Court of Appeal for Ontario

Date: 20211125 Docket: C68675

Before: Feldman, van Rensburg and Sossin JJ.A.

Between:

Robert Mandel and Ellen Pike Applicants (Appellants)

And:

1909975 Ontario Inc., 2458730 Ontario Inc., 2458721 Ontario Inc., HarrisonPike Inc., MatthewPike Inc. and Attorney General of Canada Respondents (Respondents)

Counsel: Peter H. Griffin, Matthew B. Lerner and Adam H. Kanji, for the appellants Diana Aird and Michael Ding, for the respondent Attorney General of Canada Mark A. Ross, for the respondents 1909975 Ontario Inc., 2458730 Ontario Inc., 2458721 Ontario Inc., HarrisonPike Inc. and MatthewPike Inc.

Heard: May 19, 2021 by video conference

On appeal from the order of Justice Markus Koehnen of the Superior Court of Justice, dated September 8, 2020, with reasons reported at 2020 ONSC 5343.

Feldman J.A.:

[1] The appellants restructured their family trusts in 2014 and 2015 to avoid a deemed disposition of the assets after 21 years and to maintain control of the underlying assets. As part of the restructuring arrangements, the appellants incorporated holding companies for their adult children (the “Child Corporations”) in which the appellants each subscribed for Class A voting shares and Class B convertible shares for a subscription price of $10 for the Class A shares and $100 for the Class B shares. The corporate documents stated that all the issued shares were fully paid. However, the appellants say that payment of $110 for the shares was never actually made.

[2] In 2019, the Canada Revenue Agency (“CRA”) reassessed the appellants for the tax years 2014 and 2015, increasing each appellant’s taxable income by close to $15,000,000 on the basis that their receipt of shares in the Child Corporations constituted a taxable benefit under s. 15(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).

[3] The appellants brought an application in the Superior Court of Justice for a declaration that because the shares were not paid for before they were issued, as required by s. 23(3) of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), they were not validly or lawfully issued, and that the appellants were never shareholders of the Child Corporations. They also sought an order for rectification of the share registers of the Child Corporations under s. 250(1) of the OBCA.

[4] The application judge declined to exercise jurisdiction over the application, deferring to the jurisdiction of the Tax Court of Canada. He also found that he would not have granted the declaration or ordered rectification had he assumed jurisdiction. The appellants appeal from that ruling to this court.

[5] The application judge’s decision to decline jurisdiction to grant a declaration is a discretionary decision. I see no reviewable error in the application judge’s exercise of that discretion. For that reason, I would dismiss the appeal.

A. Facts

[6] The families of each of the appellants hold a 25% interest in a successful manufacturing corporation through holding corporations. In the 1990s, the appellants transferred some of their interests in the holding corporations to family trusts, whose beneficiaries were the appellants’ respective children. In order to avoid a deemed disposition of the assets of the trusts at fair market value after 21 years, to defer the taxes that would become payable, and using a structure that would maintain control for the appellants, in 2014 and 2015 the family trusts reorganized their assets.

[7] The application judge set out the details of the reorganizations in his reasons. For the purpose of these reasons, it is sufficient to summarize the structure that was employed for each Child Corporation: a Child Corporation was incorporated for each child of each of the appellants (three Mandel children and two Pike children); one of the appellants became the first director of each corporation; by-law no. 1 was passed for each corporation, providing, in accordance with s. 23(3) of the OBCA, that no share could be issued until it is fully paid for; the appellant subscribed for 1,000 Class A voting shares for a price of $10, signing corporate documents of the Child Corporation stating that the subscription price had been paid in full; the family trust then transferred Class D voting shares of the holding company that owned the shares of the manufacturing corporation to the child, who transferred those shares to the Child Corporation in exchange for 100 non-voting common shares of the Child Corporation; after that, the appellant subscribed for 100,000 Class B convertible shares in the Child Corporation for the price of $100, again signing documents that said that the purchase price for the shares had been paid in full.

[8] In the result, each Child Corporation held shares in the family holding company, the appellants held Class A and Class B shares in each of the Child Corporations, and each child held non-voting common shares in their respective Child Corporation. Through this mechanism, the appellants each had control of the Child Corporations, and, in the event of a breakdown in any child’s marriage, by converting the Class B shares, the majority of the value of the Child Corporation would be protected.

[9] Between 2014 and 2019, the appellants signed numerous documents relating to the Child Corporations in their capacities as sole directors and as shareholders, including shareholder agreements that described their shares as issued, outstanding, fully paid and non-assessable. The only contemporaneous evidence to the contrary was a “Notice to Reader” contained in the financial statements of the Child Corporations, prepared by Ernst & Young, which recorded a “Sundry Receivable” of $110 within each Child Corporation. However, those financial statements also indicated that the shares had been issued, and recorded shareholders’ equity of $110 in respect of the shares.

[10] On June 5, 2019, the CRA advised each of the appellants that it proposed to reassess them for 2014 and 2015 and increase their respective taxable incomes on the basis that they had received a taxable benefit under s. 15(1) of the Income Tax Act by the issue of controlling shares in the Child Corporations for undervalue. Despite receiving submissions opposing the reassessment, the CRA proceeded with the reassessments on September 16, 2019, and Notices of Objection were filed on November 26, 2019. The CRA did not respond to the appellants’ Notices of Objection within 90 days. As a result, the appellants may appeal to the Tax Court, but at the time of the application, they had not yet done so.

[11] In February 2020, after the application was commenced, transactions within each Child Corporation resulted in each child becoming the controlling shareholder and a director of their respective Child Corporations.

[12] The appellants commenced this application on December 6, 2019 for a declaration that their shares in each Child Corporation were never validly issued because they did not pay for them, and for an order under s. 250(1) of the OBCA rectifying the share registers to reflect that the appellants never owned validly issued shares in the Child Corporations. In support of the applications, the appellants filed affidavits in which they explained that they never actually provided any consideration for the shares in each of the Child Corporations, and that those corporations never had bank accounts that would allow them to receive any monetary consideration. The appellants were not cross-examined on their affidavits.

B. Findings by the Application Judge

[13] The application judge accepted the submission of the CRA that the court should decline jurisdiction over the application because the matter should be determined by the Tax Court of Canada. Specifically, he found that:

The Tax Court is much better placed than is this court to determine whether, for tax purposes, the applicants should be considered to be controlling shareholders of the Child Corporations. The Tax Court has expertise in dealing with sophisticated corporate structuring and assessing the tax consequences of planning exercises of that nature. Given its specialized expertise, the Tax Court is also better placed to make findings of fact and draw inferences about whether the applicants paid for their shares, why they recorded the purchase price as a receivable (if the “Sundry Receivable” in fact relates to the shares) and whether any of these findings or inferences should have a bearing on the application of s. 23(3) to the tax assessment.

[14] The application judge also noted that the raison d’être for this application is the tax assessment, and referred to other cases where the Superior Court had declined jurisdiction in favour of the Tax Court: Baxter v. Attorney General of Canada, 2013 ONSC 3153, at paras. 8-29 and GLP NT Corp. v. Canada (Attorney General) (2003), 65 O.R. (3d) 840 (S.C.), at paras. 11-20. The application judge also referred to Danso-Coffey v. Ontario, 2010 ONCA 171, 99 O.R. (3d) 401, where this court found that the court below had erred by declaring that Ms. Danso-Coffey was not liable for retail sales tax rather than deferring jurisdiction on the tax liability issue to be determined under the Retail Sales Tax Act, R.S.O. 1990, c. R.31 scheme.

[15] However, in that case, this court also upheld the decision of the court below to make a declaration that Ms. Danso-Coffey was not a director of the bankrupt corporation. The application judge distinguished that aspect of the case as well as Orman v. Marnat Inc., 2012 ONSC 549, 108 O.R. (3d) 81, both relied on by the appellants. In Danso-Coffey, the court granted a declaration in favour of the applicant that she was never a director of the corporation, because the facts were not disputed and the applicant had other potential reasons beyond retail sales tax for wanting to be absolved of the status of director, to which she never consented, and the range of personal liabilities that may arise by virtue of that status. [1]

[16] The application judge also distinguished the case of Orman, where the Superior Court granted a declaration that certain funds in an investment vehicle constituted a return of capital rather than income. In that case, the judge relied on the decision in Juliar v. Canada (Attorney General) (2000), 50 O.R. (3d) 728 (C.A.), leave to appeal refused, [2000] S.C.C.A. No. 621, where the court found that it should not decline relief because it might affect a tax assessment. However, Juliar has since been overruled by the Supreme Court of Canada in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 S.C.R. 720.

[17] Despite declining jurisdiction to determine the application, the application judge nevertheless addressed whether he would have granted the declaration requested by the appellants.

[18] On the issue of the proper interpretation of s. 23(3) of the OBCA, and whether its effect is that if the appellants did not pay for the shares then the shares were never effectively issued and the appellants were never shareholders of the Child Corporations, the application judge found that there was no definitive answer. Referring to Dunham v. Apollo Tours Ltd. (1978), 20 O.R. (2d) 3 (H.C.), he stated that the case “demonstrates that the application of s. 23(3) is not absolutely black and white but depends on the context and purpose for which the section is being applied.” In that case, the court allowed the shareholder, who had not paid for his shares, to pay the share price of $1 in order to obtain standing as a shareholder to bring an application to wind up the corporation.

[19] The application judge gave three further reasons why he would not have granted the declaration. First, there was contradictory evidence in the record regarding whether or not the appellants had paid for the shares. Second, he noted that there was no dispute within the Child Corporations about the status of the shares, and third, there could be unknown consequences to a retroactive declaration of invalidity of the shares. Based on these three considerations, he concluded that there was no injustice in declining to grant the declaration.

[20] Finally, the application judge refused to make an order under s. 250(1) of the OBCA rectifying the share register. This flowed from his determination that if he had exercised his discretion to assume jurisdiction, he would have declined the declaration. He also found that such an order would not reflect the intentions of the parties at the time of the transactions, and referred to the Fairmont Hotels case for the principles that apply to equitable rectification.

[21] The application judge emphasized that nothing in his analysis was intended to have any bearing on the Tax Court’s adjudication of the tax assessment dispute and its interpretation or application of s. 23(3) of the OBCA.

C. Issues

[22] There are four issues raised on this appeal:

1. Jurisdiction to hear the appeal: Is the appeal from the application judge properly brought to this court or to the Divisional Court?
2. Jurisdiction of the application judge: Did the application judge err in law in declining jurisdiction over the application in favour of the Tax Court?
3. Does a corporation’s failure to comply with s. 23(3) of the OBCA by issuing shares without payment make the issuance of such shares invalid and void?
4. Did the application judge err in declining to order rectification of the share register under s. 250(1) of the OBCA?

D. Analysis

(1) Issue 1: Is the appeal from the application judge properly brought to this court or to the Divisional Court?

[23] In their application to the Superior Court, the appellants sought a declaration under s. 97 of the Courts of Justice Act, R.S.O. 1990, c. C.43, that the shares of the Child Corporations were not validly issued under s. 23(3) of the OBCA because the subscription price was not paid, and an order for rectification of the share registers under s. 250(1) of the OBCA.

[24] Section 255 of the OBCA provides that an appeal lies to the Divisional Court from any order made by the Superior Court under the OBCA. In this case, while the appellants sought relief under s. 250(1) of the OBCA, they were obliged to seek a declaration under s. 97 of the Courts of Justice Act in order to obtain the relief they sought as a result of the application of s. 23(3), because no order for relief for failure to comply with that section is mandated by the OBCA. An appeal from an order that grants or refuses a declaration of the Superior Court lies to the Court of Appeal. As a result, s. 6(2) of the Courts of Justice Act applies to this appeal:

The Court of Appeal has jurisdiction to hear and determine an appeal that lies to the Divisional Court or the Superior Court of Justice if an appeal in the same proceeding lies to and is taken to the Court of Appeal.

[25] The court therefore accepts the submission of all parties that this court has the jurisdiction to hear this appeal.

(2) Issue 2: Did the application judge err in law by declining jurisdiction over the application in favour of the Tax Court?

[26] The appellants submit that the application judge erred in law by declining to assume jurisdiction to decide the issues as a matter of corporate law. They argued that the Superior Court is the only court with jurisdiction over the issues raised in the application. They submitted that a declaration that bound the corporate and family parties could not be made by the Tax Court. They also submitted that the application was not about “whether for tax purposes” the appellants should be considered the controlling shareholders of the corporations. Instead, the issue was “whether shares in an OBCA-incorporated corporation were validly issued and if not, what the appropriate remedy should be. It was about correcting an error in the share register.”

[27] Sections 23(3) and 250(1) of the OBCA provide:

23(3) A share shall not be issued until the consideration for the share is fully paid in money or in property or past service that is not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.

250(1) Where the name of a person is alleged to be or have been wrongly entered or retained in, or wrongly deleted or wrongly omitted from, the registers or other records of a corporation, the corporation, a security holder of the corporation or any aggrieved person may apply to the court for an order that the registers or records be rectified.

[28] The appellants’ position on jurisdiction is that only the Superior Court may grant an order for rectification pursuant to s. 250 of the OBCA, and it is the jurisdiction of the Superior Court to determine the proper interpretation of s. 23(3), as a matter of law. While the Tax Court has the jurisdiction of a superior court and therefore may interpret the OBCA provision when determining cases arising under the Income Tax Act, the appellants say that they are entitled to a declaration of the status of their shares on the basis of a correct interpretation of s. 23(3), and as a matter of corporate law, and to rectification of the share register in accordance with that interpretation.

[29] The appellants’ position on interpretation is that where shares of a corporation are issued without the corporation first receiving payment, the issuance of the shares is invalid and void, and the share register must be corrected to remove the shareholders’ names.

[30] The contrary position is that while shares that are not fully paid for are issued in contravention of s. 23(3), they are nevertheless validly issued. This is the result provided in the OBCA where shares are issued without full payment because the directors of the corporation have authorized a share issuance for consideration other than money, such as property or past services, and where they have overvalued that consideration. In that event, s. 130(1) of the OBCA provides that the directors are responsible to the corporation for the difference between the actual value of the non-monetary consideration paid and the monetary value assigned to the shares. The share issuance is not void. The shares remain validly issued and the directors are liable to the corporation to make up the shortfall.

[31] The issue before this court is whether the application judge erred in the exercise of his discretion by declining to answer the question and, instead, deferring jurisdiction in favour of the Tax Court of Canada. On matters of judicial discretion, this court will defer to the application judge unless the judge misdirected himself, gave no or insufficient weight to relevant considerations, or came to a decision that was clearly wrong, amounting to an injustice: Penner v. Niagara (Regional Police Services Board), 2013 SCC 19, [2013] 2 S.C.R. 125, at para. 27; Ewert v. Canada, 2018 SCC 30, [2018] 2 S.C.R. 165, at para. 83; and Holmes v. Schoenfeld Inc., 2016 ONCA 148, 345 O.A.C. 162, at para. 14.

[32] The application judge gave one reason for declining jurisdiction in favour of the Tax Court, and also added three reasons why declining a declaration would not cause injustice, which reinforced his discretionary decision to decline to exercise jurisdiction. He understood that no appeal of the assessments had yet been taken to the Tax Court because the appellants were first pursuing this application. However, it is expected that depending on the outcome of this application, an appeal may be filed with the Tax Court.

[33] The main reason the application judge gave for deferring to the Tax Court is that the only dispute in this case is between the appellants and the CRA, and that dispute is within the expertise of the Tax Court. He noted that pursuant to the Tax Court of Canada Act, R.S.C. 1985, c. T-2, the Tax Court is a superior court of record and has exclusive original jurisdiction to hear and determine appeals on matters arising under the Income Tax Act: ss. 3 and 12(1). As a superior court, it may interpret and apply provisions of the OBCA in the context of a tax dispute.

[34] Related to the fact that the only dispute between any parties in this case is the appellants’ dispute with CRA, is the fact that the Child Corporations support the appellants in their request for relief. The application judge referred to this fact as the first reason that supported his conclusion that declining the declaration would not amount to an injustice. There is no dispute among the families or within the corporations about what should be done with the shares. In fact, as of February 2020, the families have reorganized the share structure such that each child was issued 2,000 Class A voting shares, becoming the controlling shareholder and a director of their Child Corporation. The respective shareholders meetings at which each child was elected as director of their Child Corporation proceeded on the basis that each child was the sole voting shareholder.

[35] Therefore, although the appellants argue that unlike the Superior Court, the Tax Court has no authority to make a binding order that would bind the Child Corporations, in fact the parties do not require such an order to correct mistakes and amend the register. Consequently, the application judge concluded that the effect of the relief sought by the appellants would primarily be to “force the outcome of a tax dispute with the CRA before the taxpayers have pursued the remedies available under federal statute”. [2]

[36] The second ground relied on by the application judge as demonstrating no injustice in declining the declaration request was the unclear factual record regarding whether the appellants paid for their shares and why the Child Corporations recorded the purchase price as a receivable in the financial statements. He concluded that the factual findings should be made within the tax context, where the court could determine what bearing the findings would have on the application of s. 23(3) to the tax assessment.

[37] This application was brought under r. 14.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Rule 14.05(3)(d) allows an application to be brought for the determination of rights that depend on the interpretation of a statute. That rule could apply to this proceeding; however, there are both statutory interpretation and factual issues to be determined. Rule 14.05(3)(h) allows proceeding by an application “where it is unlikely that there will be any material facts in dispute requiring a trial.” An application under r. 14.05(3)(h) gives the application judge limited jurisdiction to make factual findings where the judge is satisfied that a trial is not needed.

[38] Whether or not the application judge could have made the findings based on the record before him, he was entitled to determine that it was not appropriate for him to do so on this application. That decision regarding procedure on an application for a declaration also supports the decision not to take jurisdiction, but to defer to the Tax Court which has the full jurisdiction to decide the legal and factual issues put before the court in the context of an income tax appeal. The Tax Court has the expertise to resolve the uncertainty surrounding the appellants’ shareholdings to determine the tax consequences that flow from them, even if it does so by interpreting s. 23(3) only in the context of this specific tax dispute.

[39] The third reason the application judge gave to support the justice of his decision to decline to grant a declaration was that if he were to accede to the appellants’ position that shares issued but not paid for are void ab initio, that finding could have unintended consequences regarding the status of transactions and other steps taken by the corporation and its directors before the shares were declared void.

[40] This concern must be tempered by s. 17(3) of the OBCA, which provides:

17(3) Despite subsection (2) and subsection 3(2), no act of a corporation including a transfer of property to or by the corporation is invalid by reason only that the act is contrary to its articles, by-laws, a unanimous shareholders agreement or this Act.

[41] In light of this section, I do not share the application judge’s concern generally, although it is possible that there could be unforeseen consequences to a retroactive order, if a court were to accept the appellants’ position on nullity. However, because the Tax Court cannot order an amendment to the share register, but can only make a decision on the tax issue, it would not be making an order with retroactive effect on others. Again, that supports the decision to defer to the Tax Court.

[42] In my view, the application judge made no error in considering the factors he did — most importantly, that the only dispute is between the appellants and the CRA — in exercising his discretion to decline jurisdiction in favour of the Tax Court.

[43] The appellants’ position that they are not seeking a tax determination but solely a declaration interpreting a corporate law statute and an order for rectification, over which the Superior Court has exclusive jurisdiction, may be seen, in effect, as an assertion that in this case the application judge had no discretion to decline jurisdiction. In their factum, they refer to the Superior Court as having “exclusive” jurisdiction over the application. Put another way, their position is that they are entitled to have the Superior Court determine the meaning of s. 23(3) of the OBCA.

[44] I would reject that proposition. The appellants are correct that the Superior Court has the exclusive jurisdiction to grant an order under s. 250(1). However, that order would only follow if the declaration were granted, and would not be necessary if the Tax Court accepted that, for tax purposes, the shares were never properly issued and never belonged to the appellants.

[45] In circumstances where parties to an action have a dispute that requires the court to interpret the meaning and effect of a statutory provision, the court is not being asked to exercise a discretionary jurisdiction. It is required to answer the questions necessary to decide the dispute. However, where a party seeks a declaration of right, the court will only assume jurisdiction to decide the issue where the nature of the request meets criteria defined in the Rules or in a statutory provision. In such cases, the court has the discretion to decline jurisdiction. This is such a case.

[46] I would test it this way: if there were no CRA assessment, and the family members brought an application for a declaration under r. 14(3) for a ruling by the court whether the effect of what occurred was that the issuance of the appellants’ shares was void, but the parties could point to no issue that would turn on the outcome, the court would likely decline jurisdiction for the reason that its ruling would not be necessary to determine the rights of the parties (r. 14(3)(d)). In this case, although the Child Corporations support the appellants, and seek clarification regarding the status of the appellants’ shares, they have corrected the situation for the future, and have pointed to no issue in the past that would turn on the outcome of the declaration. In such circumstances, the parties have not established that a discretionary declaration is warranted in these circumstances.

[47] To conclude, in my view, the application judge was entitled to exercise his discretion to decline jurisdiction over the issue raised by the appellants regarding the interpretation of s. 23(3) of the OBCA in favour of the Tax Court, to be considered in the context of a tax appeal of the CRA assessments.

(3) Issues 3 and 4: Determining the meaning and effect of s. 23(3) and rectifying the share register under s. 250(1)

[48] In light of my conclusion that the application judge made no error by declining jurisdiction to determine these issues, it is neither necessary nor appropriate to address these issues on this appeal.

E. Conclusion

[49] I would dismiss the appeal. I would order costs to the respondent CRA in the agreed amount of $10,000, including HST and disbursements.

Released: November 25, 2021 “K.F.” “K. Feldman J.A.” “I agree. K. van Rensburg J.A.” “I agree. Sossin J.A.”

[1] In Danso-Coffey, the Ontario Minister of Revenue did not object to the court granting the declaration, unlike in this case. See footnote 2 below.

[2] Counsel for the CRA confirmed that an order for rectification would be binding on the CRA’s tax assessment. In Dale v. Canada, [1997] 3 F.C. 235, the Federal Court of Appeal held that an order for rectification was “binding on all the world”, including the CRA, despite the fact that the CRA was not a party to the corporate dispute.