Following its 2013 AES decision,[1] the Supreme Court of Canada ("SCC") has once again addressed the issue of retroactive modifications to written agreements in Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55. This time around, the SCC has ruled in favour of the tax authorities.
In this matter, the Jean-Coutu Group (PJC) Inc. ("PJC Canada") requested the modification of a series of transactions involving its American subsidiary, PJC USA. In 2004, PJC USA had invested in a chain of American pharmacies. A fluctuating exchange rate led to oscillations in the value of the investment, which in turn generated negative perceptions among investors. PJC Canada then decided to complete a series of transactions to neutralize the impact of the fluctuating exchange rate. However, the series of transactions also resulted in unintended fiscal consequences for PJC Canada. As such, it made a request to modify the transactions.
PJC Canada's request was dismissed. Although it is true that the intention to avoid tax consequences was a general consideration of PJC Canada's in completing the series of transactions, the SCC held that a mere desire to avoid such consequences does not justify a request for modification.
The Contract In Three Acts: Object, Cause and Consequences
The SCC considered the distinction between the object, the cause and the desired consequences of the contract.
The object of the contractual obligation is the prestation that the debtor is bound to render to the creditor and which consists in doing or not doing something. Thus, the object of the prestation is that which the prestation relates to. In contrast, the cause of the contract is the motivation that led the parties to enter into the contract, while the desired consequences represent that which the parties hope to gain from entering into the contract. Contractual interpretation is closely linked to the object of the prestation or of the agreement in question and not to its cause (motivation) or its desired consequences:
[24] […] This is because contractual interpretation focuses on what the contracting parties actually agreed to do, not on what their motivations were in entering into an agreement or the consequences they intended it to have.
In this matter, the intention to avoid tax consequences was a desired consequence of the contract, but it was not the object of the agreement:
[28] […] The intention that no adverse tax consequences result from a contract is more accurately described as the intended consequence of the contract, while the intention of neutralizing the effect of exchange rate fluctuations is more accurately described as the cause of the contract: […] Neither constitutes a contract, the object of a contract or the object of an obligation, and neither can ground the retroactive modification of documents that accurately record and implement what both parties actually agreed to do.
PJC Canada's Error Did Not Lay In the Way the Transactions Were Expressed
The object of a contract or of an obligation must be sufficiently precise, determinate or determinable in order to be recognized as the common intention of the parties. Seeking the true intention of the parties does not, therefore, allow for the modification of a written declaration of the contract on the basis that the cause or the consequences of the contract could not be achieved:
[29] Written documents can be modified in accordance with art. 1425 C.C.Q. so that they accurately reflect the true agreement between the parties. The agreement itself cannot be modified to achieve whatever results the parties may have desired or expected in entering into it. PJC Canada and PJC USA agreed on the precise set of prestations they wanted to execute, and there was no error in the way their agreement was expressed or executed. It simply resulted in unforeseen and undesirable tax consequences for PJC Canada. In the words of the respondent, there was a mistake in the transactions agreed to, not in the way they were expressed.
Convergence Between Québec Civil Law and the Common Law
The SCC also commented in its ruling that Québec Civil Law and Canadian Common Law do not differ greatly in their treatment of the doctrine of modification or rectification in contractual matters. Despite its different source in civil law as opposed to common law, this doctrine seeks the same ends and applies in essentially the same manner in both legal systems:
[47] […] both rectification under Québec civil law and rectification in equity are strict, in the sense that only the expression or transcription of contracts can be amended; contracts themselves cannot be reformulated. See AES; Spry, at pp. 630-32; Snell's Equity (33rd ed. 2015), by J. McGhee, at pp. 417-18; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368, at p. 375. In both cases, the true agreement is paramount, not its intended consequences or effects.
Dissenting Reasons of Justices Côté and Abella
It must be noted that Justices Côté and Abella provide dissenting reasons to explain why they would have allowed the modification of the transactions. In their view, the tax considerations constituted a sine qua non condition of the transactional scheme envisioned by the parties. Since the true intention of the parties was to seek tax neutrality while completing the series of transactions to avoid the effect of the fluctuating exchange rate, that true intention should have allowed the parties to obtain the desired modification:
[69] In this case, there was clearly a gap between the common and continuing intention of the parties and the operations implemented to carry out that intention. The evidence shows that there was a common and continuing intention not only as to the object of the contract but also its tax effects.
The dissenting reasons demonstrate that the scope of the concept of the true intention of the parties remains a subject that is open to further debate.
Nota Bene: A second bulletin will be issued to explain the tax debate that occurred in greater detail as well as the impact of this ruling from a tax perspective.
[1] Québec (Agence du revenu) v. Services Environnementaux AES inc.. 2013 SCC 65.
