Rectification: Notice to CRA may not be required

Last December, the SCC stated that parties are free as between themselves to amend or annul contracts and fix errors, subject to the rights of third parties (Quebec (Agence du Revenu) v. Services Environementaux AES inc. 2013 SCC).  This is contrary to the CRA's administrative position, which is to accept rectification orders as binding retroactively, provided advance notice and an opportunity to make submissions is given.  The Ontario Superior Court recently rejected the CRA's position on notice, and clarified when the CRA is entitled to notice of a court application that may potentially correct errors and circumvent, reduce or eliminate a tax bill.  In Canada (Attorney-General) v. Brogan Family Trust 2014 ONSC 6354, the taxpayer brought a successful application to rectify a Trust Agreement without advance notice to the CRA.  After the Order was granted, the CRA brought a motion to set it aside. The Court dismissed the  application, primarily because tax liability with respect to the trust had not yet been established at the time when the rectification order was granted - the amount of tax owing could only be calculated at the end of the year.  The Court examined the requirement to provide notice, and concluded that the CRA is only entitled to notice when its legal interests will be affected, such as when it is a creditor.  It is especially unclear in the context of rectification matters exactly when the CRA becomes a "creditor", as the error itself may give rise to unintended tax consequences and liability.  If the error can be rectified in Court, when is the CRA a creditor?   Presumably if the CRA is not yet a creditor, or not properly a creditor (due to error), notice may not strictly be required.  However as a matter of practice, notice is still likely prudent, if only to avoid argument after the fact, such as occurred in this case.