Rectification is a long-standing recognized equitable remedy that the Court may grant as a means of correcting errors in the recording of terms in written legal documents. In granting rectification, the Court may rectify or change the terms of a written legal document to reflect the actual agreement of the parties and to correct errors.
The 2025 Court of Appeal decision of Pyxis Real Estate Equities Inc. v Canada (Attorney General) (2025 ONCA 65) provides clarity on when the remedy of rectification is available in the context of tax planning that did not achieve the intended result.
Background
This case involved a corporate reorganization designed by accountants for the sole shareholder of a chain of corporations. In 2017, the sole shareholder of the predecessor corporations, asked his accountants to devise a potential remuneration strategy to pay off a shareholder loan and distribute a balance to the sole shareholder on a tax-free basis.
The strategy devised by the accountants involved paying tax-free capital dividends up the chain of corporations, which required each corporation in the chain to have a capital dividend account balance of at least $1.4 million.
The Court of Appeal noted that the accountants did not review historical tax and accounting records from a previous accounting firm for the corporations in the chain and were not aware that one of the corporations had a capital dividend account deficit of $323,893.00, meaning that to complete the transaction as intended, that specific corporation would have had to receive a capital dividend of $1,723,893, not $1.4 million.
The Canada Revenue Agency subsequently determined that the dividend paid by that corporation exceeded its capital dividend account balance by $323,893 and advised that it would issue a Notice of Assessment as a result.
The Application
Pyxis, as the successor by amalgamation to that corporation, sought to avoid that additional tax payment by having the corporate documents rectified to direct a capital dividend of $1,723,893, instead of $1.4 million, which Pyxis argued was its true intention.
In considering the applicable law, the Application Judge followed the test for rectification outlined in the Supreme Court of Canada decision of Canada v Fairmont Hotels Inc. which stated the following:
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.
The Application Judge referred to a memorandum that the accountants had sent to Pyxis’ lawyer outlining the proposed plan and found that the objective of the transaction was to pay a tax-free capital dividend and to take such preliminary steps as are required to achieve that objective. The Application Judge further held that achieving that objective required the corporation to have paid a capital dividend of $1,723,893.00.
In his decision, the Application Judge remarked that, in his view, it would not be “equitable to impose an adverse tax consequence” because “an accountant made a careless error” in implementing an agreed-upon structure, and accordingly, the Application Judge found that rectification was available in this matter and granted the rectification of the corporate resolutions.
Appeal to the Court of Appeal
The Attorney General of Canada appealed the decision to the Ontario Court of Appeal.
On appeal, the Court of Appeal found that the Application Judge erred in his approach to the test for rectification and erred in finding that rectification was available in this case.
The Court of Appeal noted that the situation that was before the Court was previously addressed in the Supreme Court’s decision in Canada v Fairmont Hotels Inc., in which it was noted that:
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.
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.
The Court of Appeal held that, at its core, the test for rectification required that the executed documents failed to accurately record the parties’ agreement. The Court of Appeal noted that the agreement here was for a $1.4 million tax-free capital dividend to be paid, and that the corporate resolutions that were signed documented the payment of that dividend, meaning that they accurately reflected the agreement.
As the Court of Appeal found that corporate resolutions that were executed accurately reflected the agreed-upon structure, it held that the fact that there was “a flaw in that structure” did not change the accuracy of the written documents, and as such, rectification was not available in this case.
The Court of Appeal also noted that the general principle was that rectification was to be used with “great caution” and the fact that the agreement did not result in the intended fiscal objective of being tax-free, or tax neutral, was not a basis for granting rectification.
Takeaways
This decision reinforces that while the remedy of rectification remains available to correct errors in a written agreement, it is a tool to fix documents, not outcomes.
The Court of Appeal makes clear in this case that rectification is not a remedy that is available to simply make changes to avoid an undesired outcome, or to provide a “do-over” to allow a party to do what it should have done in hindsight to achieve its intended result.
As such, when involved in complex tax planning, parties should not assume they will have the ability to later rectify the tax plan to correct an unintended outcome, and they should operate on the basis that if the underlying tax plan is wrong, the Court will not provide an equitable “safety net” to change it after the fact.
This blog post was written by Alex Bissonnette, Practice Lead of the Commercial Litigation team. Alex can be reached at 613-369-0358 or at [email protected].
