Jean Coutu Group (PJC) Inc. v. Canada (Attorney General)

Jean Coutu Group (PJC) Inc. v. Canada (Attorney General)
Collection
Supreme Court Judgments
Date
2016-12-09
Neutral citation
2016 SCC 55
Report
[2016] 2 SCR 670
Case number
36505
Judges
McLachlin, Beverley; Abella, Rosalie Silberman; Cromwell, Thomas Albert; Moldaver, Michael J.; Karakatsanis, Andromache; Wagner, Richard; Gascon, Clément; Côté, Suzanne; Brown, Russell
On appeal from
Quebec
Subjects
Commercial law
Notes
SCC Case Information: 36505
Decision Content
SUPREME COURT OF CANADA
Citation: Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670
Appeal heard: May 18, 2016
Judgment rendered: December 9, 2016
Docket: 36505
Between:
The Jean Coutu Group (PJC) Inc.
Appellant
and
Attorney General of Canada
Respondent
- and -
Agence du revenu du Québec
Intervener
Coram: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.
Reasons for Judgment:
(paras. 1 to 53):
Dissenting Reasons:
(paras. 54 to 95):
Wagner J. (McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Gascon and Brown JJ. concurring)
Côté J. (Abella J. concurring)
Jean Coutu Group (PJC) Inc. v. Canada (Attorney General), 2016 SCC 55, [2016] 2 S.C.R. 670
The Jean Coutu Group (PJC) Inc. Appellant
v.
Attorney General of Canada Respondent
and
Agence du revenu du Québec Intervener
Indexed as: Jean Coutu Group (PJC) Inc. v. Canada (Attorney General)
2016 SCC 55
File No.: 36505.
2016: May 18; 2016: December 9.
Present: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.
on appeal from the court of appeal for quebec
Contracts — Interpretation — Common intention of parties — Written instruments relating to transactional scheme not reflecting common intention of parties for tax-neutrality — Transactions having unintended tax consequences — Whether, under Quebec civil law, general intention that execution of transactional scheme be tax-neutral sufficient to authorize rectification of written instruments — Civil Code of Québec, art. 1425.
Commercial law — Corporations — Taxation — Whether rectification of written instrument amount to retroactive tax planning.
The Jean Coutu Group (PJC) Inc. (“PJC Canada”), is a Quebec corporation. In 2004, its subsidiary, PJC USA invested in a chain of pharmacies in the United States. To avoid the negative perceptions of PJC Canada’s investors of the variation in this investment’s value due to fluctuations in U.S. to Canadian dollar exchange rates, PJC Canada consulted professional advisors to find ways to neutralize them without adverse tax consequences. Although the chosen set of transactions succeeded in neutralizing the effect of the exchange rate fluctuations, they did not succeed in avoiding tax consequences. In 2010, the Canada Revenue Agency (“CRA”) assessed PJC Canada for CAN$2.2 million of unpaid income tax for the years 2005, 2006 and 2007. The CRA concluded that because PJC USA was a controlled foreign affiliate of PJC Canada the interest it had earned during those years on the US$70 million loan constituted foreign accrual property income (“FAPI”) under the Income Tax Act and was taxable as income of PJC Canada.
After the CRA audit, PJC Canada brought a motion for rectification of the documents related to the agreement and for declaratory relief under art. 1425 of the Civil Code of Québec (“C.C.Q.”). The application judge granted the motion. Because of the adverse tax consequences, he held that there was a disparity between the common intention of the parties and the documents drawn up to give effect to that intention. Therefore, PJC Canada was allowed to amend the documents by inserting new transactions, such that the interest payable by PJC Canada to PJC USA would be offset by interest payable by PJC USA to PJC Canada, reducing FAPI to zero. The Court of Appeal allowed the appeal, holding that the general intention of PJC Canada that the agreement be tax-neutral was insufficiently determinate to serve as the basis of a modified agreement.
Held (Abella and Côté JJ. dissenting): The appeal should be dismissed.
Per McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ.: A general intention of tax neutrality, in the absence of a precise juridical operation and a determinate or determinable prestation or prestations within the meaning of art. 1373 C.C.Q., cannot give rise to a common intention that would form part of the original agreement and serve as a basis for modifying the written documents expressing that agreement under art. 1425 C.C.Q. Contractual interpretation focuses on what the parties actually agreed to do, not on what their motivations were in entering into an agreement or the consequences they intended it to have. Therefore, when unintended tax consequences result from a contract whose desired consequences, whether in whole or in part, are tax avoidance, deferral or minimization, amendments to the expression of the agreement can be available only under two conditions. First, if the unintended tax consequences were originally and specifically to be avoided, through sufficiently precise obligations which objects, the prestations to execute, are determinate or determinable; and second, when the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so.
In this case, 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. There was a mistake in the transactions agreed to, not in the way they were expressed. If they had turned their minds to FAPI and had agreed to a transactional scheme that, if recorded and implemented properly, would have accomplished the goal of neutralizing currency fluctuations while also preventing the generation of FAPI, it would be appropriate to permit the written documents related to the transactions to be amended if that common intention was improperly transcribed in them. Allowing the amendment of the written document would not only amount to retroactive tax planning but would set an undesirable precedent. Taxpayers could immunize themselves from unforeseen tax consequences as well as from their inadvertence or mistakes, or for those of their tax advisors, in planning transactions.
Although rectification under Quebec civil law and in equity stems from different legal sources, they share similar principles and lead to similar results. Such similar results are particularly welcome in the tax context, where the same federal tax legislation applies throughout the country. Both have the same purpose: to ascertain that the true agreement between the contracting parties is accurately expressed in the written instruments reflecting either the terms of the agreement or the execution of the obligations themselves. Both are strict: only the expression or transcription of the contract can be amended; the contract itself cannot be. Further, in both legal systems, the true agreement is paramount, not its intended consequences or effects. Although they will not always lead to the same result because of differences between the two legal systems in contract law, they would in this case. Even in equity, PJC Canada’s requested amendments would not be permissible: the contracting parties did not reach a prior agreement with definite and ascertainable terms that included the new transactions that PJC Canada now wish to insert in the original agreement.
Per Abella and Côté JJ. (dissenting): The liberal and generous approach to rectification applied in Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838 (“AES”), should be followed. Departing from this approach limits the availability of an important recourse for taxpayers in the presence of an error made in good faith by them or their tax advisors and is incongruous with the realities of modern commerce. However, a mere intention to avoid taxation can never suffice to ground a request for rectification under art. 1425 C.C.Q. Although convergence between Quebec civil law and the common law of the other provinces is desirable from a tax policy perspective, retreating from the interpretation of art. 1425 C.C.Q. adopted in AES in order to achieve harmony with rectification in equity as considered by the majority in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720, is inconsistent with the law of contract in Quebec.
PJC Canada’s motion for rectification is both necessary and legitimate. 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 tax neutrality was a sine qua non of the parties’ envisaged transactional scheme. The object of the agreement consisted in tax-neutral reciprocal loans creating net liabilities in U.S. dollars. Failing to consider that the loans had to be tax-neutral in order for the agreement to make commercial sense is inimical to the overall scheme of the agreement. Tax neutrality was at its very core.
The object of the contract as defined in art. 1412 C.C.Q. transcends the particular prestations of the agreement. As such, rectification cannot be available only where the prestation, as expressed in the written document, was specifically envisaged by the parties from the outset. In AES, this Court recognized that even an oral declaration of the parties’ will can depart from their common intention and that rectification is not limited to the correction of clerical errors. Further, that the tax advisors’ error in this case was one of omission, insofar as they neglected to consider FAPI, as opposed to one of commission (like miscalculating the ACB of shares), is not a principled ground on which to distinguish this case from AES. This distinction is at odds with the proposition that, if an expression of common intention contains an error, particularly one that can, as here, be attributed to the taxpayer’s professional advisor, the court must, once the error is proved, ensure that it is remedied. It is also at odd with the recognition in AES of a court’s power to fill gaps in the text in interpreting the parties’ common intention.
The additional transactions or prestations envisioned by the parties were sufficiently determinable within the meaning of art. 1373 C.C.Q., as understood by this Court in AES. Indeed, under the terms of the February 7, 2005 loan agreement between PJC Canada and PJC USA, the principal could be repaid only by mutual consent of the parties. The insertion of intermediate steps involving the repayment of a demand loan therefore amounts to little more than judicial recognition of a partial discharge of an obligation that was determinable even on the terms of the parties’ original instrument. The prestations here entailed the provision of reciprocal debt financing, on the one hand, and partial repayment of that debt, on — and only on — mutual agreement of the parties. The prestations were therefore determinate and the corresponding obligation to repay was determinable.
PJC Canada’s request for rectification is not intended to rewrite the tax history of the transactions, but rather to fill in the gaps by adding two intermediate steps which maintain tax neutrality. The desired changes do not alter the nature of the original structure of the operation contemplated at the outset. The agreement was not a tax planning transaction. There is nothing here to suggest bad faith or an abuse of right on the part of PJC Canada. The tax advisors’ fault of omission was committed in good faith following the exercise of reasonable diligence by PJC Canada.
Nothing in PJC Canada’s request engaged the rights of third parties and there was no offense to the rules of evidence involved. In the absence of third party reliance, granting PJC Canada’s request promotes, rather than undermines, commercial certainty because it advances the contractual expectations of the parties. Since PJC Canada and PJC USA are in agreement as to their common intention, the concern for an illegitimate ex post rewriting of the initial bargain is absent here. Further, rectifying the agreement, in line with the innocent party’s duty to mitigate under art. 1479 C.C.Q., is preferable to the promotion of claims against that party’s advisors.
Cases Cited
By Wagner J.
Applied: Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838; referred to: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720; Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795; Guindon v. Canada, 2015 SCC 41, [2015] 3 S.C.R. 3; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368.
By Côté J. (dissenting)
Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838, aff’g 2011 QCCA 394; Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Walls v. Canada, 2002 SCC 47, [2002] 2 S.C.R. 684; Backman v. Canada, 2001 SCC 10, [2001] 1 S.C.R. 367; Pallen Trust, Re, 2015 BCCA 222, 385 D.L.R. (4th) 499; Lemair v. Canada (Procureur général), 2015 QCCS 1142; Canada (Attorney General) v. Brogan Family Trust, 2014 ONSC 6354, 2015 D.T.C. 5008; Philippe Trépanier inc. et Deloitte, s.e.n.c.r.l., 2014 QCCS 2615; Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157; Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Doré v. Verdun (City), [1997] 2 S.C.R. 862; Guindon v. Canada, 2015 SCC 41, [2015] 3 S.C.R. 3.
Statutes and Regulations Cited
Business Corporations Act, CQLR, c. S‑31.1, ss. 458, 459.
Civil Code of Lower Canada, art. 1013.
Civil Code of Québec, arts. 6, 7, 1371, 1373, 1374, 1375, 1378, 1385, 1410, 1412, 1425, 1479.
Code Napoléon, art. 1156.
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 86 , 91(1) , 95(1) “foreign accrual property income”.
Taxation Act, R.S.Q., c. I‑3, ss. 541 to 543.
Authors Cited
Baudouin, Jean‑Louis, et Pierre‑Gabriel Jobin. Les obligations, 7e éd., par Pierre‑Gabriel Jobin et Nathalie Vézina. Cowansville, Qué.: Yvon Blais, 2013.
Hanbury and Martin Modern Equity, 20th ed., by Jamie Glister and James Lee. London: Sweet & Maxwell, 2015.
Hogg, Peter W., Joanne E. Magee and Jinyan Li. Principles of Canadian Income Tax Law, 7th ed. Toronto: Carswell, 2010.
Krishna, Vern. Income Tax Law, 2nd ed. Toronto: Irwin Law, 2012.
Lluelles, Didier, et Benoît Moore. Droit des obligations, 2e éd. Montréal: Thémis, 2012.
Pineau, Jean, Danielle Burman et Serge Gaudet. Théorie des obligations, 4e éd., par Jean Pineau et Serge Gaudet. Montréal: Thémis, 2001.
Snell’s Equity, 31st ed., by John McGhee, ed. London: Sweet & Maxwell, 2005.
Snell’s Equity, 33rd ed., by John McGhee. London: Sweet & Maxwell, 2015.
Spry, I. C. F. The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages, 9th ed. Pyrmont, N.S.W.: Lawbook Co., 2014.
APPEAL from a judgment of the Quebec Court of Appeal (Chamberland, Giroux and Schrager JJ.A.), 2015 QCCA 838, [2015] 4 C.T.C. 82, [2015] AZ‑51175618, [2015] Q.J. No. 4127 (QL), 2015 CarswellQue 3542 (WL Can.), setting aside a decision of Chabot J., 2012 QCCS 6917, [2012] AZ‑50931255, [2012] J.Q. no 19046 (QL), 2012 CarswellQue 14611 (WL Can.). Appeal dismissed, Abella and Côté JJ. dissenting.
Dominic Belley and Jonathan Lafrance, for the appellant.
Daniel Bourgeois and Eric Noble, for the respondent.
Pierre Zemaitis and Christian Boutin, for the intervener.
The judgment of McLachlin C.J. and Cromwell, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ. was delivered by
[1] Wagner J. — This is one of two companion appeals dealing with requests to modify written contracts, documents or instruments after they generated unintended tax consequences. At issue in this appeal is whether, under Quebec civil law, the general intention of contracting parties that an agreement be tax-neutral is sufficient to authorize the modification of the written documents underlying the agreement so they reflect that intention.
[2] The appellant, a Quebec corporation, wanted to resolve an accounting issue without creating adverse tax consequences. To that end, the appellant and its subsidiary executed a transactional scheme recommended by its professional advisors. The transactions, however, triggered a particular tax consequence that the parties and their advisors had not foreseen, increasing the amount the appellant should have included in its income for tax purposes. Years later, when faced with an assessment for unpaid income tax after an audit by federal tax authorities, the appellant filed a motion to institute proceedings (“motion”) in the Quebec Superior Court for “rectification” of the documents relating to the transactions, in accordance with art. 1425 of the Civil Code of Québec (“C.C.Q.”). That article provides that contractual interpretation is most concerned with the common intention of the contracting parties, as opposed to the literal expression of that intention.
[3] The Quebec Superior Court granted the appellant’s motion, but the Quebec Court of Appeal overturned this decision. It saw the appellant’s request as an attempt to rewrite the tax history of the agreement. It held that the appellant’s intention that the transactions have no adverse tax consequences was insufficiently determinate to serve as the basis for modifying the documents to avoid the unintended and unforeseen tax consequence they had produced.
[4] I would dismiss the appeal. I agree with the Court of Appeal that a taxpayer’s intention that the agreement be tax-neutral which is not clearly defined and not related to obligations whose objects are sufficiently determinate or determinable cannot permit the documents recording and implementing the transactions to be amended to give effect to that intention, in accordance with art. 1425 C.C.Q. The written or oral expression of a contract can be amended if there is a discrepancy between it and the contracting parties’ true agreement. It cannot be amended where there is no such discrepancy but that true agreement merely produces unintended or unanticipated consequences. Amendments must align the written documents with the true agreement they are meant to record and implement, not with the contracting parties’ motivations for entering into the agreement or their expectations as to its consequences.
[5] The result in this appeal is bolstered by important policy considerations regarding the modification of written documents in the tax context. It also aligns with the result that would be reached in the common law provinces under the equitable remedy of rectification, which is the focus of the companion appeal, Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720 (“Fairmont”). Although the equitable remedy and art. 1425 C.C.Q. stem from different legal sources, they share similar principles and lead to similar results. Such similar results are particularly welcome in the tax context, where the same federal tax legislation applies throughout the country.
I. Facts
[6] The appellant, Jean Coutu Group (PJC) Inc. (“PJC Canada”), is incorporated and headquartered in Quebec. At the time of the agreement in question, it was the sole shareholder of Jean Coutu Group (PJC) USA Inc. (“PJC USA”), which is incorporated under the laws of Delaware.
[7] In 2004, PJC USA acquired a chain of pharmacies in the United States as an investment. The value of this investment, as recorded on PJC Canada’s balance sheets, varied from quarter to quarter due to fluctuations in U.S. dollar to Canadian dollar exchange rates until the acquisition is completed. Although these value fluctuations had no tax consequences until that time, they had to be recorded as gains or losses and they thus negatively affected the perceptions of PJC Canada’s investors. PJC Canada consulted professional advisors to find ways to neutralize this effect on perceptions without adverse tax consequences. Its advisors recommended two possible scenarios, one of which PJC Canada selected and executed in 2005:
(i) Feb. 7, 2005: PJC Canada loans US$120 million to PJC USA, with interest at London Interbank Offered Rate (“LIBOR”) plus 2.5 percent.
(ii) Feb. 25, 2005: PJC Canada purchases an additional 10 common shares of PJC USA for US$70 million.
(iii) Feb. 25, 2005: PJC USA loans US$70 million to PJC Canada, with interest at LIBOR plus 2.5 percent.
[8] The above transactional scheme succeeded in neutralizing the effect of the exchange rate fluctuations, but they did not succeed in avoiding tax consequences. In 2010, the Canada Revenue Agency (“CRA”) audited PJC Canada and assessed it for CAN$2.2 million of unpaid income tax for the years 2005, 2006 and 2007. The CRA concluded that because PJC USA was a controlled foreign affiliate of PJC Canada the interest it had earned during those years on the US$70 million loan it had advanced to PJC Canada constituted foreign accrual property income (“FAPI”), as defined by s. 95(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), and was taxable as income of PJC Canada pursuant to s. 91(1) of that Act. PJC Canada’s advisors had neither foreseen nor raised the FAPI problem.
II. Judicial History
A. Quebec Superior Court (Chabot J.), 2012 QCCS 6917
[9] After the CRA audit, PJC Canada brought a motion in the Quebec Superior Court for rectification of the documents related to the agreement and for declaratory relief, contending that its intention that the agreement be tax-neutral was not reflected in the documents. Although the term is perhaps a useful shorthand, rectification is an equitable remedy under the common law, not a Quebec civil law remedy. The parties and the courts below in fact used the term to refer to the correction of an inconsistency between the contracting parties’ common original intention and the expression of that intention in written or oral form, by way of contractual interpretation in accordance with art. 1425 C.C.Q. Relying on that article, PJC Canada sought to correct the documents recording and implementing the transactional scheme outlined above by inserting new transactions (iii) and (iv) below, such that the interest payable by PJC Canada to PJC USA would be offset by interest payable by PJC USA to PJC Canada, reducing FAPI to zero:
(i) Feb. 7, 2005: PJC Canada loans US$120 million to PJC USA, with interest at LIBOR plus 2.5 percent. (unchanged)
(ii) Feb. 25, 2005: PJC Canada purchases an additional 10 common shares of PJC USA for US$70 million. (unchanged)
(iii) Feb. 25, 2005: PJC USA pays back US$70 million of the US$120 million loan referred to above. (new)
(iv) Feb. 25, 2005: PJC Canada loans US$70 million to PJC USA. (new)
(v) Feb. 25, 2005: PJC USA loans US$70 million to PJC Canada, with interest at LIBOR plus 2.5 percent. (unchanged)
[10] The application judge granted PJC Canada’s motion. He found that the evidence demonstrated that the clear intention of the parties was to fix the exchange rate fluctuation problem without generating adverse tax consequences. Because such consequences had been generated in the form of FAPI, he held that there was a disparity between the common intention of the parties (negotium) and the legal documents drawn up to give effect to that intention (instrumentum). He held that he could therefore correct the series of documents to reflect the parties’ initial common intention, even if the parties had never originally contemplated the requested corrections. Furthermore, he noted that PJC Canada’s failure to consider FAPI was not due to negligence or lack of diligence. He also determined that PJC Canada’s request did not constitute an attempt to rewrite the tax history of the agreement, but rather served to correct unforeseen and unwarranted tax consequences. As such, in his opinion, the CRA’s rights were not affected by granting the request.
[11] In coming to the above determinations, the application judge did not have the benefit of this Court’s reasons in the companion appeals of AES and Riopel, which were heard together and disposed of in one judgment: Quebec (Agence du revenu) v. Services Environnementaux AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838. Therefore, no deference is owed to the application judge on his findings.
B. Quebec Court of Appeal (Chamberland, Giroux and Schrager JJ.A.), 2015 QCCA 838, [2015] 4 C.T.C. 82
[12] The Court of Appeal allowed the appeal, holding that the application judge had committed a palpable and overriding error in finding that the parties were not seeking to rewrite the tax history of the agreement.
[13] Unlike the application judge, the Court of Appeal was able to benefit from the reasons of this Court in AES. According to the Court of Appeal, this Court’s judgment in those cases did not overturn all the previous case law in tax matters, which indicates that parties cannot rewrite the history of their agreement and change the transactional scheme because of unintended tax consequences. Rather, the Court of Appeal determined that it is authority for the proposition that parties who choose to carry out a legitimate corporate transaction for the purpose of avoiding, deferring or minimizing tax and who make an error in giving effect to that transaction may correct that error to achieve the tax consequence originally and specifically intended and agreed upon. Parties can restore their agreement to what it should have been where they made a mistake in expressing the transaction in writing, not where they made a mistake in the transaction itself. The Court of Appeal held that the general intent of PJC Canada that the transactional scheme it undertook be tax-neutral was insufficiently determinate to serve as the basis of a modified agreement that a court should recognize with retroactive effect to cancel unintended tax consequences.
III. Issue and Positions of the Parties
[14] This appeal raises the following key issue: Where parties agree to undertake one or several transactions with a general intention that tax consequences thereof be neutral, but where unintended and unforeseen tax consequences result, does art. 1425 C.C.Q. allow the written documents recording and implementing their agreement to be amended with retroactive effect to make them consistent with that intention of tax neutrality?
[15] PJC Canada asserts that the answer to the above question is yes. It makes three main arguments in support of its position that the court’s decision to grant its motion should be restored. First, it argues that, in line with contract law principles as explained in AES, rectification was warranted. It claims that the common intention that it and PJC USA had was precise and unequivocal, as recognized by the application judge: to neutralize the effect of exchange rate fluctuations without generating adverse tax consequences. It says that this intention was erroneously expressed in the documents underlying the transactions executed in 2005, and should thus be corrected by inserting the two proposed transactions with retroactive effect. According to PJC Canada, the fact that it did not conceptualize these transactions at the time of contract formation does not bar rectification. Second, PJC Canada argues that the Court of Appeal’s conclusion that the motion was an attempt to rewrite the tax history of the agreement is fatally flawed because it is based on a factual error. Finally, PJC Canada asks this Court to adopt certain guiding principles that it proposes should govern rectification requests under art. 1425 C.C.Q., adding that its own request conforms to these principles.
[16] The respondent, the Attorney General of Canada, counters that rectification is not available in the instant appeal, for two reasons based on evidence. First, the respondent argues that there is no evidence demonstrating that PJC Canada and PJC USA reached an oral agreement before accepting the written documents relating to the transactions, which means that the written documents are the manifestation of their exchange of consents and thus an accurate reflection of the juridical operation envisaged and agreed on by them. Second, and in the alternative, the respondent asserts that even if there was an oral agreement, there was no error in the written documents transcribing it that would allow for rectification, because the documents reflected exactly what the parties had agreed. The respondent says that rectification does not allow parties to add further transactions they never initially considered, and that PJC Canada is confusing the parties’ objectives in entering into the contract ― neutralizing the exchange rate problem without generating adverse tax consequences ― with common intention, which pertains to the transactions on which they agreed. However, the respondent acknowledges that the Court of Appeal made the factual error identified by PJC Canada but submits that it is immaterial. Finally, the respondent argues that there is no need for this Court to adopt the guiding principles PJC Canada proposes, as the current jurisprudence offers sufficient guidance.
IV. Analysis
A. A General Intention of Tax Neutrality Related to Obligations Whose Objects Are Not Determinate or Determinable Does Not Permit the Modification of Written Instruments in Accordance With Article 1425 C.C.Q.
(1) Contracts Under Quebec Civil Law
[17] In this Court’s recent decision in AES, LeBel J. thoroughly canvassed the principles of contract formation under Quebec civil law, and he did so in a similar context, in which taxpayers were asking the courts to authorize and recognize amendments to written documents in accordance with art. 1425 C.C.Q. after transactions implemented by those documents triggered unintended tax results. LeBel J.’s reasons are thus highly instructive in the instant appeal. Article 1425 C.C.Q. reads: “The common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract.”
[18] Under Quebec civil law, a contract is an agreement of wills that is formed by the exchange of consents. The agreement or contract lies in the common intention of the parties, not in the oral or written declaration of that intention, which is their declared will. See AES, at paras. 32 and 48; J. Pineau, D. Burman and S. Gaudet, Théorie des obligations (4th ed. 2001), by J. Pineau and S. Gaudet, at p. 400; J.-L. Baudouin and P.-G. Jobin, Les obligations (7th ed. 2013), by P.-G. Jobin and N. Vézina, at p. 82; D. Lluelles and B. Moore, Droit des obligations (2nd ed. 2012), at para. 173. Written documents can thus be amended with retroactive effect to make them consistent with the true contract or agreement between the parties (AES; Lluelles and Moore, at para. 1574) as was the case in AES. There are, however, certain principles surrounding obligations and the formation of contracts which must be kept in mind when parties rely on art. 1425 C.C.Q. and ask courts to modify the documents expressing their common intention. I will review them below.
[19] According to art. 1371 C.C.Q., “[i]t is of the essence of an obligation that there be persons between whom it exists, a prestation which forms its object, and, in the case of an obligation arising out of a juridical act, a cause which justifies its existence.” The object of an obligation is the prestation that the debtor is bound to render to the creditor and which consists in doing or not doing something under art. 1373 C.C.Q. The object of the prestation is the thing that the prestation relates to. See Lluelles and Moore, at para. 1049. Further, art. 1373 provides that the prestation has to be “possible and determinate or determinable” and “neither forbidden by law nor contrary to public order”, whereas art. 1374 C.C.Q. reads that “[t]he prestation may relate to any property, even future property, provided that the property is determinate as to kind and determinable as to quantity.” See Baudouin and Jobin, at pp. 34‑35; Lluelles and Moore, at para. 1049.3. Such a requirement about the nature of the prestation, whether it relates to property or not, is necessary because parties must know the extent of their rights and obligations under the contract.
[20] Article 1378 para. 1 C.C.Q. defines a contract as “an agreement of wills by which one or several persons obligate themselves to one or several other persons to perform a prestation”. A contract has a cause, which art. 1410 C.C.Q. defines as “the reason that determines each of the parties to enter into the contract”. It also has an object upon which the parties must agree, which art. 1412 C.C.Q. defines as “the juridical operation envisaged by the parties at the time of its formation, as it emerges from all the rights and obligations created by the contract”. See also AES, at para. 30; Pineau, Burman and Gaudet, at p. 272; Lluelles and Moore, at paras. 1049 and 1051. In other words, the underlying purpose or motivation behind the parties entering into the contract is the cause of the contract, not to be confused with its object, which is the juridical operation they agree on: Pineau, Burman and Gaudet, at pp. 285-90; Lluelles and Moore, at paras. 1061 and 1061.2.
[21] As the above discussion shows, “for a contract to exist and become a legal reality, the parties’ undertakings must be sufficiently precise to establish the details of the contemplated operation”: AES, at para. 31. Importantly, LeBel J. explained that, because an intention of tax minimization can be neither the object of a contract nor the object of an obligation under a contract, it cannot serve as a basis for modifying the written documents or instruments expressing the contract:
Taxpayers should not view this recognition of the primacy of the parties’ internal will — or common intention — as an invitation to engage in bold tax planning on the assumption that it will always be possible for them to redo their contracts retroactively should that planning fail. A taxpayer’s intention to reduce his or her tax liability would not on its own constitute the object of an obligation within the meaning of art. 1373 C.C.Q., since it would not be sufficiently determinate or determinable. Nor would it even constitute the object of a contract within the meaning of art. 1412 C.C.Q. Absent a more precise and more clearly defined object, no contract would be formed. In such a case, art. 1425 could not be relied on to justify seeking the common intention of the parties in order to give effect to that intention despite the words of the writings prepared to record it. As I mentioned above, the agreements between the parties in both appeals were validly formed in that, according to evidence that the [Agence du revenu du Québec] did not contradict, they provided for obligations whose objects were sufficiently determinable. 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. [Emphasis added; para. 54.]
[22] Although LeBel J. spoke of reducing tax liability, in my view his comments apply equally to the general intention of contracting parties to achieve tax neutrality. By general intention, I mean that contracting parties have no specific tax consequence in mind (beyond a broad intention that no adverse tax consequences result) and have not agreed on a particular prestation or set of prestations that would, if expressed correctly, yield the intended consequence.
[23] A taxpayer’s general intention of tax neutrality cannot form the object of a contract within the meaning of art. 1412 C.C.Q., because it is insufficiently precise. It entails no sufficiently precise agreed-on juridical operation. Nor can such a general intention in itself relate to prestations that are determinate or determinable within the meaning of art. 1373 C.C.Q. It says nothing about what one party is bound to do or not do for the benefit of the other. Therefore, a general intention of tax neutrality, in the absence of a precise juridical operation and a determinate or determinable prestation or prestations, cannot give rise to a common intention that would form part of the original agreement (negotium) and serve as a basis for modifying the written documents expressing that agreement (instrumentum). As a result, art. 1425 C.C.Q. cannot be relied on to give effect to a general intention of tax neutrality where the writings recording the contracting parties’ common intention produce unintended and unforeseen tax consequences.
[24] In my opinion, when unintended tax consequences result from a contract whose desired consequences, whether in whole or in part, are tax avoidance, deferral or minimization, amendments to the expression of the agreement in accordance with art. 1425 C.C.Q. can be available only under two conditions. First, if the unintended tax consequences were originally and specifically sought to be avoided, through sufficiently precise obligations which objects, the prestations to execute, are determinate or determinable; and second, when the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so. 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.
[25] Such a reading of arts. 1412 and 1373 C.C.Q. doesn’t mean that amendments to the expression of the agreement in accordance with art. 1425 C.C.Q. can be available only to correct clerical errors. It upholds, however, the requirements stipulated in the C.C.Q. according to which the object of a contract needs to be precise and the object of an obligation sufficiently determinate or determinable to be recognized as the common intention of the parties to be sought when interpreting a contract.
(2) Application of the Above Principles to the Instant Appeal
(a) The Appellant’s Motion Should Not Have Been Granted
[26] In my view, the Court of Appeal was right to allow the appeal. Article 1425 C.C.Q. does not allow PJC Canada and PJC USA to retroactively amend the documents recording and implementing their agreement in the circumstances of this case. There was no error in the way their agreement was expressed. Moreover, they did not turn their minds to FAPI or a particular means of avoiding it, but merely had a general intention that their agreement be tax-neutral.
[27] PJC Canada emphasizes the application judge’s finding that it and PJC USA had the common intention of both neutralizing the effect of exchange rate fluctuations and generating no tax consequences. It accordingly argues that it did not need to conceptualize the precise set of prestations or transactions required to give effect to its intention of tax neutrality. I disagree.
[28] As outlined above, a general intention of tax neutrality, not related to obligations whose objects are determinate or determinable, cannot, on its own, give rise to a common intention that wou