In a post I wrote in the spring, I summarized briefly Desormiers c. Lalumière, 2006 QCCS 2357, a decision of the Quebec Superior Court, which seemed to call into question the effectiveness of price adjustment clauses.
The Court held—and the Quebec Court of Appeal agreed—that the parties merely intended that the clause should prevent double taxation and that it should not bind the mother who had sold her shares to her son for a note. (The CRA, some time after mother sold her shares, opined that they were worth less than agreed by the parties. The price adjustment clause, then, should have reduced the principal amount of mom’s note.) In other words, according to the Quebec courts, the clause should not operate to affect the legal rights and obligations of the parties in the real world. The Supreme Court of Canada denied leave to appeal.
The result is surprising and, for tax advisers, unsettling. In the September 20, 2007, issue of CCH’s Tax Topics, Constantine Kyres of Fraser Milner points out that the decision, strictly from a tax standpoint, is incoherent. A legal agreement cannot have any effect for tax purposes if it does not impose real rights and obligations on the parties. It is a fundamental principle of our tax law that the tax effect of a transaction is driven by its legal substance.
What now? Do we need to re-draft our price adjustment clauses to include a clause saying “We really mean it”? It will be interesting to see what the CRA makes of this decision.
