Canada: Rectification In The Tax Context: Quebec Court Of Appeal Gives Hope To A Damaged Equitable Remedy

This article was prepared with the assistance of summer law student Brooke Healey.

Documenting your intentions in a tax plan is crucial if you ever pursue rectification as an equitable remedy, as illustrated by a recent decision from the Quebec Court of Appeal.

On February 24, 2023, the Quebec Court of Appeal rendered a decision in the case of Agence du Revenu du Québec c. Samson (Samson CA), permitting the rectification of a tax contract under Quebec civil law. The Samson CA decision is one of relatively few recent appellate-level decisions to allow rectification of a contract.

Samson summarizes the principles established in previous decisions such as AES, Jean Coutu and Fairmont and applies the test developed in the Jean Coutu decision. While the decision is based on Quebec's civil law, it is still relevant to the rest of Canada. In obiter, Justice Wagner noted that equity and civil law would arrive at the same result in the Fairmont decision. Therefore, regardless of whether equity or civil law is applied to the Samson CA decision, the conclusion could possibly be identical.

Background

Samson is a developer and a shareholder of Résidences du Collège Inc. ("CRP") and La Bourgade St. Jean Inc ("Bourgade") who invested in real estate projects through various companies. Some of the real estate projects were profitable while others resulted in significant losses.

CRP heavily financed a building renovation project that encountered several obstacles, resulting in significant losses that led to CRP placing itself under the protection of the Companies' Creditors Arrangement . Bourgade sold 13 buildings and used the funds generated from those sales to financially assist CRP. To summarize, CRP suffered significant losses and Bourgade generated large taxable capital gains.

Samson hired France Major ("Major") as a tax specialist to determine the optimal tax planning strategy for Samson's various companies. Major developed a tax plan with the goal of utilizing all of CRP's losses through Samson's other companies. Specifically, the intention was for Bourgade to benefit from the business investment loss on CRP's shares while Résidences du Collège CRP (2014) Inc. benefited from CRP's non-capital losses.

The tax plan included an election under subparagraph 50(1)(b)(iii) of the Income Tax Act ("ITA") on November 30, 2013. Samson and Bourgade were both instructed to make the election to be deemed to have disposed of CRP shares for nil proceeds and then immediately reacquire the shares at nil cost. However, Major's tax plan had a fatal error, as the election of subparagraph 50(1)(b)(iii) of the ITA must be exercised at the end of the taxpayer's fiscal year. Bourgade's election succeeded because its fiscal yearend was on November 30. However, Samson's personal fiscal yearend was December 31. The shares were sold on December 11, 2013; therefore, Samson could not make an election on December 31, 2013, as he no longer owned the shares at that point in time.

Initial and appeal decisions

Major noted the error and requested a declaratory judgement from Quebec's Superior Court to change the date from December 11, 2013, to April 4, 2014, because April 4, 2014, was the date the documents were actually signed. The trial judge did not accept that the party's intention was always to sign in April 2014, but he did conclude that Major erred in choosing the date.

The trial judge reiterated the principles set out in AES and then applied the two-part test from Jean Coutu. First, the trial judge concluded that the intention behind the tax arrangement was clearly for Samson to elect under subparagraph 50(1)(b)(iii). Second, if the agreement date was December 31, 2013, Samson would have been a shareholder and met the requirements of subparagraph 50(1)(b)(iii). Therefore, the trial judge allowed the contract rectification.

The Quebec Revenue Agency appealed the Superior Court's decision on the grounds that the first condition of the test was not met. In addition, the Quebec Revenue Agency also argued that changing the date of the election would have additional tax impacts, which supported Samson's intention to date the agreement on December 11, 2013. The standard of review for the appeal is palpable and overriding error. The Quebec Court of Appeal concluded that the date change merely allowed for the intention of the parties as documented in Major's tax notes. Therefore, the Quebec Court of Appeal affirmed the trial judge's decision and allowed for rectification of the contract.

Conclusion

Both courts concluded that the tax consequences from the contract rectification, such as losing another tax advantage, will be settled in another court if necessary. The courts also noted that if the rectification had provided Samson with an additional tax benefit that was not anticipated at the time of his tax planning, then the conclusion of this case could have been different. However, Samson and Major anticipated the specific tax benefits discussed in this case at the time of tax planning, which allowed for contract rectification.

This decision supports rectification for cases where clear intention is expressed and the specific tax benefit sought is known and intended at the time of tax planning. Since the Fairmont and Jean Coutu decisions, appellate courts have only allowed rectification in a few instances. Therefore, this decision is significant as it provides appellate-level authority demonstrating when rectification will be possible in the post-Fairmont context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.