Structures GB – Quebec Court of Appeal finds that corporate reorganization documents could not be rectified to correct for an unforeseen Pt. IV tax issue

The shareholders of a Canadian-controlled private corporation (“Structures”) implemented a reorganization that was intended to crystallize the capital gains deduction (CGD). However, the transactions for first "purifying" Structures of investment assets entailed the issuance of some preferred shares, which caused the shareholding in Structures of three of the holding companies to be diluted from 10% to below 10%, so that Structures was no longer connected to them and so that they were subject to significant Part IV tax on dividends received from Structures.

In reversing a Quebec Superior Court rectification order which made extensive changes to the reorganization steps so as to eliminate the Part IV tax, the Court of Appeal applied the principle that:

If the agreement is consistent with what the parties agreed to but simply produces unforeseen tax consequences, due to an error by the tax planners in the design of the tax planning, rectification cannot be granted.

In particular, there was nothing about the implementation of the reorganization (whose object was to maximize CGD deductions) which indicated that the parties were thinking about Part IV tax.

Neal Armstrong. Summary of Agence du revenu du Québec v. Structures GB Ltée, 2025 QCCA 134 under General Concepts – Rectification.