Piercing the corporate veil remains a difficult feat in Ontario. Recently, in Cornerstone Properties v Southside Construction, Justice Hockin of the Ontario Superior Court of Justice refused to pierce the corporate veil to hold a corporation liable for a costs award against its subsidiary. This decision reaffirms that courts will only pierce the veil where a corporation is being abused to the point where it is not functioning as a bona fide corporate entity, and instead is being used as a vehicle to facilitate fraudulent or improper conduct.

Facts

Cornerstone Properties Inc. (“Cornerstone”) sought a money judgement against Southside Construction Management Ltd. (“Southside”) in the amount of $53,500, the sum of four costs orders obtained by Cornerstone against 2108790 Ontario Inc. (“2108”), a beneficially owned subsidiary of Southside. 2108 was incorporated for the sole purpose of purchasing lands held by Cornerstone that were set to be auctioned at tax sale due to a failure to pay municipal taxes. CIBC held an outstanding debenture registered on the lands. 2108 paid CIBC for an assignment of the debenture with the intent that it would subsequently purchase the lands at auction.

At the last minute, Cornerstone paid the tax arrears and asked 2108 to cancel the outstanding debenture. When 2108 refused, Cornerstone commenced an action for a declaration that the debenture was unenforceable. Cornerstone was ultimately successful in obtaining the declaration and 2108 was ordered to pay costs—since 2108 lacked any assets, Cornerstone brought an action to recover the costs from Southside.

Piercing the Corporate Veil

Cornerstone alleged that 2108 was an asset-less sham alter-ego, set up as part of a scheme to obtain the lands in question while protecting Southside from liability. The Court refused to pierce the corporate veil based on the following conclusions:

  1. Though 2108 was a single purpose, one-man company, it still had the capacity to act as a “natural person” and its purpose was lawful.
  2. The owner of 2108 and Southside had no duty to disclose his or Southside’s interest in the lands in question. No tort, contractual, or fiduciary duty arose.
  3. There was no trickery on the part of 2108 or its owner. After Cornerstone paid the tax arrears, 2108’s interest in the lands evaporated.
  4. The loss claimed arose from Cornerstone’s action to declare the debenture unenforceable. The assignment of the debenture was reasonable and lawful—there was nothing fraudulent or improper about it.
  5. There was no evidence that 2108 acted as an agent for its named owner or Southside. 2108 had never even dealt with Cornerstone directly.
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Photo of John Pirie John Pirie

John Pirie leads the Firm’s Canadian Litigation and Government Enforcement Group. He acts for clients in complex litigation and investigations. Mr. Pirie’s practice includes a significant fraud law and asset recovery component, often involving matters in the financial services industry. He routinely acts for our clients in coordination with other Baker McKenzie offices globally. Mr. Pirie has expertise concerning asset recovery strategies and emergency relief measures related to fraud, including Mareva injunctions, Anton Piller orders, Norwich Pharmacal orders, global asset tracing and fraudulent conveyance proceedings. Mr. Pirie has acted as lead counsel on an array of reported cases in this field, and he has been recognized in Lexpert’s Annual Guide to the Leading Canada/US Cross-Border Litigation Lawyers, and in the Legal 500 for Dispute Resolution (Canada). He appeared in the Supreme Court of Canada on a case ranked by Lexpert Magazine as Canada’s #1 business decision for 2007. Mr. Pirie has previously been named one of Lexpert’s Rising Stars, a “top 40” award that recognizes Canadian lawyers with an outstanding record of success.

Photo of Ben Sakamoto Ben Sakamoto

Ben Sakamoto is a member of Baker McKenzie’s Litigation & Government Enforcement and Corporate & Securities Practice Groups in Toronto. He joined the Firm as a summer student in 2016 and completed his articles of clerkship in 2018.  Ben has a broad commercial litigation practice. He acts for clients on fraud matters, internal investigations, jurisdictional disputes, class actions, and commercial arbitrations. He is a contributor to canadianfraudlaw.com and globalclassactionsblog.com. In addition to his litigation work, Ben’s practice includes transactional work in a range of corporate and securities law matters.