Pole Trail Ranch Co. Inc. v. Attorney General of Canada, 2020 ONSC 7050

OSHAWA COURT FILE NO.: CV-19-2987

DATE: 20201123

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

POLE TRAIL RANCH CO. INC.

Applicant

– and –

ATTORNEY GENERAL OF CANADA

Respondent

Christine Ashton, for the Applicant

Tara Magill and Diana Aird, for the Respondent

HEARD: In writing

REASONS FOR JUDGMENT

LEIBOVICH J.

1The applicant, Pole Trail Ranch Co. Inc. seeks a Judgment rectifying the September 26, 2017 resolution of it’s directors, declaring capital dividends of $210,000 on both the issued and outstanding common shares of Class A and Class B, such that the capital dividend so declared be $104,271 and only for Class B, nunc pro tunc.

2The applicant states that the amount of the capital dividend issued was mistakenly arrived at by their accountant resulting in an unintended tax bill. There is no dispute that the accountant mistakenly believed that the capital dividends account had a higher available balance. Thus, the applicant seeks to invoke the doctrine of rectification to change the September 26, 2017 resolution to avoid the tax consequences. The respondent states that the applicant does not meet the criteria for rectification, as the September 26, 2017 resolution correctly noted the amounts of the dividends that the accountant recommended but the accountant just calculated the wrong amount. In addition, given that rectification is an equitable remedy and there are alternate remedies available, the respondent submits that I should refuse to exercise my discretion in this matter.

3Both parties have consented that this application be heard in writing. I have been provided with fulsome material and written arguments. For the reasons set out below, I find that the application must fail as the elements of the doctrine of rectification have not been met and there are alternate remedies that the applicant can avail itself of.

The Facts

4The only witness for the applicant was its accountant, Mr. Loeppky, who submitted two affidavits. The first affidavit is dated October 28, 2019, while the second one is dated January 15, 2020. The respondent submitted an affidavit from Ms. Servos, a Complex Special Elections and Returns Officer at the Tax Services Office of the Canada Revenue Agency (CRA), dated March 12, 2020.

5The applicant was incorporated on July 29, 1974, pursuant to the laws of the Province of Saskatchewan. The applicant had three shareholders: 1) Ray Glasrud, who held 80 Class A shares and 598,500 Class K shares; 2) Linda Glasrud, who held 100 Class B shares and 598,500 Class K shares; and 3) Garrett Glasrud, who held 20 Class C shares. Stark & Marsh CPA LLP provided accounting and financial advice to the applicant. Mr. Loeppky was the main accountant on the file. Mr. Loeppky stated that he recommended to the applicant that they elect to pay capital dividends up to the maximum tax-free amount that was allowed. The applicant agreed to the advice and Stark & Marsh was instructed to prepare the necessary paperwork. There was no documentation for this advice.

6Mr. Loeppky had to determine what the maximum allowed amount would be in the applicant’s capital dividends account (CDA). In order to do so he used the CRA’s “My Business Account.” My Business Account is an online portal that provides business tax payers with the ability to review, update, file, et cetera, in regard to various business accounts with the CRA. According to the portal the allowance balance was $421,697. Based on this information, Mr. Loeppky prepared the resolution that was ultimately passed by the applicant and for which the applicant seeks to apply the doctrine of rectification. The critical parts of the resolution are:

a) the [applicant] declare a dividend of $210,000 payable to [Shareholder A];

b) the [applicant] declare a dividend of $210,000 payable to [Shareholder B]; and

c) the [applicant] elect under Section 83(2) of the Income Tax Act of Canada that the dividends of $420,000 mentioned above shall be deemed to be payable out of the corporation's capital dividend account, as defined in the said Act on December 15, 2017;

7The resolution was passed on September 26, 2017. However, the balance noted in the My Business Account was incorrect as it had not been fully updated. The CDA balance was in fact, $104,271 at the time of the resolution. Accordingly, there was an over-election of $315,729. As such, what was expected to be tax-free dividends, was now going to have tax consequences. Ms. Servos stated in her affidavit that the purpose of the My Business Account portal is not to calculate or determine the CDA balance. She stated that:

1. To obtain information regarding the CDA balance, taxpayers must submit a Form T2SCH89, Request for Capital Dividend Account Balance Verification, to the CRA.

2. A taxpayer paying a capital dividend must file an election in respect of the dividend prior to or the day of when the election becomes payable.

3. Taxpayers are responsible for maintaining their own records of elections paid; and

4. There is no record of a Request for a Capital Dividend Account Balance Verification prior to the date of the applicant’s filing of the election.

8The September 26, 2017 resolution also stated:

if the total amount of the dividend exceeds the capital dividend account balance available, the excess will be treated as a taxable dividend under Section 184(3). The directors declare that they have received the concurrence for such an election from all of the shareholders identified in these resolutions.

9Mr. Loeppky explained the above resolution as follows:

This resolution was based on a standard template that I believe had been created sometime prior by a lawyer retained by Stark & Marsh CPA LLP. At the end of the resolution is language regarding the consequences if the dividend exceeds the CDA balance. In speaking with Greg Smith, FCPA, FCA, a colleague, he advised me that his recollection was that this clause was likely recommended by CICA in order to allow the client to make a change, if ever required, without preparing a new resolution. It was not specifically drafted for Pole Trail's resolution. Further, it was not included in Pole Trail's resolution as there was a concern or belief that the capital dividend being paid out by Pole Trail was in excess of the CPA balance. It was Stark & Marsh CPA LLP understanding and Pole Trail's understanding that the resolution reflected Pole Trail's goal of having capital dividends paid out to the maximum allowed.

The tax consequences to the Class A common shareholder

10In his October 29, 2019 affidavit, Mr. Loeppky stated that:

On or around March 18, 2019, Stark & Marsh CPA LLP discovered that the Dividends had incorrectly been issued to the Class A and Class B common shareholders, when it should have solely been issued to the Class B common shareholder.

11However, he explained in his affidavit dated January 15, 2020, that on or about March 2019, the U.S. accountant for Ray Glasrud, the Class A common shareholder, contacted Stark & Marsh CPA LLP and advised that given Mr. Glasrud’s dual citizenship there would be negative tax consequences as a result of this dividend. Stark & Marsh did not realize the tax consequences to Mr. Glasrud at the time. As a result, on behalf of the applicant Stark & Marsh wrote a letter to the CRA asking that they accept a correction and that all the capital dividends should be paid to the class B shareholder. The CRA responded and then informed them that the CDA balance was $104,271 at the time of the payout. Mr. Loeppky stated that:

Unfortunately prior to receiving the CRA's letter in July 2019 I did not know that the CDA balance when we prepared the resolution was in fact $104,271. Stark & Marsh CPA LLP may have written to the CRA requesting the CDA balance, but when I had for other clients in the past, it had taken over a year for the CRA to provide the balance. In regards to calling, it is my understanding that the CRA does not provide the CDA balance over the phone. As I was concerned about potential tax legislative changes proposed in July 2017, I believed it was important to move swiftly and not let the 2017 year end lapse.

Law and Analysis

12The applicant states that the unintended tax consequences resulted from a genuine mistake in the calculation of the CDA balance and a lack of understanding regarding the tax consequences to shareholder A. The applicant asks that the doctrine of rectification be used to correct the September 26, 2017 resolution. The respondent states that there was no mistake that needs to be corrected. The resolution correctly documented the dividends that the applicant agreed to distribute. Unintended consequences is not a mistake that fits with the doctrine of rectification. Even if it did, since the doctrine is an equitable one, I should decline to exercise my discretion as there are alternate remedies that the applicant can avail itself of.

13Rectification is an equitable remedy which allows a court to correct a written instrument that mistakenly does not reflect the actual agreement between the two parties. The test to be satisfied on a rectification application was described by the Supreme Court of Canada in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, [2016] 2 SCR 720 and its companion case Jean Coutu Group (PJC) v. Canada (Attorney General), 2016 SCC 55, [2016] 2 SCR 670. Brown J. speaking for the majority in Canada (Attorney General) v. Fairmont Hotels Inc. stated at para. 38:

To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. Where the error is said to result from a mistake common to both or all parties to the agreement, rectification is available upon the court being satisfied that, on a balance of probabilities, there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties' prior agreement.…

14Brown J. also noted at para. 13 that caution must be exercised in using this remedy:

Because rectification allows courts to rewrite what the parties had originally intended to be the final expression of their agreement, it is "a potent remedy" (Snell's Equity (33rd ed. 2015), by J. McGhee, at pp. 417-18). It must, as this Court has repeatedly stated (KRG Insurance Brokers (Western) Inc. v. Shafron, 2009 SCC 6, [2009] 1 S.C.R. 157 (S.C.C.), at para. 56, citing Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678 (S.C.C.), at para. 31), be used "with great caution", since a "relaxed approach to rectification as a substitute for due diligence at the time a document is signed would undermine the confidence of the commercial world in written contracts": Performance Industries, at para. 31. It bears reiterating that rectification is limited solely to cases where a written instrument has incorrectly recorded the parties' antecedent agreement (Swan and Adamski, at §8.229). It is not concerned with mistakes merely in the making of that antecedent agreement: E. Peel, The Law of Contract (14th ed. 2015), at para. 8-059; Mackenzie v. Coulson (1869), L.R. 8 Eq. 368 (Eng. V.-C.), at p. 375 ("Courts of Equity do not rectify contracts; they may and do rectify instruments"). 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.

15The applicant submits that:

In this instance, it is our submission that the Applicant's intention, being that it distributes the maximum capital dividend permitted, was a clear and ascertainable intention that was not reflected by the prepared resolution.

16However, the September 26th resolution was not marked down incorrectly. At the time the applicant intended to provide dividends to the class A and class B shareholders in the amount of $210,000. That amount was arrived upon by their accountant and the applicant decided to follow their accountant’s advice. That was the agreement and it is accurately reflected in the resolution. The agreement was not to issue $104,000 in dividends to only the class B common shareholders. In effect, the applicant asks this court to change the original agreement to address the unintended tax consequences resulting from the applicant’s accountant lack of due diligence. The Supreme Court of Canada has specifically stated that this is not the purpose of the doctrine of rectification. Brown J, speaking for the majority in Canada (Attorney General) v. Fairmont Hotels, stated at para. 3:

Without disputing that tax neutrality was the parties’ intention, for the reasons that follow it is my respectful view that both courts below erred in holding that this intention could support a grant of rectification. Rectification is limited to cases where the agreement between the parties was not correctly recorded in the instrument that became the final expression of their agreement: A. Swan and J. Adamski, Canadian Contract Law (3rd ed. 2012), at §8.229; M. McInnes, The Canadian Law of Unjust Enrichment and Restitution (2014), at p. 817. It does not undo unanticipated effects of that agreement. While, therefore, a court may rectify an instrument which inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage what a party hoped to achieve. Moreover, these rules confining the availability of rectification are generally applicable, including where (as here) the unanticipated effect takes the form of a tax liability. To be clear, a court may not modify an instrument merely because a party has discovered that its operation generates an adverse and unplanned tax liability. I would therefore allow the appeal.

17And at para. 39:

Courts do not “rectify” agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome.

18I agree with the respondent that the intention to distribute the maximum allowable amount does not meet the test set out in Canada (Attorney General) v. Fairmont Hotels at para. 32 as “the party seeking rectification must identify terms which were omitted or recorded incorrectly and which, correctly recorded, are sufficiently precise to constitute the terms of an enforceable agreement.” [emphasis added]

19In addition, the applicant’s submission does not address how the doctrine of rectification could be used to correct and cancel the capital dividends issued to the class A common shareholders. It seems evident from the record that the intention was to always treat them the same as the class B common shareholders. It was only when it was discovered over a year later that the issuance of the dividends caused tax consequences to the class A common shareholder, Mr. Ray Glasrud, because of his United States citizenship and apart from the miscalculation of the CDA balance, that the applicant sought to change the September 26th resolution. As stated in Canada (Attorney General) v. Fairmont Hotels at para. 19:

I agree with this observation. As I have stressed, rectification is available not to cure a party’s error in judgment in entering into a particular agreement, but an error in the recording of that agreement in a legal instrument. Alternatively put, rectification aligns the instrument with what the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do. [emphasis added]

Also see Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562, 141 O.R. (3d) 321, at para. 69.

20Furthermore, the resolution specifically states that “if the total amount of the dividend exceeds the capital dividend account balance available, the excess will be treated as a taxable dividend under Section 184(3).” The affidavit by Mr. Loeppky seeks to explain the origin of that clause. But it is important to note that the applicant has not filed any affidavit from its board of directors to explain what they actually thought that clause meant when it was passed. It is not sufficient for Mr. Loeppky to provide his understanding of the applicant’s understanding.

21The applicant relies on Winclare Management Services Ltd v. Canada, 2009 CarswellOnt 2106. However, that case predates the Supreme Court of Canada’s decision in Canada (Attorney General) v. Fairmont Hotels and in Winclare Management Services Ltd v. Canada, the request for rectification was unopposed. I agree with the applicant that the British Columbia Court of Appeal’s decision in 5551928 Manitoba Ltd (Re), 2019 BCCA 376, 30 B.C.L.R. (6th) 215, does somewhat support its argument. However, in my view, 5551928 Manitoba Ltd (Re) is inconsistent with the Supreme Court of Canada’s decision in Canada (Attorney General) v. Fairmont Hotels and the Ontario Court of Appeal’s subsequent decision in Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562, 141 O.R. (3d) 321. But I also note that in 5551928 Manitoba Ltd (Re) the application judge found that the agreement to wipe out the CDA account was supported by the wording of the resolution which referenced the actual balance in the CDA account and the testimony of the directors in addition to the testimony of the accountant. Again, as noted the resolution in this case actually contemplated what would occur if dividends exceed the capital dividend account balance available and in this case there was no evidence submitted from the applicant’s directors.

Decline to exercise my equitable jurisdiction to rectify the resolution

22Even if I am incorrect and the elements of rectification are met, I would decline to exercise my equitable jurisdiction to apply it as there are alternative remedies available to the applicant to address the tax consequences. The Ontario Court of Appeal stated in Canada Life Insurance Company of Canada v. Canada (Attorney General) at para. 92:

First, CLICC has adequate alternative remedies to address the adverse tax consequences resulting from the mistake it relies on. As already noted, CLICC has filed a notice of objection to appeal its tax assessment, under s. 23 of the Financial Administration Act, it can apply to the Minister for a remission of tax, and it has a potential legal action against its professional advisor. The question is not whether CLICC will necessarily be successful in pursuing such alternative relief, but whether there is a remedy at law: see Bramco, at p. 741; JAFT Corp. v. Jones, 2015 MBCA 77, 323 Man. R. (2d) 57, at paras. 44-48; J.E. Martin and H.G. Hanbury, Modern Equity, 19th ed. (London: Sweet & Maxwell, 2012), at p. 35, and Jeffrey B. Berryman et al., Remedies Cases and Materials, 7th ed. (Toronto: Emond, 2016), at p. 568.

23Furthermore, as stated by the majority in Jean Coutu Group (PJC) v. Canada (Attorney General) at para. 43:

I recognize that “[i]ncome tax law is notoriously complex and many taxpayers rely on tax advisors to help them comply”: Guindon v. Canada, 2015 SCC 41, [2015] 3 S.C.R. 3, at para. 1. But when taxpayers agree to certain transactions and later claim that their advisors made mistakes by failing to properly advise them that the transactions they agreed to would produce unintended tax consequences, the appropriate avenue to recoup their ensuing losses is not through the retroactive amendment of their agreement. Rather, if the mistakes are of such a nature as to warrant it, taxpayers can bring a claim against their advisors, who generally have professional liability insurance, and try to prove that claim in the courts.

24In this case, the applicant may pursue four remedies, including the three remedies identified in Canada Life: appealing the tax assessment, applying to the Minister for a remission of tax, or taking legal action against a professional advisor.

Conclusion

25The application is dismissed. The respondent shall provide its bill of costs and its costs submissions within 10 days of the release of this decision. The applicant shall provide its submissions one week after that. The parties’ submissions shall not be longer than two pages.

OSHAWA COURT FILE NO.: CV-19-2987