Zhang – B.C. Supreme Court refuses rectification on the basis that the true agreement of parties to a share transfer agreement was accessing the s. 113(1)(a) deduction rather than avoiding capital gains tax

The taxpayer (Mr. Zhang) briefly got advice from his tax accountant (Bob) that he could access the earnings of his Chinese operating company using the exempt surplus system by transferring his shares to a BC holding company. Without getting further advice from Bob (who would have charged $2,000), he effected the transfer for a cash payment of U.S.$150,000. When CRA assessed on the basis that the fair market value of the transferred shares was much higher than this, he filed a late s. 85 election with the holding company and sought a rectification order backdating an issuance of common shares as additional consideration.

In dismissing the petition, Butler J found that "the true agreement between the parties" was the acquisition of Mr. Zhang’s shares by the holding company so as to permit tax-free dividends to be paid – rather than to minimize capital gains tax, which "was a secondary concern and one which Mr. Zhang asked Bob not to investigate."

Neal Armstrong. Summary of Zhang v. The Queen, 2015 BCSC 1256, under General Concepts – Rectification.