Rectification of Contracts in Québec: Another Loss for Taxation Authorities and Final Word to be Received from the Supreme Court
As was already mentioned in the previous blog posted on October 25, 2011 by our colleague, Brandon Kain, the Supreme Court of Canada has granted leave to appeal in a case involving the rectification of contracts in Agence du revenu du Québec vs. Services environnementaux AES Inc. Recently, the Supreme Court of Canada also granted leave to appeal in a second case involving rectification of contracts. The appeal in Riopel c. Agence de revenu du Canada also raises the question as to whether or not Québec law permits the rectification of agreements, in a manner that is retroactively enforceable against taxation authorities, when their written terms diverge from the common intention of the parties.
Ms. Archambault and Mr. Riopel, first and second respondents, have been married since 1984 and have been the owners of Déchiquetage Mobile JR up until July 2004, at which time the company was sold. Further to the sale, the accountant suggests that Déchiquetage should merge with Entreprise J.P.F. Riopel Inc., a holding company owned by Mr. Riopel only.
In order to do so, the parties met with their accountant as well as with a tax lawyer to discuss the manner in which the transaction should be performed so that no tax is payable thereunder. The technical details of the transaction remain vague to the parties, but the goal of the transaction is clear: the shares of Ms. Archambault are to be transferred to the new company without any tax effect. Unfortunately, the steps of the tax planning are not respected. Upon receipt of the Articles of Amalgamation, the accountant realizes the mistake and communicates with the tax lawyer. In order to identify a solution to the problem, both the accountant and the tax lawyer decide on an alternative plan, which is then deployed. The contract, the resolution and all of the relevant forms are signed by the respondents at the accountant’s office in 2004. The accountant as well as the tax lawyer both testified to the effect that they never informed their client of the mistake that occurred nor the fact that they changed the initial tax planning to which they had agreed. In January of 2007, Ms. Archambault received a “Notice of Assessment” claiming approximately $150,000, with the interest since 2004, further to the transaction.
The respondents, as well as the new company, brought a motion before the Québec Superior Court. They sought to rectify their agreement so that it reflects their common intention: a merger without any tax effect. In a judgment released on April 12, 2010, the Honourable Justice Francine Nantel dismissed their motion because the requested rectification affected the substance of the transaction structure. The judgment specified that the parties could have asked for an annulment of the transaction but decided not to do so.
The respondents, as well as the new company, appealed this decision of first instance, arguing that the intention of the parties should prevail. In its May 20, 2011 decision, the Québec Court of Appeal reiterates that section 1425 C.c.Q., in itself, permits to align the instrumentum (written terms) with the negotium (common intention of the parties) and insists on the fact that a parallel can be drawn between what happened in the present case and the possibility to ask for an incidental improbation when both parties to an authentic writing want to correct a mistake in the elements that the Public Officer has the mandate to note correctly. In such cases, the Courts never hesitate to correct such a mistake. Therefore, citing its own decision rendered in Services environnementaux AES Inc., the Court of Appeal allowed the appeal.
The appeal of this case to the Supreme Court, as with Services environnementaux AES Inc., which will be heard in parallel, will also be of great significance to the law of obligations in Québec in determining the extent to which the rectification of contracts is available under Québec law. The equitable remedy angle is less present in the Archambault case than it was in Services environnementaux AES Inc., but the opportunity to address the retroactive effects of rectification, especially with regards to the taxation authorities, could be of interest to any corporation having to deal with unwanted and unexpected taxation consequences.
Case Name: Agence du Revenu du Québec v. Archambault
SCC Docket number: 34393
Date leave granted: December 15, 2011
common intention of the parties Court of Appeal of Quebec Quebec Superior Court rectification of contracts retroactively enforceable against taxation authorities Supreme Court of Canada tax tax planning written terms