Rectification Application ' Mandel: Canadian Tax Lawyer Analysis

• Published date: 19 October 2020
• Subject Matter: Corporate/Commercial Law, Tax, Income Tax, Tax Authorities, Shareholders
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction - Ontario Superior Court of Justice rejects taxpayers' rectification application as attempt to engage in "retroactive tax planning"

The applicants, Mr. Mandel and Ms. Pike, were assessed by the Canada Revenue Agency (the "CRA") as having received shareholder benefits under subsection 15(1) of the Income Tax Act (the "Tax Act") amounting to approximately $15 million each in 2019. Mr. Mandel and Ms. Pike, and their families each held approximately 25% in Welded Tube of Canada ("OpCo"), a successful steel pipe and tube manufacturer. In the 1990s, each applicant created a family trust, which held shares in a holding company ("HoldCo"), which in turn owned the applicants' shares in OpCo. In 2014, to defer significant tax liability that would have materialized from the deemed disposition of the trusts' assets after 21 years, the applicants rolled the assets into corporations created for each of their children ("ChildCo"). The applicants subscribed for 1,000 Class A voting shares, and 100,000 Class B convertible shares in each ChildCo, whereas each child transferred 700 Class D voting shares in HoldCo in exchange for 100 non-voting common shares in their ChildCo. The corporate records indicated that the applicants purchased their shares in each ChildCo for $110, however the ledgers of each ChildCo contained a "Sundry Receivables" account in the amount of $110.

After the CRA reassessment in 2019, the applicants contended that they received shares in each ChildCo, but never actually paid for them, therefore, they were not shareholders. The basis of their argument was subsection 23(3) of the Ontario Business Corporations Act (the "Business Corporations Act") which requires shares to be fully paid for prior to issuance. Prior to the hearing, in February 2020, each of the children became controlling shareholders of their particular ChildCo.

Mr. Mandel and Ms. Pike brought an application to the Ontario Superior Court of Justice (the "Court"), asking for:

1. A declaratory order that shares of each ChildCo were never legally issued to them; and
2. A rectifying order to amend the corporate records of each ChildCo to reflect that the applicants were never legally issued shares.

The core issue was whether the applicants were shareholders of each ChildCo. If they were shareholders, the applicants could be subject to an income inclusion of approximately $15 million dollars each for receiving shareholder benefits under subsection 15(1) of the Tax Act. The CRA assessed the applicants on the basis that they received a taxable benefit when they were issued controlling shares in each ChildCo. The applicants were issued 100,00 Class B convertible shares at a nominal price, which might only have been converted in the event of a divorce for any of the children, to dilute the claim of the child's former spouse.

The Court first considered whether it had jurisdiction to consider the application, ultimately deciding that it did not. In the alternative, the Court considered whether...