Riopel Facts
Mr. Riopel was the sole shareholder of "JPF-1" and he and his wife (Ms. Archambeault) held 60% and 40% of the shares of "Déchiquetage." The parties intended to amalgamate the two corporations to form "JPF-2," with Mr. Riopel as the sole shareholder of JPF-2.
A detailed tax plan which was presented to Ms. Archambeault and Mr. Riopel on September 1, 2004, contemplated the sale by Ms. Archambeault of her shares of Déchiquetage to Mr. Riopel [sic, JPF-1?] in consideration for $720,000 to be satisfied by (a) a promissory note of $335,000 (corresponding to the ACB of her shares) and (b) the issuance of 385,000 Class C preferred shares with a redemption amount of $385,000. Shortly after the amalgamation, the promissory note would be repaid by JPF-2, and the Class C preferred shares would be redeemed with a view to the resulting deemed dividend being paid out of JPF-2's capital dividend account. However, the amalgamation in fact occurred before any sale by Ms. Archambeault, and the amalgamation agreement did not reflect Mr. Riopel as being the sole shareholder of Déchiquetage going into the amalgamation. The lawyer and accountant tried to fix these problems without alerting the clients, by having them sign revised documents to reflect a post-amalgamation s. 86 reorganization: they showed Ms. Archambeault's shares of Déchiquetage being converted on the amalgamation into common shares of JPF-2, and then they provided in the documents for the redemption of those common shares in consideration for the promissory note of $335,000 and the issuance of 385,000 preferred shares.
Both CRA and Quebec's Ministère du Revenu assessed Ms. Archambeault on the basis that she had received a deemed dividend of $335,000. The taxpayers then brought a motion seeking "recognition of the agreement they had actually reached [on September 1, 2004] so that the documents would reflect their true intention" (para. 13).
AES Facts
Preliminarily to a sale of a portion of its shares of a subsidiary ("Centre") to a new investor, AES and Centre instructed their advisors to implement a s. 86 reorganization of Centre, so that AES's voting shares of Centre were exchanged for (a) 4,500,000 voting participating shares with an aggregate paid-up capital of $1, and (b) a promissory note for $1,217,028. AES had erroneously understood that the adjusted cost base of its Class A shares of Centre was $1,217,029, so that the exchange would occur on a rollover basis. In fact, the ACB of those shares was only $96,001, so that the exchange gave rise to a taxable capital gain of $840,770. AES was reassessed accordingly.
After filing AES's notice of objection, the parties cancelled the $1,217,028 note and issued a $95,000 note and 1,122,029 Class C shares with a value of $1,122,029. They then asked the Quebec Superior Court for an order under art. 1425 declaring the effectiveness of these changes. Revenu Quebec contested the motion, and the Attorney General of Canada participated as intervener (in this case as well as Riopel).
Disposition
After noting (at para. 32) that "a contract is distinct from its physical medium," LeBel J found (at para. 36) respecting Riopel that "on September 1, 2004, the parties reached a verbal agreement to carry out a detailed tax plan, the essential terms of which had been recommended to them by their tax advisors," and (at para. 37) "the agreement of wills was not implemented properly." Respecting AES, "the admissions in the record confirm the existence of a tax planning agreement…[but] the agreement, the intended effect of which was to defer the tax payable was vitiated by the error made in calculating the ACB" (para. 39).
Respecting the Court's jurisdiction in a province where the common law of rectification did not apply, "the determination of the common intention, or will, of the parties represents a true exercise of interpretation" for purposes of art. 1425 C.C.Q. (para. 48). After indicating (at para. 54) that if all that had been established was "a taxpayer's intention to reduce his or her tax liability" then "absent a more precise and more clearly defined object, no contract would be formed," LeBel J. granted the requested relief under art. 1425 in both actions, stating (at para. 54):
These agreements provided, for the corporations in question, for the establishment of determinate structures that would, had they been drawn up properly, have made it possible to meet the objectives being pursued by the parties. The subsequent amendments did not alter the nature of the structures contemplated at the outset. All they did was amend writings that were supposed to give effect to the common intention, an intention that had been clearly defined and that related to obligations whose objects were determinate or determinable.
Juliar and Shafron
After referring to the argument of the Attorney General of Canada as intervener that the Juliar line of cases was inconsistent with Shafron and Performance Industries, LeBel J stated (at para. 55) that the cases before him were "governed by Quebec civil law and are not appropriate cases in which to reconsider the common law of rectification."