In a recent decision1, the Court was asked to rule on the nullity of a resolution declaring a capital dividend of $950,000 and authorizing the company to make the appropriate elections so that such dividend would not be taxable. Any portion of such a dividend exceeding the amount available in the capital dividend account is subject to a 75% punitive tax rate.
The Company pleaded error, its accountants having provided inaccurate amounts regarding the amount of dividend susceptible of being declared without tax consequences. The Company’s plea was not in respect of an error regarding the application of the law, but rather that erroneous information was given to it regarding the amounts involved. The facts indicated that the accountants had been provided with erroneous figures to deal with. It turned out that the dividend should had been limited to $750,000. The accountants had not take into account a 1999 capital loss that was ignored since the income tax returns prior to 2000 had been filed by another accounting firm and the information was not known by the new accountants or available to them.
The error was pointed out only after the adoption of the resolution and the filing of the tax elections to the tax authorities. As a result, $150,000 in tax became payable by the company.
WHAT CAN YOU DO WHEN SUCH A CALCULATION ERROR OCCURS?
What can members of the Board do when they relied on erroneous information provided by accountants? In the present case, a declaratory judgement nullifying the resolution was obtained.
We recommend that a resolution declaring a capital dividend explicitly provide that such resolution is adopted with the specific objective that no tax be payable by the company in connection with the dividend should an error occur or be made in any calculation related to the capital dividend account.
When such error occurs, the Directors’ consent to the legal action referred to in the resolution is affected on a significant aspect and such error nullifies the consent, not from a tax law perspective, but according to the Civil Code of Québec, which remains applicable in similar circumstances. Accordingly, the legal action underlying the resolution should be void and the tax consequences should disappear.