On November 19, 2015, the Supreme Court of Canada granted leave to appeal in Canada (A.G.) v. Groupe Jean Coutu (PJC) inc., 2015 QCCA 838, which addresses the question of when rectification will be granted in the tax context.
Le Groupe Jean Coutu (PJC) inc. acquired an American pharmacy chain in 2004. It faced a problem with the accounting presentation of this acquisition due to fluctuations in the exchange rate. In February 2005, in an attempt to find a tax-neutral solution to the problem, it carried out a series of transactions, the net effect of which was to transform the net U.S. investment into a net debt. The anticipated and agreed to tax consequences of the transactions were set out in the documentation formalizing the transactions.
After an audit for the taxation years 2005 to 2007, CRA advised Jean Coutu the transactions resulted in $2.2M in additional taxes for the years in question. Thus, the transactions as documented addressed the currency hedge problem, but created unanticipated tax consequences. Jean Coutu filed a motion in Québec Superior Court for an order rectifying the transactions. The Crown objected to the motion, arguing Jean Coutu did not meet the test for rectification.
The Québec Court of Appeal overturned the Superior Court decision granting Jean Coutu's motion for rectification. The Court reviewed the Supreme Court decision in AES & Riopel., 2013 SCC 65, confirming rectification is available to correct errors in giving effect to a transaction with intended tax consequences, but is not a general license to reverse or correct unintended tax consequences of commercial dealings.
The Court held that the transactions at issue were not restructuring transactions seeking to defer or avoid foreseen tax (as in AES & Riopel), but a series of offsetting loans meant to neutralize the effect on the balance sheet of the variation in the value of the American investment. The transactions thus achieved their intended purpose, and the general intention that the transactions be "tax neutral" was insufficient to justify rectification.
By granting leave to appeal in this case, the Supreme Court will hopefully provide clarification on the question of what "intention" is required to be proven in tax rectification cases. While prior cases have suggested that a general intention to enter into a "tax neutral" transaction is sufficient, more recent decisions have suggested that a more specific intent is required. If the Court of Appeal decision is upheld, rectification in the tax context will only be permitted where a transaction is purposefully structured to avoid specific, identifiable tax consequences, and not merely structured to be "tax neutral". If the Court of Appeal is correct, taxpayers and tax advisors will have to be even more diligent in considering the potential tax consequences of any transaction.