to dates that
would enable them to be carried out effectively. Such a stipulation, although
once again subject to the rights of third parties, was valid as between the parties
(M. Cresp, Le temps juridique en droit privé, essai d’une théorie
générale (2013), at pp. 116‑26).
[51]
It was open to the courts to intervene to find
that the amendments made by the parties to the acts at issue were legitimate
and necessary. Their intervention was justified by the substantive law and was
not precluded by Quebec’s rules of civil procedure. The issue was argued in an
adversarial process. The revenue agencies were impleaded, as they had to be,
in accordance with art. 5 C.C.P. and the fundamental rules of civil
procedure. Since there was a real dispute about the nature of the parties’
common intention, the issue could be brought before the Superior Court, and a
motion for rectification was the normal way to do so. The motion enabled that
court to intervene to consider conclusions that were, first and foremost,
declaratory. What was often called rectification in the course of these
proceedings basically involved recognizing the parties’ amendments and finding
that they were legitimate and necessary.
[52]
In the final analysis, the court’s intervention
was based on the fundamental rules of contract law, which is premised on a
principle of consensualism and in which a fundamental distinction exists
between the exchange of consents and the written expression of that exchange.
Quebec’s law of evidence in civil matters reinforces this distinction between
internal will — or true intention — and declared will. For example, although
that law gives particular weight to the probative value of authentic acts, it
nonetheless includes a procedure — improbation — for challenging such acts.
Improbation enables a court to rectify an act in which the public officer
responsible for executing it, such as a notary, inserted false statements. It
is now accepted that a court can correct such an act to make it consistent with
the parties’ intention (P.‑Y. Marquis, “L’inscription de faux et la
correction des actes notariés” (1990), 92 R. du N. 407, at
p. 426). The private writing is also a form of expression of a common
intention. If such a writing contains an error, particularly one that can, as
here, be attributed to the taxpayer’s professional advisor, the court must,
once the error is proved in accordance with the rules of evidence in civil
matters, note the error and ensure that it is remedied. In the civil law, the
tax authorities do not have an acquired right to benefit from an error made by
the parties to a contract after the parties have corrected the error by mutual
consent.
[53]
The common intention of the parties was
expressed erroneously in all the writings prepared to carry out the tax plans
on which they had agreed. The Court of Appeal held that it was possible to
remedy those errors and correctly identified the common intention of the
parties. I would not interfere with its decisions.
[54]
However, the judicial recognition of the
validity of the amendments made by the parties in this case to the writings
recording their agreements must be accompanied by certain reservations and a
word of warning. Taxpayers should not view this recognition of the primacy of
the parties’ internal will — or common intention — as an invitation to engage
in bold tax planning on the assumption that it will always be possible for them
to redo their contracts retroactively should that planning fail. A taxpayer’s
intention to reduce his or her tax liability would not on its own constitute
the object of an obligation within the meaning of art. 1373 C.C.Q.,
since it would not be sufficiently determinate or determinable. Nor would it
even constitute the object of a contract within the meaning of art. 1412 C.C.Q.
Absent a more precise and more clearly defined object, no contract would be
formed. In such a case, art. 1425 could not be relied on to justify
seeking the common intention of the parties in order to give effect to that
intention despite the words of the writings prepared to record it. As I
mentioned above, the agreements between the parties in both appeals were
validly formed in that, according to evidence that the ARQ did not contradict,
they provided for obligations whose objects were sufficiently determinable.
These agreements provided, for the corporations in question, for the
establishment of determinate structures that would, had they been drawn up
properly, have made it possible to meet the objectives being pursued by the
parties. The subsequent amendments did not alter the nature of the structures
contemplated at the outset. All they did was amend writings that were supposed
to give effect to the common intention, an intention that had been clearly
defined and that related to obligations whose objects were determinate or
determinable.
G. Review of Juliar
[55]
In oral argument, the intervener, the Attorney
General of Canada, asked this Court to consider and reject a line of authority
that has developed, he said, since the Ontario Court of Appeal’s decision in Juliar.
In his view, that line of authority has broadened the scope of application of
the common law remedy of rectification in tax cases and is incompatible with the
conditions for exercising the power of rectification as laid down by this Court
in Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009]
1 S.C.R. 157, and Performance Industries Ltd. v. Sylvan Lake Golf &
Tennis Club Ltd., 2002
SCC 19, [2002] 1 S.C.R. 678 (see also A. Swan and
J. Adamski, Canadian Contract Law (3rd ed. 2012), at
pp. 768‑70). The two appeals heard by this Court are governed by
Quebec civil law and are not appropriate cases in which to reconsider the
common law remedy of rectification. I will therefore refrain from criticizing,
approving or commenting on the application of that remedy by the Canadian
courts on the basis of Juliar.
V. Conclusion
[56]
For these reasons, I would dismiss the ARQ’s
appeals in these two cases, with costs against it throughout, in both cases.
Appeals dismissed
with costs throughout.
Solicitors for the appellant: Larivière Meunier,
Montréal, Sainte‑Foy.
Solicitors for the
respondents Services Environnementaux AES inc. and Centre Technologique AES inc.: Norton
Rose Fulbright Canada, Montréal.
Solicitors for the
respondents Jean Riopel, Christiane Archambault and Entreprise J.P.F. Riopel inc.: Séguin
Racine Avocats Ltée, Montréal.
Solicitor for
the intervener: Attorney General of Canada, Montréal.
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