Summary

Keywords

Contracts - Income tax, Interpretation.

Summary

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Taxation – Income tax – Contract – Interpretation – Intention of parties – Rectification – Error made by professionals – Intention stated in transaction documents not reflecting common intention of parties – Transactions having unintended tax consequences – Under what conditions can a court agree or refuse to rectify contract documentation once it has been proven that the documentation is an incorrect expression of the common intention of the parties?

After acquiring an American pharmacy chain in 2004, the applicant, Le Groupe Jean Coutu (PJC) inc., was faced with a problem with the accounting presentation of its American investment because of fluctuations in the exchange rate between the U.S. and Canadian dollars. In February 2005, in an attempt to find a tax-neutral solution to its currency hedge problem, it orchestrated a series of transactions whose net effect was to transform its net U.S. investment into a net debt. The tax consequences anticipated and agreed to by Le Groupe Jean Coutu (PJC) inc. and The Jean Coutu Group (PJC) USA Inc. were set out in the documentation formalizing the transactions.

In 2010, following an audit for the taxation years 2005 to 2007, the Canada Revenue Agency notified the applicant that the transactions as described in the accounting scenario generated $2.2 million in additional taxes for the three years in question. The documentation solved the currency hedge problem but also had tax consequences that were neither foreseen nor agreed to by the parties.

Given that the common intention of the parties was incorrectly reflected in the documentation and that its consent was therefore vitiated, the applicant filed a motion in the Superior Court for an order to rectify the books and records and for declaratory judgment. The Jean Coutu Group (PJC) USA Inc. consented to the motion for rectification, whereas the Attorney General of Canada objected to it, arguing that the requested corrections did not meet the conditions for rectification.