Court File and Parties
COURT FILE NO.: CV-16-549282 DATE: 20160425 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Non Corp Holdings Corporation, Steven Kendall, Christopher Houston, Percy Von Lipinski, Cait Houston and Kevin Kendall, Applicants AND: The Attorney General of Canada, Respondent
BEFORE: S.F. Dunphy, J.
COUNSEL: P. Guiton, for the Applicants Alisa Apostle, for the Respondent
HEARD: April 25, 2016
Endorsement
[1]
Endorsement
This is an application for rectification of a resolution declaring a dividend in order to make it conform to the tax plan that the directors thought they were implementing.
[2]
Background
The applicant Non Corp Holdings Corporation is a Canadian company. It sold its business on May 18, 2012, realizing a capital gain a portion of which could potentially be payable to its shareholders tax free if the appropriate elections are made under the Income Tax Act, R.S.C. 1985, c. 1.
3The corporation’s year end was October 31, 2012. In order to qualify as a tax-free payment from the capital dividend account, it was necessary for the dividend to be declared and payable after year end when the gain arising from the transaction would be added to the capital dividend account and for the relevant election to be filed after year end as well.
4While the dividend was in fact paid on November 1, 2012 as intended, the directors’ resolution and Canada Revenue Agency election form were both dated October 31, 2012.
5The corporation had no balance available in its capital dividend account on that day. The election to pay a dividend was thus made when there was a nil balance in the capital dividend account. Instead of a tax-free dividend, the result was a 60% tax under Part III of the Income Tax Act. This was, needless to say, quite the opposite of what was intended.
6The corporation takes the view that the dating of the CRA election and the director’s resolution was an error that can be rectified. The corporation has attempted to rectify the error and CRA has indicated that a court order is required. CRA does not oppose the requested court order and the Attorney General of Canada has consented to judgment.
7This case is quite unlike the case of Birch Hill Equity Partners Management Inc. v Rogers Communications Inc., 2015 ONSC 7189 decided by me. In Birch Hill, the tax impact of the major corporate transaction upon the employee option holders was of no moment to the purchaser and was simply not examined in any material way by the vendor. The rectification sought would have materially re-ordered the transaction in ways that nobody had considered at the relevant time.
8In the present case, the transaction giving rise to the gain is not at issue. The only issue was the means by which the resulting gain was to be distributed to shareholders. The directors knew exactly what the issue was they were trying to address. They knew they needed advice. They wished to distribute the funds immediately as a shareholder loan to be repaid by way of a tax-free capital dividend as soon as this could be done. They correctly understood that the payment of the dividend should take place after year end. They had a precise tax goal – the attribution of the proposed dividend as a tax-free capital dividend – and the goal was one that was quite simply achievable if done correctly. Through a combination of carelessness and miscommunication, the correct path was misunderstood. The directors understood that the election and dividend declaration had to be made at year-end instead of immediately afterwards.
9There was more than a general intention to structure the transaction to minimize tax. There was a specific intention to allocate specific proceeds of a specific transaction to a specific tax account – the capital dividend account – to achieve a specific tax goal. A very minor mistake, in human terms at least, was made. The date chosen to insert on the resolution and the election form was the wrong date from the point of view of the intended plan. There was a clear and specific intention throughout and a simple mistake as to the correct means of implementing that intent.
10In my view this is just the type of mistake that rectification is available to correct: Attorney General of Canada v. Juliar. I am satisfied that there was a continuing intention that was frustrated by a simple error and that I should exercise my discretion to make an order rectifying the error nunc pro tunc.
[11]
Conclusion
Accordingly, I have signed judgment amending the directors’ resolution nunc pro tunc in the form of the consent judgment filed.
S. F. Dunphy, J.
Date: April 25, 2016