Foreign Rectification Orders

Foreign Rectification Orders[1]

In Canadian Forest Navigation Co. Ltd. v. The Queen (2016 TCC 43), the court found that the minister was not bound by rectification orders granted to a taxpayer by foreign courts. The court noted that the taxpayer has two choices: (1) it may seek an order from the relevant provincial superior court declaring the foreign judgment enforceable, or (2) it may proceed to the TCC, where the presiding judge will determine the weight to be given to the foreign judgment. The Canadian Forest decision also touches on the issue of when the CRA has a right to participate in a rectification proceeding and suggests that such a right may arise as early as the time when an assessment is proposed.

The taxpayer was assessed on the basis that the transfers of funds from its foreign affiliates were dividends within the meaning of sections 12 and 90 of the Income Tax Act. After the assessments were proposed, the taxpayer obtained rectification orders from courts in Barbados and Cyprus (“the foreign judgments”) that declared that the amounts transferred from the foreign affiliates to the taxpayer were not dividends but rather were transfers that resulted in indebtedness to the foreign affiliates. The taxpayer obtained the foreign judgments without having given notice to the CRA. (Presumably, proceedings were initiated in foreign courts rather than in a Canadian court because the foreign affiliates were incorporated outside Canada, and therefore the laws of those foreign jurisdictions applied.)

The taxpayer brought an application under rule 58 of the Tax Court of Canada Rules (General Procedure) for the TCC to determine whether or not the CRA was bound by the foreign judgments. Lamarre ACJ began her analysis by determining which conflict-of-laws rules applied to determine the enforceability of the foreign judgments. Because Quebec was the only Canadian province with which the appellant had a nexus, the law of Quebec applied.

After reviewing the relevant provisions of the Civil Code of Quebec and the Quebec Code of Civil Procedure, Lamarre ACJ found that foreign rectification orders are akin to non-money foreign judgments. Thus, in order to enforce the foreign judgment, the taxpayer must apply to the competent tribunal in Quebec and have the foreign judgments “homologated” by that tribunal. In considering such an application, a domestic court must consider relevant factors so as to ensure that the foreign judgments did not disturb the structure and integrity of the Canadian legal system and did not conflict with domestic law (Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52). Alternatively, it remained open to the taxpayer to rely on the foreign judgments in presenting its evidence before the TCC at trial; the weight given to the foreign judgments was to be determined by the presiding trial judge.

Further, Lamarre ACJ suggested that in the circumstances, the taxpayer’s failure to give the CRA notice of the rectification proceedings heightened the need for a competent tribunal in Quebec to review the foreign judgments to ensure that they did not disturb the structure and integrity of the Canadian legal system and did not conflict with domestic law. She suggested that the minister’s right to participate in a rectification proceeding as a creditor may begin prior to the sending of a notice of assessment—possibly as early as the time when a proposal letter is sent to the taxpayer. This view is in contrast to that set out in Canada (Attorney-General) v. Brogan Family Trust (2014 ONSC 6354), in which the court appeared to suggest that the CRA is required to be given notice of a proposed rectification proceeding only after a notice of assessment has been issued. Therefore, the question of exactly when the CRA must be given notice of a rectification proceeding, domestic or foreign, remains an open question and may depend on the circumstances.

[1] This article originally appeared in Canadian Tax Focus, May 2016, and is reprinted here by permission of the Canadian Tax Foundation.