Crean – B.C. Supreme Court rectifies a sale agreement to turn it into a 2-step sale that no longer generated a s. 84.1 dividend
The executed documents indicated that an individual (Thomas) sold his shares of a corporation to the Newco of his brother (Michael) in consideration for a promissory note of the Newco. When the tax advisor realized this gave rise to a deemed dividend under s. 84.1, the parties applied successfully in the B.C. Supreme Court for a rectification order redoing the written agreement to provide that Thomas sold his shares to Michael directly for a promissory note, and that there was an immediate on-sale by Michael of those shares to his Newco in consideration for it assuming the promissory note.
Burke J relied on the terms of an agreement in principle that had been signed before the transactions were implemented which provided for a direct sale from Thomas to Michael and provided that “the transaction will be structured, to the extent possible, so that Tom receives capital gains treatment.” She also accepted the tax advisor’s testimony that, consistent with the agreement in principle, he had been instructed to provide for a direct sale and that the failure of the documents to so provide was an error on his part.
She accordingly found that the two brothers had a “prior definite and ascertainable agreement” to which the rectified written agreement was giving effect.
Neal Armstrong. Summary of Crean v Canada (Attorney General), 2019 BCSC 146 under General Concepts – Rectification.