Mandel et al. v. 1909975 Ontario Inc. et al.

[Indexed as: Mandel v. 1909975 Ontario Inc.]

Ontario Reports

Ontario Superior Court of Justice

Koehnen J.

September 8, 2020

152 O.R. (3d) 394 | 2020 ONSC 5343

Case Summary

Corporations — Shareholders — Applicants rolling over family trust assets into corporations for their children — Applicants having income tax returns reassessed for having been issued shares in children's corporations — Applicants seeking declaration that shares not validly issued under provincial law as applicants never paid for them — Application dismissed — Application was an attempt to resolve a tax dispute — Tax Court of Canada much better placed to determine the issues.

Courts — Jurisdiction — Provincial superior courts — Applicants rolling over family trust assets into corporations for their children — Applicants having income tax returns reassessed for having been issued shares in children's corporations — Applicants seeking declaration that shares not validly issued under provincial law as applicants never paid for them — Application dismissed — Application was an attempt to resolve a tax dispute — Tax Court of Canada much better placed to determine the issues.

Taxation — Income tax — Applicants rolling over family trust assets into corporations for their children — Applicants having income tax returns reassessed for having been issued shares in children's corporations — Applicants seeking declaration that shares not validly issued under provincial law as applicants never paid for them — Application dismissed — Application was an attempt to resolve a tax dispute — Tax Court of Canada much better placed to determine the issues.

The two applicants held an interest in a pipe and tube manufacturing business. In the 1990s, the applicants transferred their interests to family trusts, with each family trust holding shares in a holding corporation which in turn owned shares of the business. The applicants' children were the beneficiaries of the family trusts. Each trust was subject to a deemed disposition of its assets at fair market value 21 years after it was created. To defer the taxes that would arise on the deemed disposition, both family trusts reorganized their assets in a substantially similar fashion in 2014 and 2015, with the trust assets being rolled into corporations for each of the applicants' five children ("Child Corporations"). One of the effects of the restructuring was to give the applicants control of the Child Corporations. Between 2014 and 2019, the applicants and their children behaved as if the applicants were shareholders of the Child Corporations. In 2019, the Canada Revenue Agency ("CRA") reassessed the applicants' income tax returns on the basis that the applicants had received taxable benefits as a result of having been issued controlling shares in the Child Corporations. The result of the reassessments would have been to increase the taxable income of each applicant by almost $15 million, and the applicants filed notices of objection with the CRA. The applicants also commenced an application for a declaration that their shares in the Child Corporations were never validly issued because [page395] they did not pay for them and for an order rectifying the share register of each Child Corporation to reflect that the applicants never held shares in the Child Corporations because they did not pay for them.

Held, the application should be dismissed.

The Superior Court declined jurisdiction over the application in favour of the Tax Court of Canada. The Tax Court was much better placed to determine whether, for tax purposes, the applicants should be considered to be controlling shareholders of the Child Corporations. The Tax Court had 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 was also better placed to make findings of fact and draw inferences about whether the applicants paid for their shares, and whether any of those findings or inferences should have a bearing on the application of s. 23(3) of the Ontario Business Corporations Act, being the provision relied upon by the applicants to claim that shares had to be paid for before they could be issued. The application was an attempt to force the outcome of a tax dispute with the CRA before pursuing remedies under federal statute.

Even if jurisdiction were not declined, the applicants were not entitled to a declaration that they were not shareholders of the Child Corporations, nor were they entitled to an order rectifying the shareholder registers of the Child Corporations to reflect that the shares had never been validly issued to them. The only issue for which the applicants sought the declaration was the tax assessment; there was no disagreement between the applicants and their children about shareholdings or control, and there was no inability of a corporation to conduct its affairs. Rectification was not appropriate because the corporate records accurately reflected what the parties intended in 2014 and 2015, when the applicants signed several documents reflecting their intention to be the controlling shareholders of the Child Corporations.

Baxter v. Canada (Attorney General), [2013] O.J. No. 6641, 2013 ONSC 3153 (S.C.J.); Danso-Coffey v. Ontario (2010), 99 O.R. (3d) 401, [2010] O.J. No. 913, 2010 ONCA 171, 265 O.A.C. 345, 2010 G.T.C. 1028, 65 B.L.R. (4th) 179, 186 A.C.W.S. (3d) 866, [2010] 4 C.T.C. 83; GLP NT Corp. v. Canada (Attorney General) (2003), 2003 CanLII 41554 (ON SC), 65 O.R. (3d) 840, [2003] O.J. No. 2904, [2004] 1 C.T.C. 58, 2003 D.T.C. 5654, 124 A.C.W.S. (3d) 288 (S.C.J.), apld

Canada (Attorney General) v. Fairmont Hotels Inc., [2016] 2 S.C.R. 720, [2016] S.C.J. No. 56, 2016 SCC 56, 404 D.L.R. (4th) 201, J.E. 2016-2123, 58 B.L.R. (5th) 171, [2017] 1 C.T.C. 149, 2016 D.T.C. 5135, 272 A.C.W.S. (3d) 525, EYB 2016-273668, 2016EXP-3860; Canada (Attorney General) v. Juliar (2000), 2000 CanLII 16883 (ON CA), 50 O.R. (3d) 728, [2000] O.J. No. 3706, 136 O.A.C. 301, 8 B.L.R. (3d) 167, [2001] 4 C.T.C. 45, 2000 D.T.C. 6589, 100 A.C.W.S. (3d) 55 (C.A.); Spooner v. Spooner Oils Ltd., 1936 CanLII 211 (AB CA), [1936] 2 D.L.R. 634, [1936] 1 W.W.R. 561 (Alta. C.A.), consd

Danso-Coffey v. Ontario (2010), 99 O.R. (3d) 401, [2010] O.J. No. 913, 2010 ONCA 171, 265 O.A.C. 345, 2010 G.T.C. 1028, 65 B.L.R. (4th) 179, 186 A.C.W.S. (3d) 866, [2010] 4 C.T.C. 83; Orman v. Marnat Inc. (2012), 108 O.R. (3d) 81, [2012] O.J. No. 304, 2012 ONSC 549, [2012] 4 C.T.C. 274, 2012 D.T.C. 5052, 212 A.C.W.S. (3d) 131 (S.C.J.), distd

Other cases referred to

Canada Life Insurance Co. of Canada v. Canada (Attorney General) (2018), 141 O.R. (3d) 321, [2018] O.J. No. 3326, 2018 ONCA 562, 293 A.C.W.S. (3d) 310, [page396] 79 B.L.R. (5th) 171, 82 C.C.L.I. (5th) 19, [2018] 6 C.T.C. 126; Communities Economic Development Fund v. Canadian Pickles Corp., 1991 CanLII 48 (SCC), [1991] 3 S.C.R. 388, [1991] S.C.J. No. 89, 85 D.L.R. (4th) 88, DRS 92-00023, 131 N.R. 81, 76 Man. R. (2d) 1, 8 C.B.R. (3d) 121; Dunham v. Apollo Tours Ltd (No. 1) (Re) (1978), 1978 CanLII 1610 (ON SC), 20 O.R. (2d) 3, [1978] O.J. No. 3380, 86 D.L.R. (3d) 573, 3 B.L.R. 257, [1978] 1 A.C.W.S. 661 (H.C.J.); Ewert v. Canada, [2018] 2 S.C.R. 165, [2018] S.C.J. No. 30, 2018 SCC 30, 46 C.R. (7th) 339, 292 A.C.W.S. (3d) 226, 37 Admin. L.R. (6th) 1, 423 D.L.R. (4th) 577, [2019] 2 C.N.L.R. 79, 413 C.R.R. (2d) 184, 2018EXP-1629, EYB 2018-295329; Hongkong Bank of Canada v. Wheeler Holdings Ltd., 1993 CanLII 148 (SCC), [1993] 1 S.C.R. 167, [1993] S.C.J. No. 5, 100 D.L.R. (4th) 40, 148 N.R. 1, J.E. 93-273, 6 Alta. L.R. (3d) 337, 135 A.R. 83, 29 R.P.R. (2d) 1, 37 A.C.W.S. (3d) 1201; TechnoComm Solutions Inc. v. Canada (Attorney General), [2019] O.J. No. 699, 2019 ONSC 924, 2019 BCLG para. 79,313, 2019 CCLR para. 201,470, 2019 ACLG para. 79,889 (S.C.J.); Trezzi v. Trezzi (2019), 150 O.R. (3d) 663, [2019] O.J. No. 6308, 2019 ONCA 978, 51 E.T.R. (4th) 275, 2020 CCSG para. 51,799, 2020 BCLG para. 79,362, 2020 CEAG para. 32,293, 2020 OCLG para. 52,175, 2020 ACLG para. 79,938, affg [2018] O.J. No. 4620, 2018 ONSC 5180, 42 E.T.R. (4th) 322 (S.C.J.); Wasauksing First Nation v. Wasausink Lands Inc., 2004 CanLII 15484 (ON CA), [2004] O.J. No. 810, 184 O.A.C. 84, 43 B.L.R. (3d) 244, [2004] 2 C.N.L.R. 355, 129 A.C.W.S. (3d) 2 (C.A.)

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, ss. 23(3), (6), 139(3), 250, (1)

Corporations Act, R.S.O. 1990, c. C.38, s. 309 [as am.]

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 97 [as am.]

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 15(1) [as am.], 85 [as am.]

Tax Court of Canada Act, R.S.C. 1985, c. T-2, s. 12(1) [as am.]

APPLICATION for a declaration and rectification of share registers.

Peter H. Griffin, Matthew B. Lerner and Adam H. Kanji, for applicants.

Sarah Walker, for respondents 1909975 Ontario Inc., 2458730 Ontario Inc., 2458721 Ontario Inc., Harrisonpike Inc. and Matthewpike Inc.

Alisa Apostle and Michael Ding, for respondent Attorney General of Canada.

KOEHNEN J.: —

Overview

[1] The applicants and their families hold a 50 per cent interest in a successful corporation that their families had built. Like many others in a similar position, at some point they structured their affairs so that their interests in the corporation were held through family trusts. A significant tax liability would have arisen on the 21st anniversary of the trust. To defer that tax liability, the applicants rolled the trust assets into a number of family corporations, one for each of their [page397] respective children (the "Child Corporations"). The applicants subscribed for controlling shares in each Child Corporation.

[2] In 2019, the Canada Revenue Agency reassessed the applicants' income tax returns in a manner that would increase each of their taxable incomes by approximately $15 million. The reassessment was based on the assumption that the applicants held controlling shares in the Child Corporations.

[3] In response to the notice of assessment, the applicants brought this application in which they seek a declaration that they have never been shareholders of the Child Corporations because, although corporate records show that the applicants received shares, the applicants say they never paid for the shares. The applicants submit that the lack of payment renders the share issuance void because s. 23(3) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA") requires that shares be fully paid for before they can be issued. In addition, the applicants ask me to rectify the records of the Child Corporations to reflect that the applicants never held shares in them.

[4] I dismiss the application for three reasons.

[5] First, the court should not assume jurisdiction over the application. The real issue involves the tax assessment. Parliament has created a specialized court, the Tax Court of Canada to deal with tax assessments. The Tax Court has jurisdiction to interpret and apply s. 23(3) of the OBCA.

[6] Second, if I am wrong about the jurisdiction issue, I would, in any event, decline the application for a declaration that the shares were not validly issued. There is conflicting evidence on whether the applicants paid for their shares and there is no dispute within any of the Child Corporations about shareholdings or any other issue. The Child Corporations are free to adjust their shareholdings to eliminate any controlling interest the applicants are alleged to hold. Indeed, the Child Corporations did just that after this application was commenced. The absence of a declaration does not prejudice the applicants because they remain free to argue before the Tax Court that they were never shareholders of the Child Corporations.

[7] Third, I would also decline the request to rectify corporate records to reflect that the applicants were never shareholders of the Child Corporations. The claim for rectification is based on the alleged failure to pay for the shares. I decline rectification given that I have declined the declaration. In addition, rectification would not be appropriate because it is available to correct documents which do not reflect the intentions of the parties. The share registers of the Child Corporations do reflect [page398] the intention of the parties in 2014 and 2015 to give the applicants controlling shares. Rectification is not available where documents accurately reflect the original intention, but the parties want to change that intention because it did not have the anticipated effect.

The Facts

[8] The Mandel and Pike families each hold a 25 per cent interest in Welded Tube of Canada ("Welded Tube"), a successful manufacturer of steel pipe and tube. Mr. Mandel is its President and Chief Executive Officer.

[9] In the 1990s, Mr. Mandel and Ms. Pike transferred their interests in Welded Tube to family trusts. Each family trust held shares in a holding corporation which in turn owned shares in Welded Tube. The beneficiaries of the Mandel Family Trust were Mr. Mandel's three children. The beneficiaries of the Pike Family Trust were Ms. Pike's two children.

[10] Each trust was subject to a deemed disposition of its assets at fair market value 21 years after it was created. To defer the taxes that would arise on the deemed disposition, both family trusts reorganized their assets in a substantially similar fashion in 2014 and 2015.

[11] I will use the reorganization implemented for one of Mr. Mandel's children to illustrate the model followed for all five children.

[12] On January 17, 2014, Mr. Mandel incorporated 1909975 Ontario Inc. ("RebeccaCo"). Mr. Mandel named himself as the first director of the corporation.

[13] On the same day, Mr. Mandel subscribed for 1,000 Class A voting shares for a total price of $10. Mr. Mandel signed corporate documents of RebeccaCo indicating that the $10 subscription price had been paid in full.

[14] On January 25, 2014, the Mandel Family Trust transferred to Rebecca 700 Class D shares of the holding company through which the Trust had held its shares in Welded Tube. Rebecca then transferred those shares to RebeccaCo in exchange for 100 non-voting common shares of RebeccaCo.

[15] On January 25, 2014, after Rebecca obtained non-voting common shares in RebeccaCo, Mr. Mandel subscribed for 100,000 Class B convertible shares in RebeccaCo for a total price of $100. Mr. Mandel signed corporate documents of RebeccaCo indicating that the $100 subscription price had been paid in full.

[16] Mr. Mandel took substantially similar steps with respect to corporations that he created for his other two children. In 2015, [page399] Ms. Pike took essentially the same steps for corporations she established for her two children.

[17] One of the effects of this restructuring was to give Mr. Mandel or Ms. Pike control of each of the Child Corporations. In addition, the reorganization was intended to ensure that, in the event of a marriage breakdown of any child, the former spouse of such child would not share in the assets formerly held by the Family Trusts. This was achieved by giving Mr. Mandel or Ms. Pike 100,000 Class B Convertible Shares in the Child Corporation of each of their respective children and giving the child only 100 shares. In a marriage breakdown, the child's former spouse could claim up to 50 of the 100 shares which would be overwhelmed by the 100,000 shares of Mr. Mandel or Ms. Pike.

[18] Between 2014 and 2019, the applicants and the children behaved as if Mr. Mandel and Ms. Pike were shareholders of the Child Corporations.

[19] Mr. Mandel and Ms. Pike signed numerous documents relating to the Child Corporations in their capacities as sole directors and as shareholders. By way of example, they signed Subscription Agreements for shares which confirmed that the shares had been fully paid. They signed share certificates and directors' resolutions in respect of the shares. The applicants and their children signed a Shareholders' Agreements for each Child Corporation that described the applicants' shares in the Child Corporations as having been issued, outstanding, fully paid and non-assessable. Mr. Mandel and Ms. Pike signed Shareholders' Agreements as both shareholder and president of their Child Corporations.

[20] The primary objective of the reorganization was to effect a tax free "rollover" of the Family Trust into the Child Corporations. To effect the rollover, the Child Corporations and the children filed T2057 election forms with the CRA to document the rollovers under s. 85 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). In the election forms, the Child Corporations and the children represented to the CRA that there were "other" shareholders who owned or controlled shares in the Child Corporations. On the evidence before me, the "other" shareholders could refer only to Mr. Mandel and Ms. Pike.

[21] The only potential exception to conduct consistent with the shares having been fully paid is that the Notice to Reader financial statements prepared by Ernst & Young, who are also the applicants' tax advisors, recorded a "Sundry Receivable" of $110 within each of each Child Corporations. This equates to the amount that each of the [page400] applicants was required to pay for the shares for which they subscribed in each Child Corporation. Each of those financial statements also indicates that the shares have been issued and records shareholders' equity of $110 in respect of those shares.

[22] On June 5, 2019, the CRA advised Mr. Mandel and Ms. Pike that it proposed to reassess their income tax returns. In doing so, the CRA proposed to increase Mr. Mandel's taxable income in 2014 and 2015 by $14,999,734 and to increase Ms. Pike's taxable income in 2015 by $14,999,800.

[23] It appears that the reassessment was based on CRA's view that Mr. Mandel and Ms. Pike had received taxable benefits under s. 15(1) of the Income Tax Act as a result of having been issued controlling shares in the Child Corporations.

[24] The applicants' tax advisors filed submissions opposing the proposed reassessment on July 22, 2019. On September 16, 2019, the CRA proceeded with its reassessments. On November 26, 2019, the applicants each filed Notices of Objection with the CRA.

[25] On December 6, 2019, the applicants commenced this application for a declaration that their shares in the Child Corporations were never validly issued because they did not pay for them and for an order rectifying the share register of each Child Corporation to reflect that the applicants never held shares in the Child Corporations because they did not pay for them. If the relief were granted, it would remove the factual basis on which the CRA issued its notices of reassessment.

[26] If the CRA does not provide its response to a Notice of Objection within 90 days of receipt, the taxpayer may appeal directly to the Tax Court of Canada. The CRA did not respond to the applicants' Notices of Objection within 90 days. As a result, the applicants have been able to appeal directly to the Tax Court since February 24, 2020. They do not appear to have done so as of the date of the hearing.

[27] In February 2020, further transactions occurred within each of the Child Corporations pursuant to which each child has become the controlling shareholder and a director of his or her corporation.

[28] The submissions of the parties require me to consider three issues arising out of these facts:

(A) Should this court assume jurisdiction over the application?

(B) Are the applicants entitled to a declaration?

(C) Are the applicants entitled to rectification? [page401]

A. Should this court assume jurisdiction?

[29] The CRA submits that this court should decline jurisdiction over this application because the issues it raises are within the expertise of the Tax Court of Canada and because the application is an "attempt to force the outcome of a tax dispute with the CRA before the taxpayers have pursued the remedies available under federal statute", namely an appeal to the Tax Court. I am inclined to agree.

[30] Mr. Mandel and Ms. Pike base their application on s. 23(3) of the OBCA which provides:

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.

[31] They say they have not paid for the shares, as a result of which the issuance of shares to them was invalid.

[32] It is agreed that the Tax Court has jurisdiction to interpret s. 23(3) of the OBCA. I am mindful that the Tax Court does not have the jurisdiction to rectify the records of the Child Corporations. Even on the applicants' argument, however, rectification depends on a finding that the shares have not been validly issued because of the requirements of s. 23(3) of the OBCA. Moreover, as set out later in these reasons, rectification is not, in my view, an appropriate remedy here in any event.

[33] No legal issue can be properly determined without an understanding of the context in which it arises. The context in which this application arises is in that of a tax assessment. The tax assessment is the sole reason behind the application.

[34] 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. [page402]

[35] Parliament has created a specific court with expertise in tax matters and has created a specific process to address tax issues. Given that the raison d'être of this application is the tax assessment, the issues should in my view be determined by the body with specialized expertise in that area.

[36] Other courts have come to the same conclusion about the exercise of jurisdiction in similar cases.

[37] In Baxter v. Canada (Attorney General), [2013] O.J. No. 6641, 2013 ONSC 3153 (S.C.J.), the taxpayer was of the view that he held certain shares in trust. The CRA took the position that he was the beneficial holder of the shares and issued notices of reassessment on that basis. In response, the taxpayer sought a declaration that he held the shares in trust. The court declined jurisdiction in favour of the Tax Court.

[38] In doing so, the court noted at para. 13 that the Tax

Court was a superior court of record and, pursuant to s. 12(1)

of the Tax Court of Canada Act, R.S.C. 1985, c. T-2 had

exclusive original jurisdiction to hear and determine . . . appeals to the court on matters arising under . . . the Income Tax Act . . . when . . . appeals to the Court are provided for in those Acts.

[39] In Baxter, as here, it was the tax reassessment that prompted the application. The court noted at para. 16 that there was no lis between the applicant and any of the respondents except the CRA. That is the case here as well. This is demonstrated by the fact that the children were able to assume control of each Child Corporation without difficulty in February 2020.

[40] The application before me is, like the one in Baxter, in substance if not in form, an appeal of a tax ruling: Baxter, at para. 16.

[41] Justice Cumming came to a similar conclusion in GLP NT Corp v. Canada (Attorney General) (2003), 2003 CanLII 41554 (ON SC), 65 O.R. (3d) 840, [2003] O.J. No 2904 (S.C.J.) and declined jurisdiction, holding at para. 18:

In my opinion, the only real purpose in bringing this Application is to influence or upset the hearing before the TCC.[^1] The applicant, in effect, seeks an opinion of this court under the guise of a declaratory order, in order to place that opinion before the TCC in the tax appeal hearing.

[Citation omitted]

[42] That same situation applies here. [page403]

[43] Justice Cumming went on to hold that it was simpler and more efficient to have one court determine a litigious matter and that courts should not issue declaratory orders that would interfere with the jurisdiction assigned to a specialized tribunal even if it has the power to do so: GLP, at paras. 19 and 21.

[44] The Ontario Court of Appeal expressed similar sentiments in Danso-Coffey v. Ontario (2010), 99 O.R. (3d) 401, [2010] O.J. No. 913, 2010 ONCA 171, at para. 33 when it stated that

Superior Courts must be cautious in exercising their jurisdiction in order to preserve the efficacy of the system of tax assessment. They should respect the structure set up by the legislature and not develop a new form of incidental litigation.

[45] I find these authorities to be persuasive and applicable to the application before me.

[46] The applicants rely on two cases which they claim demonstrate that courts will assume jurisdiction in the face of a tax assessment: Danso-Coffey and Orman v. Marnat Inc. (2012), 108 O.R. (3d) 81, [2012] O.J. No. 304, 2012 ONSC 549 (S.C.J.). Both are distinguishable.

[47] In Danso-Coffey, the applicant was reassessed for retail sales tax because she was listed as a director of a corporation. The applicant sought and obtained a declaration to the effect that she was not a director. There does not seem to have been any dispute that the applicant never agreed to be a director. Nor was she ever aware that she was a director. The applicant had a legitimate reason for seeking a declaration that she was not a director beyond the tax assessment because directors can be held personally responsible for a range of liabilities that extend well beyond the failure to remit taxes.

[48] In Orman, the taxpayers had invested in a fund from which they had received payments for several years which the fund described as income earned on the investment and which the applicants reported as income on their tax returns. As it turned out, there was no income on the applicants' investment because the entire fund was a Ponzi scheme. At best, the amounts the applicants received were a return of capital. Justice Perell granted a declaration to the effect that the returns were capital, not income. Apart from the materially different equities arising from the facts of Orman, the case is also distinguishable because Perell J. relied on the Ontario Court of Appeal's decision in Canada (Attorney General) v. Juliar (2000), 2000 CanLII 16883 (ON CA), 50 O.R. (3d) 728, [2000] O.J. No. 3706 (C.A.) as authority for the proposition that a court should not decline relief [page404] because it might affect a tax assessment. However, the Supreme Court of Canada overturned that proposition, or at least severely constrained it, in Canada (Attorney General) v. Fairmont Hotels Inc., [2016] 2 S.C.R. 720, [2016] S.C.J. No. 56, 2016 SCC 56, at para. 16.

[49] Although I am of the view that it would be preferable for this court to decline jurisdiction for the reasons set out above, in the event I am wrong in that regard, I will address the specific relief that the applicants seek.

B. Are the applicants entitled to a declaration?

[50] The applicants seek a declaration under s. 97 of the Courts of Justice Act, R.S.O. 1990, c. C.43 to the effect that they are not, and never have been, shareholders of the Child Corporations.

[51] As noted, they base their claim on s. 23(3) of the OBCA which requires shares to be paid for before they can be issued. In this application, each applicant has sworn an affidavit stating that they have never paid for their shares in the Child Corporations.

[52] The applicants rely on case law to the effect that issuing shares to a prospective shareholder before receiving full consideration is ultra vires the powers of the corporation's directors: Spooner v. Spooner Oils Ltd., 1936 CanLII 211 (AB CA), [1936] 2 D.L.R. 634, [1936] 1 W.W.R. 561 (Alta C.A.), at paras. 18, 21, 40.

[53] In my view, Spooner and the submission based on it adds nothing to the analysis. To begin with, the doctrine of ultra vires has been abolished in Ontario and most other provinces: Communities Economic Development Fund v. Canadian Pickles Corp., 1991 CanLII 48 (SCC), [1991] 3 S.C.R. 388, [1991] S.C.J. No. 89, 85 D.L.R. (4th) 88, at p. 100 D.L.R.; Hongkong Bank of Canada v. Wheeler Holdings Ltd., 1993 CanLII 148 (SCC), [1993] 1 S.C.R. 167, [1993] S.C.J. No. 5. When asked about its abolition, the applicants responded that they were using the term ultra vires to demonstrate that that statute is the source or corporate power to issue shares and must be strictly adhered to. Rather than risk causing confusion by using a Latin phrase to say that a corporation cannot do something, which Latin phrase also refers to an abolished legal doctrine, the preferable approach is simply to interpret s. 23(3) of the OBCA without the use of Latin phrases.

[54] Interpreting s. 23(3) of the OBCA is not quite as simple as saying shares that are not paid for are void, as the applicant suggests. In Dunham and Apollo Tours Ltd. (No. 1) (Re) (1978), 1978 CanLII 1610 (ON SC), 20 O.R. (2d) 3, [1978] O.J. No. 3380 (H.C.J.), for [page405] example, the court allowed a shareholder to pay for shares even after his status as a shareholder had been challenged by reason of nonpayment. If anything, this 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.

[55] Moreover, the issue of how to interpret s. 23(3) begs the question of whether, as a matter of fact, the shares were or were not paid for. The evidence before me on that issue goes both ways.

[56] As noted earlier, when the Child Corporations were established, Mr. Mandel and Ms. Pike signed a list of documents confirming either that they had paid for their shares, that they were shareholders or both. Those documents were included in the corporate records of each Child Corporation.

[57] Section 139(3) of the OBCA provides that information in corporate records is proof, in the absence of evidence to the contrary, of the facts stated therein. Here there is evidence contrary to the corporate records. Mr. Mandel and Ms. Pike say in their affidavits that they never paid for their shares.

[58] The applicants therefore seem to have taken contradictory positions. They have signed documents saying both that they have paid for the shares and that they have not paid for the shares.

[59] As noted earlier, the Notice to Reader financial statements of each Child Corporation record a "Sundry Receivable" of $110. That is that same amount as each applicant was required to pay for his or her shares in each Child Corporation. Section 23(6) of the OBCA makes it clear that a receivable of that nature does not amount to consideration for the purposes of the section.

[60] At the same time, the Notices to Reader describe the shares as having been issued and record shareholders equity in respect of those shares as $110.

[61] Where evidence contradicts corporate records, it is up to the trier of fact to weigh the conflicting evidence: Trezzi v. Trezzi, [2018] O.J. No. 4620, 2018 ONSC 5180, 42 E.T.R. (4th) 322 (S.C.J.), at paras. 37-39, affd (2019), 150 O.R. (3d) 663, [2019] O.J. No. 6308, 2019 ONCA 978, at paras. 25-40.

[62] Evidence must, however, always be weighed in a particular context. The context here is that of a tax assessment. The declaration is not sought because of a dispute within any of the Child Corporations about corporate control or any other issue. [page406]

[63] On the contrary, there is no disagreement between the applicants and their children about shareholdings or control. As noted earlier, in February 2020, the children and the applicants cooperated with each other to make each child a director of his or her Child Corporation and to give each child controlling shares in his or her Child Corporation.

[64] Judicial intervention in corporate affairs should be limited to the degree necessary to achieve justice. There is no need for intervention on my part to achieve justice here. There is no dispute between shareholders and there is no inability of the Corporation to conduct its affairs. If, however, I were to declare that the applicants were never shareholders of the Child Corporations it may well put into question all actions that the Child Corporations took between their creation in 2014 and the time the children became controlling shareholders in February 2020.

[65] Declaratory relief is a discretionary remedy: Ewert v. Canada, [2018] 2 S.C.R. 165, [2018] S.C.J. No. 30, 2018 SCC 30, at para. 83. Given the unexplained conflict in the evidence before me about whether the applicants had paid for their shares, the absence of any dispute within the corporations and the potential for unknown consequences in granting a retroactive declaration, I exercise my discretion against awarding such a declaration.

[66] I am satisfied that there is no injustice to the applicants in declining the declaration.

[67] The only issue for which the applicants seek the declaration is the tax assessment. The tax issue is whether the applicants received a taxable benefit under s. 15(1) of the Income Tax Act by virtue of their alleged status as controlling shareholders of the Child Corporations.

[68] My declining to grant the declaration does not, however, affect the applicants' rights. They continue to have the ability to argue before the Tax Court that they were never shareholders of the Child Corporations by virtue of s. 23(3) of the OBCA. In doing so, they will be advancing their position before a court that has greater expertise to determine that question in the context of a tax dispute than this court does.

C. Rectification

[69] The applicants seek an order under s. 250(1) of the OBCA rectifying the shareholder registers of the Child Corporations to reflect that shares in those corporations had never been validly issued to them. [page407]

[70] Section 250 of the OBCA provides:

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.

(2) In connection with an application under this section, the court may make any order it thinks fit including, without limiting the generality of the foregoing,

(a) an order requiring the registers or other records of the corporation to be rectified;

(b) an order restraining the corporation from calling or holding a meeting of shareholders or paying a dividend or making any other distribution or payment to shareholders before the rectification;

(c) an order determining the right of a party to the proceedings to have the party's name entered or retained in, or deleted or omitted from, the registers or records of the corporation, whether the issue arises between two or more security holders, or between the corporation and any security holders or alleged security holders;

(d) an order compensating a party who has incurred a loss.

[71] The applicants submit that rectification of corporate records under s. 250(1) of the OBCA is distinct from the equitable remedy of rectification, which they say is not at issue in this case. The applicants submit that what they seek is an order recognizing the legal substance of what occurred, namely that the shares, as a matter of law, were not issued regardless of whether it was intended or not that they be issued. I am unable to agree with the applicants' submission.

[72] First, as concerns the legal nature of what occurred, I repeat the analysis referred to above when considering the applicants' request for a declaration. There is conflicting evidence about what occurred. In the absence of any dispute between the shareholders that requires the court to determine what occurred, I am not inclined to grant relief for the reasons set out earlier.

[73] Second, as concerns the submission that rectification under s. 250 of the OBCA is separate and distinct from equitable rectification, the applicants have provided no authority in support of this proposition. It strikes me that the simple fact that an equitable common law remedy is incorporated into a statute does not necessarily change its equitable nature or the principles relevant to its application. [page408]

[74] By way of example, in Wasauksing First Nation v. Wasausink Lands Inc., 2004 CanLII 15484 (ON CA), [2004] O.J. No. 810, 184 O.A.C. 84 (C.A.), the Court of Appeal for Ontario considered the rectification provisions found in the Corporations Act, R.S.O. 1990, c. C.38. While not identical to the provisions of the OBCA, s. 309 of the Corporations Act offers a materially similar rectification remedy to that found in the OBCA. In determining whether rectification is available under the statute, the Court of Appeal referred to texts on equitable principles and, in para. 81 of its decision, applied the same analysis to rectification under s. 309 of the Corporations Act that the Supreme Court of Canada later applied in Canada (Attorney General) v. Fairmont Hotels Inc., supra when addressing principles of rectification in the absence of a statutory provision.

[75] In Fairmont, the taxpayer redeemed shares believing the redemption was tax neutral. The CRA took a different view and imposed a tax liability as a result of the transaction. After the reassessment, the taxpayer applied to rectify the relevant documentation so that it would record the transaction as a loan instead of recording it as a share redemption.

[76] The Supreme Court described rectification in para. 12 of its reasons as follows:

If by mistake a legal instrument does not accord with the true agreement it was intended to record -- because a term has been omitted, an unwanted term included, or a term incorrectly expresses the parties' agreement -- a court may exercise its equitable jurisdiction to rectify the instrument so as to make it accord with the parties' true agreement. Alternatively put, rectification allows a court to achieve correspondence between the parties' agreement and the substance of a legal instrument intended to record that agreement, when there is a discrepancy between the two. Its purpose is to give effect to the parties' true intentions, rather than to an erroneous transcription of those true intentions.

[Citation omitted]

[77] It added in para. 13 that rectification must be used "with great caution" because it allows courts to rewrite what the parties had originally expressed as their intention and that a relaxed approach to rectification would undermine commercial confidence. It then went on to add in para. 13:

It bears reiterating that rectification is limited solely to cases where a written instrument has incorrectly recorded the parties' antecedent agreement. It is not concerned with mistakes merely in the making of that antecedent agreement. In short, rectification is unavailable where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself. More to the point of this appeal, and as this Court said in [page409] Performance Industries (at para. 31), "[t]he court's task in a rectification case is . . . to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment by one party or the other".

(Citations omitted; [emphasis in original])

[78] The court put it another way in para. 39:

Courts rectify instruments which do not correctly record agreements. Courts do not "rectify" agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome.

[79] If, for example, parties intended to redeem or issue shares and the documentation did not accurately reflect that intention, rectification is available. If, however, parties intended to redeem or issue shares believing that the transaction had a particular tax consequence, rectification does not allow the parties to change the nature of the transaction when the intended tax consequence does not materialize. To permit parties to change the transaction into something different than was originally intended allows them to engage in "retroactive tax planning" which is impermissible: Fairmont, at para. 24.

[80] To hold otherwise would allow a taxpayer to say that he or she intended a transaction to have a particular tax benefit and later allow the taxpayer to recast the entire transaction if the tax benefit did not materialize. On that theory, the taxpayer would have to be allowed to keep restructuring until he or she "got it right" or until the CRA gave up trying to reassess the taxpayer.

[81] In Canada Life Insurance Co. of Canada v. Canada (Attorney General) (2018), 141 O.R. (3d) 321, [2018] O.J. No. 3326, 2018 ONCA 562, the Court of Appeal for Ontario in effect expressed this concern at para. 67 when it interpreted Fairmont as being concerned not only with rectification but with the court being asked to do something more generally that changes "a corporate transaction nunc pro tunc to achieve a particular tax objective".

[82] In this case, rectification is not appropriate because the corporate records accurately reflect what the parties intended in 2014 and 2015. At that time, the applicants intended to be the controlling shareholders of the Child Corporations. They signed several documents reflecting that intention. They had a specific reason for doing so: to defer the adverse tax consequences of a deemed disposition of the Family Trust assets. The corporate records accurately reflect that intention. [page410]

[83] At its highest, the applicants' position is that they never carried out that intention because they did not pay for their shares. However, as MacLeod J. noted in TechnoComm Solutions Inc. v. Canada (Attorney General), [2019] O.J. No. 699, 2019 ONSC 924 (S.C.J.), at para. 37, the applicants do not require a court order to correct the books and records of the Child Corporations. They can and in fact have changed those records to show that the applicants are no longer controlling shareholders.

[84] To the extent that the applicants submit that they require a declaration to reflect what they say is the their "legal" status as non-shareholders in 2014, I decline to exercise my jurisdiction in that regard because doing so would not reflect the clear intentions of the parties at the time and because doing so would amount to retroactive tax planning.

[85] To the extent that any rectification remedy is appropriate, in my view it would be one that would allow the applicants to pay $110 to each of the Child Corporations now and obtain an order nunc pro tunc confirming that they were shareholders as of the date of their subscription agreements. That remedy would accurately reflect the intentions of the applicants in 2014 and 2015. The applicants, understandably, have not asked for that relief.

[86] In case there is any ambiguity, I underscore, however, that my analysis of rectification is not intended to have any bearing on the Tax Court's interpretation or application of s. 23(3).

Disposition

[87] For the reasons set out above I dismiss the application. Any party seeking costs as a result of these reasons may make submissions in writing within 14 days of receipt of these reasons. Any response should be delivered seven days later with a further five days for reply.

Application dismissed.

Notes

[^1]: Tax Court of Canada.

End of Document