The Ontario Superior Court of Justice recently granted
rectification in a case in which the CRA and the taxpayer differed
in their interpretation and effect of a particular document. In
Kaleidescape Canada Inc et al v Computershare Trust Company of
Canada et al, 2014 ONSC 4983, the Court was asked to
determine whether the parties intended that Kaleidescape Canada
Inc. remain a Canadian-controlled private company (CCPC) for the
purposes of obtaining certain scientific research and development
tax credits under the Income Tax Act (Canada).
Kaleidescape Canada Inc. (KCI) is a research and development
company located in Ontario. KCI was structured as a
"deadlock" corporation so that it would not be controlled
by a non-resident and therefore would qualify as a CCPC.
From its incorporation in 2001 to 2006, KCI was accepted as a
CCPC by CRA and benefitted from SR&ED credits. KCI's
shareholdings were restructured, and by 2008, were owned
by Kaleidescape Inc. (KI), an American company, and
Kaleidescape Canada Employment Trust (the Trust).
It was believed at the time of the restructuring that replacing
the previous Canadian resident individual shareholder with the
Trust would allow KCI to maintain its CCPC status and continue to
take advantage of the SR&ED credits. A Restated and Amended
Trust Deed (the Deed) was entered into with KCI as the Settlor and
Computershare Trust Company of Canada as the sole trustee. Pursuant
to the Deed, the Trust and the Trustee were intended to be
residents of Canada.
However, KI and the Trustee held equal voting rights, and a
unanimous shareholders agreement relieved KCI's directors of
their powers and conferred those powers on the shareholders. There
was no provision to resolve a deadlock, and neither the
shareholders nor directors had the right to make unilateral
CRA took the position that KCI was not a CCPC for the 2008 and
2009 tax years, arguing that the effect the Deed was to give a
non-resident authority to direct the Trustee how to vote its shares
of KCI, such that a non-resident controlled KCI.
KCI argued that its common and continuing intention at all times
was to structure and operate in a manner that would establish and
preserve its CCPC status. The CRA argued that the Applicants could
not prove common intention, did not admit that a mistake had been
made, and could not show the precise form of a corrected document
that would express their prior intention.
The Court reiterated that rectification is an equitable remedy
that permits the retroactive correction of written instruments that
do not accurately express the parties' original agreement. The
onus is on the applicant to satisfy the Court that rectification
would simply align the documentation to the true intentions of the
parties. The Court further noted that rectification can be granted
where parties had an agreement to achieve a specific tax outcome
but failed to implement their plan properly. It must be established
that the original purpose of the transaction was to avoid taxation
in a particular way, not simply avoid an unexpected tax
The Court found that the intention of the parties throughout was
to ensure that KCI – as a research and development company
– qualified for CCPC status and the available research tax
credits. As a result, the wording used in the Trust Deed was a
mistake and there was no intention to give KI de jure control over
KCI. The Court granted rectification.
The Take Away
This case is another reminder that proof of a common intention
at the time the original agreement is made is the key to a
successful application for rectification. The parties must show
that, in entering into a particular agreement or transaction, they
had the intention to achieve a certain result under the ITA.
Rectification will not be granted in cases where a disadvantageous
tax result occurred, but there was not prior intention to avoid
that result. Rectification can only be used to properly record the
agreement between the parties and not as a tool for retroactive tax
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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