Category Archives: Quebec

Rectification, Amending Contracts, and Quebec Civil Law

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Rectification, Amending Contracts, and Quebec Civil Law

Quebec (Agence du Revenu) v. Services Environnementaux AES, 2013 SCC 64

[Though a Quebec Civil Law decision, the comments of the SCC reach into the common law provinces.  Tax statutes, therefore, come into play to determine tax liability after the application of other relevant Provincial and Federal laws.  This case is interesting because it casts doubt on a number of conflicting decisions, particularly in the trust and estate tax area, where the application and effect of Provincial laws on tax liability were at issue.]

 

The shareholders of a corporation entered into an agreement to reorganize the capital of the corporation in a manner that would have no tax consequences.  They made an error in calculating the promissory note that was issued, which was supposed to be equal to the ACB of the shares, such that tax consequences would have resulted.  Rather than seeking to annul the contract, the parties agreed to correct the error by amending the contract that recorded their agreement, and then sought rectification by the courts.

The crown appeals from the Quebec Court of Appeal’s decision that granted rectifications for both of the cases before the court on the basis of article 1425 of the CC (allows for correction of discrepancy between common intention and intentions as declared in the acts).

The SCC rejected the Government of Quebec’s appeal.

The court started with the recognized premise that the nature of legal consequences of transactions to which tax law applies (after the fact) are determined by reference to the common and civil laws.

The Civil law of contracts allows parties to, as between themselves and through common agreement, to amend or alter contracts, thus parties are not prevented from acknowledging a common error and then setting out to correct it.  The courts must correct the error, if the error is proven.  Tax authorities cannot benefit from an error made by the parties to a contract after the error has been corrected by mutual consent.

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Cloutier v MNR, 2012 TCC 164

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Relationship of Subordination in Classifying the Employment Relationship in Quebec

Cloutier v MNR, 2012 TCC 164

The issue here was whether the worker was involved in insurable employment as defined in the Employment Insurance Act,  given the absence of evidence of exercise of control by the Employer (“taxpayer”).  The issue turned on the question of whether the taxpayer had a relationship of authority or subordination with the worker.

The taxpayer was a specialist physician, and the worker was hired to provide primarily child care services for the taxpayer’s child.  There was little control exercised by the taxpayer over the worker. The worker was paid full pay even when working shorter hours, or not working at all. The taxpayer said that they did this so that the worker would not leave for more steady employment.

The Court noted that it is important to refer to the Civil Code of Quebec, RSQ, c C-1991, where the contract of employment is defined in article 2085 as:

2085. A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer.

Thus, in Quebec one looks at (1) the work, (2) the remuneration, and (3) direction or control by the employer (relationship of subordination).  It is the third factor that distinguishes between a contract for services and contract of service in Quebec.    Intention of the parties, in Quebec, is not determinative, and the contract must be characterised by the court in light of what it is, not what it purports to be.  This requires an examination of how the parties conduct themselves.

The main problem here was that there was little if any evidence that the taxpayer exerted authority over the worker. The main evidence was expressions of dislike about the manner the closet was cleaned, and the existence of a set schedule (when to arrive at work, where to take care of children).

The court stated that its not the actual exercise of authority that is determinative.   The Court stated that it is:

… important to note that the relationship of subordination does not have to be demonstrated by specific facts or by a described or a well-documented situation. The evidence must simply show that the payers had and never waived such power. […] Nothing in the evidence supports the conclusion that the caregiver had the freedom, autonomy and flexibility typical of a contract for services. The mutual respect of the parties does not necessarily mean the parties negotiated as equals.

The Court asked itself whether the status of salaried employees should “exclude people who hold technical jobs requiring such highly specialized skills and knowledge that it is impossible to teach them anything or those who perform work with no supervision from the payer or those who have superior knowledge?”.  The answer is no. This was because the power of control is not tied to the payor’s experience, and “the status of employee is not inconsistent with the concepts of liberty, autonomy and flexibility”.

The worker could not entrust the children’s care to anyone else without the consent and approval of the taxpayer.

The taxpayer argued that there was always an intention to create a contract for services and that the advertisement state that the worker had to provide receipts.  The court noted that providing receipts was not determinative in the child care context, since childcare had tax consequences for the private individual while other workers did not.  The Court responded to the argument based on the mutual intention of the parties by stating that the mutual intention was not clear to the worker (she was under the impression that she was involved in insurable earning), and that before a court could take intention into account, the facts relating to the performance of the contract must be in line with – prove and validate – the choice of contract.  Also, it is important to be able to show that the worker understood the legal consequences of signing a contract for services, including the ability to collect EI.

Here, the taxpayer was satisfied with the work of the worker, and there was no opportunity to exercise the authority over the worker.  The court concluded that the agreement was a contract of services on the basis of the following taken together:

  • the regularity, continuity and indeterminate duration of the work;
  • the structure, start and end of work decided exclusively by the payer;
  • the caregiver’s lack of autonomy;
  • the exclusivity. The caregiver could not delegate her duties to a replacement without authorization and approval;
  • the special form of the remuneration;
  • the unilateral power of intervention and/or control held by the payer; and
  • the inequality in the contractual relationship. The parties were not equals in the negotiations despite the fact that the payer was very accommodating and respectful.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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