SCC to Consider Rectification of Contracts
The Supreme Court of Canada has granted leave to appeal in a case involving the rectification of contracts. The appeal in Services Environnementaux raises the question of whether Quebec law permits the rectification of agreements, in a manner that is retroactively enforceable against tax authorities, when their written terms diverge from the common intentions of the parties.
As part of a reorganization of the first respondent, Centre technologique, the second respondent, AES, decided to sell some of its shares in Centre technologique to a third party. AES and Centre technologique the entered into a reorganization agreement in which AES exchanged its 1,217,029 class A shares in Centre technologique for both: a) class B shares having an aggregate value of $1; and b) a promissory note in the amount of $1,217,028.
The share exchange tax provisions in s.86 of the Income Tax Act (Canada) and ss. 541 and 543 of the Taxation Act (Quebec) permitted the parties to defer the tax consequences of this share exchange, but only if the consideration other than shares which AES received (i.e., the promissory note) was less than the adjusted cost base of the class A shares it transferred to Centre technologique. Owing to a mistake, the parties believed the adjusted cost base of the class A shares was $1,217,029 - the same as the promissory note. In fact, however, the adjusted cost base of the class A shares was only $96,001. The tax authorities therefore assessed AES for a $840,770 capital gain.
AES and Centre technologique brought a motion before the Quebec Superior Court. They sought to rectify their agreement so that: a) the promissory note given to AES was only for $95,000; and b) instead of receiving class B shares with an aggregate value of $1, AES would receive class C shares having an aggregate value of $1,222, 029. In a judgment released on March 3, 2009, Borenstein J.C.S. allowed the application.
agreement appeal Civil Code of Québec contracts Income Tax Act interpretation rectification shares Supreme Court of Canada tax tax exchange Taxation Act