Kaleidescape – Ontario Superior Court of Justice finds that a USA did not affect de jure control of a mooted CCPC

In order to try to qualify a Canadian corporation ("K-Can’), which economically was a subsidiary of a U.S. corporation ("K-US"), as a Canadian-controlled private corporation, 100 special voting shares were issued to an employee trust whose settlor was K-Can and whose trustee was Computershare. The Deed of Trust contemplated that Computershare would take its direction, in voting its shares, from the CEO of K-Can, who was a U.S. resident. In response to a CRA position that this established non-resident de jure control of K-Can, K-Can persuaded Carole Brown J to grant a rectification order to "clarify" that this clause was really referring to the settlor (i.e., K-Can) giving voting directions to Computershare.

She rejected a Crown argument that this rectification would do nothing to detract from the de jure control of K-Can by K-US in light inter alia of a unanimous shareholder agreement delegating all the powers of the board to the shareholders (of which only K-US was prepared to make decisions), stating that "the decision-making body is the Board of Directors" (cf. Jaft: "rescission, if granted, would serve to alter the essence of the litigation before the TCC;" and Bagtech: "one must consider ... any specific or unique limitation on… the board's power to manage the business and affairs of the company, as manifested in…any unanimous shareholder agreement." )

Most or all of the Juliar-style rectifications have involved retroactively replacing a bad tax plan with a better plan in order to give effect to an explicit or obvious continuous objective of avoiding a specific bad tax result. This case is different. K-Can got a provincial Supreme Court to rectify the wording of one clause in one of its documents, in order to weaken a CRA argument respecting an aggressive structure, but with no predictable effect on the ultimate resolution of the dispute.

Neal Armstrong.  Summary of Kaleidescape Inc. v. MNR, 2014 ONSC 4983 under General Concepts - Rectification and Rescission.