Rectification/Rescission/Annulment: Local Referral Procedures for Applications for Declaratory or Equitable Relief

Subject: Rectification/Rescission/Annulment: Local Referral Procedures for Applications for Declaratory or Equitable Relief 

Number: AD-25-01

Date issued: 2025-03-10

Issued by: Policy and Technical Working Group – Compliance Programs Branch, under the authority of the Directors General of all Directorates within the Compliance Programs Branch

Directorates affected:

• Business Tax Incentives Directorate
• Criminal Investigations Directorate – Illicit Income Audit Program
• GST/HST and Digital Compliance Directorate
• High Net Worth Compliance Directorate
• International and Large Business Directorate
• Small and Medium Enterprises Directorate

On this page

• Background
• Declaratory and equitable relief
  • Rectification
  • Rescission
  • Annulment
• Administrative implications
• Procedures
  • Overview of instructions
  • Relief applications – Audit stage
  • Applications filed in non-audit areas
  • Issues subject to potential court applications – Pending applications
  • Court orders issued prior to an audit – Pre-existing orders
  • Role of the Tax and Charities Appeals Directorate
  • Rectification applications – Appeals stage
• Conclusion
• Appendix A: Jurisprudence

This communiqué supersedes AD-08-04R1, Amending Transactions: Local Referral Procedures for Applications for Rectification or Declaratory Relief.

The purpose of this communiqué is to provide guidance to Canada Revenue Agency (CRA) officials in the Compliance Programs Branch (CPB) on applications for relief where a taxpayer is seeking the common law remedy of rectification or rescission or similar reliefs under the Quebec civil law, that is rectification^{Footnote 1} or annulment.^{Footnote 2}

In the context of this communiqué, a CRA official is a person who has the authority to examine any document, including books and records of taxpayers in the administration or enforcement of the Income Tax Act (ITA) and the Excise Tax Act (ETA) for audit purposes. Further, if not otherwise specifically mentioned, taxpayer(s) includes registrants and claimants, and the terms audit and review are used interchangeably.

Background

When examining transactions that have occurred in an audit period, the CRA’s review is based on what was actually recorded in a written instrument^{Footnote 3} in conjunction with what was actually done at the time of the review. The CRA does not base its audit findings on what could have happened or what the taxpayer intended to happen. However, it is possible for mistakes to occur where the written instrument does not record the true agreement between parties.

Taxpayers may seek a remedy through a civil Provincial Court by requesting rectification, rescission, or annulment. If granted, the remedy will allow for the mistakes to be corrected by rectification which amends a written instrument to reflect the true agreement, by rescission which allows for the unwinding of a transaction,^{Footnote 4} or by annulment which is used to have a transaction annulled under the Quebec civil law. Upon receiving the final decision of the Court,^{Footnote 5} the CRA’s audit findings will have to be modified as necessary to take into account the effect of the decision.

It is important to note that a court may not modify an instrument merely because a party has discovered that its operation generates an adverse and unplanned tax liability. As has been confirmed by the Courts, equitable or declaratory remedies are not a means to correct unforeseeable or unfavourable tax consequences, nor to be used for retroactive tax planning purposes.^{Footnote 6}

Declaratory and equitable relief

Generally, rectification, rescission, and annulment will be sought in the Provincial Court where the written instrument originated.

Appendix A provides key concepts from relevant jurisprudence regarding the three remedies.

Rectification

In common law, rectification is an equitable remedy whereby a court can order the modification of a written instrument when it is established that the written instrument does not reflect the true intent of the parties. In Quebec, the Superior Court can rectify a document to reflect the parties’ common intention pursuant to art. 1425 C.C.Q. The courts have held that rectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of the agreement.^{Footnote 7}

The Supreme Court of Canada clarified the scope of the relief of rectification in the province of Quebec. Rectification under Quebec civil law and common law stems from different legal sources but will generally lead to similar results. However, because of differences between the principles of contract law specific to the two legal systems, there will be circumstances where the result will be different.^{Footnote 8}

The following cases are the leading cases on tax-motivated applications for rectification in Quebec and the common law provinces:

• ARQ et al v Services Environnementaux AES Inc. et al, 2013 SCC 65
• AGC v Fairmont Hotels Inc. Et al, 2016 SCC 56
• Jean Coutu Group (PJC) Inc. v AGC et al, 2016 SCC 55

Any court decisions on the subject predating these cases should be read with caution and keeping in mind that the Supreme Court of Canada overruled the previous leading case in common law, AG (Can) v Juliar et al, 2000 DTC 6589 (Ont. C.A.), which had expanded the availability of the remedy.

With satisfactory proof, the court can issue an order to rectify the written agreement or to restate it to reflect the true agreement between the parties. Similarly, corporations may seek statutory remedies, which vary in different jurisdictions, to correct corporate recording errors.

The requirements of rectification, both in common law and civil law, are that an applicant must demonstrate that:

• there was a prior agreement whose terms are definite and ascertainable^{Footnote 9}
• the agreement was still in effect at the time the instrument was executed
• the instrument fails to accurately record the agreement
• the instrument, if rectified, would carry out the parties’ prior agreement^{Footnote 10}

The effect of rectification is that the instrument is said to have always existed in its rectified form.

In the case of foreign rectification orders, the effect of such orders vis-à-vis the CRA has to be evaluated on a case-by-case basis and will depend on the evidence submitted by the parties. In Canadian Forest Navigation Co. Ltd. v The Queen, 2017 FCA 39, the Federal Court of Appeal concluded that foreign judgments are taken as facts, and that factual findings contained within those judgments cannot be disregarded by a Court. The Court also indicated that since the Minister of National Revenue (the Minister) was not a party to the foreign proceedings, there was nothing to enforce against the Minister. Please note that this decision was rendered in the civil law context and the judgment had not been homologated.

Rescission

Rescission is also a discretionary equitable remedy in common law, but it is separate and distinct from rectification. Rescission is the cancelling and unwinding of transactions where a mistake has been made that is fundamental to the contract in question, and it would be unfair, unjust, or unconscionable not to correct it.^{Footnote 11 Footnote 12} Rescission allows the court to set aside a written instrument and restore the parties to the position they were in prior to the date of the written instrument. Rescission is an “all or nothing” remedy; partial rescission is not a recognized equitable remedy.^{Footnote 13} The purpose of rescission can be to eliminate a benefit one party has received due to a mistake made by one or both parties to a contract.

The law respecting tax-motivated rescission was unsettled in the common law provinces, however, on June 17, 2022, the Supreme Court of Canada released the decision in AGC et al v Collins Family Trust et al, 2022 SCC 26. The Court reaffirmed some of the principles enunciated in Fairmont Hotels and Jean Coutu:

• Taxpayers are to be taxed based on what they actually agreed to do, and not on what they could have done
• A court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability

The Court stated that these principles are of general application and preclude equitable relief altogether when sought to avoid an unintended tax liability that has arisen by the ordinary application of tax statutes to freely agreed upon transactions. Therefore, these principles apply equally to cases of rectification and rescission in the common law provinces. Any jurisprudence about rescission predating the Supreme Court of Canada’s decision in Collins Family Trust should be read with caution and may no longer be relied upon.

Annulment

Annulment is a declaratory relief under the Civil Code of Quebec. A contract can be annulled if one of the parties’ consent has been vitiated^{Footnote 14} notably, by error.

The error must relate to the nature of the contract, the object of the prestation^{Footnote 15} or to any essential element that determined the consent. Therefore, in tax motivated applications, the party must demonstrate that they had a specific tax objective in mind and that this objective was an essential element that determined their consent to the contract. However, an inexcusable error does not constitute a defect of consent.^{Footnote 16}

Administrative implications

CRA officials will consider every case on the merits of the particular facts and circumstances, keeping in mind the following administrative implications to CRA’s position with respect to rectifying documents, rescinding or annulling transactions to correct unintended tax consequences:

• CRA officials do not have authority to amend contracts between parties^{Footnote 17}
• CRA officials cannot adjust filings or elections except to correct clerical or administrative errors in accordance with paragraph 16 of Information Circular 76-19R3,^{Footnote 18} or as permitted by statute^{Footnote 19}
• In the common law provinces, CRA officials cannot agree to abide by after-the-fact changes to a document that record an agreement to change the basis of an assessment without the benefit of a court order. However, in the province of Quebec, when all parties to a contract agree that a document that records an agreement in writing contains an error, they can correct it without the need for a court order. Therefore, CRA officials can agree to abide by after-the-fact changes to the document when they are convinced that the documentation misstates a term of the agreement between the parties.^{Footnote 20} It is a determination based on the overall facts and evidence. If there is a disagreement between CRA officials and the parties about the amendments to the document, the parties may apply to the Court to seek the proper declaratory relief. In all these situations, CRA officials are strongly encouraged to seek advice from the Department of Justice (DOJ)
• CRA officials must assess on the basis of the facts present at the time of the audit. Parties to a transaction should notify the Minister by providing a letter of intent to the Director of the Tax Services Office (TSO) if they wish to seek a remedy via a court order. If a reassessment has already been issued, taxpayers may protect their interests by filing a notice of objection. If ministerial notice is served in this way, the notice of objection may be held in abeyance until the matter is settled. If the Court grants a relief to the taxpayer, the Minister will deal with the notice of objection accordingly
• The CRA may oppose an application for rectification when it is of the opinion that the written instrument correctly records the prior agreement between the parties.^{Footnote 21} This includes amendments to achieve after-the-fact tax planning results. CRA may choose not to oppose an application where the amendments implement the original intentions of the parties

Procedures

The procedures below cover all reliefs. In the case of rectification, the CRA must distinguish between situations where there is clear evidence of a mistake in recording the transaction or agreement (where the application for a remedy will likely not be opposed) and where there is an attempt by the taxpayer to restructure their affairs by retroactive tax planning (where the application will likely be opposed).

In all cases dealing with the application for one of the remedies, it is imperative to inform the DOJ as soon as possible to safeguard the rights of the CRA.

Overview of instructions

Typically, the Attorney General of Canada (AGC) will be served with an application filed by the parties seeking relief and will notify the CRA. If the CRA official conducting the audit becomes aware that court action will be sought to amend a transaction, they should immediately notify their Regional Justice Advisor so as to inform the DOJ Rectification Coordination Committee members.

If the CRA official becomes aware of a pre-existing order and determines that the AGC has not been informed of the order obtained by the taxpayer, the Regional Justice Advisor should be informed immediately, especially where there are suspicions of retroactive tax planning. In these situations, the AGC can pursue available legal recourse, such as seeking an order to set aside the decision of the Court.

A Technical Advisor^{Footnote 22} can assist in determining whether the application is sought to achieve retroactive tax planning or whether transactions may constitute tax avoidance.

In addition, the CRA official will begin to document the facts in relation to the pending application or the pre-existing order. This will enable CRA officials to submit timely reports and recommendations to the Appeals Litigation Offices (LO) in the circumstances outlined below. A copy of the formal application to amend transactions prepared for the court should be obtained by the CRA official conducting the audit from the legal representative and forwarded to the LO as soon as it is filed. Please consult the Appeals Manual (section 7.19 Other court workload) for further information.

Relief applications – Audit stage

When taxpayers or their representatives inform a CRA official during the course of an audit that an application will be made to a court to amend a written document that is the basis for a completed transaction currently under review, the CRA official should forward the application to their Regional Justice Advisor with a copy to the Regional LO, as soon as it is filed.

Such applications, as well as applications for rescission or annulment, are served on the AGC and not the CRA.^{Footnote 23} The AGC will then inform the Regional LO of the proceeding.

In the unlikely event a party submits an application to the CRA rather than being served on the AGC, the CRA official assigned to the audit should quickly forward a copy of the following documents to the Regional LO and the Regional Justice Advisor:

• the relief application to the court as soon as it is received
• any appendices to the application and any exhibits as soon as they are received; if voluminous, the exhibits may be sent by courier

In addition to the documents listed above, a copy of the following documents should be sent to the LO within five working days following the initial submission above:

• the audit report (if available)
• a report on the relief sought including the following information:
  • taxpayer’s name and identification by social insurance number (SIN), business number (BN) or registrant number
  • tax year(s) or period(s) involved
  • federal tax and interest involved
  • issue(s) and the section(s) of the ITA or ETA
  • statement of the facts
  • basis for the assessment or proposed assessment
  • description of the nature and effects of the rectification sought in terms of the contract
  • impact of the rectification on the assessment or proposed assessment in terms of the effects in law and on the tax owing
  • CRA officials’ position and recommendation on the rectification application

When legal applications are filed at the audit stage, but before a reassessment has been issued, CRA officials will wait for the results of the Court’s decision on the application before proceeding to finalize the audit adjustments. Where necessary, a waiver will be required from each taxpayer to keep the reassessment period open for each return involved. If a taxpayer does not provide any such waiver or revokes it^{Footnote 24} before a court decision, the CRA official will reassess on the basis of information existing at the time of audit. This will protect the CRA’s position if the taxpayer attempts to obtain a court order before the CRA has an opportunity to make representations at court.

However, where the audit adjustments are subject to the application of a tax treaty, a waiver obtained under the ITA or ETA may not protect the reassessment process, as each treaty stipulates a limitation period that generally does not allow a contracting jurisdiction to make an adjustment after the time limit specified in the particular treaty.

Once a final court order is issued on the matter, the CRA official will process the file, making any necessary adjustments to take into account the effect of the court order. However, adjustments cannot be made to statute-barred years at the audit stage, unless otherwise provided in the ITA or ETA.

Applications filed in non-audit areas

When an application for relief is sent directly to the CRA, it will generally be referred to the CRA official conducting the audit or through the Assistant Director, Audit (ADA). However, instances may occur where an application is filed through other CRA branches for consideration. In these cases, the recipient branches are to immediately forward the application to the Regional Justice Advisor and the LO with a copy to the ADA of the TSO for review.

There may also be cases where a copy of the application for relief is sent directly to the LO, for example with a notice of objection or a notice of appeal. In situations where further verification work will be required, the LO will forward the matter to the ADA for appropriate action. Matters originating at Headquarters’ Appeals Branch may also be referred to the Tax Avoidance Division. The Regional Justice Advisor should immediately be informed of the situation.

Issues subject to potential court applications – Pending applications

During the course of an audit, CRA officials should record all representations regarding the taxpayer’s position that a written contract may not reflect the true agreement between the parties. CRA officials should also document any evidence (for example, previous versions of the contract or tax memo, email exchanges, statements from professionals, such as accountants or lawyers that were involved in preparing/executing the tax plan) that the completed arrangements do, in fact, reflect the common intent of the parties. Similarly, the basis for alleged corporate reporting errors that would affect the basis of an assessment should be documented. Furthermore, the impact of the rectification, rescission, or annulment should be clearly set out. This information should be included in the T20, Audit Report, or referenced in an independent supporting report.

A Technical Advisor can assist in determining whether the application is sought to achieve retroactive tax planning or whether transactions may constitute tax avoidance.

Court orders issued prior to an audit – Pre-existing orders

Rectification, rescission and annulment orders will be binding on third parties such as the Minister. The CRA may seek to overturn court orders that have been obtained without prior notification to the AGC and that are designed to achieve retroactive tax planning rather than to correct errors. The rules of the relevant court may provide a very short time frame for applying to overturn an order after the CRA becomes aware of it. The DOJ should be contacted immediately when CRA wishes to seek to overturn pre-existing orders.

During the course of an audit, a CRA official may find that a transaction has been reported in a manner affected by a court order that has already been issued. The following procedures should be followed immediately upon discovery of a pre-existing court order:

• Where the transaction could affect years currently under review, the CRA official should first determine if the CRA had been made aware of the application for the court order. If not, the CRA official should contact the Regional Justice Advisor and a Technical Advisor as soon as possible for advice and assistance
• The CRA official should conduct a preliminary review to determine the true intent of the parties and whether the terms of the court order have served to avoid adverse tax effects that had resulted from the actual contract terms
• If it is apparent from the review that adverse tax consequences have been avoided as a result of the court order that would affect non-statute barred years, the CRA official should confirm with a Technical Advisor that the taxpayer has achieved retroactive tax planning instead of correcting an unintentional error
• The CRA official should obtain all necessary waivers for affected returns, as described above for Relief Applications - Audit Stage
• The CRA official should submit a copy of the pre-existing order, as well as a report and recommendation detailing the same information as described above for Relief Applications - Audit Stage, to their LO

Once the Court has rendered its final decision to grant or not to grant the relief, the CRA official will process the file, making any necessary adjustments to non-statute-barred tax years to take into account the effect of the court’s decision.

These documents should be included in the T20, Audit Report, or referenced in an independent supporting report.

Role of the Tax and Charities Appeals Directorate

The Regional LO will instruct the DOJ on all filed applications and pre-existing orders that the CRA wishes to challenge. Rectification and other relief matters are a priority workload for all Appeals Offices and LO due to the tight time frames imposed by the courts (see Appeals Manual section 7.19.3 under 7.19 Other court workload). It should be noted that the Tax and Charities Appeals Directorate (TCAD) Rectification and Rescission Working Group needs to take a position regarding whether the CRA will oppose or not oppose the application for all cases. It is essential that CRA officials not communicate their position/recommendation on the rectification or declaratory relief applications to the taxpayer in any form. Decisions on CRA’s intention to challenge the applications will be made and communicated by the LO and the DOJ. This guideline does not prevent CRA officials from communicating with taxpayers to document the facts in relation to the applications.

TCAD will assume carriage of all high-risk issues, as well as decide if the case should be represented on their Important Tax Risk List. With respect to cases that remain in the LO, the TCAD Rectification and Rescission Working Group must provide a recommendation on all applications and pre-existing orders before the LO’s manager makes the final decision.

Rectification applications – Appeals stage

The taxpayer may still file an application for a court order and a notice of objection at the appeals stage, which will be handled by TCAD accordingly.

Conclusion

This communiqué outlines the CRA’s position with respect to declaratory and equitable remedies. Please direct any questions relating to this communiqué to your functional program contact within Headquarters.

Issued by:

The Policy and Technical Working Group on behalf of all Directorates within the Compliance Programs Branch, under the authority of the Directors General of all Directorates within the Compliance Programs Branch

Circulate to:

Regional Directors of Programs
Assistant Directors of Audit
Regional Program Advisors
Directors General,

• Business Tax Incentives Directorate
• Compliance Services Directorate
• Criminal Investigations Directorate
• GST/HST and Digital Compliance Directorate
• High Net Worth Compliance Directorate
• International and Large Business Directorate
• Small and Medium Enterprises Directorate

Appendix A: Jurisprudence

Rectification:

The leading case on rectification in the common law provinces is AGC v Fairmont Hotels Inc. et al, 2016 SCC 56.

AGC v Fairmont Hotels Inc. et al

Fairmont Hotels Inc. was involved in the financing of Legacy Hotels’ purchase of two other hotels, in U.S. currency. The financing arrangement was intended to operate on a tax‑neutral basis. When Fairmont was later acquired, that intention was frustrated, however, since the acquisition would cause Fairmont and its subsidiaries to realize a deemed foreign exchange loss. The parties to Fairmont’s acquisition therefore agreed on a plan, which allowed Fairmont to hedge itself against any exposure to the foreign exchange tax liability, but not its subsidiaries. There was no plan for protecting them from such exposure because the plan was deferred. The following year, Legacy Hotels asked Fairmont to terminate their financing arrangement to allow for the sale of the two other hotels. Therefore, Fairmont redeemed its shares in its subsidiaries, by resolutions passed by their directors. However, this resulted in an unanticipated tax liability. Fairmont sought to avoid that liability by rectification of the directors’ resolutions. Both the application judge and the Court of Appeal granted that rectification on the basis of the parties’ intended tax neutrality.

Held (Abella and Côté JJ. dissenting): The appeal should be allowed.

[3] […] Rectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement […] It does not undo unanticipated effects of that agreement. While, therefore, a court may rectify an instrument which inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage what a party hoped to achieve. Moreover, these rules confining the availability of rectification are generally applicable, including where (as here) the unanticipated effect takes the form of a tax liability. To be clear, a court may not modify an instrument merely because a party has discovered that its operation generates an adverse and unplanned tax liability.

[12] If by mistake a legal instrument does not accord with the true agreement it was intended to record — because a term has been omitted, an unwanted term included, or a term incorrectly expresses the parties’ agreement — a court may exercise its equitable jurisdiction to rectify the instrument so as to make it accord with the parties’ true agreement. Alternatively put, rectification allows a court to achieve correspondence between the parties’ agreement and the substance of a legal instrument intended to record that agreement, when there is a discrepancy between the two. Its purpose is to give effect to the parties’ true intentions, rather than to an erroneous transcription of those true intentions.

[38] To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. Where the error is said to result from a mistake common to both or all parties to the agreement, rectification is available upon the court being satisfied that, on a balance of probabilities, there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement. In the case of a unilateral mistake, the party seeking rectification must also show that the other party knew or ought to have known about the mistake and that permitting the defendant to take advantage of the erroneously drafted agreement would amount to fraud or the equivalent of fraud.

[39] […] Rectification is not equity’s version of a mulligan. Courts rectify instruments which do not correctly record agreements. Courts do not “rectify” agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome.

The leading cases on rectification under the civil law in Quebec are Jean Coutu Group (PJC) Inc. v AGC et al, 2016 SCC 55 and ARQ et al v Services Environnementaux AES Inc. et al, 2013 SCC 65.

Jean Coutu Group (PJC) Inc. v AGC et al

The Jean Coutu Group (PJC) Inc. (“PJC Canada”), is a Quebec corporation. In 2004, its subsidiary, PJC USA invested in a chain of pharmacies in the United States. To avoid the negative perceptions of PJC Canada’s investors of the variation in this investment’s value due to fluctuations in U.S. to Canadian dollar exchange rates, PJC Canada consulted professional advisors to find ways to neutralize them without adverse tax consequences. Although the chosen set of transactions succeeded in neutralizing the effect of the exchange rate fluctuations, they did not succeed in avoiding tax consequences. In 2010, the Canada Revenue Agency (“CRA”) assessed PJC Canada for CAN$2.2 million of unpaid income tax for the years 2005, 2006 and 2007. The CRA concluded that because PJC USA was a controlled foreign affiliate of PJC Canada the interest it had earned during those years on the US$70 million loan constituted foreign accrual property income (“FAPI”) under the Income Tax Act and was taxable as income of PJC Canada.

After the CRA audit, PJC Canada brought a motion for rectification of the documents related to the agreement and for declaratory relief under art. 1425 of the Civil Code of Québec (“C.C.Q.”). The application judge granted the motion. Because of the adverse tax consequences, he held that there was a disparity between the common intention of the parties and the documents drawn up to give effect to that intention. Therefore, PJC Canada was allowed to amend the documents by inserting new transactions, such that the interest payable by PJC Canada to PJC USA would be offset by interest payable by PJC USA to PJC Canada, reducing FAPI to zero. The Court of Appeal allowed the appeal, holding that the general intention of PJC Canada that the agreement be tax-neutral was insufficiently determinate to serve as the basis of a modified agreement.

Held (Abella and Côté JJ. dissenting): The appeal should be dismissed.

[4] […]The written or oral expression of a contract can be amended if there is a discrepancy between it and the contracting parties’ true agreement. It cannot be amended where there is no such discrepancy but that true agreement merely produces unintended or unanticipated consequences.

[23] A taxpayer’s general intention of tax neutrality cannot form the object of a contract within the meaning of art. 1412 C.C.Q., because it is insufficiently precise. It entails no sufficiently precise agreed-on juridical operation. Nor can such a general intention in itself relate to prestations that are determinate or determinable within the meaning of art. 1373 C.C.Q. It says nothing about what one party is bound to do or not do for the benefit of the other. Therefore, a general intention of tax neutrality, in the absence of a precise juridical operation and a determinate or determinable prestation or prestations, cannot give rise to a common intention that would form part of the original agreement (negotium) and serve as a basis for modifying the written documents expressing that agreement (instrumentum). As a result, art. 1425 C.C.Q. cannot be relied on to give effect to a general intention of tax neutrality where the writings recording the contracting parties’ common intention produce unintended and unforeseen tax consequences.

[24] In my opinion, when unintended tax consequences result from a contract whose desired consequences, whether in whole or in part, are tax avoidance, deferral or minimization, amendments to the expression of the agreement in accordance with art. 1425 C.C.Q. can be available only under two conditions. First, if the unintended tax consequences were originally and specifically sought to be avoided, through sufficiently precise obligations which objects, the prestations to execute, are determinate or determinable; and second, when the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so. This is because contractual interpretation focuses on what the contracting parties actually agreed to do, not on what their motivations were in entering into an agreement or the consequences they intended it to have.

[29] Written documents can be modified in accordance with art. 1425 C.C.Q. so that they accurately reflect the true agreement between the parties. The agreement itself cannot be modified to achieve whatever results the parties may have desired or expected in entering into it.

ARQ et al v Services Environnementaux AES Inc. et al

Shareholders of corporations engaged in transactions to reorganize the corporations without tax consequences. As a result of errors made by the shareholders' tax advisors, the tax authorities issued notices of assessment in which they claimed tax amounts these taxpayers had not expected to pay. In the AES case, the parties had agreed on share transfers involving a rollover transaction that would be conducted in accordance with the procedures provided for in the relevant tax legislation and was based on a calculation of the adjusted cost base ("ACB") of the transferred shares. One aspect of the consideration paid for the transferred shares was the issuance and delivery of a note for an amount equal to that of their ACB. The agreement, the intended effect of which was to defer the tax payable, was vitiated by an error made in calculating the ACB of the shares. Rather than seeking to annul the contract, the parties agreed to correct the error by amending the documents that recorded and implemented their agreement, including the necessary tax forms, after which they took their case to the Superior Court by means of a motion for rectification. In the Riopel case, the parties had reached a verbal agreement to carry out a detailed tax plan, the essential terms of which had been recommended to them by their advisors. The agreement provided for a series of operations and acts to be completed, with precise timelines, to carry out share transfers and a corporate amalgamation in such a way as to defer the tax liability associated with those transactions by following procedures provided for in tax legislation. The parties' advisors reversed the order of the corporate amalgamation and the share transfer. Because that error prevented the deferral of tax, they tried to correct it by amending the original acts and having their clients sign the amended acts without explaining the nature of the amendments to them. After the tax authorities issued the notices of assessment and the errors made in drafting the writings associated with the transaction were discovered, the parties agreed to give effect to their original agreement by amending the defective acts. The Superior Court granted the application for rectification in AES but dismissed the one in Riopel. The Quebec Court of Appeal granted both applications for rectification, holding that art. 1425 C.C.Q. authorized the correction of the discrepancies between the common intentions of the parties and the intentions declared in the acts, because the applications were legitimate and neither correction affected the rights of third parties.

Held: The appeals should be dismissed.

Before the release of this decision, it was unclear to what extent rectification of documents was available in tax motivated applications in Québec. The Québec Court of Appeal (QCCA) heard both cases in 2011 and determined that on the basis of Article 1425 of the Civil Code of Québec (CCQ), Québec civil law allows the courts to correct documents in order to give effect to the parties' true common intentions. Article 1425 also provides that the common intention of the parties shall be sought in interpreting a contract. Therefore, there is no need to import the common law doctrine of rectification into Québec's civil law. The SCC confirmed that the civil law did afford a remedy that is the equivalent of rectification of a contract. (See also Jean Coutu, at paras. 44 to 47 and Fairmont Hotels at para. 33)

Rescission:

The leading case on rescission is AGC et al v Collins Family Trust et al, 2022 SCC 26.

AGC et al v Collins Family Trust et al

Two companies implemented a plan to protect corporate assets from creditors without incurring income tax liability. The plan was based in part on interpretations published by the Canada Revenue Agency (“CRA”) of the attribution rules in section 75(2) and the intercorporate dividend deduction in s. 112(1) of the Income Tax Act. It involved the creation of family trusts, to which dividends were paid. After the plans were implemented, the Tax Court of Canada, in another matter, interpreted s. 75(2) differently than was commonly accepted by tax professionals and CRA. CRA reassessed the trusts’ returns and imposed unanticipated tax liability. The trusts petitioned for the equitable remedy of rescission of the transactions leading to and including the payment of dividends. The chambers judge considered himself bound to follow the Court of Appeal for British Columbia’s decision in Re Pallen Trust, 2015 BCCA 222, 385 D.L.R. (4th) 499, which had applied the test for equitable rescission stated in Pitt v. Holt, [2013] UKSC 26, [2013] 2 A.C. 108, to similar transactions, and he allowed the petitions. The Court of Appeal dismissed the Attorney General’s appeals.

Held (Côté J. dissenting): The appeal should be allowed, the judgments of the Court of Appeal and of the chambers judge set aside and the petitions dismissed.

[16] From Fairmont Hotels and Jean Coutu, taken together, I draw the following interrelated principles relevant to deciding this appeal:

(a) Tax consequences do not flow from contracting parties’ motivations or objectives. Rather, they flow from the freely chosen legal relationships, as established by their transactions (Jean Coutu, at para. 41; Fairmont Hotels, at para. 24).

(b) While a taxpayer should not be denied a sought-after fiscal objective which they should achieve on the ordinary operation of a tax statute, this proposition also cuts the other way: taxpayers should not be judicially accorded a benefit denied by that same ordinary statutory operation, based solely on what they would have done had they known better (Fairmont Hotels, at para. 23, citing Shell Canada, at para. 45; Jean Coutu, at para. 41).

(c) The proper inquiry is no more into the “windfall” for the public treasury when a taxpayer loses a benefit than it is into the “windfall” for a taxpayer when it secures a benefit. The inquiry, rather, is into what the taxpayer agreed to do (Fairmont Hotels, at para. 24).

(d) A court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability (Fairmont Hotels, at para. 3; Jean Coutu, at para. 41).

[22] I agree with the conclusion in Canada Life that Fairmont Hotels and Jean Coutu bar a taxpayer from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute. The statements of principle in those judgments ⸺ that tax consequences flow from legal relationships, that taxpayers’ liabilities should be governed by the ordinary operation of tax statutes and on what the taxpayer agreed to do, and that legal instruments cannot be modified merely because they generated an adverse tax liability ⸺ are categorical, and not restricted to cases where rectification is sought. To be clear: they are of general application, precluding equitable relief altogether when sought to avoid an unintended tax liability that has arisen by the ordinary application of tax statutes to freely agreed upon transactions. There is no room for distinguishing Fairmont Hotels or Jean Coutu based upon the particular remedy sought. While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.

[27] In short, the “unfairness” the respondents complain of was the direct result of the ordinary operation of the Act respecting transactions freely undertaken. And, as already discussed, no unfairness lies in holding the respondents to the consequent tax liabilities.

Annulment:

Felix & Norton international inc. c PG (Canada), 2009 QCCS 919 is a decision on annulment from the Superior Court of Quebec. (decision only available in French).

Felix & Norton international inc. c PG (Canada)

[1] Felix & Norton et ses deux actionnaires demandent au Tribunal de prononcer un jugement déclaratoire quant à la nullité d'une résolution adoptée par le conseil d’administration de la compagnie le 7 juillet 2006. Cette résolution décrétait le versement d’un dividende en capital de 950 000 $ aux actionnaires de la compagnie payable le 31 juillet suivant et prévoyait que la compagnie ferait le choix de se prévaloir des articles 83(2) de la Loi de l’impôt sur le revenu du Canada et 502 de la Loi sur les impôts du Québec.

[2] La compagnie plaide l’erreur au soutien de sa demande d’annulation, ses comptables lui ayant fourni des chiffres inexacts quant au dividende qui pouvait être déclaré sans impact fiscal. La compagnie plaide que n'eût été de cette erreur, elle n'aurait pas adopté la résolution qui a été adoptée. Elle ne plaide pas ignorance de la loi ni erreur quant à l’application de celle-ci. Elle fait plutôt valoir que des informations erronées lui ont été fournies quant aux chiffres, ce qui a vicié tout le processus. La déclaration du dividende devait en effet n’avoir aucun impact fiscal ni entraîner aucun impôt. Dans les faits, les comptables avaient en main les mauvais chiffres, de sorte que la direction de la compagnie a été induite en erreur et a fait autre chose que ce qu’elle entendait faire.

[5] En l'espèce, le dividende n’aurait pas dû dépasser 750 000 $ en raison des gains et pertes en capital antérieurement déclarés. Or seuls ceux de 2000 et 2001 ont été pris en considération par les comptables qui ont conseillé la compagnie. La perte très importante de 1999 a été ignorée. Cela vient de ce que les déclarations de revenus antérieures à 2000 étaient préparées par un autre bureau de comptables. Les informations qu'elles contiennent n'étaient donc pas connues des nouveaux comptables. Elles auraient pu être obtenues, puisque les dossiers étaient accessibles (bien qu'archivés). Mais elles ne l’ont pas été en raison d’un imbroglio qui s'est produit entre les comptables et les dirigeants de la compagnie.

[15] Il n’y a aucun doute dans le présent cas que les administrateurs de la compagnie (qui se confondent ici avec les actionnaires), et particulièrement son président, se sont fiés entièrement à ce que les comptables leur ont dit et aux chiffres qu’ils ont fournis, lors de l’adoption de la résolution du 7 juillet 2006. Ils n’avaient aucune idée des chiffres applicables, des gains et pertes en capital des années précédentes et, à vrai dire, des concepts en cause en l’espèce. Ils s’en sont remis entièrement à leurs comptables, que ce soit quant aux dispositions de la loi applicables ou quant aux chiffres. Or en ce qui concerne ces derniers, il est clair que les administrateurs de la compagnie ont été induits en erreur.

[16] D'autre part, la preuve établit clairement que les administrateurs et actionnaires de la compagnie ont consenti à l’adoption de la résolution sur la base expresse et essentielle qu’elle ne donne lieu au paiement d’aucun impôt et qu’elle n’oblige pas non plus la compagnie à verser quelque somme que ce soit aux actionnaires dans l’immédiat, en l'absence de moyens pour le faire. Ces conditions étaient des conditions sine qua non, ainsi que tous en ont témoigné, incluant le comptable. Il a toujours été clair que la résolution n’était adoptée qu’à ces conditions.

[24] Les tribunaux n’ont donc jamais hésité à annuler des contrats ou résolutions d'une compagnie afin de faire respecter l’intention initiale des parties, du moment qu’il ne s’agissait pas de cas où les parties n’avaient pas tenu compte des conséquences fiscales pour ensuite tenter d’y remédier subséquemment à la cotisation.

[30] La décision des administrateurs doit cependant émaner d’un consentement libre et éclairé. Si le consentement est vicié par l’erreur sur un élément essentiel, la nullité de la résolution peut être demandée. Les principes applicables à l’intégrité du consentement en matière contractuelle valent pour l’acte juridique unilatéral, mutatis mutandis. Ainsi, un testament, qui relève de la seule volonté du testateur, peut être annulé si celui-ci n’a pas donné un consentement valide (par exemple, parce que ne jouissant pas de toutes ses facultés). Il n’y a aucun doute que l’administrateur qui donne son consentement à une résolution le fusil sur la tempe, ne donne pas un consentement valide. La résolution peut ensuite faire l’objet d’une demande d’annulation devant la Cour.

[34] Une résolution d'une compagnie, incluant celle qui déclare un dividende, peut ainsi être annulée lorsqu’elle a été le fruit d’une erreur, lorsqu’on s’est basé sur des faits matériels erronés, en l'occurrence comme ici sur des données inexactes, à condition qu'il ne s'agisse pas d'une simple question d'appréciation et que l'erreur ne soit pas inexcusable.

[43] Le Tribunal est d’avis que l’on est ici en présence d’une erreur qui a vicié le consentement donné par les administrateurs de la compagnie à la résolution du 7 juillet 2006. L’erreur porte sur un élément essentiel et fondamental. Elle a été commise de bonne foi. Il ne s’agit pas d’annuler une résolution prise sans que l’on ait tenu compte de ses conséquences fiscales et où on tenterait maintenant d’y remédier. Il s’agit d’un simple cas où les administrateurs ont obtenu des chiffres inexacts et où l'erreur a vicié leur consentement.