A recent decision from the Ontario Court of Appeal is a good reminder that courts won't bail you out just because a tax plan didn't go as expected. In Pyxis Real Estate Equities Inc. v. Canada, 2025 ONCA 65, the Court made it clear: if your documents match the plan – even if that plan was flawed – you're likely stuck with the result.
What Happened
This case involved a group of companies that attempted to distribute a $1.4 million tax-free capital dividend up the corporate chain for the benefit of the sole individual shareholder at the top of the chain. To make that happen, the plan was for the company at the bottom of the chain with a healthy capital dividend account ("CDA") of $45 million to pay out a capital dividend of approximately $1.4 million up the chain of companies. As a general rule, CDA can be paid out as a dividend through a corporate chain and retain its tax-free CDA character.
As part of the plan, the accountants were instructed to confirm the historical tax and accounting records of each corporation in the chain; however, the accountants failed to do so. This failure meant that the accountants did not note that one of the corporations in the chain was sitting with a $300,000 CDA deficit. Consequently, that deficit ate into the $1.4 million capital dividend authorized by the corporate resolutions.
The total CDA dividend that should have been authorized was $1.7 million to generate the $1.4 million tax-free capital dividend payable to the sole individual shareholder at the top of the chain, and the corporation at the bottom of the chain had more than enough to accommodate that figure. The CRA reassessed the company with the CDA deficit for 60% of the excess capital dividends, determining that the capital dividend distribution exceeded its CDA balance by $300,000.
The company applied to the Court to fix the corporate resolutions through rectification, arguing that the plan had been to get a tax-free dividend of $1.4 million into the individual shareholders' hands at the top of the corporate chain and that the documents didn't properly reflect that.
What the Court Said
The Ontario Superior Court of Justice judge initially agreed and granted rectification on the basis that the agreement or transaction must be viewed as a whole, and the objective of the transaction was to get $1.4 million tax-free out to the ultimate shareholder. The Superior Court held that the resolutions could be corrected to fix the error. However, on appeal, the Ontario Court of Appeal reversed that decision.
The Court of Appeal found that the resolutions did reflect what had been agreed to—a $1.4 million dividend up the chain of companies. The issue was that the plan itself did not deliver the tax result they wanted. Therefore, rectification was not available in this case as the Court of Appeal held that a rectification order cannot save the parties from their failure to conduct due diligence. The Court stressed that rectification may only be available when written documents don't reflect a prior agreement, not when the agreement itself is flawed.
Key Takeaways
- Intent isn't enough: Wanting a tax-free result doesn't mean you had a binding agreement to make it happen in a particular way.
- Courts won't fix planning mistakes: If the paperwork lines up with the plan—even a mistaken one—rectification is not guaranteed.
- Review the full chain: Especially in real estate structures with multiple tiers, make sure all entities' corporate and tax records are reviewed. A small oversight can turn into a hefty tax bill.
This decision doesn't change the settled rules and requirements for rectification, but it's a helpful example of what can go wrong when a technical misstep in execution has real tax consequences.
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