News of Note

Solicitor-client privilege over a tax-planning memo prepared for Abacus on a tax-structured purchase transaction by a tax lawyer was lost when the tax lawyer provided the memo in draft form to the vendors' tax lawyer, whose comments resulted in memo revisions. Annis J rejected the submissions of the vendor and Abacus that under the common-interest privilege doctrine, which seemingly had been adopted in Pitney Bowes, there was no waiver of privilege in providing the memo in connection with advancing a transaction that was in both parties’ interests, stating:

Advisory CIP significantly expands the quantity of relevant evidence that is denied to the courts. …Furthermore, it provides an increased potential for abuse, while undermining the administration of justice by predominantly enabling transactions that anticipate creating litigation.

Neal Armstrong. Summary of MNR v. Iggillis Holdings Inc., 2016 FC 1352 under s. 232(1) – solicitor-client privilege.

The elective transitional rule in s. 13(8)(d) is applicable if a corporation disposed of eligible capital property in calendar 2016, but the gain is included in a taxation year that straddles January 1, 2017. The taxpayer may elect under s. 13(38)(d)(iii) to maintain the effect of the s. 14(1)(b) inclusion. One of the conditions is that the taxpayer has incurred an eligible capital expenditure respecting a business before January 1, 2017. CRA stated:

Where a taxpayer’s only intangible asset is internally-generated goodwill with no cost, that taxpayer cannot be said to have made or incurred an ECE in respect of the business. As such, the taxpayer would not meet the requirements of the election in subparagraph 13(38)(d)(iii). It is our understanding that this result is consistent with tax policy.

Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.13 under s. 13(38)(d).

S. 17 of the QSTA, which is the Quebec equivalent of ETA s. 220.05, provides that “very person who brings into Québec corporeal property for consumption or use in Québec by the person” is subject to QST on the value of the property.

Laurin J noted that there would be no QST if the Quebec taxpayer before him had bought a used boat directly from another Quebec consumer (as this would not have qualified as a “taxable supply,”) and thought that it was unfair that the taxpayer should instead be subject to QST on importing a used boat into Quebec even though the Ontario vendor was a consumer who had, in turn, paid QST when he had purchased the boat new in Quebec. Laurin J concluded that the legislature did not intend to create such unfairness, and that s. 17 should be read to mean "taxable supply" for the particular situation in which the property was originally purchased in Quebec.

Neal Armstrong. Summary of Beaulieu c. Agence du revenu du Québec, 2016 QCCQ 12015 under ETA s. 220.05(1).

In reversing Juliar, Brown J indicated in Fairmont that rectification only “allows a court to achieve correspondence between the parties’ agreement and the substance of a legal instrument intended to record that agreement, when there is a discrepancy between the two,” whereas in Juliar, the substance of the agreement was for the exchange of shares for a promissory note rather than shares, so that the purported rectification there was of the agreement itself rather than in the instrument recording the parties’ agreement. (Rectification also was not available on the particular facts before him, involving failure to recognize that a transaction gave rise to a net FX gain for tax purposes.) However, Brown J ignored the dissenting observation of Abella J that “both AES and Riopel involved errors of implementation: the error in AES was a faulty calculation and the error in Riopel was that a complex transaction was conducted in the wrong sequence,” and instead only referred to these cases for the uncontroverted proposition that rectification cannot be used to effect retroactive tax planning.

In the companion Jean Coutu case, Wagner J indicated that a Quebec contract can be rectified to correspond to its objects if they are determined or determinable with sufficient precision He described the AES and Riopel cases somewhat similarly to the above description by Abella J, and noted (likely apropos Riopel) that “modifications to written documents expressing parties’ agreement can include the insertion of transactions” (where consistent with “the contracting parties’ common intention.”) He also stated that there is a “fundamental difference” between a contract (such as in AES) where a party’s contractual obligation “necessary for obtaining the intended tax result - is to issue and deliver a note in an objectively calculable amount equal to the ACB of transferred shares, and a contract [such as that before him] under which there is no [contractual] obligation addressing FAPI.” Accordingly, rectifying to address the overlooked FAPI issue in the Jean Coutu transactions would not accord with the common intention at the time.

Given that both Brown J and Wagner J considered the common law and civil law approaches to rectification as being largely aligned, it would appear that rectification, to substitute share for note consideration, likely would be available on facts similar to Juliar if the common intention at the time were to take back the maximum amount of note consideration, and shares for the balance, and the transaction was not implemented this way only due to a calculation or implementation error. More generally, the correct post-Fairmont/Jean Coutu view may be that a botched execution of a tax plan may be rectified, but not a defective plan.

Neal Armstrong. Summaries of Canada (A. G.) v. Fairmont Hotels Inc., 2016 SCC 56 under General Concepts – Rectification and Statutory Interpretation – Interpretation Act, s. 8.1; summaries of Jean Coutu Group (PJC) Inc. v. Canada (A.G.), 2016 SCC 55 under General Concepts – Rectification and Statutory Interpretation – Interpretation Act, s. 8.1.