Contractual interpretation in tax disputes: insights from Canada

The Tax Court of Canada’s recent analysis, in Henco Industries Limited v. Her Majesty the Queen, raises several important questions that relate to contractual interpretation in tax disputes. Firstly, what is the proper objective of contractual interpretation in tax disputes? Is the courts’ objective of ascertaining the ‘correct tax assessment’ a proper objective of interpretation? Also, is the pursuit of a ‘just result’ in the assessment a proper objective of interpretation? Secondly, what is the proper role of the words in the contract when carrying out the task of interpretation? Is the court required, or at liberty, to look past the words and focus instead on the parties’ actions, as evidenced by extrinsic evidence of the surrounding circumstances? Thirdly, when considering extrinsic evidence, is evidence of the parties’ subjective contractual intentions admissible for the purpose of interpretation? Fourthly, under what circumstances are contractual terms ambiguous in the legal sense? Fifthly, when is extrinsic evidence of the parties’ subjective intentions admissible for the purpose of resolving latent ambiguity? The purpose of this paper is to critically analyze the court’s approach to these issues in the Henco case. While this analysis relates directly to contractual interpretation in the Canadian context, it ought to also be relevant to other common law jurisdictions that share similar principles of contractual interpretation.