Court File and Parties

CITATION: Pyxis Real Estate v. Attorney General of Canada, 2024 ONSC 2039 COURT FILE NO.: CV-22-00690866 DATE: 20240408

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: PYXIS REAL ESTATE EQUITIES INC. (AS SUCCESSOR BY TWO AMALGAMATIONS TO EDGECOMBE INC., EDGEFUND EQUITIES INC. AND PYXIS REAL ESTATE EQUITIES INC.) Applicant

AND:

ATTORNEY GENERAL OF CANADA Respondent

BEFORE: Koehnen J.

COUNSEL: Margaret Nixon for the applicant Sarah Mackenzie for the respondent

HEARD: February 14, 2024

Endorsement

[1] The applicant seeks an order rectifying certain corporate documents to give effect to the transaction the applicant says it had always intended to carry out. The transaction was not carried out as intended because of a mistake by the applicant’s accountants. The applicants seek to rectify that mistake.

[2] The respondent, Attorney General of Canada says rectification is not appropriate because the facts of this case do not meet the factual or legal requirements for rectification.

Factual Background

[3] The corporate structure immediately before the transactions at issue occurred and out of which the application arises can be summarized as follows:

David Jubb 2523183 Ontario Inc. (Jubb Holdco) Edgecombe Inc. Edgefund Equities Inc. (EEI) Pyxis Real Estate Equities Inc. (Old Pyxis)

[4] Each of the corporate shareholders in the corporate structure illustrated above is the sole shareholder of the corporation below it. [^1] David Jubb is the sole shareholder of the Class A preferred shares of Jubb Holdco.

[5] In December 2017 Mr. Jubb asked his accountants to devise a potential remuneration strategy that would allow him to pay off the shareholder loan he owed to Jubb Holdco of $1,182,596 and leave a balance of remaining for Mr. Jubb, all on a tax-free basis and to reorganize the corporate structure to remove redundant corporations. The accountants devised a strategy that involved paying tax-free capital dividends up the chain from Old Phyxis. The amount arrived at was a total tax-free dividend payable by Jubb Holdco to Mr. Jubb of $1,400,000. After paying off the shareholder loan, this would leave Mr. Jubb with a tax-free receipt of $217,404. This required each corporation in the chain to have a capital dividend account of at least $1,400,000.

[6] To implement this transaction, Mr. Jubb told his accountants to obtain the historical tax and accounting records of the corporations in the chain from another accounting firm who had previously been responsible for the corporations’ tax accounting.

[7] It appears that the current accountants did not review the historical information they were instructed to obtain. They were therefore not aware that Edgecombe had a capital dividend account deficit of $323,893. As a result, when Edgecombe received its capital dividend of $1,400,000, its capital dividend account balance was adjusted to $1,076,107. To allow Edgecombe to complete the transaction as intended, it would have had to receive a capital dividend of $1,723,893.

[8] The parties agree that the corporation at the bottom of the chain, Old Pyxis, which initiated the transaction had a capital dividend account balance of approximately $45 million. It was just as able to pay a tax-free capital dividend of $1,723,893 as it was able to pay tax-free capital dividend of $1,400,000. The parties also agreed that there was no tax benefit to having Old Pyxis initiate the dividend payment chain with the payment of $1.4 million as opposed to initiating the dividend chain with a dividend of $1,723,893 other than leaving Old Pyxis with a slightly smaller dent in its $45 million capital dividend account.

[9] In September 2020, CRA advised that it had determined that Edgecombe’s dividend exceeded its capital dividend account balance by $323,893 and that it would issue Edgecombe a Notice of Assessment for Part III tax equal to 60% of the excess capital dividend. The applicant seeks to avoid that additional tax payment by having the relevant corporate documents rectified to direct a capital dividend of $1,723,893 which reflects what it says was its true intention.

Legal Test and Analysis

[10] The legal test for rectification is not in dispute. It is an equitable remedy that is available to correct an error in a legal instrument to make the instrument accord with the parties’ true agreement or agreed plan of action.

[11] The Supreme Court of Canada described the remedy as follows in Canada (Attorney General) v. Fairmont Hotels Inc. [^2]:

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.

[12] The Supreme Court went on to identify four requirements as being necessary for rectification:

(i) There must be a “definite and ascertainable” prior agreement; (ii) The agreement must have been in effect at the time the instrument sought to be corrected was executed; (iii) The written instrument must be inconsistent with the prior agreement; and (iv) It must be possible to amend the written instrument to carry out the prior agreement. [^3]

[13] Although the Legal test for rectification is not in dispute, the parties disagree about how to characterize the events that occurred.

[14] In its submissions, the respondent quotes the memorandum in which the accountants outlined the transaction. The memorandum is the only document that records the nature of the plan. It described the transaction as follows:

1. [Old] Pyxis will declare and pay a $1,400,000 tax-free capital dividend at 2:00 pm on December 14, 2017 from its [Capital Dividend Account (CDA)] balance to its sole shareholder EEI. Any capital dividend paid out by [Old] Pyxis will have the effect of reducing its CDA on a dollar for dollar basis (i.e. CDA reduces by $1,400,000).
2. EEI will then declare and pay a $1,400,000 tax-free capital dividend at 2:15 pm on December 14, 2017 from its CDA balance to its sole shareholder [Edgecombe].
3. [Edgecombe] will then declare and pay a $1,400,000 tax free capital dividend at 2:30 pm on December 14, 2017 from its CDA balance to its sole shareholder [Jubb Holdco].
4. [Jubb Holdco] will then declare and pay a $1,400,000 tax-free capital dividend at 2:45 pm on December 14, 2017 from its CDA balance to David on his Class A preferred shares. This payment would be used to tax-effectively redeem 683.93 of David’s Class A preference shares and thereby reduce his tax exposure on death.

[15] The respondent submits that there were no mistakes in recording the terms of the memorandum. It says the terms were based on the accountants’ mistaken assumption about Edgecombe’s capital dividend account balance which they chose not to verify. In this light the respondent argues that the taxpayers intended to pay a dividend of $1,400,000 although their intention to do so may have resulted in tax consequences they did not expect.

[16] Whether one accepts this characterization depends on how one reads the memorandum. If one focusses solely on the amounts and reads the memorandum as saying that the objective was for Old Pyxis to pay a dividend of $1,400,000, I would agree with the respondent. That is not, however, how I read the memorandum.

[17] When the memorandum is read as a whole, it is clear that the objective of the transactions and the agreement is to pay a tax-free capital dividend to Mr. Jubb of $1,400,000 and to take such preliminary steps as are required to achieve that objective. Achieving that objective required Old Pyxis to pay a capital dividend of $1,723,893. Given that Old Pyxis had a capital dividend account of $45 million it was more than able to do so.

[18] The Ontario Court of Appeal has recognized the importance of viewing an agreement or transaction as a whole for purposes of rectification. In 2484234 Ontario Inc. v. Hanley Park Developments Inc. [^4], the purchaser agreed to by land for development. The vendor also owned neighbouring properties over which an easement would be required to construct a road to allow the development to proceed. As a result, the vendor’s lawyer wrote to the appellant purchaser saying:

My client, so as to assist your client and on a without prejudice basis, is prepared to do the following:

1. Convey to your client the parcel of land outlined as Parts 1, 2, 3 and 4 on the attached draft reference plan. The Engineer for the project has advised my client that these 4 parts will be sufficient for the road which is to be built to access the subdivision. [^5]

[19] The transaction closed with the purchaser receiving an easement over parts 1 – 4 of the neighbouring property. It was then discovered that the purchaser also required an easement over part 5 to build the access road. The purchaser applied for rectification. The applications judge declined to grant relief because the parties never specifically discussed part 5 as a result of which it never formed part of the agreement. The Court of Appeal reversed and rectified the agreement to provide for an easement over parts 1 – 5.

[20] The Court of Appeal held that it was necessary to look at the agreement as a whole and inferred from the letter of the vendor’s lawyer that the true object was to grant the plaintiff an easement sufficient to construct an access road. [^6] The Court of Appeal held further that if two interpretations of an agreement are possible, one of which would give business efficacy to the agreement and the other would defeat business efficacy, the former should be preferred. [^7]

[21] Returning to the transactions at issue here, the point of the various dividends was to arrive at a result that would give Mr. Jubb a dividend of $1,400,000 on a tax-free basis. That was the sole object of the transaction. The only way to give business efficacy to that transaction is to have Old Phyxis initiate the chain of dividends with a capital dividend of $1,723,893.

[22] Returning to the four elements of the test for rectification in Fairmont Hotels, there was a “definite and ascertainable” prior agreement to pay Mr. Jubb a tax-free dividend of $1,400,000. That agreement was in effect when the transaction documents were executed. The documents that were executed were inconsistent with the agreement to pay Mr. Jubb a tax-free dividend of $1,400,000. It is readily possible to amend the written instrument to carry out the prior agreement by amending the resolutions to call for the payment of capital dividends of $1,723,893 from Old Pyxis up the chain to the Edgecombe.

[23] Returning to the Supreme Court of Canada’s description of rectification quoted in paragraph 12 above, there was here a mistake in a legal instrument which made the instrument fail to accord with the true agreement it was intended to record because a term (the amount of the dividend) incorrectly expressed the parties’ agreement (to pay a tax free dividend of $1,400,000 to Mr. Jubb). Or, alternatively, rectification here allows the court to achieve correspondence between the parties’ agreement and the substance of the legal instruments.

[24] The respondent submits further that rectification is improper because the applicant is really looking for retroactive tax planning. The respondent defines retroactive tax planning as any attempt to change one’s affairs in order to escape statutorily mandated tax consequences even if the tax consequences were unintended. [^8] The respondent relies in particular on the decision of the Ontario Court of Appeal in Canada Life Insurance Company of Canada v Canada (Attorney General) [^9]. In that case, however, the Court of Appeal noted that the flaw was in the overall structure of the transaction. That is to say that the actual tax mechanism used was flawed.

[25] In the case before me, the tax structure of the proposal is sound and is not being changed. The structure involved a series of tax-free capital dividends up the corporate chain. After rectification that structure remains the same. The only change is that the capital dividend from Old Phyxis up the chain to Edgecombe is being increased to $1,723,893. The changes sought are simply those that are required to achieve the agreed objective of the transactions. That is not retroactive tax planning. The situation may be different if a taxpayer had used one tax structure, been faced with an adverse tax ruling and now proposed to implement a different structure.

[26] Next, the respondent relies on Pole Trail Ranch Co. Inc. v. Attorney General of Canada [^10] which the respondent says is a case in which the corporation paid capital dividends to its Class A and Class B shareholders in the total amount of $420,000. CRA then advised that the capital dividend account of the corporation was only $104,000. The respondent says the court rejected rectification because the applicant followed the accountants advice and that the applicant was now in effect asking the court to change the original agreement to address the unintended tax consequences.

[27] I do not entirely agree with respondent’s reading of that case. As noted, in Pole Trails, the corporation paid dividends to its Class A and Class B shareholders. After the dividend was paid, the Class A shareholder contacted the corporation and advised that he was a non-resident of Canada as a result of which the dividend would have adverse tax consequences for him. The corporation then approached CRA to change the transaction from one in which dividends were paid to both Class A and class B shareholders to one in which the dividend was paid only to the class B shareholder. [^11] CRA responded by declining to allow the change and also by advising that the corporation’s capital dividend account was only $104,000.

[28] Pole Trails is distinguishable because it involves an actual change to the structure of the transaction from one involving a payment to Class A and Class B shareholders to one involving a payment only to Class B shareholders. [^12]

[29] The respondent further submits that rectification will not be granted if the applicant has adequate alternative remedies. Those remedies, according to the respondent, are to dispute the assessment, treat the excess capital dividend as a regular dividend which would avoid the Part III tax and/or sue the accountants. The respondent submits that the applicant has acknowledged these remedies but simply dismisses them as impractical, uncertain and costly without providing an explanation. I am satisfied that no further explanation is required. The applicant has already commenced a notice of assessment, but the parties have agreed to hold it in abeyance pending the result of this decision. An assessment is unlikely to make any difference because the individuals deciding the assessment are not empowered with the equitable jurisdiction of the court to rectify transactions. Declaring the excess dividend as a regular dividend will not result in the objective of a tax-free dividend to Mr. Jubb but will result in a tax liability for him personally. Pursuing a claim against the accountants will likely take years of litigation and will be a substantially more expensive than this application for rectification.

[30] At the end of the day, rectification is an equitable doctrine. It would not, in my view be equitable to impose an adverse tax consequences on the applicant or Mr. Jubb because an accountant made a careless error in implementing and agreed upon structure and an agreed upon objective of paying a $1,400,000 tax-free dividend to Mr. Jubb.

[31] As a result of the foregoing, I grant the application nunc pro tunc rectifying the resolutions in the form attached as Schedules “A” and “B” to the Notice of Application.

[32] The parties have agreed that each side will bear its own costs.

Date: April 8, 2024 Koehnen J.

Footnotes

[^1]: Strictly speaking, the CBC Pension Board of Trustees had held 30% of the common shares of Old Pyxis. Those shares were purchased as part of the restructuring associated with the transaction so that immediately before the transactions at issue occurred, Edgefund Equities was the sole shareholder of Old Pyxis. [^2]: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, at para. 12. [^3]: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, at para. 38; see also Crean v. Canada (Attorney General), 2019 BCSC 146, at para. 45. [^4]: 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273. [^5]: 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273 at para. 13. [^6]: 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273 at paras. 59-64. [^7]: 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273 at paras. 64-65, 69. [^8]: Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56, at paras. 3, 19 and 23-24. [^9]: Canada Life Insurance Company of Canada v Canada (Attorney General), 2018 ONCA 562 at para. 69. [^10]: Pole Trail Ranch Co. Inc. v. Attorney General of Canada, 2020 ONSC 7050 (although this citation is the one listed on the copy I was given, it does not appear to be available on under that citation). [^11]: Pole Trail Ranch Co. Inc. v. Attorney General of Canada, 2020 ONSC 7050 at paras. 11, 19. [^12]: Pole Trail Ranch Co. Inc. v. Attorney General of Canada, 2020 ONSC 7050 at para. 16.