2011 QCCA 394, 2011 QCCA 394

Unofficial English Translation Québec (Sous-ministre du Revenu) c. Services environnementaux AES inc. 2011 QCCA 394 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No. : 500-09-019557-099 (500-05-069012-019) DATE: MARCH 4, 2011 CORAM: THE HONOURABLE JACQUES CHAMBERLAND, J.A. YVES-MARIE MORISSETTE, J.A. NICHOLAS KASIRER, J.A. THE DEPUTY MINISTER OF REVENUE OF QUEBEC APPELLANT – Impleaded party and CANADA CUSTOMS AND REVENUE AGENCY Respondent v. SERVICES ENVIRONNEMENTAUX AES INC. and CENTRE TECHNOLOGIQUE AES INC.

RESPONDENTS – Petitioners JUDGMENT 1 THE COURT: On appeal brought by the Deputy Minister of Revenue of Quebec (DM Revenue) from a judgment of the Superior Court, (Madam Justice Sylviane Borenstein), rendered on March 3, 2009, which allowed the joint motion of the respondents, Services Environnementaux AES inc. (AES) and Centre technologique AES inc. (Centre technologique), for rectification of a written instrument and for a declaratory judgment; Background 2 The facts are not contested. They were the subject of several admissions, which it is appropriate to reproduce in extenso : [ translation ] 1.

The petitioner, Services environnementaux AES Inc. (“ AES ”), was constituted on April 19, 1993, under

Part 1A of the Companies Act , R.S.Q., c. C-38. 2. The petitioner, Centre technologique AES Inc. (“ Centre technologique ”), was constituted on April 18, 1997, under

Part 1A of the Companies Act as a wholly owned subsidiary of AES. 3. As part of a reorganization of the business of AES and Centre technologique, AES decided to transfer 25% of its shares of Centre technologique to a new investor (hereafter “ Groupe Sani-Gestion ”). 4. AES and Centre technologique then entered into a reorganization agreement pursuant to the provisions of

section 86 of the Income Tax Act , R.S.C., c. 1 (5th Supp.), and sections 541 and 543 of the Taxation Act , R.S.Q. c. I-3, (section 86 of the Income Tax Act and sections 541 and 543 of the Taxation Act being hereafter called the “ Share Exchange Tax Provisions ”) and instructed their respective advisors to implement it. 5. The Share Exchange Tax Provisions provide expressly for the possibility of deferring the tax consequences of a transaction under certain conditions, in particular that consideration other than shares received at the time of the transfer not exceed the adjusted cost base of such shares. 6.

Before the reorganization, AES held 1,217,029 class “A” shares (voting and participating) of Centre technologique, and it believed that its adjusted cost base for the shares within the meaning of the Income Tax Act was $1,217,029 whereas in fact it was only

$96,001. 7. On December 11, 1998, the directors and the sole shareholder of Centre technologique resolved to adopt Bylaw Number III amending the capital stock of Centre technologique.

Schedule A (Exhibit I-1)

Schedule B (Exhibit I-2) 8. On December 15, 1998, AES exchanged its 1,217,029 class “A” shares for 4,500,000 class “B” shares (voting and participating), 1 having aggregate paid-up capital of $1, and a demand note for $1,217,028 receivable from Centre technologique, as it appears from the Certificate to Amend the Articles of Incorporation of Centre technologique and the resolution of the board of directors of Centre technologique dated December 15, 1998.

Schedule C (Exhibit I-3)

Schedule D (Exhibits I-4) _____________ 1 The class "B" shares of Centre technologique differ from the class "A" shares in that they rank ahead of the class "A" shares in the event of liquidation or dissolution of the company or of any other distribution of its assets, a $100 interest to be shared between the holders of class “B” shares. 9.

By establishing the amount of the note at what they thought was the adjusted cost base for AES of the 1,217,029 class “A” shares of Centre technologique, AES and Centre technologique believed they had complied with the Share Exchange Tax Provisions and thus had deferred the tax implications of the share exchange transaction. 10. On December 17, 1998, AES subscribed for one (1) class “B” share of Centre technologique for $423,000. 11. On December 18, 1998, Groupe Sani-Gestion subscribed for 1,500,000 class “A” shares of Centre technologique for $1,500,000. 12.

Thus, with its class “B” shares, AES held 75% of the voting and participating shares of Centre technologique and, with its class “A” shares, Groupe Sani-Gestion held 25% of them. 13. Between December 18, 1998, and September 30, 1999, Centre technologique fully reimbursed AES for the $1,217,028 demand note. 14.

On September 15, 2000, AES and Centre technologique learned that the adjusted cost base of the class “A” shares of Centre technologique exchanged by AES was not $1,217,029 but $96,001 when the respondent sent AES a notice of assessment dated September 15, 2000, adding a taxable capital gain of $840,770 to the income for its taxation year ended September 30, 1999. 15. On November 23, 2000, AES filed a notice of objection to the notice of assessment sent by the respondent dated September 15, 2000.

Thereafter, the respondent issued a new notice of assessment (no. 0000645) as of April 6, 2001, and on April 30, 2001, AES duly objected to the new notice of assessment. 16. On November 1, 2001, the petitioners executed the resolutions and the agreement in Schedules E, F and G.

Schedule E (Exhibit R-1)

Schedule F (Exhibit R-2)

Schedule G (Exhibits R-3) 3 On November 22, 2001, the respondents brought before the Superior Court a motion for rectification of a written instrument and for a declaratory judgment to enable them to amend the documents pertaining to the transaction of December 15, 1998, [ translation ]

“so that they reflect the will of the petitioners and more specifically to substitute the amount of $95,000 for any reference to the amount of $1,217,028 and to issue 1,122,029 class “C” preferred shares with a value of $1,122,029. 4 The motion was contested by the appellant and the Canada Customs and Revenue Agency. 5 The judgment was rendered on March 3, 2009. 6 After briefly reviewing case law relevant to this type of motion, the trial judge allowed the respondents’ application and declared that amendment of the documents concerning the transaction of December 15, 1998, had retroactive effect as at that date and could be invoked against third parties in general and the taxation authorities in particular.

The appeal 7 The appellant argued that, in the absence of a clerical error, as defined in the civil law, that tainted the transaction documents, the Superior Court did not have the power to allow the amendment; if it concluded that an error vitiating consent had taken place, it could only annul the transaction (art. 1400 and 1407 C.C.Q. ), which the respondents had not asked it to do.

It faulted the trial judge for having introduced into Quebec civil law the equitable doctrine of rectification developed in common law; it added that, in any case, even if this common law doctrine applied, the judge would have been wrong to allow the parties to amend the contracts of December 15, 1998, because they faithfully reflected their intention at that time. 8 The respondents based their arguments on the residuary power of the superior courts within the meaning of

section 96 of the Constitution Act of 1867 , as defined by articles 2, 20 and 46 C.C.P. According to them, because the Quebec legislator did not deem it advisable to specifically exclude from the inherent jurisdiction of the Superior Court the power to correct errors by which a document may be tainted, it has the jurisdiction to do so. 9 The parties referred us, each in support of its arguments, to abundant case law that addresses the problem from different viewpoints. [1] Analysis 10 Articles 1400, 1407, 1425 and 1439 C.C.Q. are central to the analysis: 1400.

Error vitiates consent of the parties or of one of them where it relates to the nature of the contract, the object of the prestation or anything that was essential in determining that consent. An inexcusable error does not constitute a defect of consent. 1407.

A person whose consent is vitiated has the right to apply for annulment of the contract; in the case of error occasioned by fraud, of fear or of lesion, he may, in addition to annulment, also claim damages or, where he prefers that the contract be maintained, apply for a reduction of his obligation equivalent to the damages he would be justified in claiming. 1425. The common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract. 1439.

A contract may not be resolved, resiliated, modified or revoked except on grounds recognized by law or by agreement of the parties. 11 The appeal raises the issue of whether the Superior Court may allow correction of a contractual document in the case of divergence between the parties’ common intention and the intention stated in the instrument. [2] 12 The Court concluded that correction is allowed when, as in this case, the application is legitimate and necessary and the correction sought in no way affects the rights of third parties. 13 The appellant’s argument concerning importation into civil law of the common law doctrine of “equitable rectification” does not stand.

Quebec civil law already has all the tools required to allow, under certain conditions, that effect be given, in accordance to the true mutual intention of the parties, to a contract whose drafting does not reflect such intention.

It is not necessary to resort to a doctrine from another legal system in order to reach this result. 14 In this case, there are two ways of analyzing the inaccuracy of the stated adjusted cost base of the shares in the documents setting out the transaction of December 15, 1998, between AES and Centre technologique: (1) an error that vitiates consent or (2) a divergence between the mutual intention of the parties and their intention stated in the contract. 15 To the extent that it is not inexcusable, an error relating to the nature of the contract, the object of the prestation or anything that was essential in determining that consent vitiates such contract (art. 1400 C.C.Q. ). 16 The error may be common but, even if it is common, it can give rise only to the nullity of the contract [3] and not to its correction. 17 Furthermore, a judge who notes not an error but a discrepancy between the parties’ common intention (the negotium ) and their intention declared in the contract (the instrumentum ) may take this discrepancy into account by giving effect to the contract (article 1425 C.C.Q. ), on the condition, obviously, that the application is legitimate and that the proposed correction in no way affects the rights of third parties. 18 In fact, the rule set out at

article 1425 C.C.Q. concerning

interpretation of a contract places priority on the parties’ true intention over that declared in the contract.

19 The judge’s power to make the instrumentum consistent with the negotium is the implicit consequence of this rule, becausein this way the text of the contract can be brought into line with the parties’ true intention; however, once again, the rights of third partiesmust not be affected (here an analogy is possible with the rules of simulation, at articles 1451 and 1452 C.C.Q.).

A recent unanimousjudgment of the Court recognized it explicitly[4] and, if one wishes to base the trial judgment on a firm principle, this is the principle thatit is based on. 20 In this case, the parties had agreed on a transaction that complied with the taxation rules of the country and of the provincesuch that it had no immediate tax consequences. In fact, the contractual documents that they executed did not reflect that intentionbecause, as the taxation authorities were to discover thereafter, they had an immediate and material tax consequence.

Correction of thecontractual documents will make it possible to reflect the parties’ true intention. 21 The respondents’ application is legitimate. In fact, it is not for them a matter of rewriting the taxation history of the file, butof being able to correct the documents to make them consistent with the story designed and written by the parties on the basis of thescenario proposed by the tax legislation.

The taxation authorities do not suffer any prejudice because both the Income Tax Act[5] and theTaxation Act[6] set out for the taxpayer the procedure to follow so that a share-for-share exchange can take place without immediate taxconsequences and, moreover, if the parties had done so in a manner consistent with their will, there would have been no immediate taxconsequences for them. 22 FOR THESE REASONS: 23 DISMISSES the appeal without costs, given the novelty of the issue and its general interest. JACQUES CHAMBERLAND, J.A. YVES-MARIE MORISSETTE, J.A. NICHOLAS KASIRER, J.A.

Mtre Judith KucharskyLARIVIÈRE MEUNIERFor the appellant Mtre Dominic C. BelleyOGILVY, RENAULTFor the respondents Date of hearing: January 12, 2011 [1] For example, Imasco Ltée v.

La société de détail Imasco (26 November 2002) Montreal 500-05-075094-027 (Sup. Ct.), analyzed in the context of a tax dispute, in Imperial Tobacco Canada Ltée v. Québec (Sous-ministre du Revenu) 2006 QCCQ 8273, atparas. 44 to 129; also Brochu v. Placement Donald Brochu inc., 2007 QCCS 6500; contra: B.E.A. Holdings inc. v. Trafys inc. (16 April2003) Montreal 500-05-074753-029 (Sup. Ct.),, set aside in appeal, the Court allowing the main conclusion sought by the appellant andannulling by reason of error the sale made between the parties, B.E.A. Holdings inc. v.

Trafys inc. (C.A., 2004-02-12), SOQUIJ AZ-04019615; Christiane Archambault et al. v. Agence du revenu du Canada, 2010 QCCS 1576, F. Nantel J.S.C. [2] The file appears to be followed closely by Quebec tax specialists; see Marc Duval, “Mise à jour concernant l’annulation pour caused’erreur et la rectification au Québec” (2010) 30 Revue de l’Association de planification fiscale et financière 37 at 76; MathieuBouchard, “Rectification de contrats en droit québécois : mythes, réalités et applications pratiques”

(2006) Congrès APFF 38:1 to 38:22. [3] In the eyes of some authors, a clerical (or stylistic) error constitutes an exception to this rule but, on closer examination, such anerror is certainly not an “error” within the meaning of

article 1400 C.C.Q. because it does not concern anything essential that determinesconsent. [4] Sobey’s Québec inc. v. Coopérative des consommateurs de Ste-Foy, 2005 QCCA 1172 , [2006] R.J.Q. 100 at paras. 47–46. [5] R.S.C. (1985) c. 1 (5th Supp). [6] R.S.Q., c. I-13.