Zhang: BC SC Refuses To Rectify Share Transfer

In Zhang v. Canada (A.G.) (2015 BSCS 1256), the British Columbia Supreme Court refused to grant rectification of a transaction in respect of which the taxpayers had no common intention to avoid capital gains tax on a share transfer.

The taxpayer was resident in British Columbia. He carried on a business of manufacturing and distributing laser equipment. In 2002, the taxpayer incorporated LABest Optronics Co. Ltd. (“LABest”) in China to carry on the business.

In 2003, the taxpayer met with his accountant to discuss his 2002 Canadian tax return. In the course of this discussion, the taxpayer asked about the distribution of income from LABest, and the accountant suggested that income earned in the company could be taxed in China and distributed to a Canadian corporate shareholder as exempt surplus dividends without further Canadian tax being imposed, and then later paid to the taxpayer.

Subsequently, the taxpayer incorporated Beamtech Optronics Co. Ltd. (“Beamtech”), a B.C. company. The accountant suggested that the shares of LABest be transferred to Beamtech. The taxpayer sought and obtained regulatory approval for the share transfer from the Chinese government, and such approval included a transfer value (determined by the government) of $150,000 USD. Beamtech paid $150,000 USD cash to the taxpayer, and no section 85 rollover of the shares was undertaken.

The CRA subsequently reviewed and assessed the transaction on the basis that the fair market value of the LABest shares was $661,164 CDN, resulting in a capital gain of $221,950 for the taxpayer in 2003.

The taxpayer sought rectification of the share transfer to substitute a section 85 rollover of the LABest shares to Beamtech.

The Court stated that the “proper approach” to rectification under B.C. law is as follows:

The focus of the analysis in tax cases is on the intention of the related parties when they entered the transaction. This is because themistake in the written instrument is usually a mistake as to the tax consequences of the transaction. It matters not if the mistake was caused by misinformation from the taxpayer to his advisors, or mistaken advice provided by a professional advisor to the taxpayer. There is nothing objectionable about taxpayers attempting to avoid tax. The real question which must be considered is whether the taxpayer is able to establish a specific continuing intention to avoid the particular tax in question. A general intention to avoid taxes is not...