Citation: 2007TCC336
Date: 20070904
Docket:
2005-394(GST)G
BETWEEN:
VILLE DE RICHMOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from an assessment of Goods and Services Tax (GST) under the Excise Tax Act
(“the Act”). The assessment bears the number 9130311, is dated
April 21, 2004, and pertains to the period from
October 1, 2002, to December 31, 2002.
Issue
[2] Essentially, the issue in this case is
whether a cancellation of an exchange of immovables, agreed upon by the parties
on November 12, 2004, can be set up against the Respondent. If so,
the Appellant owes no GST.
[3] The relevant
sections of the Excise Tax Act are sections 123, 165, 169, 199,
209, 221, 228 and 259.
The facts
[4] In making and confirming
the assessment under appeal, the Respondent relied on certain assumptions of
fact listed at paragraph 11 of the Reply to the Notice of Appeal. Those
assumptions are as follows:
[TRANSLATION]
(a) The facts admitted to above.
(b) During the period from October 1, 2002, to
December 31, 2002 ("the period"), the Appellant was a registrant
for the purposes of the GST.
(c) During the period, the Appellant, being a
municipality, was a "public service body".
(d) On November 18, 2002, the Appellant was
the owner of a building located at 375 7th Avenue in Richmond.
(e) On the same date, the Appellant was the
lessee of a building owned by the Comité de Promotion Industrielle de la Ville
de Richmond ("CPIR") and located at 790-800 Hayes Street in Richmond.
(f) The Appellant used the building located
at 790-800 Hayes Street for municipal purposes, and, in particular, for its
roadways and fire departments.
(g) By notarial contract dated November 19,
2002, Ville de Richmond ("the Town") and CPIR exchanged the
aforementioned buildings.
(h) Thus, under the deed of exchange dated
November 19, 2002, the Appellant became the owner of the building located
at 790-800 Hayes Street in
Richmond, and the CPIR became
the owner of the building located at 375 7th Avenue in Richmond.
(i) According to the aforementioned notarial deed
of exchange, the value of the building located at 375
7th Avenue in Richmond was $850,000.
(j) In
the GST return that it submitted for the quarter that ended on
December 31, 2002, the Appellant failed to report and pay the GST in
respect of this transaction.
(k) By virtue of the exchange, GST was payable
on the consideration, namely, the building located at 375 7th Avenue.
[5] The Appellant
Ville de Richmond (sometimes referred to herein as "the Town")
was assessed by notice of assessment issued under the Act on April 21,
2004, in respect of the period from October 1, 2002, to
December 31, 2002.
[6] The assessment
is based on the building exchange deed, dated November 19, 2002, between the
Appellant and the Comité de Promotion Industrielle de la Ville de Richmond ("CPIR"),
a non-profit organization.
[7] Prior to the
exchange, the Appellant owned a building formerly used in connection with the
operations of H. H. Brown Canada Ltd. The building, located
at 375 7th Avenue in Richmond, became vacant. The Appellant and CPIR
therefore agreed that CPIR would manage the building in order to meet the
Town's economic needs.
[8] For reasons
unrelated to the management of the building at 375 7th Avenue, the Appellant
became the lessee of a building that belonged to CPIR; that building, located
at 790-800 Hayes Street in Richmond, was used to house municipal services.
[9] In view of this
cross-ownership of the buildings, CPIR proposed to the Appellant that the
ownership of their respective buildings be exchanged. The Appellant accepted
the proposal.
[10] Consequently,
the parties entered into an exchange agreement that was signed before
Denis Tanguay, notary. Under the terms of the deed of exchange,
the Appellant became the owner of the building located at 790-800
Hayes Street, and CPIR became the owner of the building located at 375 7th Avenue in Richmond.
[11] The Appellant
neither reported nor paid the GST under the Act because it believed, in completely
good faith, that no GST was payable.
[12] Following an
audit by the Minister of National Revenue ("the Minister") with
respect to the period from October 1 to December 31, 2002, it was
determined that the transaction was taxable. The Appellant and CPIR then signed
a deed of cancellation dated November 12, 2004, on the ground that
there had been a defect of consent. The purpose of the deed was to restore the
parties to the condition that they were in prior to the exchange, and it was
hoped that this would retroactively cancel the tax consequences of the
exchange.
[13] The Appellant called
Martin Lafleur and Guylain Beaudoin as witnesses in support of its case. Both
gentlemen are lawyers, and hold senior management positions with each of the
parties to the contract on which the assessment is based, dated November 19,
2002 (Document No. 4) [and] to the second contract, signed on
November 12, 2004, entitled [TRANSLATION] "Exchange Cancellation –
Document No. 5".
[14] Initially, Mr.
Lafleur and Mr. Beaudoin invoked various theories in an attempt to explain and
justify the facts and circumstances of the cancellation, emphasizing that the
consent to the taxed transaction was vitiated by reason of incomplete
information, if not a lack of knowledge. However, they ultimately admitted and
acknowledged that the only explanation, or the only reason for the deed of cancellation,
was the issuance of the assessment that they had not anticipated at the time
that the contract of exchange was entered into.
[15] After considering
the matter in terms of the percentage of occupancy for municipal purposes, the
municipality determined that this avenue was not to its advantage, and the
parties then agreed that the only alternative was a cancellation.
[16] Their next step was
to mandate the same notary to draft the "deed of cancellation" of the
contract signed on November 19, 2002.
[17] Paragraph 6 of the
[TRANSLATION] "Exchange cancellation – Document No. 5" provides as
follows:
[TRANSLATION]
6- The parties
believe that there was, inter alia, an error as to the nature of the
contract, the object there of and various essential determinative elements of
each party's consent, including, but not limited to, an error as to the
intended use of each buildings, the value of each building and the absence of a
cash adjustment, which absence was, under the circumstances, an error.
[18] Despite the verbiage
concerning the reason for the cancellation, there is no doubt that the
fundamental purpose thereof was to avoid the payment of the assessment under
appeal, because both contracting parties' persons in authority, namely
Mr. Lafleur and Mr. Beaudoin, both of whom are lawyers, admitted to
this, in a manner that leaves no room for equivocation or interpretation.
[19] Indeed, this is
shown very clearly by two excerpts from the testimony that each of them gave.
Cross-examination of Martin Lafleur by
Michel Morel at pages 26, 27, 29 and 32:
[TRANSLATION]
Q. Yes, but, Mr. Lafleur, you
agree with me, do you not, that the reason that the transaction was cancelled
was the GST and QST consequences?
A. I agree that there was
definitely a consequence to the transaction.
Q. Yes, but the only reason —
and I am coming back to this question — the only reason that the transaction
was cancelled was the GST and QST consequences, correct?
A. Well, seeing that we are before you, that
is certainly true.
. . .
Q. Yes,
Mr. Lafleur, I put it to you that there was no error as to the intended purpose
of the buildings, because the Town wanted ... the Town wanted to use, for
municipal purposes, the building that it was already renting from CPIR. Do you
agree with me?
A. Yes.
. . .
Q. No, I am talking
about the time ... Could we please go back, Mr. Lafleur, to 2002, when you
signed the deed of exchange? The parties were aware of the exact nature of the
contract that they were signing, correct?
A. The exchange
contract, yes.
Q. That's right.
The only thing that caused you to reconsider that exchange was when you
received the GST and QST assessments roughly in 2004, is that correct?
A. It's certain
that when the municipality called me, and said that what we had agreed to was
not transpiring. I said: Listen, if what we agreed to was not transpiring, that
means that the basis of our consent at the time that we intended to do this ...
we are going to return to our initial condition. That was our immediate
reaction. In fact, when I think ... when the Department called me, I
immediately referred to that solution. I said: Listen, if this is the
consequence of what we did, we will put ourselves right back where we were.
Because, at the time of our transaction, that's not what we had in mind.
. . .
Cross-examination of Martin Lafleur by
Michel Morel, at pages 41-43:
A. That one? I will look at it. Yes.
Q. So the grounds of objection are set out as
follows: "We are objecting because will be seeking a cancellation."
It says, "We will be seeking", so this was written on May 17,
2004, before the cancellation.
"We
are objecting because we will be seeking the cancellation of the contract of
transfer between CPIR and the Town, which will place the parties back in the
situation that they were in before the transaction. This will automatically
cancel the GST and QST assessment."
Period. You agree
with me that the grounds of the notice of objection do not, in any way, reflect
the provision contained in paragraph 6 of the 2004 contract, right?
A. Literally, it is not the same thing.
Q. Absolutely. Literally, it is not the same
thing. Now, could you kindly look at the Notice of Appeal? I would refer you to
paragraphs 10 and 11 of the Notice of Appeal. Paragraph 10 reads:
"The Appellant neither reported nor
paid GST under the Act after this exchange, because it believed, in completely
good faith, that no GST was payable because there was no cash supplement upon
the exchange."
Paragraph 11 reads:
"The defect in the Appellant's
consent, which results from the error as to GST liability at the time that the
exchange was entered into, was discovered in the course of an audit that
preceded the issuance of the aforementioned assessment."
Do you agree with me, Mr. Lafleur, that
the only reason for the defect in consent alleged in the Notice of Appeal was
the GST-related consequences?
A. So it would seem.
Q. So it would seem. Therefore, none of the
factors set out in paragraph 6 of the 2004 contract are reflected in the notice
of appeal either?
A. Well, the GST- and QST-related elements are
reflected. And we're obviously before a court with respect to that aspect, yes.
. . .
Cross-examination of Guylain Beaudoin by
Michel Morel, at pages 65 and 67-69:
Q. It was indeed also very satisfied in 2004,
until the cancellation. It started to be less satisfied with the building when
the Revenu Québec auditor arrived there, did it not?
A. Well, to tell you the truth, Your Honour,
if I may, when the auditor showed up, it wasn't about the quality of the
building, a hidden defect, or some defect in the building. Actually, it was
about the consequence, about the fact that a huge expenditure vitiated our
contract. This is what the dissatisfaction was really about.
. . .
Q. Precisely, Mr. Beaudoin, we have just
learned ... we know that you are a lawyer and we have just learned that Mr.
Lafleur is a lawyer as well. You were with Mr. Tanguay, a notary, before
you signed that contract, so you were very informed parties who drafted clause
6.
A. I did not draft clause 6.
Q. When I say "you" ... listen, you
represent the Town, which is one of the parties to the contract, right?
A. Indeed, and, as a party, when we met with
the notary, we were very clear with him, because, as far as we were concerned,
since there was an expenditure, certain sine qua non conditions of the
contract were vitiated; he suggested this paragraph, which seemed quite
broad in scope, but was not window-dressing.
Q. Earlier, in connection with clause 6, you
used the expression "better safe than sorry", is that right?
A. Yes, that's right.
Q. You agree with me that, in your notice of
objection, your only complaint about the assessment, that is to say, the
assessment resulting from the cancellation, is about the cancellation of GST
and QST. You have read your notice of objection, Mr. Beaudoin?
A. Absolutely. In our minds, Your Honour, this
was the application of elementary legal principles regarding an essential
clause of the contract.
Q. On May 17, 2004, when you signed this
notice of objection, Mr. Beaudoin, the Town still owned the building on
Hayes Street, right?
A. Yes.
Q. Is the Town still satisfied with the
building?
A. There are no structural defects, though it
is an oversized building.
Q. No problems with the intended use of the
building, Mr. Beaudoin?
A. In terms of the intended use of the
building, I believe the notary meant to say that it had to do with the 50%
occupancy rule.
Q. You agree with me that this could mean
plenty of things, but could also mean nothing?
A. Hence the importance of our testimony,
counsel.
Q. You agree with me, Mr. Beaudoin, that, in
the Notice of Appeal, the only ground for cancellation that is alleged in
support of the Town's appeal pertains to the GST assessment that you received?
A. Indeed, and that is an extremely large
expenditure.
. . .
[20] The parties' submissions
can be succinctly summarized as follows.
The Appellant's
submissions:
[21] The Appellant
submits that there was a defect of consent stemming from a lack of awareness
of the applicable provisions of the Excise Tax Act at the time that
the exchange agreement was made.
[22] It submits that
the fundamental reason for its consent was that the exchange would give rise to
no financial obligations whatsoever.
[23] Indeed, it is
saying that if it had known, at the time of the exchange, that GST was payable
on the value of the consideration despite the absence of a cash adjustment, it
would not have signed the deed of exchange.
[24] Lastly, the
Appellant submits that the cancellation of the exchange, and of the effects
thereof, may be set up against the Respondent.
The Respondent's submissions:
[25] The Respondent,
for her part, submits that the November 12, 2004, cancellation of the
deed under which the buildings were exchanged is valid as between the parties
but cannot be set up against the Respondent.
[26] The Respondent
submits that the Appellant had to report the assessed GST to the Minister and
remit it.
[27] Lastly, the
Respondent submits that the cancellation of the deed of exchange is merely an
attempt to avoid paying the GST that is due.
Analysis
1. The relevancy of the civil
law
[28] Before analysing
the validity and the effect of the cancellation of the deed of exchange, it is
important to reiterate that the transactions between the parties are governed
by Quebec civil law.
[29] The Appellant
cites section 8.1 of the Interpretation Act, R.S.C. 1985, c. I‑21,
which reads:
Both the common law and the civil law are equally
authoritative and recognized sources of the law of property and civil rights in
Canada and, unless otherwise provided by law, if in interpreting an enactment
it is necessary to refer to a province’s rules, principles or concepts forming
part of the law of property and civil rights, reference must be made to the
rules, principles and concepts in force in the province at the time the
enactment is being applied.
[Emphasis
added]
[30] Thus, in
determining the effect and validity of the cancellation of the contract, the
provisions of the Civil Code of Québec, S.Q. 1991, c. 64 (CCQ), not
common law doctrines, are relevant.
[31] In particular, the
common law doctrines of rectification do not obtain in Quebec, except to the
extent that Quebec courts have
addressed them.
[32] According to an
explanatory article by tax law specialists:
There is an obvious corollary to the general rule that tax is
imposed according to the legal relationships or transactions established by the
parties. That corollary is that a legal relationship or transaction will not
be recognized for tax purposes if that relationship or transaction has not been
validly established under the rules of the general law. Hogg, Magee and Li,
Principles of Canadian Income Tax Law, 18.8 ‑ Rectification.
[Emphasis added]
[33] Tax law is an
accessory system of law. In Lageux & Frères Inc.,
[1974] F.C. 97, the Court wrote, at page 103:
[F]iscal law is an accessory system, which
applies only to the effects produced by contracts. Once the nature of the
contracts is determined by the civil law, the Income Tax Act
comes into effect, but only then, to place fiscal consequences on those
contracts. Without a contract, without a law and an obligation, there can be no
fiscal levy. Application of the Income Tax Act is subject to a civil
determination, whether such a determination be according to civil or common
law.
[34] In Dale v.
Canada, [1997] F.C.J. No. 476 (QL) at paragraph 13, the
Court stated:
In determining whether a legal transaction will
be recognized for tax purposes one must turn to the law as found in the
jurisdiction in which the transaction is consummated. Often that determination will be
made without the aid of guiding precedents which are on point and, hence, the
effectiveness of a transaction may depend solely on the proper application of
general common law or equitable principles. In some instances it will be
necessary for the Tax Court to interpret the statutory law of the province. As
for the Minister, he must accept the legal results which flow from the proper
application of common law and equitable principles, as well as the
interpretation of legislative provisions.
[Emphasis added]
[35] Indeed, this
principle was propounded in Wilson v. The Queen, [1983] 2 S.C.R. 594:
That decision establishes the general rule that
an order of a superior court cannot be attacked collaterally unless it is
lawfully set aside.
[36] The last point
to be made about this aspect of the matter is that the validity of the two
contracts between the Appellant and CPIR must be determined based on the
requirements of the Civil Code of Québec.
2. The
validity of the deeds of exchange and cancellation under Quebec civil law
[37] The equitable
doctrine of rectification is not recognized by the Quebec civil law. In the
common law system, rectification is associated with the concept of mistake.
There are three types of mistake in the common law system: common mistake,
mutual mistake and unilateral mistake. All three can be rectified under certain
circumstances.
What must be borne in mind is that [TRANSLATION] "[w]hen the
mistake goes to consent, the rules of rectification cannot intervene."
[38] This is
especially relevant because the Appellant is indeed arguing that the deed of
exchange is null based on the principle of vitiated consent.
[39] In Quebec, error
is defined with reference to consent.
There are two types of error: material errors and errors of consent. The first
type of error does not vitiate consent and can be corrected under certain
circumstances, whereas the second type, an error of consent, causes the
contract to be either absolutely or relatively null (articles 1416-1419 CCQ).
[40] In the case at
bar, the Appellant argues that it can have the deed of exchange set aside
because the contract is null, as the Town made an error of consent, thereby
making it unnecessary to address the question whether there was a material
error, also known as an error in form.
[41] At page 116 of
the transcript, the Appellant submits:
[TRANSLATION]
Civil law provides us with a method
that can be used to correct a purely material error. However, errors that
vitiate consent cause the contract to be invalid, and, where such an error has
been made, one does not rectify the document or apply to have it corrected;
rather, the document is cancelled.
[Emphasis
added]
[42] In other words,
in order to be able to annul the deed of exchange, the Appellant must show
that it made an error of consent. However, since it had CPIR's blessing, it
chose not to do this, but, rather, to enter into a second contract under which
the deed of exchange was cancelled so that it would not have to ask the courts
to declare it null. The civil law doctrine calls this [TRANSLATION]
"uncontested nullity" or [TRANSLATION] "conventional
nullity."
[43] The Appellant
submits that, since it entered into the second contract before a notary, the
Court has no choice but to acknowledge the transactions between the Appellant
and CPIR.
[44] The Appellant
cites Zahinda for the proposition that [TRANSLATION] "it is not necessary
to obtain a court order to correct a document that does not correctly reflect
the parties' intentions."
However, it bears repeating that the corrections referred to in Mr. Zahinda's
article are related to material errors, not errors of consent; thus, this
argument does not apply to the case at bar.
[45] Based on the
same article, the Respondent submits that it is only where the nullity of a transaction
has been declared by a court that such nullity is binding on Revenu Québec.
Judge Archambault of this Court stated as follows in Ledoux v. The
Queen, [1997] TCJ No. 1097 (98 DTC 1034
(French) affirmed, 2000 DTC 6465 (Eng.), application for leave to
appeal to the Supreme Court dismissed, 263 N.R. 395):
36 Before deciding whether this argument
is valid, it is worth recalling the approach that must guide the Court in this
undertaking. When taxpayers have engaged in transactions the primary purpose
of which is to obtain tax benefits, the courts must be especially diligent in
ensuring that those transactions correspond to the taxpayer's true intent and
also that they are legally valid and complete transactions. The courts have
developed several judicial tools to help them in this undertaking, in
particular the concept of the sham, the ineffective operation and the actual
nature of a transaction. In Stubart Investments Ltd. v. The Queen,
[1984] 1 S.C.R. 536, at 545, Estey J. proposed the following definition of
a sham:
. . . a
transaction conducted with an element of deceit so as to create an illusion
calculated to lead the tax collector away from the taxpayer or the true nature
of the transaction; or, simple deception whereby the taxpayer creates a facade
of reality quite different from the disguised reality.
37 Application of the second tool is
relatively straightforward. The Court must minutely scrutinize whether the
transaction used by the taxpayer, such as a contract, is a real transaction from
the standpoint of formal as well as substantive conditions. Urie J. gave a good
description of the application of this tool in Atinco Paper Products Ltd. v.
The Queen, 78 D.T.C. 6387, at 6395:
It is
trite law to say that every taxpayer is entitled to
so arrange his affairs as to minimize his
tax liability.
No one has ever suggested that this is
contrary to public
policy. It is equally true that this
Court is not the
watch-dog of the Minister of National
Revenue.
Nonetheless, it is the duty of the Court
to carefully
scrutinize everything that a taxpayer
has done to ensure
that everything which appears to have
been done, in fact,
has been done in accordance with
applicable law. It is
not sufficient to employ devices to
achieve a desired
result without ensuring that those
devices are not simply
cosmetically correct, that is correct in
form, but, in
fact, are in all respects legally
correct, real
transactions. If this Court, or any other
Court, were to
fail to carry out its elementary duty to
examine with
care all aspects of the transactions in
issue, it would
not only be derelict in carrying out its
judicial duties,
but in its duty to the public at large.
[My emphasis.]
38 Stubart
provides an illustration of this duty of the courts: in that case the taxpayer
met the standard. In Atinco, however, the taxpayers were not so
successful.
39 The third tool, the concept of the
actual nature of the transactions, has prompted and continues to prompt
problems of application. According to that theory, in assessing a transaction
the courts must look at the commercial and economic reality of the transaction.
In Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, at 53, Dickson C.J.
said:
Assessment
of taxpayers' transactions with an eye to commercial and economic realities,
rather than juristic classification of form, may help to avoid the inequity of
tax liability being dependent upon the taxpayer's sophistication at manipulating
a sequence of events to achieve a patina of compliance with the apparent prerequisites
for a tax deduction.
40 There are those who think, and I
agree with them, that this approach does not mean the courts may disregard the
legal consequences of a transaction. In Continental Bank of Canada et al. v.
The Queen, 94 D.T.C. 1858, at 1869, Judge Bowman clarified the meaning of
this principle as follows:5
So far as
the broader question of substance versus form is concerned, we should at least
be clear on what we are talking about when we use the elusive expression
"substance over form". Cartwright, J. (as he then was) said in Dominion
Taxicab Assn. v. M.N.R., 54 D.T.C. 1020 at p.1021:
It is well
settled that in considering whether a particular transaction brings a party
within the terms of the Income Tax Acts [sic] its substance rather than its
form is to be regarded.
His
Lordship did not elaborate but in light of other authorities I do not think
that his words can be taken to mean that the legal effect of a transaction is
irrelevant or that one is entitled to treat substance as synonymous with
economic effect. The true meaning of the expression is, I believe, found in the
judgment of Christie, A.C.J.T.C.C. in Purdy v. M.N.R., 85 D.T.C. 254 at
p. 256, where he said:
It must be borne in mind that in deciding questions
pertaining to liability for income tax the manner in which parties to
transactions choose to label them does not necessarily govern. What must be
done is to determine what on the evidence is the substance or true character of
the transaction and render judgment accordingly.
[Emphasis added]
[46] Thus, the
Appellant must show that its consent was defective. Specifically, it must
prove that the error of consent was determinative and prevented it from
entering into the contract of exchange and from consenting to it in a free and
enlightened manner.
[47] The facts, as
established by the evidence, suggest three possible scenarios:
(1) there was an
error that did not vitiate the Appellant's consent at the time that it entered
into the contract of exchange;
(2) there was an error with
respect to an essential and foundational element of consent, but since the
error is inexcusable, it does not warrant the retroactive cancellation of the contract;
or
(3) consent was vitiated in
such a manner as to cause the contract of exchange to be null retroactively.
[48] Article 1400 CCQ
explains the situations in which error vitiates consent:
1400. Error vitiates consent of the parties or of one of them where
it relates to the nature of the contract, the object of the prestation or
anything that was essential in determining that consent.
An inexcusable error does not constitute a defect of consent.
[Emphasis added]
[49] Baudouin and
Jobin write:
[TRANSLATION]
Error is a "belief inconsistent
with the truth," a "discrepancy between what one intends and how one
has expressed one's intent," which compromises the integrity of one's
consent to a juridical act. However, the circumstances in which error is
allowed to result in the nullity of a contract are subject to certain limitations
aimed at protecting the stability of contracts. Only certain types of errors,
which have a determinative influence on consent, will be allowed to annul a
contract.
[50] Clause 6 of the
contract to cancel the deed of exchange lists the reasons therefor:
[TRANSLATION]
The parties are of the opinion that there were,
among other things, errors with respect to the nature of the contract, the
object of the prestation, and various elements that were essential in
determining each party's consent, including, among other things, an error with
respect to the intended use of each building, the value of each building and
the absence of a cash adjustment, which absence was erroneous under the
circumstances.
[51] The Respondent
vigorously contested the Appellant's submissions, notably with respect to the
error concerning:
(1) the nature of
the contract;
(2) the object of
the prestation;
(3) the intended use
of each building; and
(4) the value of
each building.
[52] The facts show
that the only element giving rise to the error which was allegedly essential in
determining consent was the absence of a cash adjustment. Indeed, the excerpts from the
testimony of Mr. Lafleur and Mr. Beaudoin, reproduced at paragraph 19 of this
judgment, show this conclusion very convincingly.
[53] The Appellant
submits that one of the essential or determinative elements of consent was the
fact that there were no outlays of any kind following the exchange of the
buildings.
[54] If such an error
did vitiate its consent, it can, in theory, seek the cancellation of the deed
of exchange based on article 1407 CCQ:
1407. A person whose consent is vitiated has
the right to apply for annulment of the contract; in the case of error
occasioned by fraud, of fear or of lesion, he may, in addition to annulment,
also claim damages or, where he prefers that the contract be maintained, apply
for a reduction of his obligation equivalent to the damages he would be
justified in claiming.
[Emphasis added]
[55] In order to have
the first contract (that is to say, the deed of exchange) cancelled, the
Appellant must show that the error, which must be a juridical fact, is an error within the meaning of the
CCQ; and that the nullity of the deed of exchange is effective against third
persons, including the Minister.
[56] As for the
Respondent, she submits that, according to the case law and the doctrine to
which the Appellant has referred, the error was not related to an essential
element of consent, but was essentially economic in nature, and therefore may
not lead to the nullity of the deed of exchange. The Respondent refers to Anna
Del Peschio‑Carpanzanon v. 3660524 Canada Inc., [2005] J.Q. No. 1747 (QL):
[TRANSLATION]
33. Although error is one of the grounds based on which
contracts can be cancelled, only certain errors entitle a party to apply for
the resolution of a contract. The principle that contracts should be stable
remains a foremost and essential principle of Quebec civil law.
34. It is only if and when special
and specific circumstances have been proven, and it has been shown that the
error was related to the essential element that caused the parties to enter
into the contract, that it can be cancelled or resolved.
35. It is also important to note that
error will never be a ground for nullity where it is inexcusable or pertains to
the economy of the contract, or even if it is a mere error of form.
36. In Les obligations, supra,
Baudouin and Jobin specify as follows:
[TRANSLATION]
211 - Economic error - Since there is a principle that a contract
cannot be cancelled or revised on the basis of lesion (art. 1405 CCQ) and the
Civil Code must be interpreted consistently, a certain limitation must be
applied to error. An economic error, or an error with respect to the value of
the object of a prestation, is generally not considered a ground of nullity.
[See Note 5 below]. . . .
Note 5: For example, see Racicot v. Bertrand,
[1976]
C.A. 441, rev'd [1979] 1 S.C.R. 441; J.-L. Baudouin, 1
Supreme Court L. Rev. 249; Québec (Communauté urbaine de) v. Constructions
Simard-Beaudry (1977) Inc., [1985] C.S. 983, aff'd J.E. 87-974
(C.A.); Beaurivage et Méthot Inc. v. Corporation de l'Hôpital du
St-Sacrement, [1986] R.J.Q. 1729 (C.A.);
Cayer v. Martel, J.E. 95-2071 (C.A.); Réalisations Solidel Inc.
v. Havre du village international Inc., J.E. 95‑1229 (S.C.);
Pineau, Existence et limites de la discrétion judiciaire, supra note
112, at 5‑6; Pineau, Burman and Gaudet, Obligations, no. 74, at
119-120; Tancelin, Obligations, no. 178, at 87.
37. In 1995, the Court of Appeal
issued the following reminder about economic error:
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[TRANSLATION]
As
we know from the doctrine and the case law, the second is that an error
pertaining merely to value, that is to say, [on the basis of economic error
(except, of course, in the event of lesion)], in principle, a cancellation
may not be sought.
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Indeed,
an error that is determinative as to consent is not an error related to the
principal consideration for the obligation. . . .
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.
. . In my opinion, one can indeed envisage situations in which the economic
imperatives of the proposed contract are absolutely central to the decision
to enter into a contract and therefore rise to the level of principal
consideration and very condition of the obligation. However, such a
determinative ground must still have been outwardly expressed.
. . . [See Note 6 below].
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Note 6: Cayer v. Martel (Que. C.A.)
Montréal, 500-09-001620-905, November 7, 1995, Rothman, Baudouin and
Deschamps JJ.A.
38. The accountant, Mr. Rabinovitch,
did indeed explain to the Court that the purpose for which 3660524 Canada Inc.
was created was a tax rollover. The transfer of the shares of CGI or
Global Creations Inc. into 3660524 Canada Inc. and the creation of the latter
company were intended as a way to avoid paying tax on the company's high
income.
39. It is true that this share
rollover was not supposed to have any other tax consequences, and that losing
this tax holiday was of no benefit to the shareholders.
40. Nonetheless, the evidence shows
that the main objective of the creation of that company was a tax rollover.
41. The Court of Appeal also wrote
the following on this subject in 1996:
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[TRANSLATION]
In
my opinion, one cannot empty the form of the existing contractual
relationship of all its meaning in order to tailor one's arguments to tax‑related
constraints after the fact. The Appellant opted for an assignment of a
contract of sale when it could just as well have chosen to proceed by way of
a contract of loan. Consequently, the Appellant must bear the consequences
tied to the form of contract that was chosen. Le Dain J.A., as he then
was, of the Federal Court of Appeal, wrote:
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The incidence of taxation depends on the manner in which a
taxpayer arranges his affairs. Just as he may arrange them to attract as
little taxation as possible, so he may unfortunately arrange them in such a
manner as to attract more than is necessary. [See Note 7 below.]
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Note 7: Banque Nationale Inc. (Crédit-bail)
v. Québec (Sous-ministre du Revenu), (C.A.) Montréal, 500-09-000351-932,
September 15, 1997, Beauregard, Nuss and Forget JJ.A, at 6, paragraph 30.
42. The case at bar is distinguishable
from B.E.A Holdings Inc. v. Trafsys Inc. [See Note 8 below] cited by the
Applicant, where B.E.A., an American company, purchased Trafsys Inc. of Canada.
The federal Act provides that, in such a process, the majority of Trafsys's new
board of directors must nonetheless be Canadian. B.E.A. therefore developed a
strategy in which a Quebec company would be created and would be the transferee
of all of B.E.A's holdings in Trafsys. After this, the two companies, Trafsys
Inc. and Trafsys Communications Inc., could be amalgamated.
Note 8: B.E.A. Holdings Inc. v. Trafsys Inc.
et Trafsys Communications Inc./Les Communications
Trafsys Inc., (C.A.)
Montréal, 500‑09‑013408-034, February 12, 2004,
Delisle, Chamberland and Morissette JJ.A; C.S. Montréal, 500‑05-074753-029,
April 16, 2003, per Dufresne J.
43. The Superior Court, before which
had been brought an action to cancel that transaction on the basis of an error
made in good faith, dismissed the claim.
44. The Court of Appeal reversed this
decision in a very succinct decision, writing:
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[1]
It is clear from the evidence that the factor that was essential in
determining the Appellant's agreement to participate in the sale of
November 19, 2001, was that the sale would have no tax
consequences.
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[2]
The objective was simply to resolve a governance issue, and the Appellant
merely sought to restructure in order to achieve it.
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[3]
Based on the very specific circumstances of the case at bar, the Appellant's
error was not inexcusable, and related to an essential element of the
consent.
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45. Upon a reading of this
decision, it appears that economic error can be a basis for annulling a
contract where the economic error pertains to the essential element of the
transaction. The absence of tax consequences was the determinative reason for
creating the Quebec company.
46. Now, in the case at bar, as we
have already seen, the tax consequences associated with the creation of the new
company was a rollover that deferred a tax liability.
47. The Ontario Court of Appeal had
to address a question similar to the instant tax issue, and, although its
decision is not fully apposite in the case at bar, it is worth noting. The
Court wrote:
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The second reason why I would not exercise equitable discretion
in the appellants' favour in this case is because it would seem to me that to
do so would run contrary to a well-established rule in tax cases that the
courts do not look with favour upon attempts to rewrite history in order to
obtain more favourable tax treatment. In this case, Ms. Ho took title in the
name of 002 rather than in the name of 225 because there was an income tax
advantage for her if she did so. She did not know that by doing so she would
suffer a very significant land transfer tax disadvantage. The cases seem to
hold consistently that tax liability is based upon what happened not upon
what, in retrospect, the taxpayer wished had happened.
The fundamental principle is stated by McKinlay J. in Re
Assaly and Minister of Revenue (1986), 56
O.R. (2d) 30 at p. 40:
. . . the law is quite clear that when a taxpayer orders his
affairs in a manner that attracts a tax in one amount, he cannot subsequently
claim that he should be taxed as if he had ordered his affairs in a different
manner, which would have attracted less tax.
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[57] Mr. Lafleur, the
director of CPIR, explained and described the reasons for the exchange in the
following terms:
[TRANSLATION]
In my capacity as director of the Comité de
Promotion Industrielle, I managed buildings, including a building that I rented
to the municipality as a municipal garage, and the municipality also asked me
to manage one of its own buildings for industrial
purposes. . . .
So, at a certain point each year, the people
from the municipality get together [for what is known in French as a lac-à-l’épaule]
to work out the broad outlines of their strategy.
. . .
It's an exercise in which each sector will
determine ... with respect to recreation, the economy or what you might call
social and community issues ... will ask the municipality, propose things, ask
it for some broad policy. From the economic standpoint, in the wake of the
situation that I explained to you, I made the following proposal to the town
council: Listen. You occupy a building that I built for commercial purposes ...
and it's still for commercial purposes because the municipality was paying me
rent, and I paid the GST and QST on that rent. . . . I told them this: This
building over here belongs to you, and that one belongs for me, so why don't we
do an exchange? Let me have your building for industrial purposes, and, well,
you occupy it as a garage. We'll exchange it ... Look, we'll do a straight
trade, and can give each other the buildings that way. Each building is of
equal value, and each will fulfil the respective parties' missions. The town
didn't want to manage buildings for industrial purposes anymore, but it had to
do so because the building was built in 1956.
[Emphasis added]
[58] It has been
established clearly, on a balance of probabilities, that the Appellant's
consent was not vitiated by one of the errors set out in
article 1400 CCQ.
[59] Mr. Lafleur
explained that the contract of exchange was entered into in order to
[TRANSLATION] "make things easier for everyone." Thus, the contract
of exchange was entered into for practical and rational reasons: the buildings
concerned would be easier, and, above all, more sensible to manage. These
appear to be economic circumstances that do not make the exchange of 2002 a
nullity.
[60] However, in B.E.A. Holdings
Inc. v. Trafsys Inc.,,
the Court held that a contract can be cancelled based on an economic error
where the error is the essential element of the transaction. Thus, in my
decision, I must assess whether the error alleged by the Appellant was
essential to its consent.
Essential but
inexcusable error
[61] The Appellant
submits that the error was not an economic error but, rather, an essential
error that vitiated its consent. The Appellant's two witnesses stressed
repeatedly, and in several different ways, that if the parties had known that
the transaction was taxable, it would never have taken place. In fact, this was
very clear from the testimony that each of them gave.
[62] The explanations
described in clause 6 of the contract of cancellation are not at all persuasive.
And it was quite clear to me that the notary essentially put his imagination to
work when he drafted the contents of that provision. The evidence does not
give rise to any confusion or even to any problem of interpretation.
The parties essentially agreed to cancel the transaction in order to avoid
the assessment.
[63] However, the
same evidence also raises the following question. Given the belief that the
transaction was not subject to the provisions of the Act that pertain to the
Goods and Services Tax, can the transaction be cancelled on the ground that
there was a defect of consent resulting from the lack of knowledge of the tax
consequences?
[64] I consider it
important to note from the outset that it would be unusual for ignorance of the
Act to be a valid ground for cancelling a contract, especially since all those
involved, notably the notary who was responsible for drafting the contract,
were, or should have been, knowledgeable.
[65] In addition, cancellation
has the effect of putting the parties back in the situation in which they would
have been before the juridical act that formed the basis of the assessment. On
the other hand, it is just as obvious that such a cancellation does not affect
the rights of third parties, including the Respondent.
[66] The Appellant's
evidence consisted of the testimony of Mr. Lafleur and Mr. Beaudoin. Both
of them have a legal education and, as very active participants, they explained
how the matter developed.
[67] Mr. Lafleur
testified as follows:
[TRANSLATION]
A. . . . Someone called me. I gave
him explanations that reflect what I am telling you this morning. After that, there
were notices of assessment and other notices, and now, we are before you.
Q. And what was your reaction to those notices
of assessment?
A. When they issued them, I said: Listen, I said
that it was clear that when we did this transaction, the sine qua non
factor in the whole matter ... especially considering that the context was a
municipality whose budget, let me tell you ... it
was absolutely certain that, as far as we were concerned, the sine qua non
basis of the exchange was that there was no impact, that is to say,
there was no outlay by either side, because this was really what is called a
transaction of convenience. This was done to make it easier for all of
us; in other words, instead of having something that you manage despite the
fact that it is not really in your field, and, conversely, the other building,
used for purposes that one would consider to be more related to community
services, well it would belong to the party that was rendering those services.
[68] Mr. Lafleur also
stated that one of the elements that were essential in determining both
parties' consent was that there would be no financial impact, meaning no
outlays at the time of the transaction. The following excerpt from the
transcript reveals a great deal about the contracting parties' intentions.
[TRANSLATION]
It was done on the condition that it would be a
trade, that there would be no impact, that it would cost the municipality
nothing, and this was always the very basis of the essence of our transaction;
it was a constant assumption that it would have no impact on our citizens. It
was completely O.K. for all of us.
. . .
[W]hen we carried out the transaction, the sine
qua non factor in the whole matter ... especially considering
that the context was a municipality whose budget, let me tell you ... it was
absolutely certain that, as far as we were concerned, the sine qua non
basis of the exchange was that there was no impact, that is to say, no outlay
for either side, because this was really what one would call a transaction of
convenience.
. . .
A. Obviously, we would not even have considered
the transaction ... it was clear that this was straight exchange.
[69] Guylain Beaudoin,
the Town Manager, explains:
[TRANSLATION]
A. …[I]t was clear in everyone's mind that this
was tax-neutral and expenditure‑free. So it was really an exchange of
convenience in that sense. We closed the transaction in November 2002. The
transaction deed, which Mr. Morel brought in earlier, refers to the
absence of a cash adjustment. When we appeared before the notary, I certainly
didn't sign at the same time as Mr. Martel, but we had received the
documents; we had met with the notary beforehand to explain the context of the
transaction to him. The explanation with respect to the GST and QST was that
since there was no cash adjustment and there were truly no outlays, this was a
tax-neutral transaction.
[70] According to the
Appellant's two witnesses, the consent was vitiated because there was an error
with respect to an essential element of the contract. The veracity of this
contention does not seem to be in dispute, although the evidence was that the
error was rather economic in nature; it did not relate to an essential element
of consent. It is clearly reasonable to believe that the contracting parties
would not have entered into the transaction if they had known that there would
be an assessment, since the Town did not have the financial wherewithal to
handle an assessment.
[71] Having
determined that the Appellant has met its onus of proving that there was
genuinely an error, I must now determine whether it was an inexcusable error
within the meaning of paragraph 1400(2) of the CCQ.
[72] Beaudoin and
Jobin write that, in excluding the possibility of cancellation in the event of
an inexcusable error, Quebec law draws its inspiration from French law. This
rule against cancellations encompasses the notion that the order established by
contracts should be stable
and the idea that each person must inform him or herself before entering into a
contract or transaction. It is a well-established rule. And since the issue of
the actors' personal or professional liability does not come within this
Court's jurisdiction, I shall not devote any more time to it.
[73] The
aforementioned authors are of the opinion that inexcusable error by one party
to the contract must be proven by the other.
Here, not only did CPIR, the "other party" in this instance, not
dispute the existence of an error of consent, it agreed that such an error was
made because it has an interest in the success of the Town's appeal, having
consented to the cancellation of the contract before the notary.
[74] The case at bar
is unusual in that both parties admit to the existence of the error, and this
unusual aspect poses the problem of determining who has the burden to prove
that the error was inexcusable. In theory, it lies on the co-contractor who is
opposed to the contract's cancellation.
However, in the case at bar, the Appellant's co-contractor consented to the cancellation
of the deed of exchange.
[75] Assuming that
the Appellant has shown that the error meets the requirement set out in article
1400(1) CCQ, it is up to the Respondent to show that the error was inexcusable.
[76] What does the
evidence on this point show us? I believe that the following excerpt answers
this important question.
[TRANSLATION]
Q. I refer you to the last paragraph of page 8...
A. Yes...
Q. ...where it says, among other things:
[TRANSLATION] "Consequently, the liability to pay the Goods and
Services Tax and Quebec Sales Tax is borne by each party that has received an
immovable in the exchange."
A. Yes, and, as I noted earlier, the distinctive
element of the transaction that caused us to consent to it was that there was
no such impact...
Q. Naturally, before you signed that
transaction, the legal document was seen by your legal advisors, right?
A. We don't have legal advisors, but yes, I read
it.
Q. You read it. In any event, there was a notary
who prepared that deed, a notary by the name of Denis Tanguay, correct?
A. Yes.
Q. I imagine that the contract was reviewed by
Mr. Tanguay and that the parties were present before the exchange was signed?
A. Yes, indeed.
Q. If I understand correctly, the only reason
that you proceeded to annul that deed of exchange two years later was that the municipality of Richmond had to pay GST and QST.
A. That was the consequence, but the actual
basis was the following thing that I was told when they brought it to me:
Look, when we entered into the transaction with you — the CPIR, that is — you
told us that there would be no actual outlay in relation to it, and that was
the basis. The municipality told me that if they had known, they would never
have consented to that, or to anything else. I said listen, that was why we
took part in it.
Q. Yes, but, Mr. Lafleur, you agree with me, do
you not, that the reason that the transaction was cancelled was the GST and QST
consequences?
A. I agree that there was definitely a
consequence to the transaction.
Q. Yes, but the only reason — and I am coming
back to this question — the only reason that the transaction was cancelled was
the GST and QST consequences, correct?
A. Well, seeing that we are before you, that is
certainly true.
. . .
Q. So, Mr. Tanguay had explained this at the
time that ...
A. Mr. Tanguay. Yes.
. . .
Q. Just a few questions to clarify. Mr. Morel
noted that the deed of exchange contained a tax clause. At the time that you
signed, or at any earlier time, did Mr. Tanguay give you advice about that, or
tell you that there was no tax? What did Mr. Tanguay tell you at the time that
the document was signed?
A. As far as we were concerned, there was no
reference to the impact on our organization because we have all our
transactions executed before Mr. Tanguay, and there is no impact with respect
to that. In every case, each party is responsible...
Q. But, was that raised at the time of the
transaction or anything?
A. No, no.
Q. Were you both present at the time that the deed
was signed? Because, if you look at the dates on the deed of exchange ... I am
not sure if you are the one who has it. No, you have the deed of cancellation.
As for the deed of exchange, if you look, just clarify for us how the signature
was made. Were all the parties in attendance at the time of signing?
A. I can't answer that because I was not a
signatory. The signatory was the president of the organization. . . .
A. I wasn't present. Michel Ménard, the
president of the organization, was there to sign; I don't have the authority to
sign contracts of sale, it's the president who has that authority. I was
sent a draft beforehand, and I read it and returned it to my president, at
which time I told him that it would not be a problem for him to sign it.
. . .
Q. Mr. Lafleur, I presume that you know Mr.
Beaudoin well?
A. Yes.
. . .
Q. In fact, speaking of Mr. Beaudouin, we
recently learned … we know that you are a lawyer, and we just learned that Mr.
Lafleur (the director of CPIR) is a lawyer, and you were with the notary Mr.
Tanguay in 2004 before signing that contract, so you were very well-informed
parties and you drafted clause 6 (contract of cancellation).
A. I did not draft clause 6.
[77] The evidence
shows, on a balance of probabilities, that the error of consent alleged by the
Appellant is inexcusable, notably because of the expertise of the persons involved:
both Mr. Beaudoin and Mr. Lafleur were lawyers. In the light of this
evidence, which was highly persuasive, I find that the error of consent on
which the Appellant is relying is inexcusable.
[78] The parties
unquestionably had the skills necessary to at least have the reflex to raise questions
and check what the provisions of the relevant statute had to say.
[79] Parties must always
take the tax consequences of their transactions into account. The parties in
the instant case had a duty to get informed before entering into a contract
before the notary.
[80] The exchange was
only cancelled in 2004, when the second contract (of cancellation) came into
force. That cancellation was valid between the contracting parties and could be
set up against third parties, but only in 2004, because it had no retroactive
effect on third parties. Consequently, the assessment is valid.
[81] For the above
reasons, I would dismiss the appeal because the Appellant has no right to seek
to have the contract cancelled on the ground of inexcusable error. Consequently, the effect of the
contract of cancellation signed in 2004 is not retroactive. Even if I had not
determined that the error was inexcusable, I would have to dismiss the appeal
on another basis. Indeed, I would have had to take the following provisions
into account.
Vitiated consent and valid
nullity of the deed of exchange
[82] Article 1416 CCQ
provides as follows:
1416. Any contract
which does not meet the necessary conditions of its formation may be annulled.
[83] The effect of
the nullity of the deed of exchange is set out in article 1422 CCQ
1422. A contract that is null is deemed never
to have existed.
In such a case, each party is bound to restore
to the other the prestations he has received.
1440. A contract has effect
only between the contracting parties; it does not affect third persons, except
where provided by law.
[84] Since the deed
of exchange is null, it is deemed never to have existed. The effects of cancellation
are different from the effects of resolution, resiliation or revocation. The
form is not, in fact, corrected.
[85] In order to
better understand the concept of annulment, the Court will reproduce some of
the Respondent's submissions about the distinctions that must be drawn between
resolution, resiliation and revocation.
[TRANSLATION]
Resolution makes it possible to retroactively
cancel a deed where a party has failed to perform the contract (e.g.
resolution of a sale for non-payment of the price) whereas nullity can only
be applied for in cases where there is a defect in the formation of the
contract.
Resiliation makes it possible to cancel a
contract of successive performance prospectively (e.g. resiliation of a lease).
Unlike cancellation, revocation enables a party
to unilaterally terminate a juridical act (e.g. revocation of a mandate or
will). Revocation does not necessarily entail a restoration of the parties to a
prior situation, whereas cancellation does.
[86] Thus, we must
determine precisely what the contract of cancellation was.
[87] Under article
1422 CCQ, an annulled contract is deemed never to have existed. Thus, each
party must restore to the other what he has received. There is a retroactive
effect in that the parties are put back in the same starting position that they
would have been in if they had never entered into the contract.
[88] Rather than
applying to a court for an annulment with retroactive effect, the parties
agreed to cancel the deed of exchange before a notary. Consequently, the
effects of this conventional cancellation apply only to the parties, as
provided for in article 1440 CCQ.
[89] What is the
situation of third parties, such as the Respondent?
[90] The Respondent
submits that the retroactive effect referred to in article 1442 CCQ
applies to the parties to the proceeding, and that attracts the application of
the rule concerning restitution provided for in articles 1699 to 1707 CCQ. She cites article 1707 CCQ, which
states as follows, in support of her submissions:
1707. Acts of alienation by onerous title performed
by a person who is bound to make restitution, if made in favour of a third
person in good faith, may be set up against the person to whom restitution is
owed. Acts of alienation by gratuitous title may not be set up, subject to the
rules on prescription.
Any other acts performed in favour of a third
person in good faith may be set up against the person to whom restitution is
owed.
[91] The Respondent
correctly submits that the "amicable" or conventional cancellation cannot
be set up against interested third persons.
She also cites Placements Gentica Inc. v. Québec (Sous-ministre du Revenu),
[1998] R.D.R.Q. 281 (C.A.) in support of her submission that the second
contract, which cancelled the first, had no retroactive effect for the purposes
of the Retail Sales Tax Act.
[92] In addition, the
Respondent cites Karim:
[TRANSLATION]
In any event, the parties can agree
to declare that their contract is null. . . . However, the
parties cannot agree that their contract is null to the detriment of a third party
who, by virtue of the signing of the contract, has the right to follow the
property; the third party can validly object to any agreement that does not
take the rights that he has acquired in good faith into account, and he can
have the agreement declared ineffective against third parties.
[93] In B.E.A.
Holding, the parties admitted that they needed the court's authority to
recognize retroactive nullity with respect to third parties.
[TRANSLATION]
22. The parties admit that, being related
companies, they could simply agree to annul the contracts, but the cancellation
of these transactions would have no retroactive effect on third persons,
including the tax authorities. The applicant therefore asks this Court to
declare these contracts and other written deeds null, with retroactive effect.
[94] For all these
reasons, the appeal is dismissed in part, with costs to the Respondent; the
assessment should be amended on the basis that the fair market value of the
building was established by consent of the parties at $850,000.
Signed at Ottawa, Canada, this 4th day of September 2007.
"Alain Tardif"
Translation certified true
on this 28th day
of February 2008.
François Brunet,
Revisor
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