ONTARIO – Corporations – Rectification of corporate resolutions is an equitable remedy that is available to correct a document that fails to accurately record the parties’ true agreement. The remedy is not available to correct an improvident bargain or fill a gap in the parties’ true agreement. Rectification is only available where the executed documents fail to accurately record the parties’ agreement.

Pyxis Real Estate Equities Inc. v. Canada (Attorney General)
2025 ONCA 65 (January 29, 2025)
Ontario Court of Appeal (Nordheimer, Sossin and Copeland JJ.A.)

The Attorney General appealed the application judge’s decision to grant rectification of certain of the respondent’s corporate resolutions.

CRA advised in September 2020 that it had determined that the dividend one of the respondent’s predecessor corporations had paid exceeded its capital dividend account balance by $323,983 and it would issue the corporation a notice of assessment for tax equal to 60% of the excess capital dividend. The respondent tried to avoid that additional tax by having the relevant corporate documents rectified to direct a $1,723,893 capital dividend, which it said was its true intention. (para. 7)

Application Judge’s Decision

The application judge granted rectification, noting that the parties had agreed on the test for rectification. That test is set out in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 at para. 38 as follows:

To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. Where the error is said to result from a mistake common to both or all parties to the agreement, rectification is available upon the court being satisfied that, on a balance of probabilities, there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement.

Koehnen J. referred to a memorandum that the accountants had sent to the respondent’s lawyer that outlined the proposed plan, which was the only written document that outlined the plan. That memorandum referred to four $1.4 million tax-free dividends that would be paid up the corporate chain (para. 9)

The application judge interpreted the memorandum to find that the objective of the transactions and agreement was to pay a tax-free capital dividend of $1,400,000 and to take the preliminary steps necessary to achieve that objective. That would require the corporation at the bottom of the chain to pay a capital dividend of $1,723,893. (para. 10)

The application judge relied on the Court of Appeal’s decision in 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273 to conclude that rectification was available in this case. In particular, the application judge found that “if two interpretations of an agreement are possible, one of which would give business efficacy to the agreement and the other would defeat business efficacy, the former should be preferred.” (para. 11)

Court of Appeal Analysis

The Court of Appeal held that the application judge’s approach to the rectification test was erroneous. In doing so, the Court distinguished the Hanley Park case on its facts.

In that case, the use of rectification could not be separated from the “unfair and unconscionable” conduct of one of the parties. The Court held that in the case before it, “there is no lack of business efficacy in the corporate resolutions as executed.” It also cited Zarnett J.A.’s observation in Hanley Park that:

Rectification is an equitable remedy available to correct a document that fails to accurately record the parties’ true agreement. It is not available to correct an improvident bargain or to fill a gap in the parties’ true agreement, even when the omission defeats what one (or both) of the parties was seeking to achieve. (para. 12)

The Court of Appeal found that the situation in the present case was the same as that before the court in Fairmont Hotels. The Court held that the following observations of Brown J. in that case were “particularly apposite” to this case (para. 13):

While, therefore, a court may rectify an instrument which inaccurately records a party’s agreement respecting what was to be done, it may not change the agreement in order to salvage what a party hoped to achieve. (at para. 3)

Alternatively put, rectification aligns the instrument with what the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do. (at para. 19)

[T]he English Court of Appeal made clear that a mere intention to obtain a fiscal objective is insufficient to ground a claim in rectification: “… the court cannot rectify a document merely on the ground that it failed to achieve the grantor’s fiscal objective…”. (at para. 22)

Rectification does not operate simply because an agreement failed to achieve an intended effect (here, tax neutrality) – irrespective of whether the intention to achieve that effect was “common” and “continuing”. (at para. 30)

The Court of Appeal applied the factors in Fairmont Hotels to assess whether rectification was properly granted, holding that “[a]t its core, the test requires that the executed documents fail to accurately record the parties’ agreement.” It found that the corporate resolutions documented the payment of the agreement’s dividend and thus, “accurately reflect the agreement.” It further held that the fact that the agreement did not result in the “intended fiscal objective of being tax-free, or tax neutral” was not a basis to grant rectification. (para. 16)

Finally, the Court of Appeal held that the application judge’s conclusion that it would not be “’equitable to impose an adverse tax consequence’ because ‘an accountant made a careless error’ in implementing an agreed upon structure” was not a proper use of rectification. The Court further held that “[i]t is also not consistent with the general principle that rectification is a form of equitable relief that is to be used ‘with great caution’.” (para. 17)

The Court of Appeal held that rectification was not available, allowed the appeal and dismissed the application. (paras. 18-19)