Pyxis Real Estate – Ontario Court of Appeal finds that capital dividends were agreed to be paid in amounts that overlooked a CDA deficit: no rectification

A plan was implemented for successive capital dividends to be paid up a chain of corporations so that the individual who was the ultimate shareholder could have a tax-free receipt of $1.4 million. However, to accomplish this objective, the successive payments should have started with the payment of a $1.7 million capital dividend by the “bottom” corporation, given that an intermediate corporation in the chain had a CDA deficit of $0.3 million (which the accountants had overlooked).

In allowing the Attorney General’s appeal from the granting of an order rectifying the corporate documents so as to direct a capital dividend of $1.7 million, Nordheimer JA stated):

[T]he [Fairmont] test requires that the executed documents fail to accurately record the parties’ agreement. The agreement here was for a $1.4 million tax-free capital dividend to be paid. … The fact that the agreement did not result in the intended fiscal objective of being tax-free, or tax neutral, is not a basis for granting rectification.

Neal Armstrong. Summary of Pyxis Real Estate Equities Inc. v. Canada (Attorney General), 2025 ONCA 65 under General Concepts – Rectification.