Non Corp Holdings – Ontario Superior Court of Justice rectifies the date of a capital dividend declaration to eliminate Part III tax

CCPCs generally can pay out ½ of capital gains as a capital dividend immediately after realization, whereas additions to the capital dividend account from sales of eligible capital property do not occur until the year end. The most common mistake giving rise to rectification orders is to pay a capital dividend immediately after receipt of proceeds of goodwill, rather than waiting until the beginning of the following year.

Following the sale of a business giving rise to a “capital gain” (likely, goodwill proceeds), the dividend of the targeted capital dividend amount was paid on the first day of the following year, but the resolution declaring the dividend was dated the last day of the current year. CRA required that this error be rectified (by changing the resolution date by one day) in order to reverse the Part III tax.

In granting this rectification order (which was not opposed by CRA), Dunphy J stated that (in contrast to his Birch Hill decision, where the denied rectification “would have materially re-ordered the transaction in ways that nobody had considered at the relevant time”), here:

There was a specific intention to allocate specific proceeds of a specific transaction to a specific tax account – the capital dividend account – to achieve a specific tax goal. A very minor mistake, in human terms at least, was made.

Neal Armstrong. Summaries of Non Corp Holdings Corp. v. A.G., 2016 ONSC 2737 under General Concepts – Rectification and s. 89(1) – capital dividend account – para. (c.1).