By Ashley Kandestin
In 2013, the Supreme Court of Canada emphasized that the “meeting of the minds” principle underpins article 1385 C.c.Q as the basic rule for the formation of contracts in Quebec civil law (Québec (Agence du Revenu) c. Services Environnementaux AES inc., 2013 SCC 65). The Court distinguished between the negotium – the agreement into which the parties to a contract intended to enter – and the instrumentum – the oral or written declaration of the intended agreement. This distinction is important given the commercial realities surrounding contractual negotiations, which are often protracted over long periods of time. Sometimes, what a party believed it was agreeing to is not actually reflected in the final draft of the written document eventually signed by the parties. The Court of Appeal re-examined these basic principles, as argued by the parties in the recent case of Canada (Attorney General) c. Groupe Jean Coutu (PJC) inc., 2015 QCCA 838.
This case dealt with Groupe Jean Coutu (PJC Canada)’s petition to have the Superior Court correct or rectify a series of commercial transactions it entered into in 2005 that later yielded unintended income tax assessments. The transactions were initially carried out in order to offset currency exchange fluctuations that negatively influenced PJC Canada’s investment potential. PJC Canada took the position that in seeking to solve a business problem, it was clear that no adverse fiscal consequences were intended. The company essentially pleaded that the instrumentum did not accurately reflect the negotium, and that consequently, its consent was vitiated when it signed off on the written transactions in 2005.
In a case of vitiated consent, a party has the right to correct the written agreement in order to reflect the situation it believed it was agreeing to. The Superior Court agreed with this argument, rectifying the transactions and relieving PJC Canada of its oversight.
The Attorney General appealed the decision, advancing that PJC Canada’s primary intention – to ease the effect of currency fluctuations on its balance sheets (negotium) – was effected through the transactions (instrumentum). Yes, the transactions did yield unintended fiscal consequences, but the Attorney General argued that the general intent to avoid or minimize income tax does not justify rewriting the transactions’ tax history. Interpreting and distinguishing the Supreme Court’s AES and Riopel judgment, the Court of Appeal agreed with the Attorney General, reversing the Superior Court judgment. Justice Mark Schrager, writing for the bench of three, held the following:
“ Correcting a transaction is not the same as changing it:
 (…) rectification is granted to restore a transaction to its original purpose, and not to avoid an unintended effect. A transaction which does not succeed in achieving its goal of avoiding tax is not the same thing as a transaction whose goal is other than tax avoidance but which unexpectedly results in a tax disadvantage. While, therefore, rectification is available in order to avoid a tax disadvantage which the parties had originally transacted to avoid, it is not available to avoid an unintended tax disadvantage which the parties had not anticipated at the time of transacting.
 AES & Riopel clearly examined the first type of transaction whose legitimate goal of avoiding tax was not achieved. The courts approved a correction to allow the parties to avoid a tax consequence that they had originally transacted to avoid.
 The Supreme Court of Canada has made it clear in a taxpayer’s favour that:Unless the (Income Tax) Act provides otherwise, a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done, and certainly not based on what a less sophisticated taxpayer might have done.
 The corollary of the foregoing premise, in my view, is that a taxpayer is obliged to pay tax arising from the transaction it effected and not the transaction that it would have preferred to have effected given the benefit of hindsight regarding unintended tax consequences. Taxpayers must live with the consequences of the contract they chose to put in place.
 In the present case, the commercial transaction was not a restructuring transaction seeking to defer or avoid tax as foreseen by the income tax legislation (as was the case in AES & Riopel) but rather a series of offsetting loans meant to neutralize the effect on the balance sheet of the variation in the value of PJC Canada’s American investment. The variations corresponded to fluctuations in the rate of exchange between Canadian and US dollars.
 The observation of the judge of first instance that the parties were not seeking to rewrite the tax history of the transaction constitutes, in my respectful opinion, a manifest error. Clearly, this is precisely what the parties were seeking to do. […]”
The full judgment can be read here.