Rectification - Not Dead Yet? - Rectification to reduce an excess capital dividend (due to a computation error) was allowed as the intention to exhaust the CDA was clear from the start.


In an August 22, 2018 Supreme Court of British Columbia case (5551928 Manitoba Ltd., 2018 BCSC 1482, S1711670), the taxpayer petitioned the Court to rectify a capital dividend to reduce it by $184,880 such that the 60% Part III Tax on the excess capital dividend would be eliminated. In the event rectification was denied, the taxpayer petitioned that the dividend be rescinded. The taxpayer preferred rectification, however, as a rescission may open up other tax liabilities. The Attorney General of Canada opposed the rectification but not the rescission.

The corporation sold business assets, after which the directors sought to distribute the maximum amount of capital dividends possible. The corporation engaged third party accountants to advise on the calculation of available capital dividend. The accountants made an error in their analysis and, therefore, provided a capital dividend account calculation much higher than was actually available. As a result, an excessive capital dividend was declared.

Taxpayer wins
The Court found that there was a definite and ascertainable agreement between the directors to effectively “clean-out” the corporation’s capital dividend account, which would allow the corporation to pay the amounts out tax-free to the shareholders. The corporation’s intention was clear when seeking out the advice of the accountants and when passing the Resolutions. The only error was in the figure provided by the third-party experts.

In contrasting to the Supreme Court of Canada decision in the Fairmont case (Docket: 36606VTN 426(10)), the Court noted that:

  • there was no “bold tax planning” – the directors were simply seeking to empty the capital dividend account, to which they were entitled;

  • the corporation was not seeking to modify the instrument due to an unplanned tax liability – the agreement at the outset was to issue a tax-free dividend;

  • there was no suggestion that the corporation was recklessfailed to act with due diligence, or should have known – the directors engaged third-party experts to assist with the computation, given the complexity of the calculation;

  • there was not an error in judgment; and

  • the rectification did not require the Court to wholly rewrite or unwind a complex mechanism or series of transactions, rather the corporation wished to replace the incorrect figure with the correct one.

The Court further stated that rescission would have been granted if it were to rule on that matter (though it was not required as it allowed the rectification).

Editors’ Comment
The taxpayer’s error related to the timing of the addition to the capital dividend account on the disposition of eligible capital property, an issue which no longer exists due to the transition of eligible capital property to Class 14.1 effective January 1, 2017.

If rectification had not been granted, but rescission had, there may be a risk that the rescinded dividend would result in a shareholder benefit.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 446.