Rectification is a flexible tool that is sometimes triggered to bring equity to parties, where no other feasible remedy exists at law. The law on rectification in Canada to date has historically lacked clarity across Provinces. The most recent authoritative case to date is Canada (AG) v. Fairmont Hotels Inc,1 which set out the test for rectification.
On October 30, 2019, the Court of Appeal for British Columbia ("Court of Appeal") applied this test in the context of a corporate resolution. The decision affirmed the lower court's ruling to allow rectification, and reinforced and clarified a series of cases across Canada related to availability of rectification as an equitable remedy for corporations.
The Plaintiff, a private corporation, paid a dividend in the amount of $298,000, intending that the entire dividend be paid out from the corporation's capital dividend account ("CDA"), and therefore transferred to shareholders tax-free. Only after the directors' resolution to declare the dividend was passed did they realize that a miscalculation of the CDA drastically overemphasized the account's holdings. As a result, the CRA assessed the corporation for a penalty equal to 60% of the amount overpaid. The corporation sought to rectify the resolution.
History of Rectification as an Equitable Remedy
In Fairmont, the court dealt with a series of unintended tax consequences of the plaintiff corporation, as a result of a financing agreement which was intended to operate on a tax-neutral basis. The court held that rectification is limited to cases where a mistake occurred in a written instrument, contrary to what the parties had contemplated at the time. Importantly, in her dissent, Abella J. noted that the intention of parties was to pay a dividend. The amount to be paid out is the recorded mistake based on the financial statements. While the test emphasizes intention over consequence, the court must be careful to define those intentions within the proper parameters.
Notably, the parties did not assert that their intentions had been incorrectly recorded, only that the result of their intentions – tax neutrality – had not been realized. As a result, the facts in Fairmont did not meet the test.
Lower Court Decision
At the B.C. Supreme Court2, the Plaintiff Corporation asserted that at the time of the directors' resolution, the directors had intended to declare a dividend, "in the greatest amount that would not result in a tax liability for the corporation or its shareholders"3. They argued that in relying on the amount thought to be in the account at the time, it had never been their intention to declare any dividend that would exceed that maximum.
The Chambers Judge agreed with the Plaintiff Corporation, noting that the directors' resolution clearly established that the "essence of the agreement here was always to make a distribution to shareholders in the maximum amount that could be distributed without tax".4 The only flaw in the resolution was in the amount paid. This is consistent with Justice Abella's comments on the proper scope of the party's intention. Further, the Chambers Judge noted that no alternative remedy provided outweighed the equitable remedy requested.
The Appeal Decision
The Government of Canada appealed the Chambers Judge's decision on two basis: (1) that the Chambers Judge "misdirected himself" on the test for rectification5 and (2) that the Chambers Judge did not adequately consider alternative remedies before exercising his equitable jurisdiction6.
The Court of Appeal concluded that the facts of this case fall squarely within the test for rectification set out by the Supreme Court in Fairmont, and upheld the rectification order.7 The Court of Appeal noted that the emphasis of the test needs to be placed on determining whether there was a "definite and ascertainable intention" of parties when they signed the resolution, "but that because of a mistake, the document failed to reflect that intention".8
In this case, the intention of parties was to pay a dividend from the companies CDA, no matter what that amount may have been, and without exceeding the maximum amount allowed pursuant to the Income Tax Act. Rectifying the resolution would accurately accomplish the original intention of the parties.
With respect to alternative remedies of the court, the court found that no alternative remedies put forward were appropriate such that they could outweigh the equities favoring rectification.
Implications for Corporations & Tax Planning
The test for rectification remains highly factually driven, much like contract law.
In distinguishing Fairmont, the Court of Appeal clarified the scope of rectification as an equitable remedy, providing a positive net effect to corporations who would otherwise be facing a historically restrictive test.
Corporations should be mindful to draft resolutions in a way that casts their intention using broad language. This allows the court flexibility to grant rectification where it would have otherwise been inequitable to do so.
5551928 Manitoba Ltd. v. Canada (Attorney General), 2019 BCCA 376
Date of Decision: October 30, 2019
1 2016 SCC 56. Note: decided with companion case Jean-Coutu (PLC) Inc. v. Canada (Attorney General) 2016 SCC 55, both of which expressly disapprove the earlier decision of the Ontario Court of Appeal, Juliar v. Canada (Attorney General) (2000) 50 O.R. (3d) 728, Ive to app. Ref'd, 2001 S.C.C.A. No. 621.
2 2018 BCSC 1482.
3 2019 BCCA 376, para 9.
4 2019 BCCA 376, para 22.
5 2019 BCCA 376, para 30.
7 Though, in granting rectification, clearly distinguished the case from Fairmont and Juliar on the facts.
8 2019 BCCA 376.
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