B.C. court rectification order jeopardizes $17.6M CRA assessment

In Lau v. Canada (Attorney General) 2014 BCSC 2384, the individual taxpayer implemented a plan that involved repayment of a debt through a combination of a stock dividend, sale of shares, and assignment of notes between companies he or family members either controlled or acted as directors or officers of (the exact inter-relationships between the taxpayer and the various entities is unclear from the B.C. Supreme Court's decision).  At the end of the transactions, a debt of more than $17.6 million owed by the taxpayer to a company he was a director and officer of was repaid (again, details regarding the nature of the debt and how it arose and was reported are not provided).  The rectification application centred around the redemption amount of the stock dividend shares paid to a trust at the outset of the transactions. The CRA unsuccessfully argued that the articles of the corporation in question did not empower the directors to set a redemption amount when shares were issued as a stock dividend, and that the stock dividend was therefore legally ineffective.  The Court's decision contains a very helpful unbundling of the issues that arise when the jurisdictions of the Tax Court of Canada and provincial Superior Courts seem to overlap (or form a "Venn diagram" with overlapping circles, in the metaphor invoked here by the Court).  The Court concluded that the Tax Court has jurisdiction to make necessary and incidental findings in matters of provincial law when adjudicating tax matters, but only if a court of competent jurisdiction has not already decided the issue.  In contrast, the provincial Superior Courts may determine matters ancillary to a tax assessment, but may also decide to decline jurisdiction in favour of the Tax Court, where appropriate.  Above all, if there a mistake as evidenced by the intention of the parties, then that mistake must first be corrected so that the Tax Court may make a proper determination of the issues.  Here,  the Tax Court's lack of equitable jurisdiction, and its inability to grant relief  under the relevant legislation (B.C.'s Business Corporations Act) was determinative, and the B.C. Supreme Court granted the relief requested.  (Notably, the B.C. legislation contains specific remedial provisions.) In this way, the decision is similar to that in Dale v. Canada [1997] 3 F.C. 235 (C.A.) (cited by the Court), which retroactively authorized the issuance of preferred shares.

The original assessment was made under subsection 15(2) of the Income Tax Act.  However, the vigour with which the CRA attacked the rectification application (arguing res judicata, cause of action estoppel, and lack of jurisdiction), raises questions about the relative strength of such underlying assessment.  It will thus be interesting to watch how the case is determined at the Tax Court of Canada, where the matter was held in abeyance pending the outcome of the rectification application.  On a final note, the B.C. Supreme Court also held that the CRA was not a property party to the rectification proceedings as it had no direct interest in the litigation.  The question of whether the CRA should be added as a party or not depends upon the precise wording of the applicable provincial Rules of Court, and case law in relation thereto.  The Court's determination on this issue may therefore be relevant in other provinces.