Rectification Not Permitted To Change Tax Planning

In two cases decided under the Civil Code of Québec, the Quebec Court of Appeal (QCA) has ruled that mistakes in tax-planning strategy are not eligible for rectification.

In Mac’s Convenience Stores Inc. c. Canada (Procureur général) (2015 QCCA 837), the court dismissed the taxpayer’s appeal from an unfavourable trial decision; in Canada (Attorney General) c. Groupe Jean-Coutu (PJC) inc. (2015 QCCA 838; the taxpayer has sought leave to appeal to the SCC), the court overturned a favourable trial decision. In both cases, the QCA concluded that in contrast to the SCC decision in Québec (Agence du Revenu) v. Services Environnementaux AES inc. (2013 SCC 65), there was no discrepancy between the transactions as presented and agreed to by the taxpayers and their implementation, and that rectification was therefore unavailable.

In Mac’s, the taxpayer contracted a loan in 2005 with a US related entity and deducted the interest expense. The taxpayer and related entities of the group undertook a series of transactions in 2006; one of the transactions involved the payment of a dividend by the taxpayer. That payment triggered the application of the thin capitalization rules, thereby limiting the taxpayer’s interest deduction with respect to the 2005 loan. The taxpayer sought the remedy of rectification to replace the dividend payment with a reduction of the stated capital.

In PJC, the taxpayer acquired drugstores in the United States. A fluctuation in exchange rates affected the value of the US investments in the taxpayer’s financial statements. In order to prevent this result, the taxpayer undertook a series of transactions involving intragroup loans; unexpectedly, however, the interest income paid on the loans triggered the FAPI rules. The taxpayer therefore sought to retroactively rectify the operations so that the interest payable would be reduced to zero, thereby avoiding the application of the FAPI rules.

In AES, the SCC had distinguished between “bold tax planning” (for which no rectification should be granted) and a mistake that had been made in the structuring of the planning rather than in its implementation. Although in Mac’s the QCA did not expressly restrict the rectification remedy to mechanical or technical errors, it limited the remedy to “legitimate corporate transaction[s]” and appeared to restrict its use to fairly common tax-planning structures such as rollovers and corporate reorganizations.

In PJC, the QCA concluded that the evidence must show that the error was made in the implementation of the planning and not in the structure of the planning itself, while warning taxpayers that the SCC in AES did not sanction a “general license to travel back through time with the benefit of hindsight to reverse or correct unintended tax consequences.” The court also mentioned that the SCC had approved rectification in situations where there was no mistake in the transaction itself, but rather a mistake in the way it was put in place.

Relying on Shell Canada Ltd. v. Canada ([1999] 3 SCR 622), in which the SCC ruled that taxpayers were entitled to be taxed on what they actually did and not on what they could have done, the QCA concluded in both Mac’s and PJC that taxpayers must be taxed on the basis of the transactions that they undertook and not on the basis of the transactions that they would have preferred to undertake given the unintended tax consequences.

Nathalie Perron
Barsalou Lawson Rheault SENC, Montreal
[email protected]

Canadian Tax Focus
Volume 5, Number 3, August 2015
©2015, Canadian Tax Foundation