Mandel v. 1909975 Ontario Inc. – Ontario Superior Court declines jurisdiction in a requested shareholding rectification whose raison d’être was a CRA assessment
In order to avoid a deemed disposition under the s. 104(4) 21-year deemed realization rule, two family trusts for the children of Mr. Mandel or Ms. Pike distributed their shares of a holding company (holding the respective family interest in the Opco) under s. 107(2) to the respective children beneficiaries, who then transferred those shares on a s. 85(1) rollover basis to a newly-incorporated “Child Corporation” (of which Mr. Mandel or Ms. Pike held special voting shares) in consideration for non-voting common shares of the Child Corporation. However, Mr. Mandel or Ms. Pike then subscribed a nominal amount for a large number of convertible shares of the Child Corporation whose conversion (which they professed might occur only if a divorced spouse of a child received the non-voting common shares) would substantially dilute the entitlements of such non-voting common shares.
CRA reassessed Mr. Mandel and Ms. Pike on the basis that these transactions generated a taxable benefit under s. 15(1) to each of approximately $15 million. Each objected – but no appeal to the Tax Court had yet been launched.
Koehnen J declined to assume jurisdiction respecting a requested rectification of the corporate records of the Child Corporations (made on the basis that the shares therein of Mr. Mandel or Ms. Pikes had never been paid for by them, contrary to s. 23(3) of the OBCA), stating:
… [T]he Tax Court has jurisdiction to interpret s. 23(3) of the OBCA. …
Parliament has created a specific court with expertise in tax matters and has created a specific process to address tax issues. Given that the raison d’être of this application is the tax assessment, the issues should in my view be determined by the body with specialized expertise in that area.
Koehnen J went on to indicate that, even if he had assumed jurisdiction, he would have declined the application, referencing in this regard, “the unexplained conflict in the evidence before me about whether the applicants had paid for their shares, the absence of any dispute within the corporations and the potential for unknown consequences in granting a retroactive declaration… .”
In addition to seeking rectification on equitable grounds, the applicants had also relied on OBCA s. 250, which contemplates “an order requiring the registers or other records of the corporation to be rectified.” Koehnen J stated:
In this case, rectification is not appropriate because the corporate records accurately reflect what the parties intended in 2014 and 2015. At that time, the applicants intended to be the controlling shareholders of the Child Corporations. They signed several documents reflecting that intention.
… [T]he applicants do not require a court order to correct the books and records of the Child Corporations. They can and in fact have changed those records to show that the applicants are no longer controlling shareholders.
Neal Armstrong. Summary of Mandel v. 1909975 Ontario Inc., 2020 ONSC 5343 under General Concepts – Rectification.