The Supreme Court of Canada has, in a unanimous judgment rendered by Justice LeBel, ruled in favour of the taxpayers in two tax-related contractual rectification cases arising under the Civil Code of Quebec (Services Environnementaux AES and Riopel).
Both cases involved efforts to remedy contracts implementing tax-motivated reorganizations where the taxpayers argued that the documentation did not accurately reflect the parties’ intentions. Revenue Quebec raised reassessments against the taxpayers based on the erroneous documentation. The taxpayers, in response, sought to rectify the contracts to accord with what they said was their original intention.
The Supreme Court reaffirmed the principle that the Tax Court of Canada has exclusive jurisdiction to determine the correctness of a tax assessment. However, it also noted that tax law applies to transactions governed by, and the nature and legal consequences of which are determined by reference to, the common law or the civil law. Therefore, one must first determine the common law or civil law relationships before applying the tax law. Here, the taxpayers were able (with the assistance of a Court order) to recharacterize the civil law relationships as being different from those resulting from the erroneous documentation. Now, armed with the rectified contracts, the taxpayers will return to the tax authorities and endeavor to overturn the tax reassessments.
Interestingly, the Court did not appear to view the revenue authorities as having acquired any rights by virtue of the tax reassessments issued in reliance on the initial documentation. In paragraphs 49 and 50, the Court states: “If there had been a dispute between the parties about the nature of their intention or if third parties had acquired rights in relation to the legal situation created by the acts, the law of evidence in civil matters would have placed certain obstacles in the way of this interpretation exercise … There is no such obstacle in the cases at bar.”
The Supreme Court of Canada expressly refrained from (despite an invitation to do so by the revenue authorities) “criticizing, approving or commenting on” rectifications in the common law context as that remedy has developed since the Ontario Court of Appeal decision in A.G. Canada v. Juliar. Thus, while theoretically leaving the door open to reconsidering Juliar in the common law provinces, there is no reason to think that the Juliar line of authority is weakened by this decision.