



COURT OF APPEAL FOR ONTARIO

CITATION: Mandel v. 1909975 Ontario Inc.,
    2021 ONCA 844

DATE: 20211125

DOCKET: C68675

Feldman, van Rensburg and Sossin
    JJ.A.

BETWEEN

Robert Mandel and Ellen Pike

Applicants

(Appellants)

and

1909975 Ontario Inc.,
    2458730 Ontario Inc., 2458721 Ontario Inc.,

HarrisonPike Inc., MatthewPike
    Inc. and Attorney General of

Canada

Respondents

(Respondents)

Peter H. Griffin, Matthew B. Lerner and
    Adam H. Kanji, for the appellants

Diana Aird and Michael Ding, for the respondent
    Attorney General of Canada

Mark A. Ross, for the respondents 1909975
    Ontario Inc., 2458730 Ontario Inc., 2458721 Ontario Inc., HarrisonPike Inc. and
    MatthewPike Inc.

Heard: May 19, 2021 by video conference

On appeal from the order of Justice Markus
    Koehnen of the Superior Court of Justice, dated September 8, 2020, with reasons
    reported at 2020 ONSC 5343.

Feldman J.A.:

[1]

The appellants restructured their family trusts
    in 2014 and 2015 to avoid a deemed disposition of the assets after 21 years and
    to maintain control of the underlying assets. As part of the restructuring
    arrangements, the appellants incorporated holding companies for their adult
    children (the Child Corporations) in which the appellants each subscribed for
    Class A voting shares and Class B convertible shares for a subscription price
    of $10 for the Class A shares and $100 for the Class B shares. The corporate
    documents stated that all the issued shares were fully paid. However, the
    appellants say that payment of $110 for the shares was never actually made.

[2]

In 2019, the Canada Revenue Agency (CRA) reassessed
    the appellants for the tax years 2014 and 2015, increasing each appellants
    taxable income by close to $15,000,000 on the basis that their receipt of shares
    in the Child Corporations constituted a taxable benefit under s. 15(1) of the
Income
    Tax Act
, R.S.C. 1985, c. 1 (5th Supp.).

[3]

The appellants brought an application in the
    Superior Court of Justice for a declaration that because the shares were not
    paid for before they were issued, as required by s. 23(3) of Ontarios
Business
    Corporations Act
, R.S.O. 1990, c. B.16 (
OBCA
), they were not
    validly or lawfully issued, and that the appellants were never shareholders of
    the Child Corporations. They also sought an order for rectification of the
    share registers of the Child Corporations under s. 250(1) of the
OBCA
.

[4]

The application judge declined to exercise
    jurisdiction over the application, deferring to the jurisdiction of the Tax Court
    of Canada. He also found that he would not have granted the declaration or
    ordered rectification had he assumed jurisdiction. The appellants appeal from
    that ruling to this court.

[5]

The application judges decision to decline
    jurisdiction to grant a declaration is a discretionary decision. I see no
    reviewable error in the application judges exercise of that discretion. For
    that reason, I would dismiss the appeal.

A.

Facts

[6]

The families of each of the appellants hold a
    25% interest in a successful manufacturing corporation through holding
    corporations. In the 1990s, the appellants transferred some of their interests
    in the holding corporations to family trusts, whose beneficiaries were the
    appellants respective children. In order to avoid a deemed disposition of the
    assets of the trusts at fair market value after 21 years, to defer the taxes
    that would become payable, and using a structure that would maintain control
    for the appellants, in 2014 and 2015 the family trusts reorganized their assets.

[7]

The application judge set out the details of the
    reorganizations in his reasons. For the purpose of these reasons, it is
    sufficient to summarize the structure that was employed for each Child
    Corporation: a Child Corporation was incorporated for each child of each of the
    appellants (three Mandel children and two Pike children); one of the appellants
    became the first director of each corporation; by-law no. 1 was passed for each
    corporation, providing, in accordance with s. 23(3) of the
OBCA
, that
    no share could be issued until it is fully paid for; the appellant subscribed
    for 1,000 Class A voting shares for a price of $10, signing corporate documents
    of the Child Corporation stating that the subscription price had been paid in
    full; the family trust then transferred Class D voting shares of the holding
    company that owned the shares of the manufacturing corporation to the child,
    who transferred those shares to the Child Corporation in exchange for 100
    non-voting common shares of the Child Corporation; after that, the appellant
    subscribed for 100,000 Class B convertible shares in the Child Corporation for
    the price of $100, again signing documents that said that the purchase price
    for the shares had been paid in full.

[8]

In the result, each Child Corporation held
    shares in the family holding company, the appellants held Class A and Class B
    shares in each of the Child Corporations, and each child held non-voting common
    shares in their respective Child Corporation. Through this mechanism, the
    appellants each had control of the Child Corporations, and, in the event of a breakdown
    in any childs marriage, by converting the Class B shares, the majority of the
    value of the Child Corporation would be protected.

[9]

Between 2014 and 2019, the appellants signed
    numerous documents relating to the Child Corporations in their capacities as
    sole directors and as shareholders, including shareholder agreements that
    described their shares as issued, outstanding, fully paid and non-assessable. The
    only contemporaneous evidence to the contrary was a Notice to Reader
    contained in the financial statements of the Child Corporations, prepared by
    Ernst & Young, which recorded a Sundry Receivable of $110 within each Child
    Corporation. However, those financial statements also indicated that the shares
    had been issued, and recorded shareholders equity of $110 in respect of the
    shares.

[10]

On June 5, 2019, the CRA advised each of the
    appellants that it proposed to reassess them for 2014 and 2015 and increase
    their respective taxable incomes on the basis that they had received a taxable
    benefit under s. 15(1) of the
Income Tax Act
by the issue of
    controlling shares in the Child Corporations for undervalue. Despite receiving
    submissions opposing the reassessment, the CRA proceeded with the reassessments
    on September 16, 2019, and Notices of Objection were filed on November 26,
    2019. The CRA did not respond to the appellants Notices of Objection within 90
    days. As a result, the appellants may appeal to the Tax Court, but at the time
    of the application, they had not yet done so.

[11]

In February 2020, after the application was
    commenced, transactions within each Child Corporation resulted in each child
    becoming the controlling shareholder and a director of their respective Child Corporations.

[12]

The appellants commenced this application on
    December 6, 2019 for a declaration that their shares in each Child Corporation
    were never validly issued because they did not pay for them, and for an order
    under s. 250(1) of the
OBCA
rectifying the share registers to reflect
    that the appellants never owned validly issued shares in the Child Corporations.
    In support of the applications, the appellants filed affidavits in which they
    explained that they never actually provided any consideration for the shares in
    each of the Child Corporations, and that those corporations never had bank accounts
    that would allow them to receive any monetary consideration. The appellants
    were not cross-examined on their affidavits.

B.

Findings by the Application Judge

[13]

The application judge accepted the submission of
    the CRA that the court should decline jurisdiction over the application because
    the matter should be determined by the Tax Court of Canada. Specifically, he
    found that:

The Tax Court is much better placed than is
    this court to determine whether, for tax purposes, the applicants should be
    considered to be controlling shareholders of the Child Corporations. The Tax
    Court has expertise in dealing with sophisticated corporate structuring and
    assessing the tax consequences of planning exercises of that nature. Given its
    specialized expertise, the Tax Court is also better placed to make findings of
    fact and draw inferences about whether the applicants paid for their shares,
    why they recorded the purchase price as a receivable (if the Sundry
    Receivable in fact relates to the shares) and whether any of these findings or
    inferences should have a bearing on the application of s. 23(3) to the tax
    assessment.

[14]

The application judge also noted that the raison
    dêtre for this application is the tax assessment, and referred to other cases
    where the Superior Court had declined jurisdiction in favour of the Tax Court:
Baxter
    v. Attorney General of Canada
, 2013 ONSC 3153, at paras. 8-29 and
GLP
    NT Corp. v. Canada (Attorney General)
(2003), 65 O.R. (3d) 840 (S.C.), at
    paras. 11-20. The application judge also referred to
Danso-Coffey v.
    Ontario
, 2010 ONCA 171, 99 O.R. (3d) 401, where this court found that the court
    below had erred by declaring that Ms. Danso-Coffey was not liable for retail
    sales tax rather than deferring jurisdiction on the tax liability issue to be
    determined under the
Retail Sales Tax Act
, R.S.O. 1990, c. R.31 scheme.

[15]

However, in that case, this court also upheld
    the decision of the court below to make a declaration that Ms. Danso-Coffey was
    not a director of the bankrupt corporation. The application judge distinguished
    that aspect of the case as well as
Orman v. Marnat Inc.
, 2012 ONSC 549,
    108 O.R. (3d) 81, both relied on by the appellants. In
Danso-Coffey
, the
    court granted a declaration in favour of the applicant that she was never a
    director of the corporation, because the facts were not disputed and the applicant
    had other potential reasons beyond retail sales tax for wanting to be absolved
    of the status of director, to which she never consented, and the range of
    personal liabilities that may arise by virtue of that status.
[1]

[16]

The application judge also distinguished the
    case of
Orman
, where the Superior Court granted a declaration that
    certain funds in an investment vehicle constituted a return of capital rather
    than income. In that case, the judge relied on the decision in
Juliar v.
    Canada (Attorney General)
(2000), 50 O.R. (3d) 728 (C.A.), leave to appeal
    refused, [2000] S.C.C.A. No. 621, where the court found that it should not
    decline relief because it might affect a tax assessment. However,
Juliar
has since been overruled by the Supreme Court of Canada in
Canada (Attorney
    General) v. Fairmont Hotels Inc.
, 2016 SCC 56, [2016] 2 S.C.R. 720.

[17]

Despite declining jurisdiction to determine the
    application, the application judge nevertheless addressed whether he would have
    granted the declaration requested by the appellants.

[18]

On the issue of the proper interpretation of s.
    23(3) of the
OBCA
, and whether its effect is that if the appellants
    did not pay for the shares then the shares were never effectively issued and
    the appellants were never shareholders of the Child Corporations, the
    application judge found that there was no definitive answer. Referring to
Dunham
    v. Apollo Tours Ltd.
(1978), 20 O.R. (2d) 3 (H.C.), he stated that the
    case demonstrates that the application of s. 23(3) is not absolutely black and
    white but depends on the context and purpose for which the section is being
    applied. In that case, the court allowed the shareholder, who had not paid for
    his shares, to pay the share price of $1 in order to obtain standing as a
    shareholder to bring an application to wind up the corporation.

[19]

The application judge gave three further reasons
    why he would not have granted the declaration. First, there was contradictory
    evidence in the record regarding whether or not the appellants had paid for the
    shares. Second, he noted that there was no dispute within the Child Corporations
    about the status of the shares, and third, there could be unknown consequences to
    a retroactive declaration of invalidity of the shares. Based on these three
    considerations, he concluded that there was no injustice in declining to grant the
    declaration.

[20]

Finally, the application judge refused to make
    an order under s. 250(1) of the
OBCA
rectifying the share register. This
    flowed from his determination that if he had exercised his discretion to assume
    jurisdiction, he would have declined the declaration. He also found that such
    an order would not reflect the intentions of the parties at the time of the
    transactions, and referred to the
Fairmont

Hotels
case for
    the principles that apply to equitable rectification.

[21]

The application judge emphasized that nothing in
    his analysis was intended to have any bearing on the Tax Courts adjudication
    of the tax assessment dispute and its interpretation or application of s. 23(3)
    of the
OBCA
.

C.

Issues

[22]

There are four issues raised on this appeal:

1.

Jurisdiction to hear the appeal: Is the appeal
    from the application judge properly brought to this court or to the Divisional
    Court?

2.

Jurisdiction of the application judge: Did the
    application judge err in law in declining jurisdiction over the application in
    favour of the Tax Court?

3.

Does a corporations failure to comply with s.
    23(3) of the
OBCA
by issuing shares without payment make the issuance
    of such shares invalid and void?

4.

Did the application judge err in declining to
    order rectification of the share register under s. 250(1) of the
OBCA
?

D.

Analysis

(1)

Issue 1: Is the appeal from the application
    judge properly brought to this court or to the Divisional Court?

[23]

In their application to the Superior Court, the
    appellants sought a declaration under s. 97 of the
Courts of Justice Act
,
    R.S.O. 1990, c. C.43, that the shares of the Child Corporations were not
    validly issued under s. 23(3) of the
OBCA
because the subscription
    price was not paid, and an order for rectification of the share registers under
    s. 250(1) of the
OBCA
.

[24]

Section 255 of the
OBCA
provides that
    an appeal lies to the Divisional Court from any order made by the Superior
    Court under the
OBCA
. In this case, while the appellants sought relief
    under s. 250(1) of the
OBCA
, they were obliged to seek a declaration under
    s. 97 of the
Courts of Justice Act
in order to obtain the relief they
    sought as a result of the application of s. 23(3), because no order for relief for
    failure to comply with that section is mandated by the
OBCA
. An appeal
    from an order that grants or refuses a declaration of the Superior Court lies
    to the Court of Appeal. As a result, s. 6(2) of the
Courts of Justice Act
applies to this appeal:

The Court of Appeal has jurisdiction to hear
    and determine an appeal that lies to the Divisional Court or the Superior Court
    of Justice if an appeal in the same proceeding lies to and is taken to the
    Court of Appeal.

[25]

The court therefore accepts the submission of all
    parties that this court has the jurisdiction to hear this appeal.

(2)

Issue 2: Did the application judge err in law by
    declining jurisdiction over the application in favour of the Tax Court?

[26]

The appellants submit that the application judge
    erred in law by declining to assume jurisdiction to decide the issues as a
    matter of corporate law. They argued that the Superior Court is the only court
    with jurisdiction over the issues raised in the application. They submitted
    that a declaration that bound the corporate and family parties could not be
    made by the Tax Court. They also submitted that the application was not about whether
    for tax purposes the appellants should be considered the controlling
    shareholders of the corporations. Instead, the issue was whether shares in an
OBCA
-incorporated
    corporation were validly issued and if not, what the appropriate remedy should
    be. It was about correcting an error in the share register.

[27]

Sections 23(3) and 250(1) of the
OBCA
provide:

23(3) A share shall not be issued until the
    consideration for the share is fully paid in money or in property or past
    service that is not less in value than the fair equivalent of the money that
    the corporation would have received if the share had been issued for money.



250(1) Where the name of a person is alleged
    to be or have been wrongly entered or retained in, or wrongly deleted or
    wrongly omitted from, the registers or other records of a corporation, the
    corporation, a security holder of the corporation or any aggrieved person may
    apply to the court for an order that the registers or records be rectified.

[28]

The appellants position on jurisdiction is that
    only the Superior Court may grant an order for rectification pursuant to s. 250
    of the
OBCA
, and

it is the jurisdiction of the Superior Court
    to determine the proper interpretation of s. 23(3), as a matter of law. While
    the Tax Court has the jurisdiction of a superior court and therefore may interpret
    the
OBCA
provision when determining cases arising under the
Income
    Tax Act
, the appellants say that they are entitled to a declaration of the
    status of their shares on the basis of a correct interpretation of s. 23(3),
    and as a matter of corporate law, and to rectification of the share register in
    accordance with that interpretation.

[29]

The appellants position on interpretation is
    that where shares of a corporation are issued without the corporation first
    receiving payment, the issuance of the shares is invalid and void, and the
    share register must be corrected to remove the shareholders names.

[30]

The contrary position is that while shares that are
    not fully paid for are issued in contravention of s. 23(3), they are
    nevertheless validly issued. This is the result provided in the
OBCA
where
    shares are issued without full payment because the directors of the corporation
    have authorized a share issuance for consideration other than money, such as
    property or past services, and where they have overvalued that consideration.
    In that event, s. 130(1) of the
OBCA
provides that the directors are
    responsible to the corporation for the difference between the actual value of
    the non-monetary consideration paid and the monetary value assigned to the
    shares. The share issuance is not void. The shares remain validly issued and
    the directors are liable to the corporation to make up the shortfall.

[31]

The issue before this court is whether the
    application judge erred in the exercise of his discretion by declining to
    answer the question and, instead, deferring jurisdiction in favour of the Tax
    Court of Canada. On matters of judicial discretion, this court will defer to
    the application judge unless the judge misdirected himself, gave no or
    insufficient weight to relevant considerations, or came to a decision that was
    clearly wrong, amounting to an injustice:
Penner v. Niagara (Regional
    Police Services Board)
, 2013 SCC 19, [2013] 2 S.C.R. 125, at para. 27;
Ewert
    v. Canada
, 2018 SCC 30, [2018] 2 S.C.R. 165, at para. 83; and
Holmes
    v. Schoenfeld Inc.
, 2016 ONCA 148, 345 O.A.C. 162, at para. 14.

[32]

The application judge gave one reason for
    declining jurisdiction in favour of the Tax Court, and also added three reasons
    why declining a declaration would not cause injustice, which reinforced his
    discretionary decision to decline to exercise jurisdiction. He understood that
    no appeal of the assessments had yet been taken to the Tax Court because the
    appellants were first pursuing this application. However, it is expected that
    depending on the outcome of this application, an appeal may be filed with the
    Tax Court.

[33]

The main reason the application judge gave for
    deferring to the Tax Court is that the only dispute in this case is between the
    appellants and the CRA, and that dispute is within the expertise of the Tax
    Court. He noted that pursuant to the
Tax Court of Canada Act
, R.S.C.
    1985, c. T-2, the Tax Court is a superior court of record and has exclusive
    original jurisdiction to hear and determine appeals on matters arising under
    the
Income Tax Act
: ss. 3 and 12(1). As a superior court, it may
    interpret and apply provisions of the
OBCA
in the context of a tax
    dispute.

[34]

Related to the fact that the only dispute
    between any parties in this case is the appellants dispute with CRA, is the
    fact that the Child Corporations support the appellants in their request for
    relief. The application judge referred to this fact as the first reason that
    supported his conclusion that declining the declaration would not amount to an
    injustice. There is no dispute among the families or within the corporations
    about what should be done with the shares. In fact, as of February 2020, the
    families have reorganized the share structure such that each child was issued 2,000
    Class A voting shares, becoming the controlling shareholder and a director of
    their Child Corporation. The respective shareholders meetings at which each
    child was elected as director of their Child Corporation proceeded on the basis
    that each child was the sole voting shareholder.

[35]

Therefore, although the appellants argue that unlike
    the Superior Court, the Tax Court has no authority to make a binding order that
    would bind the Child Corporations, in fact the parties do not require such an
    order to correct mistakes and amend the register. Consequently, the application
    judge concluded that the effect of the relief sought by the appellants would
    primarily be to force the outcome of a tax dispute with the CRA before the
    taxpayers have pursued the remedies available under federal statute.
[2]

[36]

The second ground relied on by the application
    judge as demonstrating no injustice in declining the declaration request was
    the unclear factual record regarding whether the appellants paid for their
    shares and why the Child Corporations recorded the purchase price as a receivable
    in the financial statements. He concluded that the factual findings should be made
    within the tax context, where the court could determine what bearing the findings
    would have on the application of s. 23(3) to the tax assessment.

[37]

This application was brought under r. 14.05 of
    the
Rules of Civil Procedure
, R.R.O. 1990, Reg. 194. Rule 14.05(3)(d)
    allows an application to be brought for the determination of rights that depend
    on the interpretation of a statute. That rule could apply to this proceeding;
    however, there are both statutory interpretation and factual issues to be
    determined. Rule 14.05(3)(h) allows proceeding by an application where it is
    unlikely that there will be any material facts in dispute requiring a trial. An
    application under r. 14.05(3)(h) gives the application judge limited
    jurisdiction to make factual findings where the judge is satisfied that a trial
    is not needed.

[38]

Whether or not the application judge could have
    made the findings based on the record before him, he was entitled to determine
    that it was not appropriate for him to do so on this application. That decision
    regarding procedure on an application for a declaration also supports the
    decision not to take jurisdiction, but to defer to the Tax Court which has the
    full jurisdiction to decide the legal and factual issues put before the court
    in the context of an income tax appeal.
The Tax Court
    has the expertise to resolve the uncertainty surrounding the appellants
    shareholdings to determine the tax consequences that flow from them, even if it
    does so by interpreting s. 23(3) only in the context of this specific tax
    dispute.

[39]

The third reason the application judge gave to
    support the justice of his decision to decline to grant a declaration was that if
    he were to accede to the appellants position that shares issued but not paid
    for are void
ab initio
, that finding could have unintended
    consequences regarding the status of transactions and other steps taken by the
    corporation and its directors before the shares were declared void.

[40]

This concern must be tempered by s. 17(3) of the
OBCA
, which provides:

17(3) Despite subsection (2) and subsection
    3(2), no act of a corporation including a transfer of property to or by the
    corporation is invalid by reason only that the act is contrary to its articles,
    by-laws, a unanimous shareholders agreement or this Act.

[41]

In light of this section, I do not share the
    application judges concern generally, although it is possible that there could
    be unforeseen consequences to a retroactive order, if a court were to accept
    the appellants position on nullity. However, because the Tax Court cannot order
    an amendment to the share register, but can only make a decision on the tax issue,
    it would not be making an order with retroactive effect on others. Again, that
    supports the decision to defer to the Tax Court.

[42]

In my view, the application judge made no error
    in considering the factors he did  most importantly, that the only dispute is
    between the appellants and the CRA  in exercising his discretion to decline
    jurisdiction in favour of the Tax Court.

[43]

The appellants position that they are not
    seeking a tax determination but solely a declaration interpreting a corporate
    law statute and an order for rectification, over which the Superior Court has
    exclusive jurisdiction, may be seen, in effect, as an assertion that in this
    case the application judge had no discretion to decline jurisdiction. In their
    factum, they refer to the Superior Court as having exclusive jurisdiction
    over the application. Put another way, their position is that they are entitled
    to have the Superior Court determine the meaning of s. 23(3) of the
OBCA
.

[44]

I would reject that proposition. The appellants
    are correct that the Superior Court has the exclusive jurisdiction to grant an
    order under s. 250(1). However, that order would only follow if the declaration
    were granted, and would not be necessary if the Tax Court accepted that, for
    tax purposes, the shares were never properly issued and never belonged to the
    appellants.

[45]

In circumstances where parties to an action have
    a dispute that requires the court to interpret the meaning and effect of a
    statutory provision, the court is not being asked to exercise a discretionary
    jurisdiction. It is required to answer the questions necessary to decide the
    dispute. However, where a party seeks a declaration of right, the court will
    only assume jurisdiction to decide the issue where the nature of the request
    meets criteria defined in the
Rules
or in a statutory provision. In
    such cases, the court has the discretion to decline jurisdiction. This is such
    a case.

[46]

I would test it this way: if there were no CRA
    assessment, and the family members brought an application for a declaration
    under r. 14(3) for a ruling by the court whether the effect of what occurred
    was that the issuance of the appellants shares was void, but the parties could
    point to no issue that would turn on the outcome, the court would likely
    decline jurisdiction for the reason that its ruling would not be necessary to
    determine the rights of the parties (r. 14(3)(d)). In this case, although the
    Child Corporations support the appellants, and seek clarification regarding the
    status of the appellants shares, they have corrected the situation for the
    future, and have pointed to no issue in the past that would turn on the outcome
    of the declaration. In such circumstances, the parties have not established that
    a discretionary declaration is warranted in these circumstances.

[47]

To conclude, in my view, the application judge
    was entitled to exercise his discretion to decline jurisdiction over the issue
    raised by the appellants regarding the interpretation of s. 23(3) of the
OBCA
in favour of the Tax Court, to be considered in the context of a tax appeal of
    the CRA assessments.

(3)

Issues 3 and 4: Determining the meaning and
    effect of s. 23(3) and rectifying the share register under s. 250(1)

[48]

In light of my conclusion that the application
    judge made no error by declining jurisdiction to determine these issues, it is
    neither necessary nor appropriate to address these issues on this appeal.

E.

Conclusion

[49]

I would dismiss the appeal. I would order costs to
    the respondent CRA in the agreed amount of $10,000, including HST and
    disbursements.

Released: November 25, 2021 K.F.


K. Feldman
    J.A.

I
    agree. K. van Rensburg J.A.

I
    agree. Sossin J.A.





[1]

In
Danso-Coffey
,
    the Ontario Minister of Revenue did not object to the court granting the
    declaration, unlike in this case. See footnote 2 below.



[2]
Counsel
    for the CRA confirmed that
an order for rectification would be binding
    on the CRAs tax assessment. In
Dale v. Canada
, [1997] 3 F.C. 235, the Federal Court
    of Appeal held that an order for rectification was binding on all the world, including
    the CRA, despite the fact that the CRA was not a party to the corporate
    dispute.


