No Benefit of Hindsight: The ONCA clarifies the framework for Rectification
By: Amanda Laren Feigen and Sebastien Tuli
Rectification is an equitable remedy that corrects mistakes in written agreements. The recent case from the Ontario Court of Appeal, Pyxis Real Estate Equities Inc. v Canada (Attorney General), 2025 ONCA 65, provides an important reminder of how rectification operates in the tax context and the importance of obtaining good tax advice. The case highlights the strict legal framework that must be satisfied for rectification to be granted, even where the parties intended to achieve a specific fiscal outcome.
Facts
David Jubb (“Jubb”) was the sole shareholder of the vertical chain of corporations involved in the planning that was the subject of the rectification application. Jubb sought to pay off a shareholder loan that he owed to one of the corporations through a tax-free remuneration strategy. His accountants created a plan involving a tax-free capital dividend payment of $1.4 million initiated by the corporation at the bottom of the corporate chain, which would be paid up the corporate chain with successive capital dividends and ultimately paid to Jubb. To make this payment, each corporation required a capital dividend account (“CDA”) balance of at least $1.4 million. The accountants prepared a memorandum outlining that four dividends would be paid up the corporate chain, each in the amount of $1.4 million.
While the accountants were instructed to verify the historical tax and accounting records of each corporation, they failed to do so and were not aware that one of the corporations (“Edgecombe”) had a CDA deficit of approximately $300,000. As such, to achieve the goal of each corporation paying a $1.4M capital dividend, an initiating capital dividend of $1.7 million was needed, which was possible given that the initial payer corporation at the bottom of the chain had a CDA balance of approximately $45 million and was able to pay this larger dividend amount.
The CRA assessed Edgecombe and determined that it paid a capital dividend in excess of its CDA balance. As a result, it levied the punitive 60% tax on the excess capital dividend under Part III of the Income Tax Act (Canada). Jubb sought to rectify the corporate resolutions to reflect a capital dividend of $1.7 million on the basis that this was his true intention.
The lower Court granted rectification as the application judge found that the objective of the transactions was to pay a tax-free capital dividend and that a business efficacy interpretation to the agreements should be preferred.
The Law: Test established by SCC in Fairmont Hotels
The ONCA reaffirmed the test set out by the Supreme Court of Canada (“SCC”) in Canada (Attorney General) v Fairmont Hotels Inc., 2016 SCC 56, which narrowed the ability for Courts to award the remedy of rectification. The SCC outlined that rectification is only available where an error results from a mistake common to all parties to the agreement and the following is satisfied:
- There was a prior agreement whose terms are definite and ascertainable;
- The agreement was still in effect at the time the instrument was executed;
- The instrument ails to accurately record the agreement; and
- The instrument, if rectified, would carry out the parties’ prior agreement.
The ONCA confirmed that rectification is not available to correct an “improvident bargain” or to “fill a gap in the parties’ true agreement”, even when the omission defeats what one of the parties was seeking to achieve (2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273). Rectification is for remedying the agreement to place the parties in the position of what they agreed to do, not what they should have agreed to do. Ultimately, it requires that the executed documents fail to accurately record the parties’ agreement.
Moreover, a Court will not rectify a document on the basis that it failed to achieve the grantor’s fiscal or tax objective alone. In other words, it will not be awarded to achieve the objective of avoiding an unintended tax liability.
Applying the Test
The ONCA ruled that since the documents accurately reflected the agreement to pay a $1.4 million tax-free capital dividend, rectification was not warranted. The flaw was in the reorganization structuring, but not in the accuracy of the written documents. The parties’ intention to effect the transactions on a tax-free basis was not sufficient grounds for rectification.
The Court emphasized that rectification must be used with “great caution” and as such, it was not applicable in the circumstances.
Key Takeaways
What should have been an efficient, tax-free distribution for the taxpayer resulted in a significant tax penalty that could have been avoided. The case serves as an important reminder for tax practitioners and taxpayers about the importance of due diligence when undergoing tax planning. Careful consideration must be undergone in every transaction. Good communication between advisors as to what steps have been taken can help ensure that the appropriate review has been made.
This decision also reminds us that a Court will only award rectification in the tax context in very limited scenarios where the written documents do not reflect the parties’ agreement. There is no benefit of hindsight for parties whose documents reflect their agreement but who later find out that their tax objectives were not met.
