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lundi 25 mai 2015

Correcting a Transaction is not the same as Changing It to Avoid Unintended Tax Consequences

By Sarah D. Pinsonnault


While the Supreme Court of Canada, in AES and Riopel, has allowed for the courts to approve a correction in order for the parties to avoid a tax consequence that they had originally transacted to avoid (summary of which can be read here), the Quebec Court of Appeal recently maintained the rule that, in tax matters, “parties cannot rewrite history and change their transactions because of unintended tax consequences”. In Mac's Convenience Stores Inc. c. Canada (Procureur général), 2015 QCCA 837, the Court of Appeal upheld the Superior Court’s decision that refused to allow the rectification sought by the Appellant of a corporate resolution that declared a dividend of 136 million dollars which caused unforeseen and adverse tax consequences. 

It was revealed that the declaration of the dividend was intended by the parties: “[t]he tax adviser conceived the plan […] and documents were prepared to reflect that plan” (para. 21). The plan however did not take into account the potential tax consequences of said declaration since this was not a topic of discussion amongst the Appellant’s directors. As a result, as opposed to the AES and Riopel cases, there was no disparity between the juridical act intended by the parties (negotium) and the written expression of that intent (instrumentum). 

Schrager, J.A., writing on behalf of the Court of Appeal, dismissed the appeal and concluded as follows:
“[42] In this case, Appellant sought to effect not a transaction by way of corporate restructuring or otherwise, specifically seeking the deferral or other avoidance of tax on the retained earnings of 136 million dollars. Appellant sought to channel those funds to its parent corporation for the latter’s use and in turn to be channelled through other related entities to a trust where a lower rate of tax would be applicable. The transaction was not a rollover (as in AES) or other restructuring transaction specifically designed to defer or minimize Appellant’s tax burden or that of its shareholders (as in Riopel) following the distribution of the 136 million dollars. I would not go so far as to limit the possibility of rectification to correct mechanical or technical errors in transactions specifically foreseen by the tax legislation (as in AES and Riopel). However to be legitimate, the object sought by the rectification cannot be a mere general intention to reduce tax liability. As Justice LeBel stated, mere tax avoidance cannot be the object of an obligation as it is not sufficiently determinate or determined within the meaning of Article 1378 C.C.Q. Otherwise stated, a transaction cannot be rectified merely to avoid the unintended tax. 
[43] In the present case, because of an oversight, there was an unexpected tax consequence regarding the deductibility of interest payments on the loan from a related foreign corporation because of the thin capitalization rules. This was a matter different from the declaration of the dividend. The payment of the 136 million dollar dividend to CTI was intended and was effected. There was no tax consequence on the dividend to Appellant’s parent, CTI. Everything was carried out as intended. Reduction of capital was not intended. The unintended consequence of the dividend, by ricochet, resulted from the thin capitalization rules and was not part and parcel of the transaction. Seen in this manner, the decision of the Supreme Court of Canada in AES & Riopel is not a licence to recast the documentation to effect the transfer of the 136 million dollars so as to avoid triggering the thin capitalization rules. There was no common intention of the parties regarding these rules as they were never contemplated and so cannot be the object of a meeting of the minds to which a court can give effect. 
[44] In view of the above, I agree with the conclusion arrived at by the judge in first instance. I see no error in the result of her judgment dismissing Appellant’s application and I would accordingly propose that the appeal be dismissed, with costs.”

To read this decision in its entirety, click here.

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