'Rectification' – a means to fix a mistake made in the implementation of an agreement – has been a popular topic in tax law since the Supreme Court's decisions limiting the availability of rectification for tax planning errors in AG (Canada) v Fairmont Hotels Inc (2016 SCC 56) and Jean Coutu Group (JPC) Inc v AG (Canada) (2016 SCC 55) last year. Tax rectification was also the focus of the Federal Court of Appeal's decision in Canadian Forest. However, this case involved the applicability of foreign rectification orders (with Canadian tax consequences), rather than the availability of rectification itself. The court held that the foreign rectification orders were not necessarily dispositive or binding on a Canadian tax assessment, but must be taken as facts at trial even in the absence of domestic recognition through homologation.
The appellant in Canadian Forest received certain payments described as 'dividends' from its foreign affiliates in 2004, 2005 and 2006. The appellant then sought rectification to declare these payments as loans. The rectification orders were granted under Barbados and Cyprus law and the dividends were rectified as loans by retroactively altering the corporate resolutions from declarations of dividends to resolutions noting indebtedness. Nonetheless, the minister of national revenue assessed the appellant on the basis that dividends were paid within the meaning of Sections 12 and 90 of the Income Tax Act.
While the appellant's dispute could have gone to trial with reliance on the foreign rectification orders as evidence before the Tax Court of Canada, the appellant instead brought an application under Rule 58 of the Tax Court of Canada Rules (General Procedure) to determine whether the minister was bound by the foreign rectification orders. Presumably, had the application under Rule 58 succeeded, there would have been no further need for trial.
The Tax Court decision with respect to Rule 58 centred around conflict-of-laws rules to determine the enforceability of the foreign judgments. Given that Quebec was the only Canadian province with which the appellant had a nexus, the court held that the law of Quebec applied. Upon review of the relevant jurisprudence, the court found that the proper approach to be applied to the foreign rectification orders was similar to that of non-money foreign judgments – that is, a domestic court must consider relevant factors necessary to ensure that the foreign judgment does not disturb the structure and integrity of the Canadian legal system (Pro Swing Inc v ELTA Golf Inc (2006) SCR 612). This was especially the case here, given the tax context and because the appellant gave the minister no notice of the rectification or opportunity to intervene or present arguments against it.
The minister also argued that foreign rectification orders were retroactive tax planning, but the court did not directly address this. Instead, it made note of the fact that the judgments were issued after the Canada Revenue Agency sent notices of reassessments, and that Canadian courts should ensure foreign judgments do not extend judicial outcomes to what could not be achieved normally through domestic litigation.
In a brief judgment, the Federal Court of Appeal disagreed with the Tax Court's analysis regarding the requirement of homologation because the minister was a third party to the foreign proceedings and there was nothing to enforce against the minister. In the Federal Court of Appeal's view, what needed to be determined was the foreign rectification orders' effect with respect to the minister; the answer to which should be left to the Tax Court judge at trial, with a full evidentiary record at his or her disposal.
As a result, the court found that:
- no answer should have been given to the Rule 58 application in the first place; and
- no part of the Tax Court's analysis was endorsed.
In coming to this decision, the court agreed with the appellant that foreign judgments must be taken as facts, but disagreed with the appellant (as it had argued in tax court) that pursuant to the Quebec Civil Code, the foreign orders were dispositive or binding on the minister.
The Federal Court of Appeal, by limiting the scope of its decision to the amount of weight that may be given to foreign rectification orders, had no need to consider or apply the Supreme Court's decisions in Fairmont or JPC. Nonetheless, we can expect to see the application of Fairmont or JPC to the facts of Canadian Forest if the case proceeds to trial. It will be worthwhile to monitor this case to see how the law is applied in this regard.
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