Grenon v. The Queen | Jun 1, 2021

Docket: 2014-3401(IT)G

BETWEEN:

JAMES T. GRENON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of The RRSP Trust

of James T. Grenon (552-53721) by its Trustee CIBC Trust Corporation

– 2014-4440(IT)G

Appeal heard on February 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 2019 and

September 9, 10, 11, 12 13, 2019, at Winnipeg, Manitoba.

Before: The Honourable Justice Guy R. Smith

Appearances:

Counsel for the Appellant:

Cy M. Fien

Brandon Barnes Trickett

Ari M. Hanson

Aron W. Grusko

Counsel for the Respondent: Ifeanyi Nwachukwu

Tanis Halpape

Christopher Kitchen

Jeremy Tiger

AMENDED JUDGMENT

Page: 2

[This Amended Judgment is issued in

substitution of the Judgment dated April 9, 2021 to

correct and add counsel’s names.]

In accordance with the attached Reasons for Judgment, the appeal from Notices of

Reassessment made by the Minister of National Revenue on February 28, 2013 in

respect of the 2008 and 2009 taxation years, pursuant to subsection 56(2) of the

Income Tax Act AND the appeal from the Notices of Assessment made on March 1,

2013 in respect of the 2004 to 2011 taxation years, pursuant to subsection 204.1(2.1)

of the Income Tax Act, are hereby allowed.

The parties will have 60 days from the date of hereof to provide written submissions

regarding costs. Such submissions shall not exceed 15 pages for each party.

Signed at Ottawa, Canada, this 27th day of April 2021.

“Guy R. Smith”

Smith J.

Docket: 2014-4440(IT)G

BETWEEN:

THE RRSP OF JAMES T. GRENON (552-53721)

BY ITS TRUSTEE CIBC TRUST CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of

James T. Grenon – 2014-3401(IT)G

Appeal heard on February 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 2019 and

September 9, 10, 11, 12 13, 2019, at Winnipeg, Manitoba.

Before: The Honourable Justice Guy R. Smith

Appearances:

Counsel for the Appellant:

John J. Tobin

Linda Plumpton

James Gotowiec

Cy M. Fien

Brandon Barnes Trickett

Ari M. Hanson

Aron W. Grusko

Counsel for the Respondent: Ifeanyi Nwachukwu

Tanis Halpape

Christopher Kitchen

Jeremy Tiger

Page: 2

AMENDED JUDGMENT

[This Amended Judgment is issued in

substitution of the Judgment dated April 9, 2021 to

correct and add counsel’s names.]

In accordance with the attached Reasons for Judgement, the appeal from Notices of

Assessment made by the Minister of National Revenue on March 6, 2013 in respect

of the 2004 to 2009 taxation years, pursuant to subsection 146(10.1) of the Income

Tax Act is allowed and the appeal is referred the back to the Minister for

reconsideration and reassessment on that basis that the income of the RRSP Trust

received from the Income Funds (described herein as the Distribution Transactions)

during the 2005 taxation year, shall be reduced by $136,654,427;

The appeal from Notices of Reassessment dated March 6, 2013 in respect of the

2004 to 2009 taxation years, pursuant to subsection 207.1(1) of the Income Tax Act,

is hereby dismissed.

The parties will have 60 days from the date of hereof to provide written submissions

regarding costs. Such submissions shall not exceed 15 pages for each party.

Signed at Ottawa, Canada, this 27th day of April 2021.

“Guy R. Smith”

Smith J

Page: 3

Table of Contents

OVERVIEW..................................................................................................................................................1

BACKGROUND FACTS................................................................................................................................3

a) The Appellant....................................................................................................................................3

b) The Income Funds.............................................................................................................................5

c) The acquisition of units by the RRSP Trust .......................................................................................7

d) The income distributions made by the Income Funds....................................................................10

e) Tom 2003-1 Income Fund...............................................................................................................12

f) Tom 2003-2 Income Fund...............................................................................................................13

g) Tom 2003-3 Income Fund...............................................................................................................13

h) Tom 2003-4 Income Fund...............................................................................................................14

i) Tom 2006-5 Income Fund...............................................................................................................15

j) Tom 2006-8 Income Fund...............................................................................................................15

k) The Fact witnesses..........................................................................................................................15

THE ASSESSMENTS.................................................................................................................................19

a) Grenon Appeal - Part 1 Reassessments .........................................................................................19

b) Grenon Appeal - Part X.1 Assessments...........................................................................................19

c) RRSP Trust Appeal - Part 1 Assessments.........................................................................................20

d) RRSP Trust Appeal - Part XI.1 Reassessments.................................................................................20

THE ISSUES.............................................................................................................................................20

a) Grenon Appeal - Part 1 Reassessments and Part X.I Assessments.................................................20

b) RRSP Trust Appeal - Part 1 Assessments and Part XI.1 Reassessments..........................................21

PRELIMINARY ISSUES ..............................................................................................................................22

a) Admissibility of the Affidavit of Helen Little ...................................................................................22

b) Admissibility of certain Read-ins.....................................................................................................25

RELEVANT STATUTORY PROVISIONS .....................................................................................................26

a) The RRSP legislative framework......................................................................................................26

b) Mutual Fund Trusts.........................................................................................................................37

c) Indirect Payments ...........................................................................................................................43

d) General Anti-Avoidance Rule (“GAAR”)..........................................................................................44

ANALYSIS...............................................................................................................................................48

Page: 4

Whether the Income Funds were “Qualified Investments”? .............................................................48

a) Overview – “a lawful distribution…to the public” ..........................................................................48

b) Summary of the Alleged Deficiencies .............................................................................................56

c) The burden of proof in tax appeals.................................................................................................57

d) General principles of statutory interpretation ...............................................................................60

e) The meaning of “distribution” in subparagraph 4801(a)(i)A ..........................................................61

f) The meaning of “lawful” in subparagraph 4801(a)(i)A...................................................................66

g) Failure to disclose the position held...............................................................................................72

h) The subscription and acquisition of units by minors ......................................................................73

i) The subscription of units by adults for other adults.......................................................................83

j) The requirement that units be purchased “as principal” ...............................................................86

k) The requirements of Regulation 4900(1)(d.2) ................................................................................90

l) Conclusion.......................................................................................................................................92

The Sham Doctrine..............................................................................................................................93

Window Dressing..............................................................................................................................100

The Application of Subsection 56(2).................................................................................................105

The Excess Contributions ..................................................................................................................113

Statute-Barred Years.........................................................................................................................117

a) The Grenon Appeal .......................................................................................................................117

b) The RRSP Appeal...........................................................................................................................121

The application of GAAR...................................................................................................................133

a) Was there a tax benefit?...........................................................................................................135

b) Was there an avoidance transaction? ..........................................................................................137

c) If so, was the avoidance transaction ‘abusive’?............................................................................140

d) Determination of tax consequences.............................................................................................149

e) Analysis and Conclusion............................................................................................................151

CONCLUSION......................................................................................................................................154

Appendix A – The Read-ins .......................................................................................................................157

Citation:2021 TCC 30

Date:20210601

Docket: 2014-3401(IT)G

BETWEEN:

JAMES T. GRENON,

and

Appellant,

HER MAJESTY THE QUEEN,

Respondent.

Docket: 2014-4440(IT)G

THE RRSP OF JAMES T. GRENON (552-53721)

BY ITS TRUSTEE CIBC TRUST CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN

Respondent.

FURTHER AMENDED REASONS FOR JUDGMENT

Smith J.

OVERVIEW

James T. Grenon (the “Appellant”) was the annuitant of a Registered

Retirement Savings Plan (the “RRSP Trust”) in which he had accumulated

substantial assets. CIBC Trust Corporation (“CIBC Trust”) acted as trustee.

The Appellant established and promoted several income funds (the “Income

Funds”) each of which raised a relatively modest amount of capital relying on the

exempt distribution rules of the provinces of Alberta and British Columbia. The

investors in each fund were essentially the same but the Appellant also participated,

acquiring units personally and through investment vehicles he owned or controlled.

Page: 2

Following the closing of the exempt distributions, the Appellant (acting alone

or in concert with two other individuals and their respective RRSPs) then arranged

for the RRSP Trust to acquire in excess of 99% of the units of the Income Funds.

The Income Funds then invested in flow-through investment vehicles that

served as conduits for the acquisition of business ventures or investments controlled

directly or indirectly by the Appellant, the profits of which flowed back to the

Income Funds and were distributed to unitholders, including the RRSP Trust.

It is not disputed that the Appellant intended from the beginning to structure

the Income Funds as qualified investments for RRSP purposes and one of the key

issues in this appeal is whether they met the definition of a “mutual fund trust”.

The Minister of National Revenue (the “Minister”) has taken the position that

the steps undertaken to establish the Income Funds were not legally effective such

that they were not a “qualified investment” for RRSP purposes or alternatively, that

they were a sham or mere window dressing intended to allow the Appellant to

manipulate the RRSP regime by using the funds in the RRSP Trust to acquire and

actively manage businesses or investments, the profits of which flowed back to the

RRSP Trust where they continued to accrue on a tax-exempt basis. The Minister has

also relied on the general anti-avoidance rule (“GAAR”).

The appeals herein were heard on common evidence with the appeals in

Magren Holdings Ltd. v. Her Majesty the Queen, 2017-486(IT)G; 2176 Investments

Ltd. v. Her Majesty the Queen, 2017-605(IT)G; and Magren Holdings Ltd. v. Her

Majesty the Queen, 2017-606(IT)G (the “Corporate Appeals”). Reasons for

Judgment in respect of the Corporate Appeals will be issued separately.

The “Appellant” will refer to Mr. Grenon in his personal capacity and as the

annuitant of the RRSP Trust and the “Appellants” will refer to both Mr. Grenon and

the CIBC Trust. Unless otherwise indicated, the 2004 to 2011 taxation years will be

referred to as the relevant period (the “Relevant Period”).

Unless otherwise indicated, all references to legislative provisions in these

Reasons for Judgment are references to the legislative provisions of the Income Tax

Act¹, (the “Act”) including Regulations promulgated under the Act, that relate to the

assessments or reassessments and the taxation years in question.

¹R.S.C., 1985, c.1 (5th Suppl.)

Page: 3

BACKGROUND FACTS

The Appellant testified on his own behalf but also called four fact witnesses,

all of whom had acquired units in the Income Funds. Two other witnesses testified

on behalf of the CIBC. Their respective testimony will be reviewed below.

Alan B. Martyszenko testified as an expert witness but his testimony relates

primarily to the Corporate Appeals and will not be reviewed herein.

The Minister did not call any witnesses but relied on the affidavit of Helen

Little, an auditor with the Canada Revenue Agency (“CRA”).

a) The Appellant

The Appellant completed a law degree at University of Manitoba in 1980 and

practiced law in Alberta for a short period of time before pursuing an interest in

corporate finance and investments. He resided in Alberta during the Relevant Period

but became a non-resident when he emigrated to New Zealand in 2012.

Early in his career, the Appellant became involved with a company known as

Tom Capital Associates Inc. (“Tom Capital”) that focused on general corporate

finance including loans and distressed lending. During the Relevant Period, it was

controlled by Grencorp Management Inc. (“GMI”), wholly-owned by the Appellant.

The Appellant also owned or controlled numerous other companies or entities

that were used in the Income Funds structure including 100% of the shares of

1042946 Alberta Inc. (“1042 Inc.”) and 1019109 Alberta Inc. (“1019 Inc.”) that

acted as general partners as well as participating interests in Colborne Capital

Corporation (“CCC”) and Landcraft Development Corporation (“Landcraft”).

The Appellant was also involved in the early stages of the Alberta oil and gas

industry and as a result of these activities, gained significant personal wealth.

By 2003, the Appellant had accumulated substantial assets in the RRSP Trust

including approximately $39 million in cash and cash equivalents and a 58% interest

in Foremost Industries Income Fund (“FMO”), a publicly traded mutual fund trust

created in 2001, of which he was a trustee.

By March 2004, the units of FMO were valued at $46 million and the total

value of the RRSP Trust at that point in time was approximately $90 million.

Page: 4

It was apparent that the Appellant was a sophisticated individual whose

knowledge of income tax law surpassed that of ordinary taxpayers. He readily

admitted that he frequently consulted the Act and generally followed developments

in income tax law. He described this as one of his hobbies.

With respect to the RRSP Trust, the Appellant explained that he was not

interested in passive investments or in a diversified portfolio of publicly traded

companies. He wanted to be as actively involved as possible in the management of

the investments acquired. He understood the financial consequences of withdrawing

funds from an RRSP which he described as financial “suicide”.

With respect to the structure of his investments or businesses, the Appellant

explained that he preferred a flow-through structure using business trusts or limited

partnerships that he viewed as more efficient from an income tax point of view.

With respect to the Income Funds, the Appellant’s objective was to broaden

his RRSP investment horizon and to provide flexibility in the management of his

investments in a way that was not normally possible within an RRSP.

He was also not especially interested in raising large amounts of capital from

a wide array of investors. As will be seen below, he only sought to raise as much

capital from as many investors as was needed to meet or exceed the minimum

requirements of a “mutual fund trust” as defined by the Act.

Since he had already accumulated substantial assets in the RRSP Trust, what

he needed was an appropriate vehicle to invest those funds. He was of the view that

the Income Fund structure was “best aligned with his investment objectives.”

With respect to at least two Income Funds, the Appellant collaborated with

two other business associates, namely Bruce MacLennan (“MacLennan”) and Angus

Sutherland (“Sutherland”). Both individuals acquired units of two Income Funds,

accepting a transfer from the Grenon RRSP in exchange for cash from their

respective RRSP’s (the “MacLennan RRSP” and “Sutherland RRSP”) and assumed

various roles in the Income Fund structure. They acted as trustee of some funds or

as directors of various companies that acted as general partners. As will be seen in

greater detail below, the MacLennan RRSP and Sutherland RRSP each held a 49%

interest in two Income Funds.

Although the Appellant was the promoter of all the Income Funds, the

Minister has described all three individuals as insiders (the “Insiders”) in connection

Page: 5

with the Income Fund structure. According to the Minister’s assumptions²“the

structures were crafted so that Insiders could obtain a number of tax related benefits

from these non-arm’s length structures” including the following (the Minister refers

to the Income Funds as the “Promoted Funds”):

- The reduction and postponement of taxes payable by Grenon and various

businesses owned by Grenon, through the payment of interest and management

fees to related entities;

- The deferral of tax on the distribution of income to the various RRSP Trusts held

by the Insiders, including the Grenon RRSP Trust, income that would otherwise

be distributed as dividends, or otherwise, subject to tax;

- The avoidance of Part 1 and Part X1.1 tax on non-qualifying investments held by

the Insiders’ RRSP Trusts, including the Grenon RRSP Trust;

-The avoidance of Part X.1 tax on excess amounts contributed to the Grenon RRSP

Trust in respect of the amounts that the Grenon RRSP Trust received from the

Promoted Funds.

b) The Income Funds

The Income Funds that are relevant to these appeals were established in 2003

and 2006. The 2003 series of Income Funds (described as Tom 2003-1, Tom 2003-

2, Tom 2003-3, Tom 2003-4) were established in Alberta by separate deeds of trust

dated March 14, 2003. The 2006 series of Income Funds (known as Tom 2006-5 and

Tom 2006-8) were similarly established on June 30, 2006.

Each Income Fund undertook a first distribution of units to 171 Investors (the

“First Distribution”) relying on a prospectus exemption pursuant to the securities

legislation of the provinces of Alberta and British Columbia (“BC”) known as the

“Offering Memorandum Exemption” (“OME”).

The units in the 2003 series of Income Funds were distributed pursuant to the

OME requirements described in Part 4 of Multilateral Instrument 45-103 Capital

Raising Exemptions.³The units in the 2006 Income Funds were issued pursuant to

the OME requirements described in Part 2 of National Instrument 45-106 Prospectus

²Paragraph 19(dd) of the Fresh as Further Amended Reply.

³Adopted by the Alberta Securities Commission effective March 30, 2002 and by the BC Securities Commission

effective April 3, 2002.

Page: 6

and Registration Exemptions⁴. The OME requirements of Multilateral Instrument

45-103 and National Instrument 45-106 (the “Instruments”) are substantially the

same and where there are differences, they are not material in these appeals.

An Offering Memorandum (“OM”) was prepared for each Income Fund

indicating that a minimum of 100 units (a “block of units”) valued at $7.50 per unit

for a total of $750 would be issued to each investor, subject to a minimum of 160

investors (the “Investors”). All units had the same rights. The investment process

involved delivery of the OM to prospective investors who were then required to sign

the risk acknowledgment (the “Risk Acknowledgment”) and subscription agreement

(the “Subscription Agreement”) forms.

Each Income Fund allegedly issued units to 171 Investors thus raising

approximately $128,250, subject to nominal legal and accounting fees. As explained

by the Appellant, the minimum subscription amount and minimum number of

Investors, was established by him with the intention that it meet or exceed the

minimum requirements of a “mutual fund trust”, as defined by the Act.

The Appellant participated as an Investor in the First Distribution acquiring a

block of units for himself but additional units were acquired by entities owned or

controlled by him including Grencorp, Tom Capital, Tom Capital Consulting Corp

and Tom Consulting Limited Partnership. All were included as part of the Investors.

As will be seen in greater detail below, the units were promoted and

distributed to the Appellant’s immediate and extended family members, friends,

employees, business associates and others with whom he was not as closely

connected. In any event, it is not disputed that Investors who acquired units in the

2003 and 2006 series of Income Funds were essentially the same persons.

Additionally, I find that all Investors were residents of Alberta or BC.

The OM indicated that it was a “blind pool offering” or “junior capital pool”

and that the business would be identified by trustees at a later date. It indicated that

investors would be “restricted from selling their units for an indefinite period to

time” but that the Appellant would provide liquidity to those who might wish to

redeem their units at cost (though this never occurred). It also indicated that the

Appellant would “invest at least $1,000,000 in the Fund” and that he or other trustees

⁴Adopted by the Alberta Securities Commission and the BC Securities Commission effective September 14, 2005.

Page: 7

would acquire at least 66.66% of the units, thus allowing them “to substantially

control the Fund”.

Each OM contained a certificate indicating: “This Offering Memorandum

does not contain a misrepresentation”. It was signed by the Appellant as trustee and

promoter and included the following statement:

No securities regulatory authority has assessed the merits of the Units or reviewed

this offering memorandum. Any representation to the contrary is an offence. This

is a risky investment (…)

Finally, the OM contained an explanation of the “Tax Status of the Fund”

indicating that, subject to certain conditions, it would be a “unit trust” and a “mutual

fund trust” and thus a “qualified investment for Exempt Plans”. It added that if the

fund ceased to qualify as a “mutual fund trust”, investors who acquired units in an

exempt plan would have to pay a 1% tax on the fair market value of the units and

report any income or gains personally.

Upon completion of the First Distribution, the Appellant selected and

arranged for the appointment of the trustees of the Income Funds, including Bruce

MacLennan and Deborah Nickerson, as well as various legal counsel.

As will be seen in greater detail below, the income fund structure generally

included a series of trusts described as fund venture trusts (“FVT’s”) wholly-owned

by the Income Funds. The FVT’s in turn held 99.99% of the units of a master limited

partnership (“MLP”) that established a series of limited partnerships, as required, to

acquire various investments or businesses. A corporation generally wholly-owned

or controlled by the Appellant or other Insiders acted as general partner and held a

0.01% interest. The 2006 series of Income Funds did not use an FVT and

investments were held directly.

c) The acquisition of units by the RRSP Trust

Following completion of the First Distribution (including the filing of a report

with the Alberta and BC securities commission), the Appellant undertook a second

distribution of units in favour of his RRSP Trust which resulted in a substantial

dilution of the initial Investors’ aggregate holdings.

The table below provides a detailed breakdown of the subscriptions made by

the RRSP Trust in the 2003 and 2006 series of Income Funds, setting out the date of

Page: 8

the subscription, the number of units acquired, the value of the units and the

subscription amount, collectively referred to as the second distribution (the “Second

Distribution”):⁵

Subscriptions made by the RRSP Trust in the Income Funds

2003-1 Income Fund

Sub. Date

June. 2003

Jan. 2005

Dec. 2007

Total

# of Units

1,575,000

3,400,000

1,390,500

Value of Units Amount ($)

7.50

9.06

8.99

11,812,500

30,804,000

12,500,595

55,117,095

2003-2 Income Fund

Sub Date

Sept. 2003

Sept. 2006

July 2007

# of Units

540,000

225,800

60,000

Value of Units Amount ($)

7.50

4,050,000

3,499,900

896,400

15.50

14.94

15.08

18.00

May 2008

July 2010

147,700

41,666

2,227,316

749,988

Total

11,423,604

2003-3 Income Fund

Sub Date

# of Units

Value of Units Amount ($)

Sept. 2003

540,000

7.50

4,050,000

Total

4,050,000

2003-4 Income Fund

Sub Date

Nov. 2005

May 2006

# of Units

3,821,850

4,000,000

Value of Units Amount ($)

40.00

5.53

152,874,000

22,120,000

174,994,000

Total

2006-5 Income Fund

Sub Date

March 2008

July 2008

# of Units

320,000

213,333

Value of Units Amount ($)

7.50

2,400,000

1,599,998

3,999,998

Total

2006-8 Income Fund

Sub Date

# of Units

Value of Units Amount ($)

7.50 39,999,998

August 2008

5,333,333

⁵Tab 3 of the Appellant’s Compendium of Documents

Page: 9

August 2009

3,176,620

7.87

24,999,999

Total

64,999,997

The total amounts are further summarized in the table below. The RRSP Trust

acquired units of the 2003 Income Funds and the 2006 Income Funds, valued at

approximately $245 million and $69 million, respectively:

Total number and value of units acquired by the RRSP Trust⁶

2003 Income Funds

2006 Income Funds

Subscription

Year

Amount ($)

Number of

Units

Number of

Units

2,655,000

0

19,912,500

0

2003

2004

2005

2006

2007

2008

0

7,221,850

4,225,800

1,450,500

147,700

183,678,012

25,619,900

13,396,995

2,227,316

0

5,866,666

43,999,996

0

3,176,620

24,999,999

2009

Total

15,742,516

$245,584,711

9,043,286.00

$68,999,995

7

As a prerequisite to the acquisition of units in the Income Funds (the

“Acquisition Transactions”), CIBC Trust required delivery of certain documents

including copies of the OM, the subscription documents and a legal opinion from a

reputable law firm to confirm that the Income Funds were qualified investments.

The process and documentation required was more fully explained by Kerri Calhoun

and Sabrina Tam, employees of the CIBC, whose testimony is summarized below.

A total of twelve legal opinions were issued, one for each Acquisition

Transaction (collectively, the “Legal Opinions”). The Legal Opinions were set out

⁶See below

⁷This table was taken, with slight modifications, from the Written Submissions of the Crown (Volume 1 of 3). I

have corrected the table to include the subscription amount of $3,999,998 for the 2006-5 Income Fund in 2008. This

has the effect of increasing the total amount for the 2006 Promoted Funds to $68,999,995 instead of $64,999,997.

Page: 10

on the law firm’s letterhead and addressed to CIBC Trust. They contained four

paragraphs including the following:

For the purposes of this opinion, we have relied upon the facts represented to us

by James T. Grenon in the form of the Trustee’s Certificate attached hereto and

other matters as we have considered necessary or appropriate for the purpose of

this opinion.

Four of the Legal Opinions were distinct in that they included a caveat that

the facts represented in the Trustee’s Certificate (the “Certificates”) had not been

“independently verified” and that if the facts differed “from those presented (…) this

opinion may not be valid.” All of the Legal Opinions concluded that the Income

Funds were “qualified investments under the Act for the RRSP maintained for the

benefit of James T. Grenon.”

The Certificates signed by the Appellant contained an acknowledgment that

the Legal Opinions would be based in part on the factual information set out in the

certificate wherein the Appellant represented that he knew those facts to be true and

correct and specifically that:

In respect of the Fund, an offering memorandum has been filed with the Alberta

Securities Commission and the British Columbia Securities Commission and there

has been a lawful distribution in Alberta and British Columbia to the public of Units

of the Fund in accordance with the offering memorandum.

When the RRSP Trust acquired units of the Income Funds that were already

engaged in business or investment activities, valuation reports prepared by

accounting firm Grant Thornton (the “Grant Thornton valuations”) were included

with the Legal Opinions. These valuation reports were intended to support the

issuance of units at prices exceeding the initial subscription price of $7.50 per unit.

As will be seen in greater detail below, the Income Funds were required to file

a report with the securities commission within 10 days from the completion of the

distribution of units. Reports were filed in connection with the First Distribution but

no evidence was adduced to demonstrate that reports were filed in connection with

the Second Distributions.

d) The income distributions made by the Income Funds

The profits from the various investments or businesses were flowed-up

through the various entities, including the FVT’s, to the Income Funds and were then

Page: 11

distributed to unitholders, including the RRSP Trust. Trustee resolutions to support

the distribution of profits were prepared and reported in the T3 Returns.

According to the Minister, a total of $186,489,148 was distributed to the

RRSP Trust (the “Distribution Transactions”). The table below represents a

summary of all distributions made from the Income Funds to the RRSP Trust during

the Relevant Period (the “Distribution Transactions”):

Total distributions made by the Income Funds to the RRSP Trust

2003-1

2003-2

2003-3

2003-4

2006-8

Total

2004

4,192,015

1,924,362

6,116,377

2005 6,372,526

2006 4,176,831

2007 2,513,091

2008 1,381,913

2009

3,493,797

861,930

4,773,945

3,232,052

2,838,325

136,654,427

2,636,201

2,554,003

151,294,695

10,907,014

10,099,615

3,432,833*

2,194,196

2,050,920

1,516,445

3,122,169 4,638,614

Total 14,444,361 14,309,303 12,768,594 141,844,631 3,122,169 186,489,148

8

As will be seen in greater detail below, there is some dispute as to the actual

distributions made in 2005 by the 2003-4 Income Fund. The Appellant argues that

the distributions made in that year resulted from the issuance of new units to the

RRSP Trust in exchange for the transfer of the FMO units to the 2003-4 Income

Fund and that this did not have the effect of increasing the value of the RRSP Trust.

The Appellant also argues that the Minister failed to account for a loss of

$129,876,648 realized by the RRSP Trust on the disposition of those units in 2008.

In any event, the Appellant has acknowledged that the RRSP Trust earned

approximately $58 million from the Income Funds during the Relevant Period.

⁸The Minister has acknowledged that this amount should be reduced by $1,806,008 to $3,432,833: Written

Submissions of the Crown, volume 1, page 40.

Page: 12

The Appellant as trustee, approved the filing of the respective T3 Trust

Income Tax and Information Returns on an annual basis indicating that each fund

was a “mutual fund trust”. Similarly, CIBC as trustee filed a T3GR Return in which

it was required to list all “taxable” RRSP’s (meaning RRSPs that held non-qualified

investments) with the applicable tax withheld and remitted to the Minister. The

RRSP Trust was grouped with others in a specimen plan but was not listed as a

taxable RRSP holding non-qualified investments. The annual filing of the T3GR

Returns was explained by the CIBC employees and will be addressed below.

e) Tom 2003-1 Income Fund

In June 2003 (shortly after the closing of the First Distribution), the RRSP

Trust initially subscribed for 1,575,000 units of the Tom 2003-1 Income Fund at

$7.50 per unit for total proceeds of $11,812,500. Additional subscriptions were made

at later dates, as detailed above.

As with all Income Funds, a corporation acted as trustee of the FVT to ensure

a form of creditor protection, as explained by the Appellant. In this instance, 1019

Inc., a corporation wholly owned by the Appellant, acted as general partner.

This fund held 100% of the units of the Tom 2003-1 FVT that owned 99.99%

of the units of the Tom 2003-1 Master Limited Partnership. (“MLP-1”). 1042 Inc.,

another corporation wholly owned by the Appellant, acted as general partner.

Beginning in 2005, MLP-1 acquired a 99.99% in both the Raywal Limited

Partnership and the Tom 2003-1 Limited Partnership-1 that held 100% of the units

or shares in 1213321 Alberta Ltd., Raywal Kitchens Inc. and 2037629 Ontario Inc.

In 2006, the Tom 2003-1 Income Fund acquired a 99.99% interest in Can-Am

Kitchens Limited Partnership and a 75% participating interest in Landcraft Limited

Partnership with Landraft as the general partner. Prior to these transactions, 75% of

the shares in Landcraft were owned by the Appellant. The Appellant also owned or

controlled several of the companies that acted as general partners.

The Tom 2003-1 Income Fund also entered into several loan transactions. On

August 1, 2003, it entered into a loan agreement for $10 million with CCC, owned

in part by Grencorp, the Appellant’s management company. Security for the loan in

the form of a general security agreement securing the assets and undertakings of

CCC, was signed by the Appellant on behalf of the borrower.

Page: 13

As noted in the table above, the 2003-1 Income Fund distributed a total of

$14,444,361 to the RRSP Trust during the Relevant Period.

f) Tom 2003-2 Income Fund

In September 2003, the RRSP Trust initially subscribed for 540,000 units of

the Tom 2003-2 Income Fund at $7.50 per unit for total proceeds of $4,050,000. The

MacLennan RRSP owned 49% of the units in this fund. MacLennan owned 100%

of the shares in Century Services Inc. (“Century Services”) that was involved in the

business of distressed lending.

The Tom 2003-2 Income Fund held 100% of the units in a FVT whose primary

investment was a 99.99% interest in the Century Services Limited Partnership

(“CSLP”) established on November 15, 2003. Century Services held the remaining

interest and acted as general partner.

In December 2003, CSLP purchased the assets and liabilities of Century

Services Partnership for $12.6 million. The only assets of that partnership were the

shares of Century Services. In 2005, Century Services paid management fees of

$5,692,000 to CSLP. The net income of CSLP was paid to the 2003-2 FVT and then

to the Tom 2003-2 Income Fund.

As noted above, this fund distributed a total of $14,309,303 to the RRSP Trust

during the Relevant Period, excluding the amounts distributed to the MacLennan

RRSP.

g) Tom 2003-3 Income Fund

In September 2003, the RRSP Trust subscribed for 540,000 units of the 2003-

3 Income Fund at $7.50 per unit for total proceeds of $4,050,000. The RRSP Trust

and Sutherland RRSP each owned 49% of the units and the remaining units were

held by the Investors. This fund owned 100% of the units in the Tom 2003-3 FVT

which owned 99.99% of the units in MLP-3 formed in January 2004. The general

partner was 661314 B.C. Ltd. (“661 Ltd.”), a company controlled by Sutherland.

Sutherland had a controlling interest in Silvercreek Development Corporation

and was involved in the development, subdivision and sale of commercial and

residential properties in Alberta and British Columbia.

Page: 14

MLP-3 owned 99.99% of the units in Silvercreek Abbortsford Limited

Partnership (“SALP”), formed in February 2004. Several other limited partnerships

were later created but in all instances 661 Ltd. was the general partner.

Properties were identified for development and a corporation owned by

Sutherland would acquire the property. SALP or other limited partnerships in which

MLP-3 owned 99.99% of the units, acted as limited partners while 661 acted as

general partner. These properties were developed and sold to third parties. The net

income was paid by the limited partnerships to MLP-3 and then to the 2003-3 FVT,

followed by distributions to the 2003-3 Income Fund.

As appears from the table above, the Tom 2003-3 Income Fund distributed a

total of $12,768,594 to the RRSP Trust during the Relevant Period, excluding

amounts paid to the Sutherland RRSP.

h) Tom 2003-4 Income Fund

The Tom 2003-4 Income Fund was not directly involved in any business and

its income was generated from loans made to related parties including other Income

Funds. It was referred to by the Appellant as the “fund of funds”.

As noted above, the Tom 2003-4 Income Fund acquired the units of FMO, a

publicly traded mutual fund trust, held by the RRSP Trust. As long as the units of

FMO were actually held by the RRSP Trust, the Minister has acknowledged that

they were a qualified investment for RRSP purposes.

This transaction took place on November 14, 2005, and involved, inter alia,

a transfer by the RRSP Trust of its 58% interest in FMO to the 2003-4 Income fund,

in exchange for units. As part of that transaction, the RRSP Trust submitted a

subscription for 3,821,850 units valued at $40 per unit for a total $152,874,012.

In May 2006, the RRSP Trust submitted a further subscription for 4 million

units valued at $5.53 per unit for net proceeds of $22,120,000. No explanation was

provided to the Court as to why the value of the units had decreased in value between

November 2005 and May 2006.

As noted in paragraph k) of the Reply to the Fresh as Further Amended Reply,

the transaction involving the transfer of the FMO units is more particularly described

in the Corporate Appeals.

Page: 15

i) Tom 2006-5 Income Fund

The Tom 2006-5 Income Fund was settled in 2006.

In March 2008, the RRSP Trust subscribed for 320,000 units at $7.50 per units

for net proceeds of $2,400,000 and in July 2008, it subscribed for an additional

213,333 units at $7.50 per unit for net proceeds of $1,599,998.

As a result of these subscriptions, the RRSP Trust controlled more than 99%

of the outstanding units but no distributions were made during the Relevant Period.

The proposed acquisition was never completed and all units were eventually

redeemed at cost.

j) Tom 2006-8 Income Fund

The 2006-8 Income Fund was also settled in 2006.

In March 2008, the RRSP Trust subscribed for 5,333,333 units at $7.50 per

unit for net proceeds of $39,999,998 and in August 2009, it subscribed for a further

3,176,620 units at $7.87 per unit for net proceeds of $24,999,999.

On August 12, 2008, the Tom 2006-8 Income Fund entered into a loan

transaction with the Appellant extending a loan of $18,000,000 at 9%per annum.

The loan proceeds were used for investment purposes and the Appellant

acknowledged in oral testimony that he claimed the interest charges as a deduction

on his personal tax return. Several other loans were made to related corporations.

As noted in the table above, the 2006-8 Income Fund made distributions of

$3,122,169 to the RRSP Trust during the Relevant Period.

k) The Fact witnesses

Geoffrey Merritt

The Appellant called Geoffrey Merritt, a chemical engineer with extensive

experience in the oil and gas industry. He invested in both the 2003 and 2006 series

of Income Funds with his spouse and 2 children, aged 15 and 18 in 2003.

Page: 16

Mr. Merritt was made aware of the funds through the Appellant’s brother and

since he knew that the Appellant would be investing his own money, he did not feel

the need to conduct any further due diligence. He confirmed signing the subscription

documents on behalf of his spouse and children and receiving income distributions

and T3’s over the years. He stated that his children held investments in other

securities from a young age but no corroborating evidence was adduced.

Mary Yee

Mary Yee was employed as a legal assistant with Tom Capital for 14 years

and provided administrative assistance for the Income Funds, including up-dates to

unitholders, distributions, tax slips and notices of annual meetings.

She testified that all the investors in the Income Funds were residents of

Alberta or BC and that while minors had subscribed for units, none had ever refuted

the subscription or refused or returned a distribution cheque, even upon reaching the

age of majority. She and her spouse had subscribed for units in the 2006 series of

Income Funds based on the success of the 2003 series.

Deborah Nickerson

Deborah Nickerson joined the accounting team of Tom Capital in 2005 and

eventually assumed a leadership role. She also provided accounting services for both

Tom Capital and the Income Funds and served as trustee for several funds. She

provided those services through a numbered company.

Ms. Nickernon also provided advice as to the appropriate interest rate and

security to be provided for loans from the Income Funds to related parties such as

the Appellant. She felt that the terms were commercially reasonable but

acknowledged that she had no formal training or credentials in this area. She also

indicated that the Income Funds were regularly reviewed by external accountants,

that clarifications were provided where needed and that if any issues arose, they were

always resolved.

In connection with the Income Funds, she too confirmed that all Investors

were residents of either Alberta or BC and that units had been issued to minors. In

fact, she testified that she had signed the Subscription Agreement and Risk

Acknowledgment forms for her two children, aged 10 And 13 at the time of the

subscriptions in 2003. She also indicated that the subscription funds for her children

Page: 17

were intended as loans to be reimbursed once the units were redeemed. She

acknowledged that she had no documentation to support this.

Bruce MacLennan

Bruce MacLennan was the president of Century Services whose core business

was appraising real estate or other assets for institutional and private lenders. It was

also involved in distressed lending which is how he came into contact with the

Appellant and Tom Capital.

Mr. MacLennan served as trustee of the 2003 series of Income Funds. He

testified that he signed the subscription and risk acknowledgement forms for his two

children (both aged 5 in 2003) who acquired units in the 2003 series of Income

Funds. Both children signed their own documents for the 2006 series of Income

Funds but he witnessed their signature. During cross-examination, he acknowledged

that he had actually paid the subscription price for his spouse and two children and,

on re-examination, indicated that the amounts paid on their behalf were intended as

gifts. All distribution cheques were deposited in their respective bank accounts.

Kerri Calhoun

Kerri Calhoun joined CIBC Trust Corporation in 1988 and at the time of her

testimony was Executive Director. She explained that only trust companies could

act as trustees of an RRSP and as a result, CIBC, being a Canadian chartered bank,

had appointed CIBC Trust as trustee for all its RRSP’s. That said, CIBC Wood

Gundy, and later CIBC Capital Markets Inc., were appointed as agents to manage

the day-to-day administration and ensure that assets were qualified investments.

Ms. Calhoun also explained that in a self-directed plan, the annuitant made all

investment decisions and the role of CIBC Wood Gundy, as agent for CIBC Trust,

was to ensure that investments were qualified investments under the Act.

Other investments, described as non-public offerings or private placements,

required additional documentation including the OM, Subscription Agreement as

well as a legal opinion from a reputable law firm confirming that the investment was

a qualified investment. The team tasked with the review of the documents would

have been familiar with the requirements of the Act and Regulations.

Page: 18

From CIBC’s perspective, they relied on the legal opinions provided as to the

status of the investment though it understood that the law firm itself would be relying

on the statements made in a trustee certificate. If the investment was an initial

offering, the value of the securities was determined with reference to the OM but for

a secondary or subsequent offering, a valuation report prepared by a reputable

accounting firm might be required. On cross-examination, she indicated that there

was no obligation to obtain a comprehensive valuation report. They were only

required to make reasonable efforts to obtain a fair market value of the proposed

investment. She also indicated that for self-directed plans, in accordance with the

contractual documentation required to open such a plan, it was ultimately up to the

annuitant to ensure that the acquired assets were qualified investments.

With respect to the CIBC Trust’s filing obligations with the CRA, Ms.

Calhoun indicated that CIBC would submit an application and declaration of trust.

If the documentation was approved, CRA would assign a specimen plan number that

could reference hundred of thousand of RRSP plans. On an annual basis, CIBC

would then submit a T3GR – Group Income Tax and Information Return for RRSP,

RRIF, RESP, or RDSP Trusts, being the prescribed form that included the fair market

value of all RRSP’s listed under that specimen plan.

The T3GR included a listing of all RRSPs within the specimen plan that held

non-qualified investments, described as taxable RRSP’s, in which case taxes were

deducted from the RRSP and paid to the CRA. In this instance, the RRSP Trust was

not listed on any of the T3GR forms filed during the Relevant Period because,

according to Ms. Calhoun, it did not hold any non-qualified investments.

With respect to the documentation submitted by the Appellant or his agents,

she was not aware and could not comment as to whether minors had acquired units

in the Income Funds or who had actually paid the subscription amounts. Such

enquiries were not made given the reliance on legal opinions.

On cross-examination, she acknowledged her understanding that the T3GR

was both an income tax return and information return but that if an RRSP trust had

taxable income, a T3 Trust and Information Return was required to be filed.

She indicated that a T3 Return was not filed for RRSPs that held only qualified

investments as CRA did not require it to do so. She acknowledged that a T3 return

had not been filed with the CRA in connection with the RRSP Trust.

Sabrina Tam

Page: 19

Sabrina Tam was a director of business risk effectiveness at CIBC World

Markets Inc. She commenced her employment with CIBC in 1999 as a compliance

officer moving on in 2005 to the business risk and sales supervision group (“BBRS

Group”) tasked with reviewing and approving private-placement transactions.

The BBRS Group reviewed all private placement documentation. If concerns

arose, they consulted with the CIBC compliance or legal departments. She

confirmed that the required documents included a subscription agreement to confirm

both the value and number of securities being purchased as well as a risk

acknowledgement and legal opinion from a reputable law firm confirming that the

investment was a qualified investment for RRSP purposes. On cross-examination,

she stated that they would typically rely on the legal opinion provided and would not

parse the representations or certificates contained in the OM.

THE ASSESSMENTS

The Minister has issued a number of assessments or reassessments (the

“Reassessments”) as described below but has acknowledged that the Part 1

assessments in both appeals seek to tax the same amounts for the 2008 and 2009

taxation years and that she can only be successful in one or the other:

a) Grenon Appeal - Part 1 Reassessments

The Appellant appeals from Notices of Reassessment made by the Minister

on February 28, 2013, on the basis that the payments of $3,432,833 and $4,638,614

made by the Income Funds to the RRSP Trust during the 2008 and 2009 taxation

years, respectively, (the “Grenon Part 1 Reassessments”), should be assessed as

indirect payments taxable in the hands of the Appellant on the basis of subsection

56(2)⁹or in the alternative on the basis of sham, window dressing or GAAR. The

2009 taxation year gave rise to a nil assessment, such that it is not under appeal, but

the Appellant claimed a non-capital loss for that year, the amount of which is not in

dispute, which he carried back to the 2006 taxation year. The Minister reduced the

non-capital loss by $4,638,614, thus resulting in a consequential increase of the

Appellant’s taxable income for the 2006 taxation year.

b) Grenon Appeal - Part X.1 Assessments

⁹An assessment pursuant to subsection 15(1) was later abandoned.

Page: 20

The Appellant also appeals from Notices of Assessment (T1-OVP) made by

the Minister on March 1, 2013 (late filing penalties were later deleted by Notice of

Reassessment dated August 13, 2014) in respect of the 2004 to 2011 taxation years

(the “Grenon Part X.1 Assessments”) on the basis that payments made by the Income

Funds to the RRSP Trust (described herein as the Distribution Transactions) should

be re-characterized as excess contributions to the RRSP Trust and subject to a tax of

1 % calculated monthly pursuant to subsection 204.1(2.1), or in the alternative, on

the basis of sham, window dressing or GAAR.

c) RRSP Trust Appeal - Part 1 Assessments

The RRSP Trust appeals from Notices of Assessment made by the Minister

on March 6, 2013, served on CIBC as trustee, in respect of the 2004 to 2009 taxation

years (the “RRSP Trust Part 1 Assessments”) assessing taxes and late filing penalties

on the payments made by the Income Funds to the RRSP Trust (described herein as

the Distribution Transactions), pursuant to subsection 146(10.1) or in the alternative,

on the basis of sham, window dressing or GAAR.

d) RRSP Trust Appeal - Part XI.1 Reassessments

The RRSP Trust also appeals from Notices of Reassessment made by the

Minister on March 6, 2013, served on CIBC as trustee, in respect of the 2004 to 2009

taxation years (the “RRSP Trust Part XI.1 Reassessments”), assessing a tax of 1%

on the fair market value of the units of the Income Funds acquired by the RRSP

Trust, pursuant to subsection 207.1(1) or, in the alternative, on the basis of sham,

window dressing or GAAR. Late filing penalties were also assessed.

THE ISSUES

The issues in this appeal may be described as follows:

a) Grenon Appeal - Part 1 Reassessments and Part X.I Assessments

i. Whether the Income Funds were a “qualified investment” for RRSP

purposes, as that term is defined in subsection 146(1) of the Act and

Regulation 4900(1) and, more particularly, whether the Income Funds were

properly constituted as a “mutual fund trust” as defined in subsection 132(6)

and met the prescribed conditions set out in Regulation 4801, or alternatively

qualified as a unit trust as described in Regulation 4900(1)(d.2);

Page: 21

ii. Whether the Income Funds were shams or mere window dressing;

iii. Whether the Minister was entitled to include the Income Fund payments

made in respect of the 2008 and 2009 taxation years to the Appellant’s

personal income on the basis that they were “indirect payments” relying on

subsection 56(2) or, in the alternative, whether the Minister was entitled to do

so relying on sham, window dressing or GAAR, as a basis for the application

of subsection 56(2);

iv. Whether the Minister was entitled to re-characterize the payments made by

the Income Funds to the RRSP Trust, described herein as the Distribution

Transactions, as “excess contributions” to the RRSP Trust, relying on sham

or window dressing or alternatively on GAAR, and if so, whether the

Appellant was entitled to a credit of $152,874,000 (or at least $136,654,427,

being the lesser amount used by the Minister), being the value of the units

issued to the RRSP Trust in exchange for the FMO units and/or to a further

credit of $129,876,648 as a result of a loss suffered by the RRSP Trust from

the disposition in 2008 of the units held in the 2003-4 Income Fund;

v. Whether the Part 1 and Part X.1 Reassessments are statute-barred and in

particular, whether the Appellant was required to file a separate T1-OVP

Return to report and pay tax on the excess contributions;

b) RRSP Trust Appeal - Part 1 Assessments and Part XI.1 Reassessments

i. Whether the Minister was entitled to assess the RRSP Trust on the basis that

the Income Fund payments, described herein as the Distribution Transactions,

were income derived from non-qualified investments, taxable pursuant to

subsection 146(10.1) of the Act or alternatively, on the basis of sham, window

dressing or GAAR and if so, whether the Appellant was entitled to a credit of

$129,876,648 resulting from a loss suffered by the RRSP Trust from the

disposition in 2008 of the units held in the 2003-4 Income Fund;

ii. Whether the Minister was entitled to assess the RRSP Trust for a tax equal

to 1% calculated monthly on the fair market value of the units in the Income

Funds at the time they were acquired, pursuant to subsection 207.1(1) of Part

XI.1 of the Act or alternatively, on the basis of sham, window dressing or

GAAR;

iii. Whether the Part 1 and Part XI.1 assessments are statute-barred on the

basis that CIBC filed the T3GR form within 90 days from the end of each

Page: 22

applicable year, as required by subsection 207.2(1) and was assessed

accordingly;

PRELIMINARY ISSUES

The Court reserved on two issues at the conclusion of the hearing and what

follows is the final disposition forming part of these Reasons for Judgment.

a) Admissibility of the Affidavit of Helen Little

As noted above, the Respondent did not call any witnesses but on the final

day of the hearing, tendered the affidavit of Helen Little (the “Affidavit”), an auditor

with the CRA, relying on the following provision of the Act:

244(9) Proof of Documents – An affidavit of an officer of the Canada Revenue

Agency, sworn before a commissioner or other person authorized to take affidavits,

setting out that the officer has charge of the appropriate records and that a document

annexed to the affidavit is a document or true copy of a document, or a print-out of

an electronic document, made by or on behalf of the Minister or a person exercising

a power of the Minister or by or on behalf of a taxpayer, is evidence of the nature

and contents of the document.

Appended to the Affidavit, was a computer screen shot of the name and

birthdate of all minors who had acquired units in the Income Funds. The Appellant

was aware of its contents since it had been in the possession of counsel for several

months prior to the actual hearing of the appeals.

Helen Little’s name had been included in the Respondent’s list of potential

witnesses with a short summary of her proposed testimony but she was not called to

testify. When the Affidavit was tendered as evidence as the Respondent closed its

case, the Appellant requested a sealing order given the confidential nature of the

information pertaining to minors. The Court issued the Order, restricting access to

Court officials, the parties to these proceedings and their authorized agents.

The Appellant also reserved the right to make further written submissions as

to the admissibility or weight of the Affidavit. There were no further objections.

Aside from the sealing Order, no further ruling was made at that time and the

intention of the Court, though not clearly expressed as appears from the transcript of

the hearing, was to mark the Affidavit for identification purposes and to reserve on

its admissibility, subject to written submissions to be delivered at a later date.

Page: 23

The Appellant indicates in written submission that Helen Little was to be

cross-examined at the hearing. It is argued that although she was present in court for

most of the hearing, she was not present when the Respondent closed its case and

this has deprived him of the fundamental right of cross-examination.

There is little doubt that the facts that the Affidavit seeks to establish are

relevant to the Minister’s position i.e. whether minors acquired units of the Income

Funds. It had been established that “the presumption is that relevant evidence is

admissible and that all those called to testify with respect to relevant evidence are

compellable”: Globe and mail v. Canada (AG), (2010) 2 SCR 592, (para 56).

Thus, although Hellen Little was “compellable”, the Appellant did not

indicate to the Court that he wished to cross-examine her nor request an adjournment

to secure her presence. Given that 5-6 days remained in the scheduled time allotted

for the hearing of the appeals, there was still ample time to do so.

As excerpted above, subsection 244(9) indicates that an “affidavit of an officer

of the Canada Revenue Agency (…) setting out that the officer has charge of the

appropriate records and that a document annexed” is a true copy of “a print-out of

an electronic document (…) is evidence of the nature and contents of the document”.

Similarly, subsection 25(1) of the Canada Evidence Act, RSC, 1985, c C-5 provides

that “[w]here an enactment provides that a document is evidence of a fact (…) that

document is admissible in evidence and the fact is deemed to be established in the

absence of any evidence to the contrary”.

The Minister submits that the Appellant failed to introduce “any evidence to

the contrary” by way of documentary or viva voce evidence as to the age of unit-

holders in the Income Fund. As will be reviewed in greater detail below, the

Appellant confirmed in oral testimony that subscription documents signed by minors

or their guardian, had been accepted and units issued accordingly. This was also

confirmed by several fact witnesses, as noted above.

As noted by the Court at the hearing, the fact that minors had signed

subscription documents was relatively uncontroversial. In fact, CIBC Trust has since

indicated in written submissions (para. 44) that “[b]etween 35 and 40 unitholders

were under the age of 18 years old when they subscribed”.

In James Scott et al. vs. HMTQ, 2017 TCC 224 (“James Scott”) (paras 36-64),

Sommerfeldt J. conducted a review of the applicable law on the admissibility of an

affidavit under subsection 244(9). In that instance, the appellant had objected to the

Page: 24

filing of an affidavit without prior notice arguing that it “constituted prejudicial ‘last-

minute trial-by-ambush type tactics” and that the affidavit “should not be admitted

into evidence”.

Justice Sommerfeldt reserved on its admissibility and later reviewed

subsection 89(1) of the Tax Court of Canada Rules (General Procedure) SOR/90-

688a (the “Rules”) which provides as follows:

89 (1) Unless the Court otherwise directs, except with the consent in writing of

the other party or where discovery of documents has been waived by the other

party, no document shall be used in evidence by a party unless

(a) reference to it appears in the pleadings, or in a list or an affidavit filed

and served by a party to the proceeding,

(b) it has been produced by one of the parties, or some person being

examined on behalf of one of the parties, at the examination for discovery,

or

(c) it has been produced by a witness who is not, in the opinion of the

Court, under the control of the party.

(2) Unless the Court otherwise directs, subsection (1) does not apply to a

document that is used solely as a foundation for or as part of a question in

cross-examination or re-examination.

Justice Sommerfeldt noted (para 47) that “the opening words of subsection

89(1) (…) provide the Court with a discretion to allow a document into evidence

even if the requirements of that provision have not been met” and that:

(47) “(…) The Court must exercise its discretion judicially, according to the rules

of reason and justice, and not arbitrarily. In determining whether to admit a

previously undisclosed document, there must be a balancing of the competing

interest of justice and the overriding importance of having all of the relevant

information before the Court to enable it to arrive at a proper and just disposition

of the particular appeal (…).”

In this instance, as noted above, the Appellant reserved the right to make

written submissions as to the admissibility of the Affidavit but did not indicate that

he wished to conduct cross-examinations nor request an adjournment for that

purpose.

Page: 25

The contents of the Affidavit are relevant to these proceedings and are

relatively uncontroversial (as noted above) since the Minister had made an

assumption that minors had acquired units in the Income Funds. The Appellant has

not seriously disputed the Minister’s position on this issue but has not outright

admitted the actual number of minors (except as noted above by the CIBC Trust)

indicating in response to a request to admit that there was no reason to conclude that

the listed minors were not minors, arguing in any event that the issue was not

relevant since minors could acquire units in the Income Funds.

In the end, I find that the information appended to the Affidavit was readily

available or would have been readily available to the Appellant had he taken the time

to obtain it in order to contradict the Minister’s assumption. He chose not to do so

despite having the evidentiary burden of rebutting the assumption.

I conclude that the Court should exercise its discretion pursuant to subsection

89(1) of the Rules and that rejecting the Affidavit at this time, would be procedurally

unfair to the Minister. Having considered the written and oral submissions of the

respective parties and having considered the requirements of subsection 89(1) of the

Rules, the Court hereby rules that the Affidavit of Helen Little is admissible.

It establishes the birthdates of the minor Investors in the 2003 and 2006 series

of Income fund. The relevance of this information will be discussed below.

b) Admissibility of certain Read-ins

Parties are permitted to read into evidence examination for discovery

materials pursuant to the operation of section 100 of the Rules and Tax Court of

Canada Practice Note 8, titled “Use of Discovery/Undertakings”, July 19, 2001

(“Practice Note 8”) which governs the use of examinations for discovery and

undertakings as evidence at trial. An adverse party may request that other parts of

the evidence be introduced to qualify or provide some context concerning the

proposed read-ins.

Before the scheduled date for the hearing of theses appeals, the parties had

exchanged their list of read-ins from examination for discovery. The Appellant gave

notice of his proposed read-ins on February 1, 2019 and the Minister did not request

any contextual read-ins in respect of those read-ins.

The Minister served a notice of proposed read-ins on February 6, 2019,

exactly four days before the hearing was scheduled to commence. They consisted of

Page: 26

approximately 850 pages of discovery transcript, representing a substantial majority

of the discovery. The Appellants reviewed the Minister’s proposed read-ins within

the two days contemplated by Practice Note 8 and served their notice of proposed

contextual read-ins on February 7th and 8th, 2019.

On the last day of trial, the Minister tendered on the Appellant and the Court

her list of read-ins from examinations for discovery but the list was a significantly

abridged selection of the read-ins which the Minister had identified in her pre-trial

notice, constituting about one-third of that original list. The Appellants requested

time to perform a new contextual review of the Minister’s actual read-ins as the

previously identified contextual read-ins were rendered moot by the significant

reduction in the Minister’s read-ins. The Minister challenged the appellants’ request

for time to complete a contextual review of the read-ins.

The Court ordered that the parties provide written submissions on the matter

and the parties did so later in March of 2019. The Minister challenged certain of the

Appellant’s requests to read-in additional portions of the discovery evidence in order

to qualify or explain the Minister’s read-ins pursuant to subsection 100(3) of the

Rules. The Minister challenged these requests on the basis that section 100 and

Practice Note 8 did not allow additional read-ins at or following trial.

Only four contextual read-ins are at issue. For reasons set out in the attached

Appendix A, I find that the contextual read-ins #8, #10 and #18 are admissible and

that contextual read-ins #16 is also admissible but subject to certain limits.

RELEVANT STATUTORY PROVISIONS

a) The RRSP legislative framework

The basic legislative framework for RRSP’s is set out in Division G, entitled

“Deferred & Special Income Arrangements” and is governed by section 146 and

various other provisions of the Act in addition to certain regulations under the Income

Tax Regulations, CRC, c 945 (the “Regulations”).

Definitions

Définitions

146(1) In this section,

annuitant means

146(1) Les définitions qui suivent

s’appliquent au présent article.

Page: 27

(a) until such time after maturity of the

plan as an individual’s spouse or

déductions inutilisées au titre des

REER

common-law partner becomes entitled, as

a consequence of the individual’s death, a) Jusqu’au moment, après l’échéance

to receive benefits to be paid out of or du régime, où son conjoint acquiert le

under the plan, the individual referred to droit, par suite du décès du rentier, de

in paragraph (a) or (b) of the definition recevoir des prestations qui doivent être

retirement savings plan in this subsection versées sur ce régime ou en vertu de ce

for whom, under a retirement savings régime, le particulier visé aux alinéas a)

plan, a retirement income is to be ou b) de la définition de régime

provided, and

d’épargne-retraite au présent paragraphe

pour lequel est prévu, en vertu d’un

(b) thereafter, the spouse or common-law régime d’épargne-retraite, un revenu de

partner referred to in paragraph (a); retraite;

(rentier)

b) après ce moment, son conjoint.

benefit includes any amount received out (annuitant)

of or under a retirement savings plan other

than

prestation est comprise dans une

prestation toute somme reçue dans le

(a) the portion thereof received by a cadre d’un régime d’épargne-retraite, à

person other than the annuitant that can l’exception

reasonably be regarded as part of the

amount included in computing the income a) de la fraction de cette somme reçue

of an annuitant by virtue of subsections par une personne autre que le rentier et

146(8.8) and 146(8.9),

qu’il est raisonnable de considérer

comme faisant partie de la somme

(b) an amount received by the person with incluse dans le calcul du revenu d’un

whom the annuitant has the contract or rentier en vertu des paragraphes (8.8) et

arrangement described in the definition (8.9);

retirement savings plan in this subsection

as a premium under the plan,

b) d’une somme reçue à titre de prime en

vertu du régime par la personne avec

(c) an amount, or part thereof, received in laquelle le rentier a conclu le contrat ou

respect of the income of the trust under the l’arrangement visé à la définition de

plan for a taxation year for which the trust régime d’épargne-retraite au présent

was not exempt from tax by virtue of paragraphe;

paragraph 146(4)(c), and

c) d’une somme, ou d’une partie de cette

(c.1) a tax-paid amount described in somme, reçue relativement au revenu de

paragraph (b) of the definition tax-paid la fiducie en vertu du régime, pour une

amount in this subsection that relates to année d’imposition, à l’égard de laquelle

interest or another amount included in la fiducie n’était pas exonérée d’impôt

computing income otherwise than en vertu de l’alinéa (4)c);

because of this section

Page: 28

and without restricting the generality of c.1) d’un montant libéré d’impôt, visé à

the foregoing includes any amount paid to l’alinéa b) de la définition de cette

an annuitant under the plan

expression au présent paragraphe, qui se

rapporte à des intérêts ou à un montant

(d) in accordance with the terms of the inclus dans le calcul du revenu

plan,

autrement que par l’effet du présent

article.

(e) resulting from an amendment to or

modification of the plan, or

Sans préjudice de la portée générale de

ce qui précède, le terme vise toute

(f) resulting from the termination of the somme versée à un rentier en vertu du

plan; (prestation)

régime :

(…)

d) soit conformément aux conditions du

régime;

issuer means the person referred to in the

definition retirement savings plan in this e) soit à la suite d’une modification du

subsection with whom an annuitant has a régime;

contract or arrangement that is a

retirement savings plan; (émetteur)

(…)

f) soit à la suite de l’expiration du

régime. (benefit)

(…)

non-qualified investment, in relation to a

trust governed by a registered retirement émetteur la personne visée à la

savings plan, means property acquired by définition de régime d’épargne-retraite

the trust after 1971 that is not a qualified au présent paragraphe et avec laquelle

investment for the trust; (placement non un rentier a conclu un contrat ou un

admissible)

arrangement qui constitue un régime

d’épargne-retraite. (issuer)

(…)

qualified investment for a trust governed

by a registered retirement savings plan placement non admissible dans le cas

means

d’une fiducie régie par un régime

enregistré d’épargne-retraite, s’entend

(a) an investment that would be described des biens acquis par la fiducie après

in any of paragraphs (a), (b), (d) and (f) to 1971 et qui ne constituent pas un

(h) of the definition qualified investment placement admissible pour cette fiducie.

in section 204 if the references in that (non-qualified investment)

definition to a trust were read as

references to the trust governed by the (…)

registered retirement savings plan,

placement admissible« placement

admissible » Dans le cas d’une fiducie

Page: 29

(b) a bond, debenture, note or similar régie par un régime enregistré

obligation

d’épargne-retraite

(i) issued by a corporation the shares of a) placement qui serait visé aux alinéas

which are listed on a prescribed stock a), b), d) et f) à h) de la définition de

exchange in Canada, or

placement admissible à l’article 204 si la

mention « fiducie » y était remplacée par

(ii) issued by an authorized foreign bank la mention de la fiducie régie par le

and payable at a branch in Canada of the régime enregistré d’épargne-retraite;

bank,

b) obligation, billet ou titre semblable

(c) an annuity described in the definition qui, selon le cas :

retirement income in respect of the

annuitant under the plan, if purchased (i) est émis par une société dont les

from a licensed annuities provider,

actions sont inscrites à la cote d’une

bourse de valeurs au Canada visée par

règlement,

(…)

(d) such other investments as may be (ii) est émis par une banque étrangère

prescribed by regulations of the Governor autorisée et payable à sa succursale au

in Council made on the recommendation Canada;

of the Minister of Finance; (placement

admissible)

c) rente visée à la définition de revenu de

retraite relativement au rentier en vertu

du régime, si elle a été achetée d’un

fournisseur de rentes autorisé;

(…)

No tax while trust governed by plan

d) tout autre placement qui peut être

146(4) Except as provided in subsection prévu par règlement pris par le

146(10.1), no tax is payable under this gouverneur en conseil, sur

Part by a trust on the taxable income of the recommandation du ministre des

trust for a taxation year if, throughout the Finances. (qualified investment)

period in the year during which the trust

was in existence, the trust was governed (…)

by a registered retirement savings plan,

except that

Exonération d’impôt d’une fiducie

régie par le régime

(a) if the trust has borrowed money (other

than money used in carrying on a 146(4) Sous réserve du paragraphe

business) in the year or has, after June 18, (10.1), aucun impôt n’est payable en

1971, borrowed money (other than money vertu de la présente partie par une

used in carrying on a business) that it has fiducie sur son revenu imposable pour

not repaid before the commencement of une année d’imposition si, tout au long

the year, tax is payable under this Part by de la période de l’année où la fiducie

the trust on its taxable income for the year;

Page: 30

(b) in any case not described in paragraph existait, elle était régie par un régime

146(4)(a), if the trust has carried on any enregistré d’épargne-retraite; toutefois :

business or businesses in the year, tax is

payable under this Part by the trust on the a) si la fiducie a emprunté de l’argent

amount, if any, by which

(autre que de l’argent utilisé pour

l’exploitation d’une entreprise) au cours

(i) the amount that its taxable income for de l’année ou a emprunté, après le 18

the year would be if it had no incomes or juin 1971, de l’argent (autre que de

losses from sources other than from that l’argent utilisé pour l’exploitation d’une

business or those businesses, as the case entreprise) qu’elle n’a pas remboursé

may be,

avant le début de l’année, un impôt est

payable par la fiducie, en vertu de la

présente partie, sur son revenu

imposable pour l’année;

exceeds

(ii) such portion of the amount determined

under subparagraph 146(4)(b)(i) in b) dans tout cas non visé à l’alinéa a), si

respect of the trust for the year as can la fiducie a exploité une ou plusieurs

reasonably be considered to be income entreprises au cours de l’année, un impôt

from, or from the disposition of, qualified est payable par elle en vertu de la

investments for the trust; and

présente partie sur l’excédent éventuel

du montant visé au sous-alinéa (i) sur le

(c) if the last annuitant under the plan has montant visé au sous-alinéa (ii):

died, tax is payable under this Part by the

trust on its taxable income for each year (i) le montant qui constituerait le revenu

after the year following the year in which imposable de la fiducie pour l’année si

the last annuitant died.

elle n’avait pas tiré de revenu, ni subi de

pertes de sources autres que l’entreprise

ou les entreprises en question,

(…)

(ii) la partie du montant déterminé selon

Disposition of non-qualified investment

le sous-alinéa (i) à l’égard de la fiducie

146(6) Where in a taxation year a trust pour l’année, qu’il est raisonnable de

governed by a registered retirement considérer comme un revenu provenant

savings plan disposes of a property that, soit de placements admissibles pour elle,

when acquired, was a non-qualified soit de la disposition de tels placements;

investment, there may be deducted, in

computing the income for the taxation c) si le dernier rentier en vertu du régime

year of the taxpayer who is the annuitant est décédé, un impôt est payable par la

under the plan, an amount equal to the fiducie en vertu de la présente partie sur

lesser of

son revenu imposable pour chaque

année postérieure à l’année suivant

(a) the amount that, by virtue of l’année du décès de ce rentier.

subsection 146(10), was included in

computing the income of that taxpayer in (…)

Page: 31

respect of the acquisition of that property,

Disposition d’un placement non

and

admissible

(b) the proceeds of disposition of the 146(6) Lorsque, au cours d’une année

property.

d’imposition, une fiducie régie par un

régime enregistré d’épargne-retraite

dispose d’un bien qui, au moment où il a

été acquis, était un placement non

admissible, il est permis de déduire, dans

le calcul du revenu du contribuable qui

(…)

Benefits taxable

146(8) There shall be included in est le rentier du régime, pour l’année

computing a taxpayer’s income for a d’imposition, une somme égale au

taxation year the total of all amounts moins élevé des montants suivants :

received by the taxpayer in the year as

benefits out of or under registered a) le montant qui était, en vertu du

retirement savings plans, other than paragraphe (10), inclus dans le calcul du

excluded withdrawals (as defined in revenu de ce contribuable à l’égard de

subsection 146.01(1) or 146.02(1)) of the l’acquisition de ce bien;

taxpayer and amounts that are included

under paragraph (12)(b) in computing the b) le produit de disposition du bien.

taxpayer’s income.

(…)

Prestations imposables

Where acquisition of non-qualified

investment by trust

146(8) Est inclus dans le calcul du

revenu d’un contribuable pour une année

146(10) Where at any time in a taxation d’imposition le total des montants qu’il

year a trust governed by a registered a reçus au cours de l’année à titre de

retirement savings plan

prestations dans le cadre de régimes

enregistrés d’épargne-retraite,

(a) acquires a non-qualified investment, l’exception des retraits exclus au sens

à

or

des paragraphes 146.01(1) ou 146.02(1),

et des montants qui sont inclus, en

(b) uses or permits to be used any property application de l’alinéa (12)b), dans le

of the trust as security for a loan,

calcul de son revenu.

the fair market value of

(…)

(c) the non-qualified investment at the

time it was acquired by the trust, or

Acquisition d’un placement non

admissible par une fiducie

(d) the property used as security at the 146(10) Lorsque, à un moment donné

time it commenced to be so used, d’une année d’imposition, une fiducie

Page: 32

as the case may be, shall be included in régie par un régime enregistré

computing the income for the year of the d’épargne-retraite :

taxpayer who is the annuitant under the

plan at that time.

a) acquiert un placement non admissible;

b) utilise à titre de garantie d’un prêt un

bien quelconque de la fiducie ou en

permet l’utilisation,

la juste valeur marchande :

c) du placement non admissible au

moment de son acquisition par la

fiducie;

d) du bien utilisé à titre de garantie, au

moment où il a commencé à être ainsi

utilisé,

selon le cas, doit être incluse dans

le calcul du revenu, pour l’année,

du contribuable qui est le rentier

en vertu du régime à ce moment.

Subsection 146(10) was amended in 2011 (Keeping Canada’s Economy and

Jobs Growing Act, SC 2011, c. 24 at s.65) to introduce the concept of a “controlling

individual” for Registered Retirement Savings Plans in section 207.04 of Part XI.01

of the Act and impose a tax of 50% on the fair market value of non-qualified

investments held by the controlling individual in the calendar year. Those

amendments only apply to non-qualified investments acquired after March 22, 2011

such that they are not at issue in this appeal.

In any event, the Appellant, being “the taxpayer” who is the annuitant under

the plan, was not assessed by the Minister pursuant to subsection 146(10) and the

Minister assessed the RRSP Trust pursuant to subsection 146(10.1) which provides

as follows:

Where tax payable

Impôt payable

146(10.1) Where in a taxation year a trust 146(10.1) Lorsqu’une fiducie régie par

governed by a registered retirement un régime enregistré d’épargne-retraite

savings plan holds a property that is a non- détient, au cours d’une année

qualified investment,

Page: 33

(a) tax is payable under this Part by the d’imposition, un bien qui est un

trust on the amount that its taxable income placement non admissible :

for the year would be if it had no incomes

or losses from sources other than non- a) la fiducie doit payer un impôt en vertu

qualified investments and no capital gains de la présente partie sur le montant qui

or losses other than from dispositions of serait son revenu imposable pour l’année

non-qualified investments; and

si les sources de ses revenus et pertes

n’étaient que des placements non

(b) for the purposes of paragraph admissibles et si ses gains en capital et

146(10.1)(a),

pertes en capital ne résultaient que de la

disposition de tels placements;

(i) income includes dividends described in

section 83, and

b) pour l’application de l’alinéa a):

(ii) paragraphs 38(a) and 38(b) shall be (i) sont compris dans le revenu les

read without reference to the fractions set dividendes visés à l’article 83,

out in those paragraphs

(ii) aux alinéas 38a) et b) il n’est pas tenu

(…)

compte des fractions qui y figurent.

PART X.I - Tax in Respect of Over-contributions to Deferred Income Plans

Tax payable by individuals

Impôt payable par les particuliers

204.1 (1) (…)

204.1(1) (…)

Tax payable by individuals -- Impôt payable par les particuliers —

contributions after 1990 cotisations postérieures à 1990

204(2.1) Where, at the end of any month 204(2.1) Le particulier qui, à la fin d’un

after December, 1990, an individual has a mois donné postérieur au mois de

cumulative excess amount in respect of décembre 1990, a un excédent cumulatif

registered retirement savings plans, the au titre de régimes enregistrés

individual shall, in respect of that month, d’épargne-retraite doit, pour ce mois,

pay a tax under this Part equal to 1% of payer un impôt selon la présente partie

that cumulative excess amount.

égal à 1 % de cet excédent.

(…)

Waiver of tax

Renonciation

204.1(4) Where an individual would, but 204.1(4) Le ministre peut renoncer à

for this subsection, be required to pay a l’impôt dont un particulier serait,

tax under subsection 204.1(1) or compte non tenu du présent paragraphe,

204.1(2.1) in respect of a month and the redevable pour un mois selon le

Page: 34

individual establishes to the satisfaction paragraphe (1) ou (2.1), si celui-ci établit

of the Minister that

à la satisfaction du ministre que

l’excédent ou l’excédent cumulatif qui

(a) the excess amount or cumulative est frappé de l’impôt fait suite à une

excess amount on which the tax is based erreur acceptable et que les mesures

arose as a consequence of reasonable indiquées pour éliminer l’excédent ont

error, and

été prises.

(b) reasonable steps are being taken to (…)

eliminate the excess, the Minister may

waive the tax.

Excédent cumulatif au titre des REER

(…)

204.2(1.1) L’excédent cumulatif d’un

particulier au titre des régimes

enregistrés d’épargne-retraite à un

Cumulative excess amount in respect of

RRSPs

moment

donné

d’une

année

d’imposition correspond à l’excédent

204.2(1.1) The cumulative excess amount éventuel du montant visé à l’alinéa a) sur

of an individual in respect of registered le montant visé à l’alinéa b):

retirement savings plans at any time in a

taxation year is the amount, if any, by a) les primes non déduites, à ce moment,

which

qu’il a versées à des régimes enregistrés

d’épargne-retraite;

(a) the amount of the individual’s

undeducted RRSP premiums at that time b) le résultat du calcul suivant :

exceeds

A + B + R + C + D + E

(b) the amount determined by the formula

où :

A + B + R + C + D + E

A représente les déductions inutilisées

where

au titre des REER du particulier à la fin

de l’année d’imposition précédente,

A is the individual’s unused RRSP

deduction room at the end of the B l’excédent éventuel du moins élevé du

preceding taxation year,

plafond REER pour l’année et de 18 %

du revenu gagné du particulier, au sens

du paragraphe 146(1), pour l’année

d’imposition précédente sur le total des

B is the amount, if any, by which

(i) the lesser of the RRSP dollar limit for montants représentant chacun :

the year and 18% of the individual’s

earned income (as defined in subsection (i) le facteur d’équivalence du particulier

146(1)) for the preceding taxation year pour l’année d’imposition précédente

exceeds the total of all amounts each of quant à un employeur,

which is

Page: 35

(ii) the individual’s pension adjustment (ii) le montant prescrit quant au

for the preceding taxation year in respect particulier pour l’année,

of an employer, or

C si le particulier a atteint 18 ans au

(iii) a prescribed amount in respect of the cours d’une année d’imposition

individual for the year,

antérieure, 2 000 $; sinon, zéro,

C is, where the individual attained 18 D le montant relatif à un REER collectif

years of age in a preceding taxation year, quant au particulier à ce moment,

$2,000, and in any other case, nil,

E si le particulier a atteint 18 ans avant

D is the group RRSP amount in respect of 1995, le montant de transition qui lui est

the individual at that time,

applicable à ce moment; sinon, zéro;

E is, where the individual attained 18 R le facteur d’équivalence rectifié total

years of age before 1995, the individual’s du particulier pour l’année.

transitional amount at that time, and in

any other case, nil, and

Déclaration et paiement de l’impôt

R is the individual’s total pension 204.3 (1) Les contribuables visés par la

adjustment reversal for the year.

présente partie doivent, dans les 90 jours

qui suivent la fin de chaque année

postérieure à 1975:

Return and payment of tax

204.3 (1) Within 90 days after the end of a) produire auprès du ministre, sans avis

each year after 1975, a taxpayer to whom ni mise en demeure, une déclaration

this Part applies shall

pour l’année en vertu de la présente

partie, selon le formulaire prescrit et

(a) file with the Minister a return for the contenant les renseignements prescrits;

year under this Part in prescribed form and

containing

prescribed

information, b) estimer, dans cette déclaration,

without notice or demand therefor;

l’impôt dont ils sont redevables en vertu

de la présente partie pour chaque mois

(b) estimate in the return the amount of de l’année;

tax, if any, payable by the taxpayer under

this Part in respect of each month in the c) verser cet impôt au receveur général.

year; and

Dispositions applicables

(c) pay to the Receiver General the

amount of tax, if any, payable by the 204.3(2) Les paragraphes 150(2) et (3),

taxpayer under this Part in respect of each les articles 152 et 158, les paragraphes

month in the year.

161(1) et (11), les articles 162 à 167 et la

section J de la partie I s’appliquent à la

présente partie, avec les adaptations

nécessaires.

Provisions applicable to Part

Page: 36

204.3(2) Subsections 150(2) and 150(3),

sections 152 and 158, subsections 161(1)

and 161(11), sections 162 to 167 and

Division J of Part I are applicable to this

Part with such modifications as the

circumstances require.

PART XI.I – Tax in Respect of Deferred Income Plans and Other Tax Exempt

Persons

Tax payable by trust under registered Impôt payable par les fiducies régies

retirement savings plan

par

des

régimes

enregistrés

d’épargne-retraite

207.1(1) Where, at the end of any month,

a trust governed by a registered retirement 207.1(1) La fiducie régie par un régime

savings plan holds property that is neither enregistré d’épargne-retraite et qui, à la

a qualified investment (within the fin d’un mois donné, détient des biens

meaning assigned by subsection 146(1)) qui ne sont ni un placement admissible

nor a life insurance policy in respect of (au sens du paragraphe 146(1)) ni une

which, but for subsection 146(11), police d’assurance-vie à l’égard de

subsection 146(10) would have applied as laquelle, sans le paragraphe 146(11), le

a consequence of its acquisition, the trust paragraphe 146(10) aurait été applicable

shall, in respect of that month, pay a tax à la suite de son acquisition doit payer,

under this Part equal to 1% of the fair pour ce mois, en vertu de la présente

market value of the property at the time it partie, un impôt égal à 1 % de la juste

was acquired by the trust of all such valeur marchande des biens au moment

property held by it at the end of the month, où ils ont été acquis par la fiducie, de

other than

tous ces biens qu’elle détient à la fin du

mois, autres que :

(a) property, the fair market value of

which was included, by virtue of a) les biens dont la juste valeur

subsection 146(10), in computing the marchande a été incluse, en vertu du

income, for any year, of an annuitant paragraphe 146(10), dans le calcul du

(within the meaning assigned by revenu, pour une année donnée, d’un

subsection 146(1)) under the plan; and

rentier (au sens du paragraphe 146(1))

en vertu du régime;

(b) property acquired by the trust before

August 25, 1972.

b) les biens acquis par la fiducie avant le

25 août 1972.

(…)

Return and payment of tax

Déclaration et paiement de l’impôt

Page: 37

207.2 (1) Within 90 days after the end of 207.2 (1) Le contribuable assujetti à la

each year, a taxpayer to whom this Part présente partie doit, dans les 90 jours qui

applies shall

suivent la fin de chaque année :

(a) file with the Minister a return for the a) produire auprès du ministre, sans avis

year under this Part in prescribed form and ni mise en demeure, une déclaration

containing

prescribed

information, pour l’année en vertu de la présente

without notice or demand therefor;

partie, selon le formulaire prescrit et

contenant les renseignements prescrits;

(b) estimate in the return the amount of

tax, if any, payable by it under this Part in b) estimer dans cette déclaration l’impôt

respect of each month in the year; and

dont il est redevable en vertu de la

présente partie pour chaque mois de

(c) pay to the Receiver General the l’année;

amount of tax, if any, payable by it under

this Part in respect of each month in the c) verser cet impôt au receveur général.

year.

Responsabilité du fiduciaire

Liability of trustee

207.2(2) Le fiduciaire d’une fiducie qui

207.2(2) Where the trustee of a trust that est assujettie à l’impôt en application de

is liable to pay tax under this Part does not la présente partie qui ne remet pas au

remit to the Receiver General the amount receveur général le montant de l’impôt,

of the tax within the time specified in dans

le

délai

imparti,

est

subsection 207.2(1), the trustee is personnellement tenu de verser, au nom

personally liable to pay on behalf of the de la fiducie, le montant total de l’impôt

trust the full amount of the tax and is et a le droit de recouvrer de la fiducie

entitled to recover from the trust any toute somme ainsi versée.

amount paid by the trustee as tax under

this section.

Dispositions applicables

(3) Les paragraphes 150(2) et (3), les

articles 152 et 158, les paragraphes

Provisions applicable to Part

(3) Subsections 150(2) and 150(3), 161(1) et (11), les articles 162 à 167 et la

sections 152 and 158, subsections 161(1) section J de la partie I s’appliquent à la

and 161(11), sections 162 to 167 and présente partie, avec les adaptations

Division J of Part I are applicable to this nécessaires.

Part with such modifications as the

circumstances require.

(…)

b) Mutual Fund Trusts

Page: 38

132(1) (…)

Meaning of mutual fund trust

132(6) Subject to subsection 132(7), for

Sens de fiducie de fonds commun de

placement

the purposes of this section, a trust is a 132(6) Sous réserve du paragraphe

mutual fund trust at any time if at that time 132(7) et pour l’application du présent

article, une fiducie est une fiducie de

(a) it was a unit trust resident in Canada,

fonds commun de placement à un

moment donné si, à ce moment, les

conditions suivantes sont remplies :

(b) its only undertaking was

(i) the investing of its funds in property a) elle est une fiducie d’investissement à

(other than real property or an interest in participation unitaire résidant au

real property),

Canada;

(ii) the acquiring, holding, maintaining, b) sa seule activité consiste :

improving, leasing or managing of any

real property (or interest in real property) (i) soit à investir ses fonds dans des

that is capital property of the trust, or

biens, sauf des biens immeubles ou des

droits dans de tels biens,

(iii) any combination of the activities

described in subparagraphs 132(6)(b)(i) (ii) soit à acquérir, à détenir, à entretenir,

and 132(6)(b)(ii), and

à améliorer, à louer ou à gérer des biens

immeubles qui font partie de ses

(c) it complied with prescribed conditions. immobilisations ou des droits dans de

tels biens,

(iii) soit à exercer plusieurs des activités

visées aux sous-alinéas (i) et (ii);

c) elle satisfaisait aux conditions

prescrites portant sur le nombre de ses

détenteurs d’unités, la répartition et le

commerce de ses unités.

Paragraph 132(6)(c) was amended for 2000 and later years by Technical Tax

Amendments Act, S.C. 2013, c.34, subsection 278(1) to delete (from the end) the

phrase “relating to the number of its unit holders, dispersal of ownership of its units

and public trading of its units.”

Election to be mutual fund

Choix de devenir une fiducie de fonds

commun de placement

132(6.1) Where a trust becomes a mutual

fund trust at any particular time before the

Page: 39

91st day after the end of its first taxation 132(6.1) La fiducie qui devient une

year, and the trust so elects in its return of fiducie de fonds commun de placement

income for that year, the trust is deemed to à un moment avant le quatre-vingt-

have been a mutual fund trust from the onzième jour suivant la fin de sa

beginning of that year until the particular première année d’imposition est réputée

time.

avoir été une telle fiducie depuis le début

de cette année jusqu’à ce moment si elle

en fait le choix dans sa déclaration de

revenu pour cette année.

Retention of status as mutual fund trust

(6.2) A trust is deemed to be a mutual fund

trust throughout a calendar year where

Note marginale :Fiducie qui demeure

une fiducie de fonds commun de

placement

(a) at any time in the year, the trust would,

if this section were read without reference

to this subsection, have ceased to be a (6.2) Une fiducie est réputée être une

mutual fund trust

fiducie de fonds commun de placement

tout au long d’une année civile si, à la

(i) because the condition described in fois :

paragraph 108(2)(a) ceased to be satisfied,

a) elle aurait cessé d’être une telle

(ii) because of the application of fiducie à un moment de l’année si le

paragraph (6)(c), or

présent article s’appliquait compte non

tenu du présent paragraphe du fait que,

selon le cas :

(iii) because the trust ceased to exist;

(b) the trust was a mutual fund trust at the (i) la condition énoncée à l’alinéa

beginning of the year; and 108(2)a) n’est plus remplie,

(c) the trust would, throughout the portion (ii) l’alinéa (6)c) s’applique,

of the year throughout which it was in

existence, have been a mutual fund trust if (iii) la fiducie a cessé d’exister;

(i) in the case where the condition b) elle était une telle fiducie au début de

described in paragraph 108(2)(a) was l’année;

satisfied at any time in the year, that

condition were satisfied throughout the c) elle aurait été une telle fiducie tout au

year,

long de la partie de l’année où elle a

existé si, à la fois :

(ii) subsection (6) were read without

reference to paragraph (c) of that (i) la condition énoncée à l’alinéa

subsection, and

108(2)a) étant remplie à un moment de

l’année, elle était remplie tout au long de

(iii) this section were read without l’année,

reference to this subsection.

Page: 40

(…)

(ii) le paragraphe (6) s’appliquait

compte non tenu de son alinéa c),

(iii) le présent article s’appliquait

compte non tenu du présent paragraphe.

(…)

Income Tax Regulations

Règlement de l’impôt sur le revenu

Regulation 4801(as it read in 2004)

4801 (2004)

4801 For the purposes of paragraph 4801 Aux fins de l’alinéa 132(6)c) de la

132(6)(c) of the Act, the following Loi, les conditions suivantes sont

conditions are hereby prescribed in prescrites à l’égard d’une fiducie :

respect of a trust:

a) selon le cas :

(a) either

(i) une catégorie d’unités de la fiducie

(i) a class of the units of the trust shall be peut faire l’objet d’un appel public à

qualified for distribution to the public, or l’épargne,

(ii) there has been a lawful distribution in (ii) des unités de la fiducie ont fait

a province to the public of units of the l’objet d’un appel public légal à

trust and a prospectus, registration l’épargne dans une province, et un

statement or similar document was not prospectus,

une

déclaration

required under the laws of the province to d’enregistrement ou un document

be filed in respect of the distribution; and semblable relatif à cet appel n’avait pas

à être produit selon la législation

(b) in respect of any one class of units provinciale;

described in paragraph (a), there shall be

no fewer than 150 beneficiaries of the b) à l’égard de l’une quelconque

trust, each of whom holds

catégorie d’unités visée à l’alinéa a), il

ne doit pas y avoir moins de 150

(i) not less than one block of units of the bénéficiaires de la fiducie, dont chacun

class, and détient

(ii) units of the class having an aggregate (i) pas moins d’une tranche d’unités de

fair market value of not less than $500.

la catégorie, et

(ii) des unités de la catégorie ayant une

juste valeur marchande totale non

inférieure à 500 $.

Regulation 4801, as amended in 2012

on a retroactive basis to 2000

Page: 41

4801 In applying at any time paragraph

132(6)(c) of the Act, the following are

prescribed conditions in respect of a trust:

Règlement 4801, amendée en 2012 sur

une base rétroactive à 2000

4801 Pour l’application, à un moment

donné, de l’alinéa 132(6)c) de la Loi, les

conditions auxquelles une fiducie doit

satisfaire sont les suivantes :

(a) either

(i) the following conditions are met:

(A) there has been at or before that time a a) selon le cas :

lawful distribution in a province to the

public of units of the trust and a (i) les conditions ci-après sont réunies :

prospectus, registration statement or

similar document was not, under the laws (A) des unités de la fiducie ont, au plus

of the province, required to be filed in tard à ce moment, fait l’objet d’un appel

respect of the distribution, and

public légal à l’épargne dans une

province, et un prospectus, une

déclaration d’enregistrement ou un

document semblable relatif à cet appel

(B) the trust

(I) was created after 1999 and on or n’avait pas à être produit selon la

before that time, or législation provinciale,

(II) satisfies, at that time, the conditions (B) la fiducie :

prescribed in section 4801.001, or

(I) soit a été établie après 1999 et au plus

(ii) a class of the units of the trust is, at tard à ce moment,

that time, qualified for distribution to the

public; and

(II) soit remplit, à ce moment, les

conditions énoncées l’article

à

(b) in respect of a class of the trust’s units 4801.001,

that meets at that time the conditions

described in paragraph (a), there are at (ii) une catégorie d’unités de la fiducie

that time no fewer than 150 beneficiaries peut, à ce moment, faire l’objet d’un

of the trust, each of whom holds

appel public à l’épargne;

(i) not less than one block of units of the b) à l’égard d’une catégorie d’unités de

class, and

la fiducie qui remplit à ce moment les

conditions énoncées à l’alinéa a), la

(ii) units of the class having an aggregate fiducie compte, à ce moment, au moins

fair market value of not less than $500.

150 bénéficiaires qui détiennent chacun

:

(i) pas moins d’une tranche d’unités de

la catégorie, et

Page: 42

(ii) des unités de la catégorie ayant une

juste valeur marchande totale non

inférieure à 500 $.

The words “at any time” and “at that time” were added to Regulation 4801 by

an amendment made in 2013¹⁰applicable for the 2000 and later taxation years.

Regulation 4900

Règlement 4900

4900 (1) For the purposes of paragraph (d) 4900 (1) Pour l’application de l’alinéa d)

of the definition qualified investment in de la définition de placement admissible

subsection 146(1) of the Act, paragraph au paragraphe 146(1) de la Loi, de

(e) of the definition qualified investment l’alinéa e) de la définition de placement

in subsection 146.1(1) of the Act, admissible au paragraphe 146.1(1) de la

paragraph (c) of the definition qualified Loi, de l’alinéa c) de la définition de

investment in subsection 146.3(1) of the placement admissible au paragraphe

Act, paragraph (h) of the definition 146.3(1) de la Loi et de l’alinéa i) de la

qualified investment in section 204 of the définition de placement admissible à

Act, paragraph (d) of the definition l’article 204 de la Loi, chacun des

qualified investment in subsection 205(1) placements suivants constitue, sous

of the Act and paragraph (c) of the réserve du paragraphe (2), un placement

definition qualified investment in admissible pour une fiducie de régime à

subsection 207.01(1) of the Act, each of une date donnée si, à cette date, il s’agit

the following investments is prescribed as :

a qualified investment for a plan trust at a

particular time if at that time it is

a) d’un intérêt dans une fiducie ou d’une

action du capital-actions d’une société

(a) an interest in a trust or a share of the qui constitue un placement enregistré

capital stock of a corporation that was a pour la fiducie de régime au cours de

registered investment for the plan trust l’année civile pendant laquelle tombe la

during the calendar year in which the date

donnée

ou

de

l’année

particular time occurs or the immediately immédiatement antérieure;

preceding year;

b) d’une action du capital-actions d’une

(b) a share of the capital stock of a public société publique, sauf une société de

corporation other than a mortgage placement hypothécaire;

investment corporation;

c) d’une action du capital-actions d’une

(c) a share of the capital stock of a société de placement hypothécaire qui, à

mortgage investment corporation that aucun moment de l’année civile qui

does not hold as part of its property at any comprend la date donnée, ne détient

time during the calendar year in which the parmi ses biens une dette — sous forme

particular time occurs any indebtedness, d’hypothèque ou toute autre forme —

¹⁰2002-2013 Technical Bill, 2013, c. 34, s. 398.

Page: 43

whether by way of mortgage or otherwise, d’une personne qui est un rentier, un

of a person who is a connected person bénéficiaire, un employeur ou un

under the governing plan of the plan trust; souscripteur en vertu du régime

d’encadrement de la fiducie de régime,

(c.1) a bond, debenture, note or similar ou de toute autre personne qui a un lien

obligation of a public corporation other de dépendance avec cette personne;

than a mortgage investment corporation;

c.1) de quelque obligation, billet ou titre

(d) a unit of a mutual fund trust;

(d.1) [Repealed, 2007, c. 29, s. 32]

(d.2) a unit of a trust if

semblable d’une société publique, sauf

une société de placement hypothécaire;

d) d’une unité d’une fiducie de fonds

communs de placement;

(i) the trust would be a mutual fund trust d.1) d’une obligation, d’un billet ou d’un

if Part XLVIII were read without titre semblable émis par une fiducie de

reference to paragraph 4801(a), and

fonds commun de placement dont les

unités sont inscrites à la cote d’une

(ii) there has been a lawful distribution in bourse de valeurs visée à l’article 3200;

a province to the public of units of the

trust and a prospectus, registration d.2) d’une unité d’une fiducie, dans le

statement or similar document was not cas où, à la fois :

required under the laws of the province to

be filed in respect of the distribution;

(i) la fiducie serait une fiducie de fonds

commun de placement si la partie

XLVIII s’appliquait compte non tenu de

l’alinéa 4801a),

(…)

(ii) des unités de la fiducie ont fait

l’objet d’un appel public légal à

l’épargne dans une province, et un

prospectus,

une

déclaration

d’enregistrement ou un document

semblable relatif à cet appel n’avait pas

à être produit selon la législation

provinciale;

(…)

c) Indirect Payments

Other Sources of Income

Autres sources de revenu

Page: 44

Amounts to be included in income Sommes à inclure dans le revenu de

for year

l’année

56(1) Without restricting the 56 (1) Sans préjudice de la portée

generality of section 3, there shall be générale de l’article 3, sont à inclure dans

included in computing the income of le calcul du revenu d’un contribuable

a taxpayer for a taxation year,

pour une année d’imposition :

(…)

Indirect payments

Paiements indirects

56(2) A payment or transfer of 56(2) Tout paiement ou transfert de

property made pursuant to the biens fait, suivant les instructions ou

direction of, or with the concurrence avec l’accord d’un contribuable, à toute

of, a taxpayer to some other person autre personne au profit du contribuable

for the benefit of the taxpayer or as a ou à titre d’avantage que le contribuable

benefit that the taxpayer desired to désirait voir accorder à l’autre personne

have conferred on the other person — sauf la cession d’une partie d’une

(other than by an assignment of any pension de retraite conformément à

portion of a retirement pension l’article 65.1 du Régime de pensions du

pursuant to section 65.1 of the Canada ou à une disposition comparable

Canada Pension Plan or a comparable d’un régime provincial de pensions au

provision of a provincial pension sens de l’article 3 de cette loi ou d’un

plan as defined in section 3 of that régime provincial de pensions visé par

Act or of a prescribed provincial règlement — doit être inclus dans le

pension plan) shall be included in calcul du revenu du contribuable dans la

computing the taxpayer’s income to mesure où il le serait si ce paiement ou

the extent that it would be if the transfert avait été fait au contribuable.

payment or transfer had been made to

the taxpayer.

d) General Anti-Avoidance Rule (“GAAR”)

PART XVI

Tax Avoidance

Definitions

Évitement fiscal

Définitions

245(1) In this section, tax benefit 245(1) Les définitions qui suivent

means a reduction, avoidance or s’appliquent au présent article.

deferral of tax or other amount

payable under this Act or an increase attribut fiscal S’agissant des attributs

in a refund of tax or other amount fiscaux d’une personne, revenu, revenu

Page: 45

under this Act, and includes a imposable ou revenu imposable gagné

reduction, avoidance or deferral of au Canada de cette personne, impôt ou

tax or other amount that would be autre montant payable par cette

payable under this Act but for a tax personne, ou montant qui lui est

treaty or an increase in a refund of tax remboursable, en application de la

or other amount under this Act as a présente loi, ainsi que tout montant à

result of a tax treaty; (avantage fiscal) prendre en compte pour calculer, en

application de la présente loi, le revenu,

le revenu imposable, le revenu

imposable gagné au Canada de cette

tax consequences / attribut fiscal

tax consequences to a person means personne ou l’impôt ou l’autre montant

the amount of income, taxable payable par cette personne ou le montant

income, or taxable income earned in qui lui est remboursable. (tax

Canada of, tax or other amount consequences)

payable by or refundable to the

person under this Act, or any other

amount that is relevant for the

avantage fiscal

purposes of computing that amount; Réduction, évitement ou report d’impôt

(attribut fiscal)

ou d’un autre montant exigible en

application de la présente loi ou

augmentation d’un remboursement

d’impôt ou d’un autre montant visé par

transaction / opération

transaction includes an arrangement la présente loi. Y sont assimilés la

or event. (opération)

réduction, l’évitement ou le report

d’impôt ou d’un autre montant qui serait

exigible en application de la présente loi

en l’absence d’un traité fiscal ainsi que

General anti-avoidance provision

245(2) Where a transaction is an l’augmentation d’un remboursement

avoidance transaction, the tax d’impôt ou d’un autre montant visé par

consequences to a person shall be la présente loi qui découle d’un traité

determined as is reasonable in the fiscal. (tax benefit)

circumstances in order to deny a tax

benefit that, but for this section,

would result, directly or indirectly,

opération

from that transaction or from a series Sont assimilés à une opération une

of transactions that includes that convention, un mécanisme ou un

transaction.

événement. (transaction)

Avoidance transaction

Disposition générale anti-évitement

245(3) An avoidance transaction 245(2) En cas d’opération d’évitement,

means any transaction

les attributs fiscaux d’une personne

doivent être déterminés de façon

(a) that, but for this section, would raisonnable dans les circonstances de

result, directly or indirectly, in a tax façon à supprimer un avantage fiscal

benefit, unless the transaction may qui, sans le présent article, découlerait,

Page: 46

reasonably be considered to have directement ou indirectement, de cette

been undertaken or arranged opération ou d’une série d’opérations

primarily for bona fide purposes dont cette opération fait partie.

other than to obtain the tax benefit; or

Opération d’évitement

(b) that is part of a series of

transactions, which series, but for this 245(3)

section, would result, directly or s’entend :

indirectly, in a tax benefit, unless the

L’opération

d’évitement

transaction may reasonably be a) soit de l’opération dont, sans le

considered to have been undertaken présent article, découlerait, directement

or arranged primarily for bona fide ou indirectement, un avantage fiscal,

purposes other than to obtain the tax sauf s’il est raisonnable de considérer

benefit.

que l’opération est principalement

effectuée pour des objets véritables —

l’obtention de l’avantage fiscal n’étant

pas considérée comme un objet

Application of subsection (2)

245(4) Subsection (2) applies to a véritable;

transaction only if it may reasonably

be considered that the transaction

b) soit de l’opération qui fait partie d’une

série d’opérations dont, sans le présent

(a) would, if this Act were read article, découlerait, directement ou

without reference to this section, indirectement, un avantage fiscal, sauf

result directly or indirectly in a s’il est raisonnable de considérer que

misuse of the provisions of any one l’opération est principalement effectuée

or more of

pour des objets véritables — l’obtention

de l’avantage fiscal n’étant pas

considérée comme un objet véritable.

(i) this Act,

(ii) the Income Tax Regulations,

Application du par. (2)

(iii) the Income Tax Application (4) Le paragraphe (2) ne s’applique qu’à

Rules,

l’opération dont il est raisonnable de

considérer, selon le cas :

(iv) a tax treaty, or

a) qu’elle entraînerait, directement ou

(v) any other enactment that is indirectement, s’il n’était pas tenu

relevant in computing tax or any compte du présent article, un abus dans

other amount payable by or l’application des dispositions d’un ou de

refundable to a person under this Act plusieurs des textes suivants :

or in determining any amount that is

relevant for the purposes of that (i) la présente loi,

computation; or

(ii) le Règlement de l’impôt sur le

(b) would result directly or indirectly revenu,

in an abuse having regard to those

Page: 47

provisions, other than this section, (iii) les Règles concernant l’application

read as a whole.

de l’impôt sur le revenu,

(iv) un traité fiscal,

Determination of tax consequences

245(5) Without restricting the (v) tout autre texte législatif qui est utile

generality of subsection (2), and soit pour le calcul d’un impôt ou de

notwithstanding

enactment,

any

other toute autre somme exigible ou

remboursable sous le régime de la

présente loi, soit pour la détermination

(a) any deduction, exemption or de toute somme à prendre en compte

exclusion in computing income, dans ce calcul;

taxable income, taxable income

earned in Canada or tax payable or b) qu’elle entraînerait, directement ou

any part thereof may be allowed or indirectement,

un

abus

dans

disallowed in whole or in part,

l’application de ces dispositions compte

non tenu du présent article lues dans leur

(b) any such deduction, exemption or ensemble.

exclusion, any income, loss or other

amount or part thereof may be

allocated to any person,

Attributs fiscaux à déterminer

245(5) Sans préjudice de la portée

(c) the nature of any payment or other générale du paragraphe (2) et malgré

amount may be recharacterized, and tout autre texte législatif, dans le cadre

de la détermination des attributs fiscaux

(d) the tax effects that would d’une personne de façon raisonnable

otherwise result from the application dans les circonstances de façon à

of other provisions of this Act may be supprimer l’avantage fiscal qui, sans le

ignored,

présent article, découlerait, directement

ou indirectement, d’une opération

in determining the tax consequences d’évitement :

to a person as is reasonable in the

circumstances in order to deny a tax a) toute déduction, exemption ou

benefit that would, but for this exclusion dans le calcul de tout ou partie

section, result, directly or indirectly, du revenu, du revenu imposable, du

from an avoidance transaction.

revenu imposable gagné au Canada ou

de l’impôt payable peut être en totalité

ou en partie admise ou refusée;

b) tout ou partie de cette déduction,

exemption ou exclusion ainsi que tout ou

partie d’un revenu, d’une perte ou d’un

autre montant peuvent être attribués à

une personne;

Page: 48

c) la nature d’un paiement ou d’un autre

montant peut être qualifiée autrement;

d) les effets fiscaux qui découleraient

par ailleurs de l’application des autres

dispositions de la présente loi peuvent ne

pas être pris en compte.

ANALYSIS

Whether the Income Funds were “Qualified Investments”?

a) Overview – “a lawful distribution…to the public”

Qualified investments are defined in paragraphs 146(1)(a) to (d) of the Act

and paragraphs (a) to (w) of Regulation 4900(1) which includes at paragraph (d) a

“mutual fund trust”. Subsection 248(1) provides that a “mutual fund trust” has the

meaning assigned by subsection 132(6).

It is not disputed in this appeal that the Income Funds met the requirements of

paragraphs 132(6)(a) and (b) in that they were “a unit trust resident in Canada”

whose only undertaking was “the investing of its funds in property” or “the

acquiring, holding (…) of real property”.

At issue is whether the Income Funds satisfied the requirements of paragraph

132(6)(c) being the prescribed conditions described in Regulation 4801 that require

that either “there has been (…) a lawful distribution in a province to the public of

units of the trust and a prospectus (…) was not, under the laws of the province,

required to be filed in respect of the distribution” or “a class of the units of the trust

is (…) qualified for distribution to the public”.

The second requirement as set out in paragraph 4801(b) of the Regulation is

that, in respect of each Income Fund, there has been “no fewer that 150 beneficiaries

of the trust, each of whom” hold “not less that one block of units (…) having an

aggregate fair market value of not less than $500.” The latter issue will be discussed

in the next section entitled “Summary of Alleged Deficiencies.”

It is not disputed in this proceeding that the distribution of securities in Canada

is subject to provincial legislation, in this instance the Alberta Securities Act (“ASA”)

Page: 49

and the British Columbia Securities Act (“BCSA”)¹¹and to agreements known as

national instruments or multilateral instruments adopted by the provinces and

territories. It is also not disputed that the Appellant did not file a prospectus or similar

document and that he relied on the OME, as described above. However, the

requirements of subparagraphs 4801(a)(i) and (ii) of the Regulation both refer to a

distribution “to the public” and as a result it is necessary to review some general

concepts related to the distribution of securities.

It is not disputed that a distribution refers to the process by which securities

are issued to prospective investors or subscribers and that securities can only be

distributed “to the public” in accordance with applicable securities legislation. This

is known as the “closed system” for the distribution of securities that prevails today

in most if not all provinces or territories.

It has been suggested that the expression “to the public” is anachronistic in

the modern world of securities distribution¹²and that historically, the notion was

used to determine whether a prospectus or other disclosure document was required

for a distribution to an investor who was not closely connected to the issuer and thus

deemed to be in need of protection from unscrupulous or fraudulent behaviour.

These investors were viewed as not having the benefit of the “common bonds or

interest or association with the issuer of the security or its directors (…) or promoter”

and would “have a ‘need to know’ all relevant matters before making an informed

investment decision”. Attempts to distinguish between closely connected investors

and broader constituents of “the public” gave rise to litigation and “a minefield of

interpretive difficulties”.¹³

Since the “advent of the closed system in 1979”,¹⁴it is recognized that the

triggering event for the registration and prospectus requirements is “a distribution to

the public”¹⁵. The historical distinction between a distribution “to the public” or “to

the non-public” was eliminated as recommended by the Merger Report.¹⁶

¹¹Securities Act, RSA 2000, c S-4 (“ASA”) and Securities Act, RSBC 1996, c 418 (“BCSA”).

¹²Canadian Securities Regulation, 5^thedition, 2014, pages 169-170.

¹³Canadian Securities Regulation, opcit, pages 169-170.

¹⁴Canadian Securities Regulation, opcit, page 113.

¹⁵David Johnston, Kathleen Rockwell & Cristie For, Canadian Securities Regulation, 5th Edition, (Markham, Ont.:

Butterworths Canada Ltd, 1998), pages 112-113.

¹⁶Canadian Securities Regulation, opcit, page 113 - Report of the Committee of the Ontario Securities Commission

on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (Toronto:

OSC, 1970).

Page: 50

It is noted that both the ASA and BCSA continue to distinguish between

members of the public and individuals who have “a special relationship with the

issuer” and are, for example, an “insider, affiliate or associate”¹⁷for disclosure,

compliance or insider-trading purposes.

None of those provisions are relevant in this instance but they are mentioned

to emphasize that the distinction between individuals who fall within those

categories and members “of the public” are still relevant for administrative,

enforcement or compliance proceedings instituted by the securities commissions.

Subject to the exceptions described below, securities can only be distributed

if a disclosure document described as a prospectus has been filed with the provincial

securities commission.¹⁸Such securities are said to be “qualified for distribution to

the public” and become freely tradeable in the jurisdiction where they are qualified

and typically trade on the public exchanges. The issuer becomes a reporting issuer

and is required to provide continuous disclosure to its investors.

However, securities can also be distributed pursuant to one of several capital

raising exemptions set out in the provincial legislation or instruments, including the

OME requiring delivery of a simplified disclosure document known as an OM, as

was used in this instance.

In Gupta (P.L.) v. Minister of National Revenue [1992] 1 C.T.C. 2535

(“Gupta”) the Tax Court of Canada considered the difference between a

“prospectus” and an “offering memorandum” and indicated as follows:

56. Neither the Income Tax Act nor the Quebec Securities Act define the words

“prospectus” and “offering memorandum” or “registration statements”. However,

one can find these definitions in the following reference works:

The Dictionary of Canadian Law

“PROSPECTUS. n. Any prospectus, notice, circular or advertisement of any kind

whatsoever, whether of the kind hereinbefore enumerated or not, whether in writing

or otherwise offering to the public for purchase or subscription any shares or

debentures of any company.”

“OFFERING MEMORANDUM. A document that: (i) sets forth information

concerning the business and affairs of an issuer; and (ii) has been prepared primarily

¹⁷See for example section 9 ASA or section 3.3 BCSA.

18 Section 110(1) of ASA or section 61(1) of BCSA.

Page: 51

for prospective purchasers to assist those purchasers to make an investment

decision with respect to securities being sold pursuant to a trade that is made in

reliance on an exemption.”

[My emphasis]

Other exemptions include the “Private Issuer Exemption”, the “Family and

Friends and Business Associates’ Exemption” or the “Accredited Investor

Exemption”, none of which are at issue in this proceeding. The requirements of these

exemptions may vary from one province to another but securities issued pursuant

thereto are generally subject to re-sale restrictions. They are not “freely-tradeable”

since they have not been qualified for distribution to the public.

As explained by the Appellant, he knew that the filing of a prospectus was an

expensive and onerous undertaking and he chose to rely on the OME.

As indicated above, the units in the 2003 Income Funds were distributed

pursuant to the OME described in Part 4 of Multilateral Instrument 45-103 and the

units in the 2006 Promoted Funds were distributed in reliance on National

Instrument 45-106 (the “Instruments”). The OME described in Multilateral

Instrument 45-103 provides as follows:

Part 4 - Offering memorandum exemption

4.1

(1)

In British Columbia… the dealer registration requirement does not apply to

a person or company with respect to a trade by an issuer in a security of its

own issue if the purchaser purchases the security as principal and, at the

same time or before the purchaser signs the agreement to purchase the

security, the issuer

a. delivers an offering memorandum to the purchaser in compliance with

sections 4.2 to 4.4, and

b. obtains a signed risk acknowledgement from the purchaser in compliance

with section 4.5(1).

(2)

(3)

In British Columbia… the prospectus requirement does not apply to a

distribution of a security in the circumstances referred to in subsection (1).

In Alberta… the dealer registration requirement does not apply to a person

or company with respect to a trade by an issuer in a security of its own issue

if

Page: 52

a. the purchaser purchases the security as principal,

b. at the same time or before the purchaser signs the agreement to purchase

the security, the issuer

i. delivers an offering memorandum to the purchaser in compliance

with sections 4.2 to 4.4, and

ii. obtains a signed risk acknowledgement form from the purchaser

in compliance with section 4.5(1),

(…)

(4)

In Alberta…the prospectus requirement does not apply to a distribution of

a security in the circumstances referred to in subsection (3).

4.2 Required form of offering memorandum

An offering memorandum delivered under section 4.1 must be in the required form.

(…)

4.4

Certificate

(1)

An offering memorandum delivered under section 4.1 must contain a

certificate that states the following:

“This offering memorandum does not contain a misrepresentation.”

(…)

4.5

(1)

Risk Acknowledgement

A risk acknowledgement under section 4.1 must be in the required form.

(…)

4.7

Filing of offering memorandum

The issuer must file a copy of an offering memorandum delivered under section 4.1

and any update of a previously filed offering memorandum with the securities

regulatory authority on or before the 10th day after each distribution under the

offering memorandum or update of the offering memorandum.

(…)

Page: 53

7.1

Reporting Requirements

Subject to subsection (2), if an issuer distributes a security of its own issue under

an exemption in section 3.1(2), 4.1(2), 4.1(4) or 5.1(2), the issuer must file a report

in the local jurisdiction in which the distribution takes place on or before the 10^th

day after the distribution.

[My emphasis]

The “Confidential Offering Memorandum” prepared for the 2003 and 2006

Income Funds described the subscription process as follows:

5.2

Subscription Procedure

This Offering is made to, and subscriptions for Units will only be accepted from

persons resident in the Provinces of Alberta and British Columbia. The Offering is

being made in reliance upon Multilateral Instrument 45-103 – Capital Raising

Exemptions (“MI 45-103”). See items 11 and 12

A prospective Investor may acquire Units if the following is received by the Fund

and accepted by the Trustees:

a. One manually signed and duly completed subscription agreement substantially

in the form of the Subscription Agreement attached as Schedule “A” hereto;

b. One manually signed and duly completed Risk Acknowledgement (Form 45-

103F) substantially in the form of the Risk Acknowledgement attached as

Schedule “B” hereto; and

c. Payment of the subscription price to be made by cheque or other payment

method acceptable to the Trustees.

[My emphasis]

To summarize, “the prospectus requirement does not apply to a distribution

of a security”, where the issuer relies on the OME and prospective investors have i)

received a copy of the OM ii) returned a manually signed and duly completed risk

acknowledgement and ‘agreement to purchase the security’ and iv) provided

payment of the subscription amount.

Sections 4.1(1) and (3) of the Instrument simply refer to “the agreement to

purchase the security” (there is no prescribed form) but section 5.2 of the OM, noted

above, explains the subscription procedure and refers to “the form of Subscription

Agreement attached as Schedule “A” hereto” to which was appended Exhibit “A”

Page: 54

being the “Terms and Conditions for the Subscription of Units” (the “Terms and

Conditions” or collectively, the “Subscription Agreement”). It contained amongst

other matters, the following provision:

5.

Representation, Warranties and Covenants of the Investor.

The Investor hereby represents and warrants to and covenants and agrees with the

Trustees that:

a. Legal Capacity: If the investor is a corporation, the investor is a duly

incorporated and subsisting corporation (…) If the Investor is an individual, he

or she has attained the age of majority and has the legal capacity and

competence to execute this Subscription Agreement, and to take all Actions

required pursuant hereto;

b. No Prospectus: No prospectus has been filed (…) with any securities regulator

authorities of the Provinces of Canada (…);

c. Offering Memorandum: the Investors has received from the Trustees the

Offering memorandum (…);

d. Prospectus Exemption: (i) The Investor is a resident of British Columbia and

Alberta and is purchasing Units as principal for its own account, not for the

benefit of any other person (…) ii) it has received a copy of the Offering

Memorandum (…);

e. Resale Restrictions: The Investor (…) is aware of the applicable restrictions on

the resale of Units (…);

f. Status of Investor: The Investor has such knowledge, skill and experience in

business, financial and investment matters so that the Investor is capable of

evaluating the merits and risks of an investment in the Units. To the extent

necessary, the Investor has retained, at his or her own expense, and relied upon,

appropriate professional advice regarding the investment, tax and legal rights

and consequences of this subscription and owning the Units;

(…)

6.

Reliance upon Representations, Warranties and Covenants.

The Investor acknowledges that the foregoing representations and warranties are

made by it with the intent that they may be relied upon by the Trustees and their

counsel in determining the eligibility of the Investors to purchase the Units (…)

The Fund, the Trustees (…) shall be entitled to rely on the representations and

warranties of the Investor contained hereto (…)

Page: 55

7.

Survival of Representations, Warranties and Covenants.

All representations, warranties and covenants set out I this Agreement (…) will

survive the Closing.

8.

Amendment.

Neither this Subscription Agreement nor any provisions hereof will be modified,

changed, discharged or terminated except by an instrument in writing, signed by

the party against whom, any waiver, change, discharge or termination is sought.

[My emphasis]

In compliance with section 4.4 of the Instrument, each OM prepared in

connection with the Income Funds included a certificate which stated “This Offering

Memorandum does not contain a misrepresentation” (the “Certificate”).

The Certificate was required to be true when it was signed and when the OM

was delivered to prospective purchasers. Additionally, each OM contained the

following statement:

No securities regulatory authority has assessed the merits of the Units or reviewed

this offering memorandum. Any representation to the contrary is an offence. This

is a risky investment…

The Companion Policy to National Instrument 45-106¹⁹provides additional

guidance on the need for prospective investors to be fully informed and on the

requirement placed on the issuer in relation to the Certificates:

Date of certificate and required signatories

The issuer must ensure that the information provided to the purchaser is current and

does not contain a misrepresentation. For example, if a material change occurs in

the business of the issuer after delivery of an offering memorandum to a potential

purchaser, the issuer must give the potential purchaser an update to the offering

memorandum before the issuer accepts the agreement to purchase the securities.

The update to the offering memorandum may take the form of an amendment

describing the material change, a new offering memorandum containing up-to-date

disclosure or a material change report, whichever the issuer decides will most

effectively inform purchasers.

¹⁹The Companion Policy to National Instrument, 45-106.

Page: 56

[My emphasis]

Section 4.7 provides that the OM delivered to prospective investors had to be

filed with the securities commission within 10 days of the distribution which

corresponded to the timing for the filing of the Report pursuant to section 7.1.

It is not disputed that the Appellant filed a copy of the OM with the filing fee

and Form 45-103F4 for Alberta and Form 45-902F for BC, each being a “Report of

Exempt Distribution” (the “Reports”) in connection with the First Distribution. As

noted above, no evidence was adduced to suggest that a Report was filed in

connection with the Second Distribution(s) of units.

The cover letters addressed to the respective securities commissions and the

Reports were signed by “James T. Grenon – Trustee”. By so doing, he certified their

accuracy, and included the required schedules that listed the name and address of the

Investors, the “position” held by them with the issuer, if any, and the exemption

relied upon. Both versions of the Reports to the provinces included a statement that

it was “[a]n offence to make a misrepresentation”.

b) Summary of the Alleged Deficiencies

The Minister argues that the Income Funds were not properly constituted and

that there were multiple deficiencies that resulted in an unlawful distribution as well

as misrepresentations in that i) the Reports failed to disclose the “position” held by

any of the Investors, notably the Appellant himself; ii) contrary to the Terms and

Conditions for Subscription of Units attached to the Subscription Agreement, as

noted above, the Appellant accepted Risk Acknowledgment and subscription forms

from minors, signed by minors themselves or by guardians or other adults for

minors; iii) numerous subscription forms were signed by adults for other adults, and

finally iv) all Investors were required to purchase “as principal” but in numerous

instances, subscription funds were paid for by third parties.

In particular, the Minister argues that the acceptance by the Trustees of

numerous subscriptions was unlawful, as detailed below, and that the filing of the

Reports by the Appellant constituted a misrepresentation. Central to the position of

the Respondent is that, as a result of the number of deficiencies, the distribution did

not meet the requirements of paragraph 4801(b) of the Regulation that there be “no

fewer than 150 beneficiaries” in each Income Fund. As reviewed above, the OM

actually required that there be a minimum of 160 investors.

Page: 57

The Minister takes the position that for 65 of the 171 Investors in the 2003

series of Income Funds, units were issued contrary to the OM in that:

- 39 subscribers were minors at the time of subscription; and

- 65 subscribers (including 39 minors and 26 adults) did not pay the

subscription amount themselves.

Of the 39 minors, two signed the Risk Acknowledgement and Subscription

Agreement forms themselves while 32 such documents were signed by a guardian.

In the remaining five cases, an individual other than a guardian, executed the

documents ‘in trust’ for the minor. Of the 65 subscribers who did not purchase their

own units, the subscription amounts were paid by third parties.

The Minister takes the position that 74 of the 171 Investors in the 2006 series

of Income Funds were issued contrary to the OM in that:

- 31 subscribers were minors at the time of subscription; and

- 74 subscribers (including 31 minors at least 40 adults) did not pay

the subscription amount themselves.

Of the 31 minors, 10 signed the Risk Acknowledgement and Subscription

Agreement forms themselves while 21 were signed by a guardian. Of the 18 adult

subscribers who did not sign their own Risk Acknowledgment and Subscription

forms, it appears these were signed by other adults. For 74 of the subscribers, the

subscription amounts were paid by third parties.

As a result of these alleged deficiencies, the Minister takes the position that

all the Income Funds was were not validly constituted as a “mutual fund trust” and

thus were not “qualified investments” for RRSP purposes.

The following inquiry will consider the objective reality and effectiveness of

the steps undertaken by the Appellant to constitute the Income Funds in order to then

assess the effectiveness of those arrangements for purposes of the Act.

c) The burden of proof in tax appeals

Page: 58

The Appellant has taken the position that he “does not admit” the numbers

cited above suggesting that the Minister has the burden of convincing the Court.

A review of the Appellant’s written submissions indicates that there is an

admission that units were purchased by minors directly or by their guardian and that

some adults signed subscription documents for other adults and paid for their units.

I find that these admissions are binding on the Appellant and that he has made no

effort to provide any further detail or specificity. He has maintained that the issue

was unimportant and irrelevant. In particular, the Appellant has relied on the position

that all units of the Income Funds had been paid for and issued and that none of the

Investors has in any way repudiated the subscription.

The Appellant admitted in oral testimony that he knew that subscriptions were

being accepted for minors and that some adults were signing for other adults and

paying for their units. Indeed several of the fact witnesses admitted as much. The

Appellant has stated that he was not at all concerned with this.

A review of the Minister’s assumptions indicates that it was assumed i) that

many of the Investors were minors ii) who did not sign their own subscription

documents and iii) did not pay for their own units and iv) many of the adult

subscribers did not sign their own subscription documents and v) did not pay for

their own units and vi) in certain instances, adult subscribers purchased units for

multiple investors both minors and adults²⁰. I find that these assumptions were

sufficiently clear and precise for purposes of the pleadings and that, following the

production of documents by the Appellant, including all subscription documents and

subscription cheques, the Minister was able to particularize those basic assumptions.

The number of subscriptions challenged by the Minister, as outlined above,

are set out in Schedules A and B attached to the Written Submissions of the Crown

(Volume 1 of 3) and were presented to the Court during closing submissions as an

“aide-mémoire” that sought to reflect the information provided. I find that the

Appellant cannot sit on his laurels and argue that he does not admit the numbers.

If the Appellant wished to contradict the tabulation of information that had

been prepared based on documents provided by him, it was incumbent on him to call

witnesses or adduce some form of evidence to establish on a balance of probabilities

that the Minister was mistaken. He has not done so.

²⁰RRSP Trust Reply, paragraphs 17 (p) to (u); Grenon Appeal Reply, paragraphs 21 (r) to (v).

Page: 59

As the Appellant must know, in tax appeals the burden of proof rests on the

taxpayer. The basic principles regarding the burden of proof were summarized by

the Federal Court of Appeal in House v Canada, 2011 FCA 234:

[30] In determining the issue before us, it is important to keep in mind the

Supreme Court of Canada’s decision in Hickman Motors Ltd. v. Canada, [1997] 2

S.C.R. 336 (Hickman), where Madam Justice L’Heureux-Dubé enunciated, at

paragraphs 92 to 95 of her Reasons, the principles which govern the burden of

proof in taxation cases:

1. The burden of proof in taxation cases is that of the balance of probabilities.

2. With regard to the assumptions on which the Minister relies for his

assessment, the taxpayer has the initial onus to “demolish” the assumptions.

3. The taxpayer will have met his initial onus when he or she makes a prima

facie case.

4. Once the taxpayer has established a prima facie case, the burden then shifts

to the Minister, who must rebut the taxpayer’s prima facie case by proving,

on a balance of probabilities, his assumptions (...).

5. If the Minister fails to adduce satisfactory evidence, the taxpayer will

succeed.

It is understood that the “assumptions” referred to in the above citation

concern assumptions of fact only and do not include assumptions of law or

assumptions of mixed fact and law: Canada v Anchor Pointe Energy Ltd., 2003 FCA

294. Moreover, the assertions made in paragraphs 4 and 5 above have been the

subject of some controversy and in the more recent decision of the Federal Court of

Appeal in Sarmadi v The Queen, 2017 FCA 131 (“Sarmadi”), Justice Webb

indicated that:

[61] In my view, a taxpayer should have the burden to prove, on a balance of

probabilities, any facts that are alleged by that taxpayer in their notice of appeal and

that are denied by the Crown. In most cases this should end the discussion of the

onus of proof since the assumptions of fact made by the Minister in reassessing the

taxpayer would generally be inconsistent with the facts pled by the taxpayer with

respect to the material facts on which the reassessment was issued.

[62] If there are facts that were assumed by the Minister in reassessing a taxpayer

and that are not inconsistent with the facts as pled by that taxpayer, it would also

seem logical to require the taxpayer to prove, on a balance of probabilities, that

these facts assumed by the Minister (and which are in dispute and are not

Page: 60

exclusively or peculiarly within the Minister’s knowledge) are not correct.

Requiring a taxpayer to disprove the facts assumed by the Minister in reassessing

that taxpayer simply puts the onus on the person who knows (or ought to know) the

facts. It also puts the onus on the person who indirectly asserted certain facts in

filing their tax return that would be inconsistent with the facts assumed by the

Minister in reassessing such taxpayer.

[63] Once all of the evidence is presented, the Tax Court judge should then (and

only then) determine whether the taxpayer has satisfied this burden. If the taxpayer

has, on the balance of probabilities, disproven the particular facts assumed by the

Minister, based on all of the evidence, there is no burden to shift to the Minister to

disprove what the Tax Court judge has determined that the taxpayer has proven.

Either the taxpayer has disproven the assumed facts or he, she or it has not.

[My emphasis]

In this instance, I find that the Appellant has failed to satisfy his burden in that

he has not established on a prima facie basis that the units in the Income Funds were

issued other than as indicated in the Minister’s assumptions.

The Appellant has utterly failed to adduce any evidence that might demolish

the assumptions made by the Minister as further particularized above. I find that he

has not addressed the facts with candour, fairness and honesty. On the contrary, he

has made glib admissions “that there were minors”, that “adults did sign for other

adults” and that “third parties paid the subscription amounts for other subscribers”

but he has otherwise declined to address the assumptions with any degree of

specificity. Vague admissions of fact do not suffice to shift the burden to the

Minister. As indicated by Justice Webb in Sarmadi, supra, “either the taxpayer has

disproven the assumed facts or (…) not”. In this instance, I find that he has not.

I thus conclude that the number of subscriptions challenged by the Minister,

as set out above, have been established to the satisfaction of the Court.

What remains to be discussed are the legal consequences.

d) General principles of statutory interpretation

Since Regulation 4801 has not been judicially considered to date, it is

appropriate to review the basic rules of statutory interpretation as set out by the

Supreme Court of Canada that “the words of an Act are to be read in their entire

context and in their grammatical and ordinary sense harmoniously with the scheme

of the Act, and the intention of Parliament (…) according to a textual, contextual

Page: 61

and purposive analysis to find a meaning that is harmonious with the Act as a

whole”: Canada Trustco Mortgage Co. v. Canada [2005] 2 SCR 601 (“Canada

Trustco”).The Supreme Court has added that “where the words are precise and

unequivocal, the ordinary meaning of words play a dominant role in the

interpretative process” (para. 10)

In the later decision of Placer Dome Canada Ltd. v. Ontario (Minister of

Finance), [2006] 1 S.C.R. 715 (“Placer Dome”), the Supreme Court referenced tax

legislation specifically and noted that “because of the degree of precision and detail

characteristic of many tax provisions, a greater emphasis has often been placed on

textual interpretation where taxation statutes are concerned” (para 21) and that

“where such provision admits of no ambiguity in its meaning or in its application to

the facts, it must be simply applied”. Reference to the purpose of the provision

“cannot be used to create an unexpressed language” (Para 23).

The Appellant argues that terms used in provincial securities legislation

should inform the interpretation of similar terms in the Act, and relies on two earlier

decisions of the Supreme Court of Canada, notably Backman v. The Queen, 2001

SCC 10 (“Backman”) where is was held that a partnership was defined by reference

to provincial or territorial definitions and Will-Kare Paving & Contracting Ltd. v.

Canada, [2000] 1 SCR 915 (“Will-Kare Paving”) where the Supreme Court

emphasized that “a ‘plain meaning’ interpretation (…) would assume that the Act

operates in a vacuum, oblivious to the legal characterization of the broader

commercial relationships it effects”, noting that the Act “is not a commercial code

in addition to a taxation statute” (para 31).

e) The meaning of “distribution” in subparagraph 4801(a)(i)A

The Appellant argues that each Income Fund completed a valid and lawful

distribution of units to 171 Investors but that in order to satisfy the requirements of

sub-paragraph 4801(a)(i)A, all that was required was a valid and lawful distribution

to “at least one” Investor.

The Appellant argues that the Regulation requires only that “some units of the

class have been lawfully distributed” but that “not all units of the class must have

been issued in accordance with such requirements” as long as “at least one” of the

150 beneficiaries “has received their securities through a lawful distribution (…) the

requirement for a lawful distribution is met”, and further that “taken as a whole,

Regulation 4801 does not require all of the 150 beneficiaries to have received their

Page: 62

securities through a lawful distribution in a province” as some “might be friends and

family of the promoter” who remain as security holders.

The Appellant maintains that a “distribution” is an industry term that refers to

a singular trade in securities. He relies on the definition of that term in the ASA as

“a trade in securities of an issuer that have not been previously issued”²¹and in the

BCSA as “a trade in a security of an issuer”.²²

The Appellant relies on the decision of Will-Kare Paving, supra, and argues

that any other interpretation of the word “distribution” would create uncertainty in

that the acquisition of units by one investor and the validity of that issuance would

depend on the acquisition of units by all other investors, many of whom are not

known to each other, leading to undesirable results from a practical and policy

perspective.

Although this issue is primarily one of statutory interpretation, I note that the

Appellant’s testimony on the subject was inconsistent and contradictory. When

asked during cross-examinations which exemption he had relied on, he expressed

some uncertainty explaining that he might have relied on more than one before

finally concluding that it was the OME and that he had understood that it required

only one lawful trade. But in earlier testimony, he had indicated that the OM was

drafted to exceed the minimum requirements of Regulation 4801, and in particular

that the number of investors had been increased to 160. There was no mention of a

single trade to one investor. He understood that units had to be issued to at least 160

investors to satisfy the terms of the OM.

In any event, the Minister maintains that a “mutual fund trust” will be a

qualified investment for RRSP purposes only if there has been i) a lawful distribution

of securities ii) to at least 150 investors. If these requirements are not met, the Income

Fund might continue to exist as an ordinary trust but not as a “mutual fund trust”, as

defined in the Act.

As indicated by the Minister, the word “distribution” is defined in the Oxford

English Dictionary, 2019 Oxford University Press (“Oxford Dictionary”) as “the

action of dividing and dealing out or restoring or bestowing in portions among a

number of recipients; apportionment, allotment”. Also subsection 33(2) of the

²¹ASA, section 1(p)(i).

²²BCSA, section 1(1).

Page: 63

Interpretation Act, RSC 1985, c I-21, provides that “words in the singular include

the plural, and words in the plural include the singular”.

Analysis

From a textual analysis point of view, I agree with the Minister that the

ordinary meaning of the word “distribution” incorporates the plural form of the term

and that the use of the expression “a lawful distribution (…) to the public” suggests

that Parliament intended that it would refer to more than one isolated trade.

The plain meaning of the word “public” suggests a collective concept and the

Oxford Dictionary defines it as “ordinary people in general; the community”.

While the definitions set out in the provincial securities legislation, as noted

above, refer generally to “a” trade in securities of an issuer, I find that had Parliament

intended to refer to an isolated trade to one investor, it would have said so using

precise language. As noted by the Minister, in other provisions of the Act, Parliament

has spoken clearly, for example, by using the expression “to any member of the

public”²³. As argued by the Respondent, this is consistent with the notion that

“giving the same words the same meaning throughout a statute is a basic principle

of statutory interpretation”: R. v. Zeolkowski, (1989) 1 SCR 1378 (S.C.C.).

If the notion of “a lawful distribution” referred to only one singular trade, the

use of the expression “to the public” would be superfluous and, as noted by the

Minister, this would run counter to the presumption against tautology in the sense

that Parliament seeks to avoid superfluous words: Quebec (Attorney-General) v.

Carrières Ste. Thérese Ltée., (1985) 1 S.C.R. 831 (at 838) (S.C.C.).

The parties agree that the prescribed conditions for a “mutual fund trust” are

set out in paragraphs (a) and (b) of Regulation 4801, as noted above, but the

Appellant argues that paragraph (a) only requires one valid trade as long as there are

at least 150 investors at the time the trust claims to be a “mutual fund trust”.

On this issue, I agree with the Minister that the use of the conjunctive “and”

(and not the disjunctive “or”) indicates that the conditions of both paragraphs must

be met. From a contextual point of view, it is apparent that Parliament intended to

link the requirement in paragraph (a) that there be “a lawful distribution…to the

²³ITA, Section 39(3) and section 84(6).

Page: 64

public” with the requirement in paragraph (b) of the Regulation that there be a

widely-held distribution to no fewer than 150 investors.

I agree with the Minister that this inter-connection supports the interpretation

of “a lawful distribution” as being to more than one investor. Moreover, the phrase

“in respect of a class of the trust’s units that meets at that time, the conditions

prescribed in paragraph (a)” that appears at the beginning of paragraph 4801(b),

provides further context. It requires that “at the time” the lawful distribution is

completed, there are no fewer than 150 investors. Moreover, the introductory words

to Regulation 4801 indicate that “[i]n applying at any time paragraphs 136(c) of the

Act, the following are the prescribed conditions (…).” The word “conditions” is

expressed in the plural and not the singular.

As a result I conclude that paragraphs (a) and (b) of Regulation 4801 must be

read harmoniously as a whole, or “holistically”, as argued by the Minister, and that

this is consistent with the notion that the purpose of the provision is to establish the

precise requirements for a “mutual fund trust” that may provide valuable tax

advantages to annuitants as a “qualified investment” for RRSP purposes.

Subsection 132(6.1) provides that “where a trust becomes a mutual fund trust

at any particular time” it may so elect “in its return of income for that year”. This is

consistent with the wording of subsection 132(6) which provides that “a trust is a

mutual fund trust if, at that time” it satisfies the conditions set out therein including

the requirements of Regulation 4801. This suggests that a trust would only become

a “mutual fund trust” when it so elects having satisfied “at that time” the

requirements of both paragraphs (a) and (b) of Regulation 4801.

It may be, as argued by the Appellant, that a distribution to one single investor

is “a trade in a security of an issuer” that satisfies the definition contained in

provincial legislation, as noted above. But it is not clear how this advances the

Appellant’s position in establishing that the Income Funds were a “mutual fund

trust”. If paragraph (a) of the Regulation refers to only one lawful trade to one

investor, then the Court would have to wonder how or pursuant to what other lawful

distribution the remaining units in the trust were issued to other Investors. I agree

with the Minister that it would be absurd to condone the possibility that there might

be 149 unlawful distributions as long as there was at least one lawful distribution.

The Appellant suggests that sub-paragraphs (a)(i) and (a)(ii) of Regulation

4801, do not provide that “all” units must be distributed in the same distribution or

pursuant to “a lawful distribution” and do not exclude the possibility of there being

Page: 65

only “one” lawful distribution, as long as there were no fewer than 150 investors “at

that time”.

I find that this interpretation is incompatible with and ignores the closed-

system for the distribution of securities that prevails in Canada, as reviewed above.

All securities, without exception, must be legally or lawfully distributed and

that involves filing a prospectus or relying on a prospectus exemption, as required

“under the laws of the province”.

The uncontroverted evidence is that the Appellant undertook only “one”

distribution of units in connection with each Income Fund relying on the OME and

it was an essential term of the OM that units be issued to at least 160 investors.

There was no evidence of a prior distribution of units by prospectus or

pursuant to any other exemption. The evidence on this issue was unequivocal.

Although it is not necessary for the Court to opine in the abstract, I will add

that it would be possible (subject to the finer points of securities legislation) to issue

securities relying on a prospectus or a combination of different exemptions carried

out at different points in time (and possibly in different provinces), given the use of

the words “there has been at or before that time” in sub-paragraph 4801(a)(i). For

example, a trust might issue units having a value of at least $500 to 50 investors

relying on the “Friends, Family and Business Associates Exemption” and, at a later

date (or simultaneously), if it intended to qualify as a “mutual fund trust”, undertake

a second distribution of units having a value of at least $500 to at least 100 investors,

relying on the OME. For the purposes of Regulation 4801, as long as a class of units

had been distributed “lawfully” to the initial 50 investors, there would be a lawful

distribution to the public under the laws of the province. Once the second distribution

was completed, there would be “at that time”, no fewer than 150 investors. Having

completed two lawful distributions and having reached the “bright-line test” of 150

investors, the trust would qualify as a “mutual fund trust” in accordance with the

requirements of Regulation 4801.

To conclude on this issue, given the undisputed terms of the OM and the

Appellant’s admission that he had raised the bar to exceed the minimum

requirements of the provision, the Court finds in this instance that, “a lawful

distribution…under the laws of the province” required a distribution to no fewer than

160 investors. Anything less than that would not be “a lawful distribution” since it

would be contrary to the precise terms of the OM. I find that this interpretation of

Page: 66

the word “distribution” in Regulation 4801 is consistent with the text of the provision

and provides a result that achieves the statutory objectives and gives effect to the

entire statutory scheme.

f) The meaning of “lawful” in subparagraph 4801(a)(i)A

As noted above, the Minister has argued that as a result of a number of

deficiencies, the distribution of units in the Income Funds was not “lawful” in that it

was contrary to securities legislation including the OME and the terms of the OM.

The Oxford Dictionary defines “unlawful” as “contrary to or prohibited by

law; not conforming to, permitted by, or recognized by law; illegal; unjust,

wrongful.”

Before reviewing the alleged deficiencies in greater detail, I turn to the

position of the parties as to the meaning of the word “lawful”.

The Minister argues that under the closed-system for the distribution of

securities, an issuer is prohibited from distributing securities unless a prospectus has

been filed and approved in advance of the distribution or alternatively, the issuer has

met the requirements of an exemption as set out in the national or multilateral

instruments, as reviewed above. The Minister argues that these requirements are

mandatory and have force of law and must be strictly complied with. A distribution

that does not strictly comply will be characterized as illegal and thus unlawful.

The Minister cites a number of decisions of the Alberta Securities

Commission including Re Homerun International Inc., 2014 ABASC 59

(“Homerun”); Re Cloutier, 2014 ABASC 170 (“Cloutier”) and Bartel Re, 2008

ABASC 141 (“Bartel”). All of these decisions involved enforcement proceedings

against issuers or individuals who were prosecuted for having engaged in illegal

trades or the distribution of securities where there was no exemption from the

prospectus requirements. They had also made prohibited representations to

investors. In all instances, the focus was on the conduct of the issuer or individuals

involved.

In Homerun, the Commission referred to the exempt-distribution rules as the

“Prescribed Capital-Raising Exemptions” explaining that they were enacted to

“facilitate capital-raising on terms that preserve investor protection” (para. 82) and

added that the “onus of demonstrating the availability, and adherence to all the

Page: 67

conditions and requirements, of the Registration Exemption (…) rests with the

[person] claiming the benefit of the exemption” (para. 83).

Similarly, in Bartel, the Commission noted that “distributions that fall

squarely within the exemption requirements will not be illegal” but that “the onus

rests on [the promoter] to prove the facts necessary to demonstrate that one or more

of those exemptions was available” (para 109). It later noted that “the use of

exemptions must be complied with strictly” and that “those who use exemptions are

expected to know what the rules are and how they work” adding that “[o]ne is

responsible for the trades one conducts” (para. 127).

The Minister also relies on the decisions of R. v. Del Bianco, 2008 ABPC 248,

confirmed on appeal in Del Bianco v. Alberta Securities Commission, 2004 ABCA

344 (“Del Bianco”), R. v. Boyle, 2001 ABPC 152 (“Boyle”) and Ironside v. Smith,

1998 ABCA 366 (“Ironside”). In the latter decision, the court conducted a detailed

review of what it described as “the highly regulated world of securities law” (paras.

18-30) noting that it seeks to balance the twin-goals of “investor protection and

efficient raising of capital” (para. 19) by regulating issuers and individuals involved

in the distribution of securities by providing “civil and criminal sanctions (…) to

discourage fraudulent behaviour” (para. 21) and “broad definitions to capture most

distributions before excluding various trades by exemption” (para. 22).

In both Boyle and Del Bianco, individuals were accused of contravening the

provisions of the securities legislation by engaging in the illegal trade of securities

and failing to comply with various orders of the Alberta Securities Commission,

including that they cease trading in securities and resign as officers and directors of

any issuers. In Boyle, the Provincial Court of Alberta stated that:

[18] (…) In a closed system, all “trades” of “securities,” both of which are broadly

defined, must be undertaken in full compliance with the regulatory regime. If an

issuer of securities wishes to operate “outside” of the full system, it must take

affirmative steps to be exempt from various statutory requirements.

[My emphasis]

The Minister argues that all of these decisions support the broad proposition

that under the closed-system of distribution of securities, all distributions must be

undertaken in strict compliance with the securities legislation. Moreover, while

acknowledging that the Companion Policy 45-106CP Prospectus Exemption, is not

binding legislation, the Minister points to section 1.9(1) that provides as follows:

Page: 68

It is the seller that is relying on the prospectus exemption and it is the seller that is

responsible to ensure that the terms of the exemption are met. If the seller has any

reservations about whether the purchaser qualifies under the exemption, the seller

should not sell securities to the purchaser in reliance on that exemption.

The Appellant argues that the alleged deficiencies are of no consequence since

the word “lawful” refers to something that is prohibited by law as a consequence of

which it is utterly void. The Appellant argues that the distribution of units was in

keeping with the requirements of the Instruments and that even if it was contrary to

the Instruments or to the OM, as the Minister has alleged, it would not render them

automatically unlawful since they would only be voidable.

The Appellant relies inter alia on the decision of the Federal Court of Appeal

in Still v. M.N.R., [1998] 1 FC 549 (“Still”) involving an American citizen who was

lawfully admitted to Canada to join her spouse. Pending consideration of her

application for permanent resident status, she accepted gainful employment without

a work permit, contrary to the provisions of the immigration legislation. She was

laid-off after several months and sought unemployment benefits. Despite a finding

that she was of good faith and had paid insurance premiums, her application for

unemployment benefits was denied and the trial judge who up-held the Minister’s

determination that her failure to obtain a work permit resulted in an illegal contract

of service that did not constitute “insurable employment”.

On appeal, the Federal Court of Appeal reviewed the common law doctrine of

illegality noting that the “classical model” provides that “a contract which is either

expressly or impliedly prohibited by statue is normally considered void ab initio”.

Before concluding that the applicant was entitled to unemployment benefits, the

Court noted that “the classical model has long since lost its persuasive force and is

no longer being applied consistently” and that:

“(… ) where a contract is expressly or impliedly prohibited by statute, a court may

refuse to grant relief to a party when, in all of the circumstances of the case,

including regard to the objects and purposes of the statutory prohibition, it would

be contrary to public policy, reflected in the relief claimed, to do so.

I note that Still has been cited in several decisions of this Court involving

claims for unemployment benefits, notably Garland v. M.N.R., 2005 TCC 176

(“Garland”) (para. 8) and Haule v. M.N. R., (Docket 98-511-UI) (“Haule”). These

decisions involved individuals who had been denied unemployment benefits as a

result of the alleged illegality of their employment contract. The paragraph from Still

that is most of often quoted is that of Robertson J.A.:

Page: 69

(…) As the doctrine of illegality is not a creature of statute, but of judicial creation,

it is incumbent on the present judiciary to ensure that its premises accord with

contemporary values (…)

[My emphasis]

In Haule, Lamarre J. (as she then was), noted that “as the doctrine of illegality

rests on the understanding that it would be contrary to public policy to allow a person

to maintain an action on a contract prohibited by statute, then it is only appropriate

to identify those policy considerations which outweigh the applicant’s prima facie

right to unemployment benefits” (para. 49).

The Appellant also relies on the Supreme Court of Canada’s approach to the

doctrine of illegality in Continental Bank of Canada v The Queen (1998), 98 DTC

6505 (SCC) (“Continental”). In that instance, the Court reviewed the application of

the doctrine explaining that it includes both “common law illegality” and “statutory

illegality” (para 67) and provides that “a contract prohibited by statute or for an

illegal purpose, will be declared void even if it conforms to all other requirements of

a valid transaction” (para. 64).

Writing for the majority, McLachlin J. (as she then was) indicated that a

finding that “a contract is void or unenforceable for public policy reasons under the

doctrine of illegality does not render either the contract itself or the subject of the

contract unlawful” (para. 116) and further that, even if the Court concluded (on the

facts of that decision) that the bank’s participation in the “partnership should be void

or unenforceable for public policy reasons under the doctrine of illegality” that

would “not necessarily mean that its participation was illegal or unlawful in the

traditional sense of either term” (emphasis in the original text, para 117). She

concluded that “public policy requires that breaches of the Bank Act should not lead

to the invalidation of contracts and other transactions” (emphasis in the original text,

para 118) explaining further that the legislation in question specifically provided that

“[n]o act of a bank…is invalid by reason only that the act or transfer is contrary to

this Act”²⁴. In the end, McLachlin J. concluded that “the doctrine of illegality should

have no application in the case at bar” (para 119).

The Appellant also relies on the decision of Sidmay Ltd. v. Wehttam

Investments Ltd., [1967] 1 OR 508 (ONCA) (“Sidmay”) affirmed on appeal [1968]

SCR 828, involving a mortgagor who sought to invalidate a mortgage (“the

impugned mortgage”) on the basis of illegality since the lender was not registered

²⁴Section 20, Bank Act, R.S.C., 1985, c.B-1.

Page: 70

under the Loan and Trust Corporations Act ²⁵. The trial judge declared the mortgage

“void and unenforceable”, a finding that was rejected by the Ontario Court of

Appeal. Laskin J.A. quoted the following phrase with approval: “If refusal to enforce

or to rescind an illegal bargain would produce a harmful effect on the parties for

whose protection the law making the bargain illegal exists, enforcement or

rescission, whichever is appropriate, is allowed” (para 74).

The Appellant argues that Still, Continental and Sidmay all support the broad

proposition that even if certain subscriptions for units in the Income Funds were

accepted mistakenly or contrary to the provisions of the securities legislation, the

Instruments or the OM, they would only be rendered voidable and not unlawful. The

Appellant argues that a finding that the issuance of units to some investors was

“unlawful” could also harm innocent third parties who were unaware of the potential

illegality of the transaction.

Analysis

It is apparent from the decisions cited by the Minister that securities legislation

has evolved over time as a highly-regulated area of law intended to facilitate capital-

raising efforts while also ensuring investor protection.

In particular, securities legislation provides discreet capital-raising

exemptions as an alternative to the more onerous process of filing a prospectus but

holds that exemptions must be strictly complied with and “must be undertaken in

full compliance with the regulatory regime”. Only “distributions that fall squarely

within the exemption requirements will not be illegal” (Bartel), suggesting that all

others will be considered illegal.

I now turn of the decision of Still on the issue of statutory illegality. It is not

entirely clear how this applies to the facts in this instance since the issue of the

enforceability of the subscriptions as between the various unitholders and the

Income Funds, and whether they are voidable or utterly void, is not before the Court.

The only issue is whether the distribution was “lawful” for the purposes of

Regulation 4801. In the decisions of Still, Godard and Haule, the applicants had all

been engaged in gainful employment and the critical issue was their entitlement to

statutory benefits. In this instance, the Minister does not seek to deprive any of the

Investors of their entitlement to pro rata distributions from the Income Funds much

less to any statutory benefits.

²⁵R.S.O. 1960, c. 222.

Page: 71

Similarly, the decision of Sidmay involved a dispute as to the enforceability

of a mortgage that was alleged to be void on the basis of illegality. But Laskin J.A.

rejected that notion finding that “the prohibition of the statute affects the mortgagee

alone” (para 61) (My emphasis) and that the mortgage was enforceable. As noted

above, the Minister does not seek a declaration that the impugned subscriptions are

void or voidable, but only whether units were issued as part of “a lawful distribution”

to determine whether the Income Funds satisfy the requirements of Regulation 4801.

It is relevant to note that in Continental, McLachlin J. concluded that “the

doctrine of illegality had no application in the case at bar” (para 119) suggesting that

her comments on the issue were largely obiter dicta. However, even if the Court

considers the application of the doctrine, it bears repeating that it rests on the

understanding that public policy considerations dictate that an impugned contract

that is said to be prohibited by statute, should not be disregarded outright. As noted

in Haule, in such circumstances, it is only appropriate for the court to identify those

policy considerations which would outweigh a finding of illegality.

In this instance, the Court must determine the validity of the assessments

wherein the Minister takes the position that the Appellant did not complete “a lawful

distribution...under the laws of the province” such that the Income Funds were not a

“qualified investment” for RRSP purposes. If the Court concludes that the issuance

of units to certain Investors was contrary to the requirements of the OME and OM,

then the Income Funds would continue to exist as ordinary trusts (assuming they still

exist today). With the exception of the Appellant (and possibly Sutherland and

MacLennan who acquired units with their respective RRSP’s) the remaining

unitholders would not be affected by a decision of this Court.

The issue before the Court is the meaning of the word “lawful”. To make that

determination, the Court must consider whether the Income Funds have been legally,

validly or properly constituted and were compliant with securities legislation. Did

they meet the definition of a “mutual fund trust” in Regulation 4801 and in particular

was there “a lawful distribution (…) in accordance with the laws of the province” or

stated otherwise, were the Income Funds “qualified investments” for RRSP

purposes.

To provide further context on the analytical framework, it bears repeating that

in the realm of tax law, form matters a great deal. That the Appellant intended, in

good faith or otherwise, to issue units to at least 160 investors per Income Fund does

not suffice. In the seminal decision of The Queen v. Friedberg, 92 D.T.C. 6031

(FCA) (“Friedberg”) at 6032, Linden J.A. stated the following:

Page: 72

In tax law, form matters. (…) If a taxpayer arranges his affairs in certain formal

ways, enormous tax advantages can be obtained, even though the main reason for

these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106,

per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however,

tax may have to be paid. (…) While evidence of intention may be used by the Courts

on occasion to clarify dealings, it is rarely determinative. In sum, evidence of

subjective intention cannot be used to "correct" documents which clearly point in a

particular direction.

[My emphasis]

I conclude that a distribution will be “lawful” and meet the requirements of

paragraph (a) of Regulation 4801, where the distribution of securities is made “under

the laws of the province” and either i) the distribution of securities is pursuant to one

of several exempt-distribution rules (where a prospectus is not required) and the

securities are distributed in accordance with that exemption, or ii) the securities have

been qualified for distribution to the public by the filing of a prospectus and the

securities are distributed in accordance with that document.

In this instance, despite the Appellant’s assertion that he “may have relied on

more than one exemption”, it cannot seriously be disputed that he relied exclusively

on the OME. The Reports filed with the securities commissions in connection with

the First Distribution, confirm that all listed Investors, without exception, including

the Appellant and his related entities, relied on that exemption. At issue is whether

the distribution complied with or met the technical requirements of the securities

legislation, including the OME and OM.

g) Failure to disclose the position held

As noted above, the Reports included a schedule listing the name and address

of Investors, the exemption relied upon, and the “role” assumed by each of them.

The Minister argues that the Appellant did not indicate the “position” held by

any of the Investors, including the Appellant himself nor Bruce Maclennan for the

2003 series of funds or Deborah Nickerson for the 2006 series of funds. The Minster

argues that this was a misrepresentation.

The ASA provides a broad definition of the word “misrepresentation”²⁶as

being “an untrue statement of a material fact” or “an omission of a material fact that

is required to be stated” or, finally, “an omission to state a material fact that is

²⁶ASA, section 1(ii).

Page: 73

necessary to be stated in order for a statement not to be misleading”. The BCSA

contains a similar definition.

The schedule in question listed a certain “Jim Grenon” as an Investor but

described his position as “none”. The Appellant explained in oral testimony that his

staff knew him by that name and that they prepared the form accordingly, suggesting

it was in the nature of a clerical error. The failure to identify his role was also

characterized as a clerical error. The Appellant indicated that in any event he had

signed the cover page addressed to the securities commission and the Reports in his

capacity as trustee and that his role as promoter was described in the OM.

I note that the Appellant’s suggestion of a clerical error is uncorroborated. The

cover page was signed by the Appellant below the type-written words “James T.

Grenon - Trustee”. If the said “Jim Grenon” was one and the same as the Appellant,

the Court must wonder why his role was not specified and why this error was

repeated in at least six Reports that also failed to identify the other trustees.

Moreover, the Court notes that the Appellant’s employees were sufficiently

diligent and attentive to detail to list numerous entities related to the Appellant in the

2003 Reports and at least 14 other Investors sharing the same address and telephone

number as Tom Capital Consulting, including Grencorp, Tom Capital, Tom

Consulting Limited Partnership and at least 5 Alberta numbered companies, two of

which were noted above as being wholly owned by the Appellant.

To suggest that these was mere clerical errors stretches credulity and, at the

very least, raises serious concerns as to how the distribution process was managed.

That said, while I find that the Appellant’s testimony on this issue was not

credible, I am unable to conclude that the failure to describe his “role” or that of the

other trustees in the schedules to the Reports was a “misrepresentation” or “an

omission of a material fact that is required to be stated”. In the end, the Reports at

least identified the Appellant as the trustee and promoter of the Income Funds.

h) The subscription and acquisition of units by minors

For reasons set out above, the Court has concluded that 39 Investors in the

2003 series of Income Funds and 31 Investors in the 2006 series of Income Funds,

were minors. In oral testimony, the Appellant indicated that he was not at all

concerned with this because of his view that “little Johnny can own shares”.

Page: 74

Although there is some disagreement as to the actual age of the minors

involved, the Affidavit of Helen Little provides birthdates and in response to

requests to admit, the Appellant indicated that he had no reason to dispute that the

listed minors were not minors. They were all under the age of majority.

In all instances, the subscriptions were accepted and units were issued to the

minors “as named” and over the years, pro-rata distributions were made

accordingly. The Appellant’s testimony on this has been corroborated by the fact

witnesses.

The Appellant maintains that under common law, minors²⁷can acquire

property including securities and enter into contracts with third parties. The common

law simply holds that contracts with minors are prime facie voidable (with the

exception of contracts for “necessaries”) and may be rescinded by the minor upon

reaching the age of majority. These common law notions have been incorporated

into statute. For example, the applicable BC legislation provides that a contract with

a minor is unenforceable unless “affirmed by the infant on his or her reaching the

age of majority” or “if not repudiated by the infant within one year after his or her

reaching the age of majority”²⁸. At common law, “all instruments and acts of an

infant are voidable only” but not void ab initio: Rex v. Rash, (1923) 53 O.L.R. 245

(ONCA) (para 49).

The Appellant also relies on an article entitled “The Present Law of Infants’

Contracts”²⁹in support of the proposition that “[a]ny contract made by an infant for

the purchase or other acquisition of shares is voidable at the option of the infant, but

is valid unless and until so repudiated.” I note that this article predates the

introduction of the closed-system in 1979, as described above. It also does not

specifically address the issuance of securities pursuant to an OM.

The Appellant also maintains that guardians can enter into legally binding

contracts on behalf of minors and thus could lawfully sign the subscription

documents on their behalf. In Alberta, the Domestic Relations Act, RSA 2000, c D-

14 (section 50(1) (replaced effective 2013, by the Family Law Act, SA 2003, c F-

4.5), provides that parents are the joint guardians of a child. There is similar

legislation in BC: Family Law Act, SBC 2011, c 25, section 39.

²⁷In Alberta the age of majority is 18: Age of Majority Act, RSA 2000, c A-6 and in BC it is 19: Age of Majority

Act, RSBC 1996, c. 7.

²⁸Section 19(1) – Infants Act, RSBC, 1996, c. 223.

²⁹1975, 53 Can. B. Rev. (Source: CED Business Corporations V.9(b) (Ontario) at 401.

Page: 75

The Appellant’s position on this issue is best encapsulated by the following

phrase: “[g]uardianship is a specific legal construct designed, and inculcated in

statute, to address the relatively unique relationship of children and parents (…) The

guardian acts, as a child, such that, in a commercial context, any party seeking to

deal with the child’s property can, by contracting through the guardian, obtain an

enforceable agreement”³⁰.

The Minister does not appear to disagree with the general proposition of law

that minors can acquire property and that guardians may sign contracts on behalf of

a minor. She relies on the case law referenced above, which holds that under the

closed-system for the distribution of securities, a distribution of securities is

unlawful unless the requirements of the exemption are strictly complied with.

In particular, the Minister has focused on section 5 of the Terms and

Conditions being the “Representations, Warranties and Covenants of the Investor”,

as noted above, and concluded that it was contrary to the OME and OM for minors

to acquire units. Similarly, the Minister has argued that the Risk Acknowledgement

is a prescribed form that does not allow for the signature of guardians in the pre-

printed signature block. And finally, the Minister has argued that when the Appellant

filed the Reports with the securities commission, listing the name and address of all

the Investors, having knowledge of the subscriptions by minors, that this was a

“misrepresentation” leading to the conclusion that the distribution was contrary to

the OME as well as the OM and thus not “a lawful distribution”.

I find that there are compelling reasons to agree with the Minister’s

submissions.

As a preliminary observation, I note that the Appellant’s bald assertion that

minors can own shares is mistaken or at least too simplistic. Within the realm of

private corporations where securities are typically issued pursuant to the “Private

Issuer Exemption” or “Family, Friends and Business Associates Exemption”, it may

be that shares are routinely issued to minors without further consideration. As noted

by the Appellant, the Act itself contains provisions seeking to reattribute dividend

income to adults³¹or to impose the so-called ‘kiddie’ tax³². But outside the narrow

confines of those exemptions, I note that even securities that have been “qualified

for distribution to the public” (ie. by the filing of a prospectus with the applicable

securities commission) and trade on an exchange, cannot simply be acquired by

³⁰Trial Submissions of Appellant, paragraph 133.

³¹Section 74.1(2), ITA.

³²Section 120.4, ITA.

Page: 76

minors except with the use of a custodial or “in trust” account managed by an adult.

No evidence has been lead on this issue, but I take judicial notice of the fact that

investment dealers in Canada will not open investment accounts for minors because

they are not competent to give instructions. Given the inherent risks of owning

securities, it is of little comfort for investment dealers to know that securities

acquired for minors are only “voidable” until the age of majority.

In this instance, we are dealing with the OME and securities that have “not”

been qualified for distribution to the public and the governing law, as set out in the

Instruments, provides that the OM and Risk Acknowledgment “must be in required

form”, as noted in sections 4.2 and 4.5 above. The Court must take this to mean that

the “forms” could not be modified unless otherwise provided for.

It is not disputed that the OM was in required form and that it included various

Schedules, including a “Form of Subscription Agreement”. The attached Terms and

Conditions included the representation that prospective investors had attained the

age of majority and had legal capacity and competence.

More importantly, section 5(k) included a representation as to the “Status of

Investor” indicating that the investor had such “knowledge, skill and experience in

business and investment matters” as was necessary and was “capable of evaluating

the merits and risks of an investment in the Units” and “to the extent necessary” had

retained “appropriate professional advice regarding the investment, tax and legal

merits and consequences of this subscription”.

It is true, as argued by the Appellant, that the Subscription Agreement itself

was not a prescribed form. However, since it was attached to the OM (and listed in

the table of contents) that was delivered to Investors and later filed with the securities

commission, I find that it was indivisible from the statutory form. Offering

Memorandum Form 45-103F1, entitled “Instructions for Completing”, Offering

Memorandum for non-qualifying issuers, provides as follows:

5.2 - It is an offence to make a misrepresentation in the offering memorandum.

This applies both to information that is required by the form and to additional

information that is provided.

[My emphasis]

I find that both the “Form of Subscription Agreement” and “Terms and

Conditions for Subscription of Units” were indivisible or part and parcel of the OM.

Page: 77

They were not simply extraneous documents that could be ignored by the Appellant

if he deemed it convenient or expedient to do so.

The Court accepts that the applicable securities legislation does not expressly

prohibit the sale of securities to minors. This leads the Appellant to the conclusion

that it was therefore not “unlawful” to do so. However, the Court cannot agree and

must conclude that in “the highly-regulated world of securities law” (Ironside),

where issuers are required to strictly comply with capital raising exemptions (Bartel,

Homerun, Del Bianco, Doyle), it follows that they must also strictly comply with the

OME and OM.

A review of the OM with the attachments as noted above, and the prescribed

Risk Acknowledgment form, leads me to conclude that subscription documents

could only be signed by individuals or persons who had legal capacity to do so and

were able to represent that they had the requisite “knowledge, skill and experience”

and were “capable of evaluating the merits and risk” of the investment and seeking

“appropriate professional advice” if deemed appropriate. Minors by definition are

not legally competent to fulfill those requirements. In this context, it does not matter

that at common law, a contract signed by a minor is only voidable.

As a result, I reject the suggestion that the Appellant as trustee “had the

discretion to make non-material changes to the form”³³or that the requirement as to

the age of majority or as to the status of the investor, as noted above, was a mere

contractual term that could be waived by the Appellant when he knew “that the

subscriber’s representations are not accurate or fulfilled”³⁴. The Appellant relies on

Kempling v. Hearthstone Manor Corp., 1996 ABCA 254 and Saskatchewan River

Bungalow ltd. v. Maritime Life Assurance Co., [1994] 2 SCR 490, to support the

broad proposition that “a party to a contract may waive a stipulation or a condition

in a contract to its benefit”. However, none of these decisions involved the issuance

of securities to minors.

The OM could have stated that a particular representation was inserted for the

benefit of the issuer and could be waived at any time before closing. But in this

instance, there are no words to that effect. It does not assist the Appellant that section

6 of the Terms and Conditions indicates that “the Trustees and their counsel” would

rely on the representation to determine “the eligibility of the Investor to purchase

Units”. Having determined that subscribers were minors, the Appellant should have

³³CIBC Reply Submissions, paragraph 25.

³⁴Appellant Trial Submissions, paragraph 137.

Page: 78

rejected them or taken affirmative steps to correct the situation, possibly by

amending the documentation. No such steps were taken.

Similarly, it is clear that minors were not legally competent to sign the Risk

Acknowledgement form and the Court must conclude, given the wording and law

applicable to minors, that the Alberta and BC securities commission intended that

this document would only be signed by adult subscribers who had legal capacity.

I note parenthetically that this form is not required for the “Private Issuer

Exemption” which is limited to 50 investors who are closely-connected or deemed

to be closely-connected to the issuer³⁵or by the “Family, Friends and Business

Associates Exemption” which is also only available to individuals closely-connected

or deemed to be closely-connected with the issuer. For the latter two exemptions, a

disclosure document is also not required and thus we can conclude that the

legislatures of Alberta and BC have sought to relax the rules for a limited and fairly

well-defined category of investors who were not deemed to be in need of protection,

thus ensuring that the objectives of facilitating capital-raising and investor

protection, were being met.

The same cannot be said for the OME because securities are distributed to a

much broader category of investors that can best be described as “the public” in the

traditional sense even though some investors may be closely-connected to the

promoter, such as family, friends and business associates, for example.

Since the Appellant chose to rely on the OME (as confirmed in the Reports),

the underlying premise is that prospective investors were deemed not to be closely

connected with the issuer (whether they were or not, is not relevant) and as such

were deemed to be in need of protection. This is apparent given the requirement for

a relatively detailed disclosure document (the OM) and Risk Acknowledgment, all

in prescribed form. This suggests that the exemption relied upon in this instance was

structured to ensure that the objective of investor protection was given priority given

the deemed absence of a close connection with the issuer. As such, all Investors,

without exception (even those closely connected to the Appellant), were required to

adhere to the requirements of the OME and OM.

At this point, I will mention that during the course of the hearing, the

Appellant entered Exhibits A-2 and A-3 purporting to provide a list of investors who

were not well-known or closely-connected to him. I find that this list is of no

³⁵Except SK and ON.

Page: 79

consequence for reasons set out above. Since he chose to rely on the OME, all

prospective investors without exception, including those who were well-known or

closely connected to him, were required to sign the subscription documents.

The Appellant could not rely on other capital-raising exemptions on a casual

or ad hoc basis. That is apparent from the decisions cited above. He relied on the

OME as outlined in the Reports. It does not assist him in this proceeding to suggest

that “he may have been relying on other exemptions”. While it may be possible to

rely on multiple exemptions, it is not possible to do so on an ex post facto basis. As

noted in Boyle, supra, the Appellant would have been required to “take affirmative

steps to be exempt from various statutory requirements” (para 18). He did not do so.

On the issue of the subscription documents signed by individuals purporting

to act as guardians for minors and those signed by unrelated adults for minors, I find

that a similar analysis applies. Given the highly-regulated nature of the securities

industry and the closed-system for the distribution of securities, the Appellant could

not simply waive the requirement that individual investors be of the age of majority

by having the subscription forms signed by guardians or other adults for minors who

were not their children. This was not permissible. It was contrary to the Terms and

Conditions and thus unlawful.

The fact that guardians may bind minors under ordinary contract law, as

reviewed above, does not assist the Appellant in this instance. This is so because the

case-law has established that the capital-raising exemptions must be strictly

construed and applied and the attachments to the OM clearly required that investors

have “attained the age of majority” and “the legal capacity and competence” to

execute the subscription documents. If it was appropriate for documents to be signed

by guardians or other third parties, the Terms and Conditions would have addressed

this possibility.

If the Court were to accept that subscription documents could be signed by

guardians or other adults for minors, it would be necessary to read-in words that do

not appear in the language of these quasi-statutory forms. That is not permissible.

In the end, I find that this interpretation is consistent with the cautionary words

of the section 1.9(4) of the Companion Policy titled “Responsibility for compliance

and verifying purchaser status”, indicating what reasonable steps should be taken

too ensure compliance with the exemption and that if an issuer had “any reservations

about whether the purchaser” qualified under the exemption, “the seller should not

sell securities to the purchaser in reliance on that exemption”.

Page: 80

As noted above, the Instrument states that the OM and Risk Acknowledgment

were to be in “prescribed form”. This must be interpreted to mean that they could

not be modified in any way, notably to accommodate the signature of a guardian or

other adult, unless this was permissible under another provision.

To reinforce this notion, section 8 of the Terms and Conditions states that

“neither the Subscription Agreement nor any provision hereof” could be “modified,

changed, discharged or terminated except by an instrument in writing”. (My

emphasis). Although this suggests that it might have been possible to amend the

Terms and Conditions, there was no evidence before the Court that such an

instrument had been prepared.

It is noted that the Appellant could have prepared and delivered a modified

OM. He did not do so. He could have made an application to the securities

commission seeking “an exemption from the Instrument, in whole or in part”³⁶.

There is no evidence to suggest that a dispensation was sought or obtained.

With respect to the issue of a “misrepresentation”, that concept is defined, as

noted above, to include “an omission of a material fact that is required to be stated”.

I find that this relates primarily to the contents of the OM, including the business

objectives of the issuer, the use of subscription proceeds or the contractual rights of

unit holders, for example. This is apparent from a reading of the Certificate, as noted

above, stating that the OM remained true and that the “offering memorandum does

not contain of misrepresentation”.

However, the obligation to avoid a “misrepresentation” also extended to the

Reports since the prescribed form contained a similar caution in bold capitalized

letters. Given the conclusions I have reached as to the obligation of an issuer in the

closed-system of distribution of securities, the need to ensure investor protection,

the express prohibition against issuing securities to minors in the OM, I find that the

Appellant made a misrepresentation when he reported to the securities commission

attaching a list of Investors that included minors.

The Appellant has argued that a finding that some subscriptions were unlawful

and not others would mean that all subscriptions were somehow interconnected

which was not desirable from a public policy point of view. I would reject this

analysis outright since the funds can continue to exist as ordinary trusts with a

reduced number of beneficiaries, if necessary. The number of investors required in

³⁶45-106, section 7.1(1).

Page: 81

this instance was a function of the OM prepared by the Appellant and his attempt to

establish a “mutual fund trust” for RRSP purposes. If the trust was only successful

in issuing units to a lesser number of investors, it could have amended the OM to

indicate that a revised minimum number of investors was required.

The Appellant cannot, in the context of these proceedings, rely on his own

inadvertence or mistaken interpretation as to the requirements of the Instruments,

the OME or OM. Even if he mistakenly believed that units had been issued in full

compliance with the securities legislation, this would still not result in a “lawful

distribution” for the purposes of the Act or Regulation 4801. Nor can he rely on the

assertion that there were no complaints or enforcement proceedings or that units

were issued to minors and other investors who received pro-rata distributions over

the years. Such considerations are simply not relevant to these proceedings.

I indicated above that the doctrine of illegality had no application to this

analysis because the only issue before the Court was the validity of the assessments

under the Act and compliance with Regulation 4801. That said, if I consider for a

moment the application of the doctrine of illegality, I need only turn to the words of

the Federal Court of Appeal as laid out in Still, (a decision relied upon by the

Appellant) indicating that where “a contract is expressly or impliedly prohibited by

statute” a court may consider all the circumstances “including the objects and

purposes of the statutory prohibition” and ask if “it would be contrary to public

policy” to grant relief. A similar comment was made in Haule, supra.

In this instance, as established by the case law, the closed-system for the

issuance of securities mandates strict compliance with the exemptions as described

in the Instruments. By extension, the OME requires strict compliance with the OM,

including the attached Terms and Conditions. The object and purpose of those

provisions is investor protection.

In Gupta, supra, the court concluded that there had been “a lawful

distribution” where the taxpayer had not filed a prospectus but had obtained a

dispensation from the provincial securities commission. The court noted that:

71. The Quebec Securities Commission in exempting the appellant from filing a

prospectus pursuant to section 263 of the Quebec Securities Act determines a

certain number of conditions (…) to protect the purchasers. Indeed the protection

of purchasers of securities is the main basis of the legislation concerning securities.

[My emphasis]

Page: 82

This was later confirmed by the Supreme Court of Canada in Committee for

the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities

Commission), [2001] 2 SCR 132, where it held that the statutory and public policy

goals of the statutory scheme governing the issuance of securities included investor

protection, capital market efficiency and public confidence in capital markets.

In the context of an exempt offering of securities relying on the OME, where

investors are deemed not to be connected with the issuer or promoter, I find that

investor protection is the broad public policy objective. As a result, I have no

difficulty in concluding that the issuance of units to minors directly or by their

guardians or other adults, was contrary to that public policy objective.

In the words of Robertson J.A., since “the doctrine of illegality is not a

creation of statute but of judicial creation, it is incumbent on the present judiciary to

ensure that its premises accord with contemporary values”. (Still, supra). I find that

those “contemporary values” are implicitly described in the Instruments, the OME

and the OM, and that there is no justifiable reason for this Court in the context of a

tax appeal, to turn a blind eye and provide relief to the Appellant or to make a finding

that the subscriptions in favour of minors were lawful for the purposes of the Act.

Given the various decisions reviewed above, I have little doubt that the

Alberta and BC Securities Commission, would have come to a similar conclusion

had there been a complaint that might have triggered enforcement or compliance

proceedings.

It is important to appreciate that contrary to the distribution of securities

pursuant to a prospectus that is filed, reviewed and approved by a securities

commission, all exempt distributions rules, including the OME, only require the

“filing” of a prescribed report “in the jurisdiction where the distribution takes place

no later that 10 days after the distribution”³⁷. These reports are filed to ensure a

minimum level of regulatory oversight but are not reviewed unless there is a

complaint or other reason to make enquiries.³⁸.

On the basis of the foregoing, I have no difficultly in concluding that all

subscriptions in favour of minors, whether the documents were signed by the minors

themselves, by their guardians or other unrelated adults, were illegal as that term has

³⁷Part 6 – Reporting Requirements, section 6.1.

³⁸Canadian Securities Regulation, opcit., page 113.

Page: 83

been used in Bartel, Homerun, Del Bianco or Doyle, supra, as being contrary to the

securities legislation and the Instruments. They were thus unlawful.

As a result, all of the subscriptions in favour of minors should be disregarded

for the purpose of this analysis and compliance with Regulation 4801.

i) The subscription of units by adults for other adults

The Minister argues that at least 20 adults acquired units in the 2006 Income

Funds without signing the Subscription Agreement and Risk Acknowledgment

forms.

The Appellant does not dispute that there were “adults who signed for other

adults”³⁹but argues that this is totally irrelevant since the units were issued in favour

of the “named subscriber”, regardless of who signed.

Also, the named subscribers received investor packages intended for the

annual meetings as well as pro-rata distributions and annual T3 slips in normal

course. The Appellant argues that all subscriptions were paid for and that there was

no evidence that any of the adults had repudiated their subscriptions.

While acknowledging that the OME as set out in the Instruments and OM

required that the “purchaser purchase the security as principal” and that the

subscriber sign a Subscription Agreement and Risk Acknowledgement form, the

Appellant argues that the Instruments do “not preclude one person subscribing on

behalf of an identified principal” and that “[t]his requirement is intended to prevent

an agent, such as a financial institution, purchasing from one or many undisclosed

principals, such as a financial institution’s clients” ⁴⁰.

Moreover, while acknowledging that the OM and Risk Acknowledgement are

prescribed forms, the Appellant argues that the Subscription Agreement itself is not,

suggesting it does not necessarily need to be signed by the named subscribers.

The Appellant argues that even if securities have “mistakenly” been issued to

a named subscriber, that “does not detract from a lawful distribution to another

³⁹Appellant Trial Submissions, paragraph 94.

⁴⁰Appellant Trial Submissions, paragraph 97.

Page: 84

unitholder” and “if that were so, large offerings could be nullified by one non-

compliant subscription”⁴¹.

The Minister does not agree with any of these submissions and again, as with

the subscriptions in favour of minors, I find that there are compelling reasons to

conclude that the issuance of units on the basis of subscriptions made by adults for

other adults were contrary to the securities legislation and the Instruments and thus

were unlawful.

From an evidentiary point of view, the Court was not provided with any

context as to why adults were signing for other adults. There may have been

acceptable reasons but the record is silent as to the relationship between those who

signed the subscription documents and the so-called “named subscribers”. The

circumstances under which they received units in the Income Funds remains

somewhat of a mystery but the Appellant asks that they be accepted as a “fait-

accompli” that should not be challenged by the Minister or this Court.

I note moreover that although the Appellant has admitted that there were

“adults who signed for other adults”, as noted above, he has been careful to avoid

any admission as to the number of adults who did not subscribe for their own units,

despite his knowledge that this was a matter of some controversy and despite the

fact that the Minister had made an assumption on the issue. The Appellant has failed

to adduce any evidence on the matter and his oral testimony was vague at best. As a

result of this the Court must again draw a negative inference.

A review of the requirements of the OME as described in the Instruments

indicates in clear and unequivocal terms, that prospective investors must have

received a copy of the OM. There was no evidence of this. They also must have

signed the subscription documents personally to which were attached the Terms and

Conditions described above, including notably the “Status of Investor”.

Moreover the Risk Acknowledgment begins with the words “I acknowledge

that this is a risky investment – I am investing entirely at my own risk”. The form

ends with the acknowledgement that “this is a risky investment and I could lose all

the money I invest” followed by a space for the “Purchaser” to print his name and

appose his signature. The second page of the form includes a reminder that the

purchaser will be receiving an OM and that it should be read carefully “because it

has important information about the issuer and its securities”. There is little doubt

⁴¹Appellant Trial Submissions, paragraph 101(b).

Page: 85

that prospective subscribers were required to sign this document personally. It could

not be delegated to a third party.

The Appellant’s testimony on this issue was wholly inadequate. He had little

to offer by way of explanation except to say that he relied on his staff and that all

units were paid for. The Appellant should have known that the distribution of

securities is a highly regulated activity. The steps that needed to be followed were

not trivial or inconsequential. Unless the Appellant had sought a dispensation from

the securities commission, they were all mandatory. He did not seek a dispensation.

To address the more technical arguments raised by the Appellant, I would say

that the Instruments do in fact “preclude” adults from signing for other adults. The

OME is predicated on the notion that investors have received a detailed disclosure

document that was to be carefully evaluated to ensure the investor was sufficiently

informed as to the potential risks involved before signing the subscription. This was

not a trivial exercise. It was mandated by the Instruments.

The argument that the named subscribers had not “repudiated” the units

received should also be rejected. The notion of a repudiation in contract law relates

to a contracting party’s obligation to perform the terms of a contract. If the terms are

not performed, the contract is said to have been repudiated. This legal principle has

no application to these facts. The “named subscribers” who were adults received

units from other adults who intended to provide them with a benefit. The Court must

wonder for what reason or for what purpose? There must have been an understanding

or quid pro quo as between the signatories of the subscription documents and the

recipients, but no evidence whatsoever was adduced to explain the situation.

In the end, the Appellant has not advanced any credible theory of law that

would satisfy this Court that an adult can sign subscription documents on behalf of

another adult.

As explained above, it is not necessary for this Court to conclude if the

subscriptions signed by adults for other adults are void ab initio or merely voidable.

Those issues are not relevant to these proceedings.

Since an issuer is required to strictly comply with the requirements of the

exemption relied upon, and since the Appellant has failed to do so in connection with

the subscriptions submitted by adults for other adults, the Court must conclude that

they were unlawful under the laws of the applicable provinces and that they should

be disregarded for the purpose of this analysis.

Page: 86

j) The requirement that units be purchased “as principal”

As noted above, according to paragraphs 4.1(2) and (3) of the Instruments

describing the OME, the purchaser was required to “purchase the security as

principal”. Although the Minister has acknowledged that the subscription price was

to be paid “by cheque or other payment method acceptable to the Trustees”⁴²the

parties disagree as to the meaning of this expression.

It is not disputed that numerous adults acquired units and where a cheque was

drawn for spouses from a joint bank account, the Minister has conceded that this was

an acceptable payment for both spouses. The Minister has also not challenged

subscriptions made by various legal entities connected to the subscriber.

Since the Court has already concluded that the subscriptions in favour of

minors were unlawful, it is not relevant who paid the subscription amount as they

should have been rejected in any event. That said, the Appellant has failed to adduce

any evidence to contradict the Minister’s assumption that the minors did not pay for

their units. I must therefor conclude that none of the minors paid for their units.

At issue then are units in the 2003 Income Funds issued to 27 adults and those

in the 2006 Income Fund issued to 43 adults. As noted above, the Minister has

particularized the assumption based on the results of the discovery process including

requests to admit and production of documents. I find that the assumption that these

adults did not pay for their own units was sufficient to indicate that they had not

purchased the units as principal for their own account. It was not necessary for the

Minister to adduce evidence of an undisclosed principal or resulting trust or other

arrangement. The evidentiary onus was on the Appellant to demonstrate that the

subject adults had in fact acquired the units as principal.

As noted above, the Appellant has argued in written reply submission that

“they have never admitted that the unitholders did not pay for their own units” and

“have always maintained that all units were paid for”.

For reasons set out above on issue of the burden of proof in tax appeals, I

accept the Minister’s position that these adults did not pay for their own units and

find that it was incumbent on the Appellant to adduce some evidence to prove that

they did in fact pay for their own units. Copies of cheques or bank drafts or other

proof of payment, possibly evidence of a loan arrangement, should have been

⁴²Appellant, page 13, paragraph 25.

Page: 87

provided to the Court in order to allow it to reach its own conclusions. Instead, the

Appellant has chosen to rely on the bald assertion that “all units were paid for”.

As noted above, the Minister’s assumptions stipulated that many investors “of

the age of majority, did not purchase units with their own money” and that “one

unitholder purchased units (…) with his/her own money for multiple Outsiders, both Minors and

persons of the age of majority.”⁴³

At least three of the Appellant’s fact witnesses testified on this issue. Bruce

Maclennan admitted that he had paid for the units of his two children but had

difficulty explaining the nature of the payment, finally agreeing that it was a gift.

Geoff Merrit admitted that he had advanced the money as a gift for his child.

Deborah Nickerson was the only witness who indicated that the funds advanced for

her two children were intended as loans to be repaid when the units were redeemed.

She admitted having no documentation to support this.

In the end, despite the disagreement as to the actual numbers, I draw a negative

inference from the Appellant’s vague responses to these issues and his failure to

adduce any evidence to clarify the matter for the Court or to meet his evidentiary

burden in connection with the Minister’s assumptions.

I now turn to the position of the parties on this issue.

The Appellant argues that there is no requirement that “a subscriber use his or

her own money” or that they draw a cheque from their own bank account, and that

“the purchase of securities in Alberta and British Columbia is much like the purchase

of anything else: a third party can physically give money to the seller (in this case,

the issuer) to fund that buyer’s obligation to pay”⁴⁴.

The Minister takes the position that the expression “to purchase as principal”

has been interpreted to mean “to purchase in one’s own right and not on behalf of a

third party”⁴⁵. In the Alberta Securities Commission decision of Little (re), 2000

LNABASC (“Little Re”) it was interpreted to mean “a person acting in a transaction

entirely for his or her own account and not on behalf of any other person” (p.13) and

in Cartaway Resources Corp (Re), 2000 LNBSSC 391 (para 246) (“Cartaway”) the

BC Securities Commission indicated that it was “to be used in connection with sales

⁴³RRSP Trust – Grenon Appeals, Fresh as Further Amended Replies Further Amended Replies, paragraphs 17 (s),

(t) and (u) and RRSP Trust Appeal – Fresh as Further Amended Reply, para 21 (t), (u) and (v).

⁴⁴Appellant Trial Submissions, page 35.

⁴⁵Respondent Submissions, paragraph 172.

Page: 88

to persons who are legitimately making the full investment themselves” (para 246).

[My emphasis].

In Cartaway, a promoter was prosecuted for having actively solicited,

encouraged and advised individuals to subscribe for and purchase securities through

a private placement by pooling their money with other investors so that separate

investments could appear as one combined investment. This was done so that

investors could rely on the “sophisticated purchaser” exemption (now known as the

“accredited investor” exemption) and following the subscription, the main investor

would hold the units on behalf of the other investors. The Alberta Securities

Commission highlighted the need for investors to purchase as principal and not on

behalf of others since the exemption was “designed for investors who have, by virtue

of their net worth, sufficient sophistication to be able to ensure that they obtain

adequate information and, if necessary, appropriate advice before deciding that they

are prepared to accept the risks associated with the investment”.

The Minister argues that the Instruments include a limited category of persons

or entities that are “deemed to purchase as principal” for purposes of the “accredited

investor” exemption, including financial entities registered to carry on the business

of “trading as a trustee or agent on behalf of a fully managed account” or a person

or company licensed “to act a portfolio manager or equivalent designation,

authorised to act as agent for a fully managed account”. The Minister argues that

there are no such exemptions for the OME which means that each investor was

required “to purchase as principal” meaning to purchase for one’s own account and

not for the benefit of other persons.

The Minister argues that the securities legislation provides “a complete

regulatory code” for the closed-system for the distribution of securities and that since

the legislatures have already provided a narrow range of individuals or persons who

“are deemed to act as principal”, it is not the role of the court to take an expansive

interpretation of matters that have already been addressed.

The Minister concludes by indicating that the statutory provisions and

Instruments are clear and that the OME does not allow for any person other that the

investor to purchase units as principal and that the limited exceptions, noted above,

“do not allow guardians, trustee, agents, ‘attorneys of fact’ to purchase as

principal”⁴⁶.

⁴⁶Crown Submissions, paragraph 87.

Page: 89

Analysis

I agree with the Minister’s submissions on this issue. Subscriptions that have

been paid for by third parties should be rejected for the purpose of this analysis.

This is consistent with the notion that the closed-system for the distribution of

securities has evolved over time to protect the integrity of the system, to avoid

fraudulent or unscrupulous behavior and to ensure that securities are acquired by

investors who not only fit within the narrow category of investors targeted by the

capital-raising exemption, but also that subscription funds are advanced from an

investor’s own personal resources, though this could include borrowed money.

The decision of Cartaway supports the notion that investors are expected to

advance their own funds and not rely on third parties to pay for their subscriptions.

In this instance, how can the Court conclude that subscribers who did not pay

for their own units were in fact “acting in a transaction entirely for [their] own

account and not on behalf of any other person” (Little Re, supra) or were

“legitimately making the full investment themselves” (Cartaway, supra)? The

Instruments address some of these concerns, for example, by explicitly prohibiting

the distribution of securities to a person or company that had no pre-existing purpose

(also known as a “syndicate”) and is created solely for the purchase of securities

under an exemption⁴⁷.

In the end, the issue once again relates to the evidentiary burden. The

Appellant cannot hide behind the bald assertion that “all the units have been paid

for”. This does not assist the Court in determining whether these adults have

purchased as principal. If they have not paid for subscriptions themselves, then the

logical inference is that the units were not acquired by them as principal. Third

parties do not routinely advance money on a gratuitous basis. There are usually

strings attached. What were they? The question remains unanswered.

A person may be a “purchaser for valuable consideration” without advancing

money if there is a corresponding “release of a right or the compromise of a claim”,

as was observed in Re Laventure, 1985 CarswellAlta 336 (ABQB), but there would

need to be some evidence of such a compromise or other arrangement.

⁴⁷45-103, “accredited investor” (p) and (q) and 45-106, 2.3(5).

Page: 90

The Court has absolutely no explanation or information as to why third parties

were advancing funds on behalf of other adults (who were not their spouses)

including the so-called named-subscribers. As with the previous issue, the

Appellant’s explanation was wholly inadequate. If there was a quid pro quo or some

other rational explanation, it was not shared with the Court. If funds were advanced

by an arm’s length individual as a loan or if a bank draft was delivered instead of a

personal cheque, it would have been a simple matter to provide evidence of the

arrangement. No such evidence was forthcoming.

The Court cannot simply accept the unsupported theory of law that third

parties can advance subscription funds and that as long as the units are issued to a

named individual, they have been purchased as principal. The issue is not whether

units have been “purchased” but whether they have been “purchased as principal”.

The Court must again draw a negative inference from the Appellant’s failure

to adduce any evidence to contradict the Minister’s assumption that numerous

subscriptions were paid for by third parties.

As with the previous analysis, it is not necessary to determine if the issuance

of these units was voidable or void ab initio. That is a matter that remains to be

determined as between the issuer and the individuals who received the units.

It is sufficient for the purpose of this analysis to conclude that the issuance of

units to individuals whose subscriptions were paid for by third parties, was contrary

to the requirement that “the purchaser purchase the security as principal”. Since it

was contrary to the Instrument, it was illegal and thus unlawful.

As a result of the foregoing, the Court must conclude that all units issued to

minors or to adults, whose subscriptions were paid by third parties (excluding

payments from joint bank accounts) should be disregarded for the purpose of this

analysis.

k) The requirements of Regulation 4900(1)(d.2)

The Appellant argues in the alternative that if the Court concludes that the

Income Funds did not issue units to at least 150 beneficiaries and as a result did not

meet the requirements of Regulation 4801, they are still “qualified investments”

because they meet the definition of a “unit of a trust” described as follows:

Page: 91

4900 (1)

(d.2) a unit of a trust if

(i) the trust would be a mutual fund trust if Part XLVIII were read without

reference to paragraph 4801(a), and

(ii) there has been a lawful distribution in a province to the public of units

of the trust and a prospectus, registration statement or similar document

was not required under the laws of the province to be filed in respect of

the distribution;

The Appellant argues that “a unit of a trust” involves a trust that would be a

“mutual fund trust” if the requirements of Regulation 4801(a) were disregarded. It

is argued that since the requirement for at least 150 investors in Regulation 4801(b)

“is dependant for its vitality on 4801(a) by virtue of a cross-reference to the class of

units described in Regulation 4801(a), then 4801(b) is inoperative, and therefor the

150 unitholders test no longer applies”. The Appellant argues finally that even if the

Income funds have not issued units to at least 150 investors, there was nonetheless

a lawful distribution to a number of investors.

This argument was not raised in the pleadings. It should be dismissed outright

on that basis alone but I will nonetheless make a few observations.

Regulation 4900)1)(d.2) was added by P.C. 2001-1106 for property acquired

after 1983. According to the Technical Notes, it was intended to allow a widely-held

trust to make a lawful distribution in a province of its units to qualify as a mutual

fund trust without filing a prospectus or similar document where such a document

was not required to be filed. This amendment was intended to ensure that the

requirements under the Act for a distribution were no more onerous than those

imposed under provincial securities requirements.

Subparagraph (1)(d.2)(i) of Regulation 4900 refers to a trust that would be a

mutual fund trust if the definition was considered “without reference to paragraph

4801(a)” - but it does not exclude the application of paragraph 4801(b) and hence it

is not possible to simply conclude that paragraph 4801(b) is rendered “inoperative”

because 4801(b) is necessarily linked to 4801(a). Had Parliament intended to

exclude the application of 4801(b), it would have said so explicitly. Since it did not

do so, units would still have to be issued to at least 150 investors.

Page: 92

Secondly, this provision allows a widely-held unit trust that makes a lawful

distribution in a province of its units to qualify as a mutual fund trust for the purpose

of the qualifying investment determination, without filing a prospectus or similar

document where it was not required to be filed. As noted above, the distribution of

securities is regulated at a provincial level and in Alberta and BC an issuer must

either file a prospectus or rely on one of the capital raising exemptions described

above. As a result, it cannot be said that “such a document was not required to be

filed” in Alberta or BC.

Finally, the provision refers to a lawful distribution. The Appellant argues that

there was such a lawful distribution of units to many investors who paid for their

units including the Appellant himself. This argument has already been disposed of

since the Court has concluded that the issuance of units to those investors was

inextricably tied to the OME and the OM and since the Income Funds had not issued

units to at least 160 investors, the Court was unable to conclude that there had been

“a lawful distribution” pursuant to subparagraph 4801(i)A. For the same reason,

there was not a lawful distribution pursuant subparagraph (1)(d.2)(ii) of Regulation

4900.⁴⁸It has been noted that this provision has very little practical application today

since it was introduced as a retroactive relieving measure in 2001 for units of certain

mutual funds sold by private placement between 1993 and 1999.

As a result, the Court must reject this argument in its entirety.

l) Conclusion

In the end, it is difficult for the Court to disagree with the Respondent’s

suggestion that the Appellant has demonstrated a wanton and reckless disregard for

the requirements of the securities legislation, the OME and the OM.

Without going that far, I would at least conclude that the Appellant was

careless, cavalier and possibly indifferent. In particular, he misconstrued,

misunderstood and failed to appreciate the importance of the requirements of the

securities legislation, the OME and the OM and, more importantly, the important

legal steps required to ensure that the Income Fund qualified as a mutual fund trust.

As a result of the foregoing analysis, the Court must conclude that the steps

undertaken by the Appellant to constitute the Income Funds were not legally

48

Qualified Investments and Prohibited Investment Rules Applicable to Self-Directed Registered Plans: Canadian

Tax Foundation: Joelle Kabouchi and Laura White, 2017 Ontario Tax Conference, page 26;

Page: 93

effective. The Income Funds did not qualify as a “mutual fund trust” because they

failed to satisfy the prescribed condition that there be “a lawful distribution …to the

public of units” under the laws of the provinces of Alberta and BC to not fewer than

160 investors as required by the OM. Even if the Court considers for a moment that

“a lawful distribution” should be interpreted to refer to a distribution to “no fewer

than 150 beneficiaries of the trust”, as set out in paragraph (b) of Regulation 4801,

the Income Funds have not met that bright-line test.

Since the Court has concluded that the Income Funds did not meet the

prescribed conditions set out in Regulation 4801, as required by paragraph 132(6)(c),

it follows that they were not a “mutual fund trust” and as a result they were not

qualified investments for RRSP purposes.

The Sham Doctrine

I have already concluded that the Income Funds were not validly constituted,

that the steps undertaken by the Appellant were legally ineffective to establish a

“mutual fund trust” and consequently that they were not a “qualified investment”. In

the event that I have erred in so finding, I will review whether the Income Funds,

including the Acquisition Transactions and Distribution Transactions, were a sham.

Since the existence of a sham and window dressing (to be addressed separately

below) was not assumed in assessing the Appellant or the RRSP Trust, it is

understood that the Minister has the onus of satisfying the Court on a balance of

probabilities that the Income Funds involved a sham or window dressing. This is

consistent with the decisions of Canada v. Anchor Pointe Energy Ltd, 2007 FCA

188, Swirsky v. The Queen, 2013 TCC 73 (para 53.) and Morrison v The Queen,

2018 TCC 220 (para 106).

Position of the Respondent

The Respondent argues that the Appellant knew at all times that the Income

Funds had not been properly constituted as a “mutual fund trust” since he had not

completed a lawful distribution to the public in accordance with the laws of the

provinces and that he made a number of misrepresentations.

The Respondent alleges that the initial Certificate attached to the OM

contained a misrepresentation in that it suggested that all units would be distributed

Page: 94

pursuant to applicable securities legislation, the OME and the OM, when in fact

many units (as described above) were distributed contrary to the terms of those

documents. It is also alleged that the Appellant submitted at least six Reports to the

securities commissions in connection with the Income Funds and that they contained

misrepresentations as to the completion of the distribution and as to the list of unit

holders and the securities exemption relied upon, when in fact the Appellant knew

that the distribution had not been validly completed and that many units had been

issued contrary to the OME and OM, as noted above.

The Respondent alleges further that the Appellant then completed a total of

twelve Trustee’s Certificates attesting to the existence and validity of the Income

Funds as mutual fund trusts. In the preamble to the Certificates, the Appellant

specifically acknowledged that the Legal Opinions would be based in part on the

factual information set out in the Certificates that were attached to and formed the

basis of the Legal Opinions relied upon by CIBC prior to releasing funds for the

completion of the Acquisition Transactions. These Opinions confirmed that the

Income Funds were mutual fund trusts and thus qualified investments and expressly

stated that they had “relied on the facts represented to us by James T. Grenon”.

The Respondent alleges further that the Appellant as trustee of the Income

Funds then submitted T3 Trust Income Tax and Information Returns for the 2004 to

2009 taxation years in connection with the Distribution Transactions, indicating that

all Income Funds were a “mutual fund trust” when in fact he knew that this was

incorrect.

Similarly, it is argued that on the basis of the Appellants ongoing

misrepresentations, CIBC filed T3GR returns that included the RRSP Trust as part

of its specimen plan but did not list it as a taxable plan even though it held non-

qualified investments.

In the end, the Respondent argues that the Appellant was at all times on both

sides of all transactions. As the promoter of the Income Funds, he established the

basic mutual fund structure and controlled the distribution of units to the same 171

investors. As the annuitant of the RRSP Trust (a self-directed RRSP), he directed

and controlled the acquisition of units in the various Income Funds, described above

as the Acquisition Transactions. As the individual who appointed or controlled the

appointment of trustees of the Income Funds, he was directly involved in the

preparation of the Trustee Resolutions by which profits were distributed to the

various unitholders including the RRSP Trust. He essentially controlled all aspects

of the businesses or investments.

Page: 95

I now turn to the position of the Appellant.

The Appellant argues that there are no transactions “involving Mr. Grenon or

any other party which meets the definition of a sham”, that there was no “intention

to deceive the Minister” and that “no part of the [Income Fund] structure or (…)

49

investments (…) was secretive or mis-documented or mis-described”.

The

Appellant argues that “the transaction documents described exactly” what he

“intended to carry out” and that there was “no alternative reality to the

transactions”⁵⁰. The Appellant adds that the RRSP Trust was simply “a self-directed

RRSP that made investments” in the Income Funds that “were created and

documented accurately and completely (…) and there was a total absence of deceit”.

It is argued that the Appellant “intended that the [Income Funds] be created and that

the CIBC RRSP invest in the [Income Funds] and that (…) there was no

misrepresentation as to the legal relationship among the parties.”⁵¹. He argues that

the evidence “established that the unitholders were real beneficiaries (…) who

earned a return on their investment.”⁵²

The Appellant admits that the Income Funds were established for tax purposes

but argues that proper tax planning “depends for its effectiveness on real steps being

taken in respect of actual entities”⁵³. In this respect, the Appellant relies on Lee v

The Queen, 2018 TCC 230 (“Lee”), where Owen J. stated that “[c]reating legal (or

equitable) relationships to give effect to a tax plan is not the perpetration of a sham.”

(para 69)

The Appellant argues that even if the RRSP Trust acquired a high percentage

of the units in the Income Funds, that would not equate to a sham and that the

definition of a “mutual fund trust” does not restrict the “percentage of units that any

one unitholder may own”.⁵⁴

The Appellant relies on a number of decisions including Stubart Investments

Ltd v. The Queen, [1984] 1 SCR 536 (“Stubart”) where the Supreme Court of Canada

reviewed the distinction between the “incomplete transaction test and the sham test”.

In that instance, the Court found that “the appearance created by the documentation”

was “precisely the reality” and that the “obligations created by the documents were

⁴⁹Appellant Submissions, page 18.

⁵⁰Appellant Submissions, page 18.

⁵¹Appellant Submissions, page 51-52.

⁵²Appellant Submissions, page 54.

⁵³Appellant Submissions, page 53.

⁵⁴Appellant Submissions, page 55.

Page: 96

legal obligations (…) fully enforceable at law”. It concluded that there was “a total

absence of the element of deceit, which is the heart and core of a sham” (p. 573).

The Appellant also relies on Cameco Corporation v The Queen, 2018 TCC

195 (“Cameco”) (confirmed on appeal to the Federal Court of Appeal in Canada v.

Cameco Corporation, 2020 FCA 112) where Owen J. found that there was no

evidence that the written terms and conditions of the contracts did not reflect the true

intention of parties and that “the arrangements created by the contracts were not a

façade”. He noted moreover that “a tax motivation does not transform the

arrangements (…) into a sham” (paras 602-605).

The meaning of sham according to the case law

The meaning of a sham was addressed in great detail by Owen J. in Cameco,

supra (confirmed by the Federal Court of Appeal, as noted above) where he cited

the decision of Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R.

518 (“Snook”), in which Diplock L.J. stated (p. 528) that a sham refers to:

“(…) acts done or documents executed by the parties to the “sham” which are

intended by them to give to third parties or to the court the appearance of creating

between the parties legal rights and obligations different from the actual legal rights

and obligations (if any) which the parties intend to create.”

Owen J. noted that this description of sham was adopted by the Supreme Court

of Canada in M.N.R. v. Cameron, [1974] S.C.R. 1062 (p. 1068) (“Cameron”) and

later, in Stubart, supra where Estey J. stated (p. 545) that:

“(…) A sham transaction: This expression comes to us from decisions in the United

Kingdom, and it has been generally taken to mean (but not without ambiguity) a

transaction conducted with an element of deceit so as to create an illusion calculated

to lead the tax collector away from the taxpayer or the true nature of the transaction;

or, a simple deception whereby the taxpayer creates a facade of reality quite

different from the disguised reality (…)”

As further noted by Owen J., in the later decision of Continental Bank Leasing

Corp. v. Canada, [1998] 2 S.C.R. 298 (“Continental Bank”), the Supreme Court of

Canada interpreted Estey J.’s comments in Stubart to mean that the “sham doctrine

will not be applied unless there is an element of deceit in the way a transaction was

either constructed or conducted” (para 20) and that “the determination of whether a

sham exists precedes and is distinct from the correct legal characterization of a

transaction”. If the transaction is a sham, the true nature of the transaction must be

determined from extrinsic evidence (i.e. evidence other than the document(s)

Page: 97

papering the transaction). If the transaction is not a sham, the correct legal

characterization of the transaction can be determined with reference to the

document(s) papering the transaction” (para 21).

As restated by Owen J. in Lee, supra (para 68):

(…) A sham involves an element of deceit—the parties must intend to give to third

parties the appearance of creating between them legal rights and obligations

different from the legal rights and obligations, if any, that the parties actually intend

to create. An allegation of sham is an allegation that the parties to the alleged sham

have been deceitful because they know that the actual legal rights and obligations

created by them, if any, differ from the legal rights and obligations presented to the

outside world.

In the earlier decision of 2530-1284 Québec Inc. v The Queen, 2007 TCC 286

(also known as “Faraggi”), Rip A.C.J. (as he then was) stated that “[f]or a sham to

exist, the taxpayers must have acted in such a way as to deceive the tax authority as

to their real legal relationships” such as where the “taxpayer creates an appearance

that does not conform to the reality of the situation” (para 86). On appeal to the

Federal Court of Appeal (2008 FCA 398), Noel J.A. (as he then was) reiterated that

(para 59):

“(…) the existence of a sham under Canadian law requires an element of deceit

which generally manifests itself by a misrepresentation by the parties of the actual

transaction taking place between them (…)”.

In Antle v. The Queen, 2010 FCA 280 (“Antle”), Noel J.A. (as he then was)

discussed the concept of a sham in obiter and but addressed the level of deceit

required for the “tort of deceit” noting that “the required intent or state of mind is

not equivalent to mens rea and need not go as far as to give rise to what is known at

common law as the tort of deceit” (para 22). However, as noted by Owen J. in

Cameco, four years later the Supreme Court of Canada held in Bruno Appliance and

Furniture, Inc. v. Hryniak, 2014 SCC 8 (“Bruno Appliance”) that the tort of civil

fraud has four elements that must be satisfied (para 21):

From this jurisprudential history, I summarize the following four elements of the

tort of civil fraud: (1) a false representation made by the defendant; (2) some level

of knowledge of the falsehood of the representation on the part of the defendant

(whether through knowledge or recklessness); (3) the false representation caused

the plaintiff to act; and (4) the plaintiff’s actions resulted in a loss.

Page: 98

Owen J. then concluded that the third and fourth elements were not relevant

but that the first and second elements of civil fraud were indistinguishable from the

requirements under the doctrine of sham. He noted that (para 594):

(…) The second element of civil fraud arguably establishes a lower bar than the

doctrine of sham in that the mental element in civil fraud requires only some level

of knowl000edge of the falsehood of the representation whether through knowledge

or recklessness. The reference to recklessness implies that the parties need only be

subjectively aware of the possibility that there is a false representation but proceed

in any event.

[My emphasis]

If the Court concludes that there was a sham, the jurisprudence has established

that it may re-characterize the transaction to reflect the true reality.

In Shell Canada Ltd v. Canada, [1999] 3 S.C.R. 622 (“Shell Canada”),

McLachlin J. opined that the legal relationships between taxpayers must be

respected, unless there is a sham in which case “[r]e-characterization is only possible

if the label attached by the taxpayer to the particular transaction does not properly

reflect its actual legal effect” (para 39).

More recently, as noted by Noel J.A. in 2529-1915 Québec Inc. v. Canada,

2008, FCA 398 (aka “Faraggi”), “when confronted with this situation, courts will

consider the real transaction and disregard the one that was represented as being the

real one” (para. 59). See also Gladwin Realty Corporation v. The Queen, 2019 TCC

62 (“Gladwin”) (para 80).

Analysis and Conclusion

The Court has already concluded that the Income Funds were not a “mutual

fund trust” because they failed to satisfy the prescribed conditions and more

specifically failed to complete “a lawful distribution” in accordance with the

securities legislation, the OME and the OM. The Court has indicated that the Income

Funds likely existed as ordinary trusts but not as a “mutual fund trust”, as defined in

the Act. The issue is whether there was a sham.

The difficulty with this particular analysis, as noted by Estey J. in Stubart (p.

572) is that “there has been an unwitting confusion between the incomplete

transaction test and the sham test”. As noted in a Continental Bank, supra, “the

determination of whether a sham exists (…) is distinct from the correct legal

Page: 99

characterization of a transaction”. This was restated by Owen J. in Cameco, supra,

where he indicated that “a sham does not exist if the parties present the legal rights

and obligations to the outside world in a factually accurate manner (…) but identify

the legal character of the transaction incorrectly” (para. 598).

In this instance, the Appellant has admitted that he sought to establish the

Income Funds because he intended “to broaden his RRSP investment horizon”. He

intended from the beginning that once the Income Funds were established, the RRSP

Trust would acquire units and he would assume an active role in the management of

those funds including the selection of investments or businesses. That was his tax

plan but as noted by Owen J., taking steps to “effect a tax plan is not the perpetration

of a sham” and “a tax motivation does not transform the arrangements (…) into a

sham.” (Lee and Cameco, supra). The fact that the Appellant intended to assume

multiple roles in the Income Fund structure or that “he was on both sides of every

transaction”, as alleged by the Respondent, would also not constitute a sham.

The Court accepts the submissions of the Respondent as to the various

misrepresentations made by the Appellant, including those made to prospective

unitholders in the OM (that the units would be distributed in accordance with the

terms of the OME and OM), those contained in the Reports to the securities

commission, those contained in the Trustee Certificates attached to the Legal

Opinions, those made to the CIBC as plan administrator and finally, those made to

the Minister on an annual basis in the T3 returns that the Income Funds were mutual

fund trusts. But such misrepresentations are not sufficient to establish a sham.

The Appellant has admitted that he planned to establish income trusts as

investment vehicles relying on the OME and OM. The fact that he was not successful

in establishing the Income Funds as a “mutual fund trust” does not lead to the

conclusion that there was a “disguised reality” or “an illusion”. There was no

extraneous evidence to suggest that the Income Funds were something other than

investment vehicles. This was confirmed by several of the fact witnesses who had

invested in the Income Funds and received income distributions over time.

The Court has found that the Appellant was careless (and perhaps even

cavalier) in connection with the implementation of his tax plan and the establishment

of the Income Funds and that he misconstrued or misunderstood the requirements of

the securities legislation, the OME and the OM. However, the Court has stopped

short of finding that the Appellant demonstrated “a reckless and wanton disregard

for the securities legislation” as suggested by the Respondent.

Page: 100

I conclude that the Appellant proceeded unwittingly with the implementation

of his tax plan “as if” the Income Funds qualified as mutual fund trusts when in

reality they did not. But as explained by Owen J, a sham does not exist if a taxpayer

identifies “the legal character of the transaction incorrectly.” (Cameco, para. 598).

The Respondent argues that the Appellant “knew at all times” that the Income

Funds were not a mutual fund trust. To quote Bruno Appliance, supra, the Court

would have to be convinced that the Appellant had “some level of knowledge of the

falsehood” or was “subjectively aware of the possibility that there [was] a false

representation but [decided] to proceed in any event”. In Cameco (para 594), Owen

J. similarly indicated that “sham requires a level of knowledge of the falsehood (...)

whether through knowledge or recklessness”. I find that the word “falsehood” is akin

to “deceit” but I am not convinced that the Appellant had the requisite knowledge

nor am I prepared to equate carelessness with recklessness.

The notion of sham requires that there be “a façade of reality quite different

from the disguised reality” or “a transaction conducted with an element of deceit so

as to create an illusion.”(Stubart, supra). While I may have doubts as to the

Appellant’s characterization of some events or the credibility of his testimony on

other issues, I am not convinced on the balance of probabilities that he “knew at all

times” or was subjectively aware that the Income Funds had not met the

requirements of the Act and that they were not a “mutual fund trust”. In the end, I

find that the evidence falls short of establishing the necessary element of deceit.

Window Dressing

The Appellant acknowledges that one of the issues to be determined by the

Court is whether the Income Funds were ‘window dressing’.⁵⁵

The Respondent argues that ‘window dressing’ is a deception that is not about

the legal validity of a transaction, as is the case with sham, but rather is about the

taxpayer’s intention for entering into the transaction. When addressing the

taxpayer’s intention, the court must make the determination objectively having

regard not only to the taxpayer’s stated intention, but to the objective reality of the

transactions at issue: Ludco Enterprises v. Canada, 2001 SCC 62 (“Ludco”).

More specifically, the Respondent argues that the creation of the Income

Funds and the recruitment of the 171 Investors “was nothing more than window

⁵⁵Appellant Submissions page 2.

Page: 101

dressing undertaken to deceive the Minister into [believing] that there was an

intention to make a lawful distribution to the public of the units of the Income

Funds”. He did so “to gain the tax benefits available to mutual fund trusts that are

qualified investments” and to subsequently hold these investments in the RRSP

Trust.⁵⁶

The Appellant argues that “there is no stand-alone doctrine of window

dressing that can negate the existence of a transaction; rather it is a doctrine under

which the Court may disregard self-serving evidence created by the taxpayer to

support the filing position”. The Appellant states that “window dressing applies

where a taxpayer takes an action, or enters into a transaction, that is extraneous to

the real transaction in order to disguise the taxpayer’s true intentions”.

The Appellant adds that the notion of ‘window dressing’ is an unnecessary

embellishment and that there is no difference between window dressing and sham,

adding that if there is a distinction, it may be that “window dressing specifically

requires a transaction that did, in fact occur, but the doing of it was unnecessary to

achieve what the taxpayer actually wanted to accomplish.”⁵⁷

The Appellant refers to Standard Life Assurance Company of Canada v. The

Queen, 2015 TCC 97 (“Standard Life”), described in more detail below, where the

taxpayer engaged in a number of activities designed to give the appearance that it

was carrying on a real insurance business in Bermuda. The Court found that there

was no business activity and that the taxpayer had no real intention of conducting

such a business. It concluded that the actions of the taxpayer were “window

dressing”.

The Appellant argues that the “exact opposite is true in this case” and that the

“evidence does not suggest that any additional step was taken to obscure the

taxpayer’s true intention” and that the taxpayer was very clear about his intention

“to establish the [Income Funds] as qualified investments with more than 150

unitholders.”⁵⁸The Appellant raises much of the same arguments as with sham

indicating that the Appellant intended to establish mutual fund trusts whose units

would be qualified investments for RRSP purposes. He wanted to do this to broaden

⁵⁶Grenon Appeal, Fresh as Further Amended Reply, paragraphs 61-62 and 73-74 and RRSP Trust Appeal, Fresh as

Further Amended Replies, paragraphs 37-38.

⁵⁷Appellant Reply Submissions, page 48.

⁵⁸Appellant Submissions, page 57-58.

Page: 102

the investment horizons of the CIBC RRSP and maximize returns. The 171 Investors

in each Income Fund “were (…) not window dressing but (…) were real investors”.⁵⁹

The relevant case law

In Ludco, supra, the Supreme Court of Canada concluded on the facts of that

case, that “the purchase of shares was genuine” and that “there was no sham” such

that “the payment of dividends could not be characterized as window dressing” (para

69). Iacobucci J. added that “absent a sham or window dressing or other vitiating

circumstances”, he was “not concerned with the sufficiency of the income expected

or received” (para 69). He did not define the expression ‘window dressing’ but

seemed to equate it with the notion of “vitiating circumstances”.

In Backman, supra, the issue was whether taxpayers who had purchased an

interest in an oil and gas property that ceased production shortly after its acquisition,

were entitled to deduct partnership losses. The Supreme Court of Canada agreed

with the trial judge that “the transaction at issue was not a sham” (para. 32) but that

it was window dressing. The Court noted that (para 32):

“(…) the trial judge also found that the purchase of the one percent interest in an

oil and gas property was “nothing more than window dressing”. We take that as a

finding that there was no real ancillary profit-making purpose behind the

appellant’s involvement in the oil and gas property. Like the Federal Court of

Appeal, we agree with that finding as well. In coming to this conclusion we do not

adopt or employ a quantitative analysis, that is, we do not base our conclusion

solely on the amount of the expected profit, although that is a factor to consider. In

determining whether there is the necessary “view to profit” the courts must look at

all the factors that relate to carrying on business in common with a view to profit.

[My emphasis]

In Singleton v. Canada, 2001 SCC 61 (“Singleton”), the Supreme Court of

Canada considered the “economic realities” jurisprudence, finding that the court

“should ask whether the legal relations created by the taxpayer were bona fide”. It

added that: (para 52):

(…) This, of course, still requires courts to look beyond the legal instruments used

by the taxpayer. It limits such inquiries to those cases where the legal relations were

not created bona fide, for instance where transactions simply amount to window

dressing as in Backman v. Canada, [2001] 1 S.C.R. 367, 2001 SCC 10. Since it is

⁵⁹Appellant Reply Submissions, page 5.

Page: 103

still very much in question whether the legal relations in the case at bar were created

bona fide, this is an important consideration.

In the Tax Court of Canada decision of Standard Life, referenced above, the

issue was whether the taxpayer had carried-on “a business in Bermuda” or only gave

the “illusion of doing so”, as argued by the Minister (para 9). Pizzitelli J. found that

the notion of “sham” and “window dressing” were not necessarily synonymous and

that the latter could be taken to mean simply that “the taxpayer did not carry on

business” (para 80). He continued with a review of the notion of “window dressing”

indicating that:

[158] As the Respondent has argued, the Supreme Court of Canada has

distinguished a “sham” from “window dressing”, which was recognized in Ludco

Enterprises Ltd. v Canada, [2001] 2 SCR 1082, 2001 SCC 62, Backman v Canada,

[2001] 1 SCR 367, 2001 SCC 10 and Spire Freezers Ltd. v Canada, [2001] 1 SCR

391, 2001 SCC 11, as a deception that is not about the legal validity of a transaction,

as in sham, but about the taxpayer’s intention for entering into the transaction. In

determining how the Courts should go about identifying whether the stated

intention or purpose is present or what standard should be applied, Iacobucci J

stated in Ludco at paragraph 54:

In the interpretation of the Act, as in other areas of law, where

purpose or intention behind actions is to be ascertained, courts

should objectively determine the nature of the purpose, guided by

both subjective and objective manifestations of such purpose…

[…]

[160] Based on an objective review of the entire evidence, I cannot find that the

few activities of the Appellant in 2006 and 2007 can suggest a reinsurance business

was being carried on in Bermuda. I agree with the Respondent that these activities

were designed to give the appearance the Appellant was carrying on such business

for profit, when in fact, its only supportable purpose was to obtain a tax benefit.

(…)

[161] (…) I find that its actions as such were mere window dressing designed to

mislead the Minister into believing that it was carrying on a business in Bermuda

for profit, when its true objective was only to obtain a tax benefit.

[My emphasis]

Analysis and conclusion

Page: 104

The Appellant has maintained from the beginning that his intention was

simply to create a number of investment vehicles that would be qualified investments

allegedly in order to broaden his RRSP investment horizon.

On the one hand, I am inclined to agree with the Respondent that when the

evidence is considered objectively, it is apparent that the Income Funds were

designed primarily “to obtain a tax benefit” (Standard Life, para 161) and to disguise

the Appellant’s true intention of actively managing businesses and investments using

funds from his RRSP but without actually withdrawing funds and triggering the

normal tax consequences associated with such a withdrawal.

The preparation of the OM and distribution of units was intended to give the

appearance that the Appellant was engaged in a capital-raising endeavor with a

distribution of units on a widely-held basis. In reality, the Investors in the Income

Funds were the same and the Appellant acquired units himself and several more

using various entities owned or controlled by him. The “minimum” investment

amount of $750 as set out in the OM was actually the maximum amount permitted

for all Investors. None of the Investors (with the exception of Sutherland and

MacLennan), were allowed to acquire units using funds from an exempt plan such

as an RRSP (or at least none were described as such in the Reports).

Having filed the Reports with the securities commissions, the Appellant then

quickly proceeded to implement his tax plan and directed that his self-directed RRSP

acquire a substantial number of units in the Income Funds, thus acquiring in excess

of 99% of all the units (save and except for two Income Funds where he owned 49%

of the units). The amounts transferred from the RRSP Trust to the Income Funds (in

exchange for units) were massively disproportionate to the capital raised from the

Investors. The Appellant controlled the appointment of trustees for each Income

Fund and ensured he had effective control by using entities he owned and controlled

as trustees of the venture trusts or as general partners of the various master limited

partnerships. Though he might have shared some duties and consulted with

Sutherland and MacLennan, he essentially controlled all business activity and

investments, extended sizable loans to himself personally or to entities he owned or

controlled, and oversaw the distribution of profits, the lion’s share of which were

returned to the RRSP Trust.

The Appellant’s admission that he was not interested in passive investments

and that he wanted to be actively involved in his RRSP investments belie his true

intentions. When the evidence is considered in its totality, it seems quite apparent

that the Income Funds were actually intended to create business vehicles that would

Page: 105

allow him to access the funds held in the RRSP Trust (without triggering any actual

withdrawals), operate businesses and return sizable profits to the RRSP, all on a tax-

exempt basis. Given this analysis, it is not surprising that the Respondent has

referred to the Income Funds as the Appellant’s “alter ego”.

However, the question for the Court is whether the activities described above

meet the definition of “window dressing”. As indicated in Singleton, the Court must

look to the underlying “economic realities” and determine whether “the legal

relationships where bona fide”. It must however, limit “the enquiry to those instances

where the legal relations were not created bona fide”.

In Standard Life, Pizzitelli J. made a factual determination that “a reinsurance

business” was not “being carried on in Bermuda” and that the company “was

designed to give appearances that the taxpayer was carrying on such a business for

profit” when it was not. The same cannot be said in this instance.

When the Court considers the “economic realities” of the transactions

described above, including the preparation of the OM, the subscriptions (or

purported subscriptions) and issuance of units to Investors, the various acquisitions

or investments made by the Income Trusts, it is not able to conclude that they were

not bona fide. As argued by the Appellant, the Investors “were real” and they

received distributions over time, as confirmed by several fact witnesses.

In the end, although the case law cited above suggests that “window dressing”

is “a deception that is not about the legal validity of a transaction, as in sham, but

about the taxpayer’s intention for entering into the transaction” (my emphasis), I find

that that analysis, as compelling as it may seem in this instance, is circumscribed by

the “economic realities” of the transaction(s) at issue and is limited to an enquiry as

to whether “the legal relations were bona fide”: Singleton.

Although the Court has concluded that the Income Funds were not qualified

investments for RRSP purposes, and while it certainly finds that the Appellant had

ulterior motives in connection with his RRSP, that is not sufficient to reach a finding

that the Income Funds were “window dressing”.

The Application of Subsection 56(2)

The Minister has reassessed the Appellant on the basis that a portion of the

Distribution Transactions, being the payments made by the Income Funds to the

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RRSP Trust in respect to the 2008 and 2009 taxation years, should be included in

his personal income relying on subsection 56(2) of the Act.

That provision has been considered in numerous decisions, including Fraser

Companies Limited v. The Queen, 81 DTC 5051 (“Fraser”), where the Federal Court

- Trial Division considered the application of an identical predecessor provision.⁶⁰It

relied on the comments of Cattanach J. in Murphy (G.A.) v. The Queen (1980) C.T.C.

386 (F.C.T.D.) (“Murphy”) and opined that (para. 84):

(…) the “object and purpose” of this provision is “to cover cases where the taxpayer

seeks to avoid what would be income in his hands and to have that amount received

by another person when[sic] he wishes to benefit or for his own benefit.”

In the Supreme Court of Canada decision of McClurg v. Minister of National

Revenue (1990) 3 S.C.R. 1020 (“McClurg”), discretionary dividends had been

declared on a class of shares held by the spouses of two directors but not on the class

of shares held by them. The Minister reassessed the directors on the basis that the

dividends should have been declared proportionately to all common shareholders.

The Supreme Court concluded that the declaration of dividends was normally

beyond the scope of subsection 56(2) and Dickson C.J., speaking for the majority

indicated that (para 49):

(…) The purpose of subsection 56(2) is to ensure that payments which otherwise

would have been received by the taxpayer are not diverted to a third party as an

anti-avoidance technique. (…) Consequently, as a general rule, a dividend payment

cannot reasonably be considered a benefit diverted from a taxpayer to a third party

within the contemplation of s. 56(2).

In Outerbridge Estate v. Canada, (1991) 1 C.T.C. 113 (FCA) para 4

(“Outerbridge”)⁶¹, the majority shareholder of an investment company caused the

corporation to issue shares for less than fair market value to his son-in-law, who was

also a shareholder. The Minister reassessed the majority shareholder pursuant to

subsection 56(2) for the difference between the issued purchase price for the shares

and their fair market value. The taxpayer argued that “this provision could not apply

since he did not have an independent right to the shares which were held by the

corporation” (para 10). ⁶²

⁶⁰Subsection 16(1) of the Income Tax Act, RSC 1952, c 148.

⁶¹Aka Winter v. Canada.

⁶²Ibid at paragraph 10.

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On appeal, the Federal Court of Appeal held that the real question was whether

the taxpayer could direct the corporation to issue the shares at a depressed value and

that subsection 56(2) does not require the directing taxpayer to have been initially

entitled to the payment or transfer of property made to the third party. Specifically,

the FCA held that (para 14):

It is generally accepted that the provision of subsection 56(2) is rooted in the

doctrine of "constructive receipt" and was meant to cover principally cases where

a taxpayer seeks to avoid receipt of what in his hands would be income by arranging

to have the amount paid to some other person either for his own benefit (for

example the extinction of a liability) or for the benefit of that other person … There

is no doubt, however, that the wording of the provision does not allow to its being

confined to such clear cases of tax-avoidance…the fact is that the language of the

provision does not require, for its application, that the taxpayer be initially entitled

to the payment or transfer of property made to the third party, only that he would

have been subject to tax had the payment or transfer been made to him.

Marceau, J.A. continued, indicating that:

It seems to me however, that when the doctrine of constructive receipt is not clearly

involved, because the taxpayer had no entitlement to the payment being made or

the property being transferred, it is fair to infer that subsection 56(2) may receive

application only if the benefit conferred is not directly taxable in the hands of the

transferee. Indeed, as I see it, a tax-avoidance provision is subsidiary in nature; it

exists to prevent the avoidance of a tax payable on a particular transaction, not

simply to double the tax normally due nor to give the taxing authorities an

administrative discretion to choose between possible taxpayers.

[Emphasis added]

This final comment made by Marceau J.A., notably that the taxpayer “would

have been subject to tax had the payment or transfer been made to him”, has been

interpreted to mean that there is a fifth implicit condition (in addition to the four

conditions described in Fraser and Murphy or later in Neuman, infra) which

provides that where the doctrine of constructive receipt is not clearly engaged, all

that needs to be demonstrated by the Minister is that the recipient of the benefit was

not subject to tax. As will be seen below, there is some dispute about that conclusion.

In Smith v. Canada (1993) FCJ No. 740 (FCA), 2 C.T.C. 257 (“Smith”), the

issue was the extent to which a taxpayer had to be involved in the attribution of a

benefit to a third party to engage subsection 56(2). The Court concluded that “it need

not be active” and that:

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“(…) It may well be passive or implicit and can be inferred from all the

circumstances, not the least of which being the degree of control which the taxpayer

is entitled to exercise over the firm or corporation conferring the benefit.”

On the issue of the so-called fifth condition referenced above, Mahoney J.A.

noted that the comments made by Marceau J.A. on that issue, were obiter. This was

later repeated in Canada v. Neuman (1997) 1 FC 79 (FCA), where a different panel

of the Federal Court of Appeal confirmed that the comment of Marceau J. A. was

obiter and that there is:

(…) nothing in subsection 56(2), read in the context of the Act as a whole, which

mandates the imposition of a fifth element or pre-condition in a case such as this

which is concerned with the declaration of dividends designed solely to reduce the

tax payable by the respondent.

In the seminal decision of Neuman v. Minister of National Revenue, (1998)

SCJ No. 37 (“Neuman”), the Supreme Court of Canada restated the four conditions

required to engage subsection 56(2), describing them as follows (para 32):

1.

2.

The payment must be to a person other than the reassessed taxpayer;

The allocation must be at the direction or with the concurrence of the

reassessed taxpayer;

3.

4.

The payment must be for the benefit of the reassessed taxpayer or for

the benefit of another person whom the reassessed taxpayer wished to

benefit;

The payment would have been included in the reassessed taxpayer’s

income if it had been received by him or her;

Iacobucci J. found that these four prerequisites provide “an appropriate

analytical framework for the interpretation of ss. 56(2)” before concluding that it

was not intended to apply to dividend payments made by a corporation to its

shareholders, reasoning that “dividend income, by its very nature, cannot satisfy the

fourth precondition absent a sham or other subterfuge” (para 33). On the facts of that

case, the Court held that ss. 56(2) could not be applied to reattribute dividend income

on the basis that a shareholder had not contributed to or participated in the business

of the corporation. Iacobucci J. also reviewed and approved of the conclusion of the

Federal Court of Appeal in Outerbridge, but did not go so far as to confirm the

comments made in obiter by Marceau J.A. on the existence of the so-called fifth

condition recognizing that “the court declined to find that there was a fifth pre-

condition to the application of ss. 56(2).” (para 29). This was noted by Jorré J. in

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Delso Restoration Ltd. v. The Queen, 2011 TCC 435 (para 33) (“Delso

Restoration”).

The Respondent also relies on the decision of Hasiuk v. Minister of National

Revenue, (FCA) (“Hasiuk”), where the taxpayer’s corporation was in the business

of building and selling homes. The taxpayer was reassessed on the basis that he

directed or concurred in the transfer of the proceeds of sale of a house owned by his

corporation to a corporation owned by his sons. On the facts before him, O’Connor

J. found that the four conditions had been satisfied “including the fifth condition

since there was no conclusive proof that the benefit was ‘required’ to be included”

in the income of the corporation belonging to his two sons. The Court held that there

was no evidence of a commercial agreement or that the sons’ company had actually

built the house in question.

Hasiuk was affirmed by the Federal Court of Appeal but Sharlow J.A. noted

that the appeal “raised no legal issue” and that the debate was “entirely a factual

one” (para 5). In particular, the Court did not consider or discuss whether the fifth

condition had been satisfied.

It seems apparent that Hasiuk would have been decided differently had the

taxpayer been able to demonstrate that the sons’ company had a genuine commercial

entitlement to the transferred funds. Indeed, as noted by Jorré J. in Delso

Restoration, supra, commenting on Outerbridge and Smith, these decisions would

have been decided differently had there been “adequate consideration in the context

of a legitimate business relationship” (Para 39). The same can be said for Hasiuk.

In Williams v. Minister of National Revenue, 2004 TCC 838 (“Williams”) the

Tax Court held that subsection 56(2) could not be applied to attribute benefits from

inter-company loan agreements to a taxpayer who operated the group. The Court

relied on Neuman, supra, for the principle that subsection 56(2) “was intended to

cover cases where taxpayers seek to avoid receipt of property which would be

income in their hand by seeking to have the amount transferred to a third party” (para

60) and that “where there is a business contract with that person for added

consideration there is no benefit” (para 61). The Court refused to apply subsection

56(2).

Position of the Appellant

The Appellant acknowledges that “the whole legal structure was put in place

to flow funds from the operating entities” to the Income Funds and then to the RRSP

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Trust but that “Mr. Grenon as an individual” was not “part of this chain”. It is argued

that the units in the Income Funds were acquired by the RRSP Trust using its own

funds and that the payments were simply pro-rata distributions.

The Appellant argues that as the annuitant of the RRSP Trust, he would have

been entitled to withdraw the funds and pay tax accordingly at some future point in

time but that this does not suggest that he was otherwise entitled to the income from

investments held therein. Similarly, it is argued that even if the Appellant, as the

annuitant of a self-directed RRSP, was able to select investments and give directions

to the CIBC as the plan administrator, that does not alter the fundamental notion that

they were two separate legal entities.

The Appellant adds that by virtue of section. 75(3) of the Act, he would not

be subject to tax on the income or gains of the RRSP Trust. Subsection 75(2) deals

with a revocable or reversionary trusts and seeks to attribute all income or gains to

the settlor of those trusts but subsection 75(3) specifically excludes payments made

to a RRSP.

Position of the Respondent

The Respondent contends that all four conditions (as well as the fifth

condition) listed in the Neuman decision have been met, arguing that the first

condition is satisfied because payments were made by the Income Funds to the

RRSP Trust, being “an entity distinct from the Appellant”.⁶³

It is argued that the second condition is met because the Appellant “was the

controlling trustee” of each of the Income Funds⁶⁴and took an active role in the

Distribution Transactions. To the extent that “he was not actively involved in each

and every decision to distribute funds” he implicitly agreed to the payments, relying

on Smith, supra (para 17).

It is argued that the third condition is also satisfied because the Appellant

beneficially owned all the property held by the RRSP Trust. He was its sole annuitant

and all payments made by the Income Funds were intended for the RRSP Trust,

being the “person whom the reassessed taxpayer wished to benefit.”⁶⁵

⁶³Crown Submissions, page 85.

⁶⁴Crown Submissions, page 85.

⁶⁵Crown Submissions, page 85.

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The Respondent maintains that the fourth condition was also met in that “had

the distributions been made directly from the Income Funds” to the Appellant, “they

would have been included in his income pursuant to sections 3 and 9 of the Act”.

The Minister adds that the Appellant “owned one unit of each of the” Income Funds

directly, such that any amounts transferred to him directly would have been income

from his investments in the [Income Funds].⁶⁶

Finally, the Respondent argues that the fifth condition was also met in that

either the Appellant had “an entitlement to the amount transferred” to the Income

Funds or in the alternative, the benefit conferred was “not directly taxable in the

hands of the transferee”⁶⁷. The Minister relies on Outerbridge and Hasiuk, supra.

The Respondent also relies on the doctrines of sham and window dressing.

Analysis and conclusion

To begin with, I note that subsection 75(2) raised by the Appellant deals with

revocable and reversionary trusts. It seeks to reattribute all income back to the settlor

of such trusts while clarifying in paragraph 75(3)(a) that this does not apply to

income or gains that have accrued in an RRSP. I agree with the Respondent that this

provision is not relevant to the application of subsection 56(2) in this context.

It is apparent that that subsection 56(2) is an anti-avoidance provision that is

rooted in the doctrine of constructive receipt. It is intended for situations where a

taxpayer seeks to avoid what would be income in his or her hands by having the

amount received by a third party whom he or she wished to benefit (Fraser and

Outerbridge, supra). A long line of decisions have established that all four

conditions, as restated in Neuman, must be satisfied to effectively engage subsection

56(2).

In connection with the first condition, it is not disputed that the Appellant and

the RRSP Trust are distinct legal entities and that payments were made to someone

“other than the reassessed taxpayer”, i.e. to the RRSP Trust. However, the

application of subsection 56(2) is not without difficulty because we are dealing with

a legislative scheme that seeks to ensure that all income earned within the RRSP

accrues on a tax-exempt basis. That is the object of the legislation.

⁶⁶Crown Submissions, page 85.

⁶⁷Crown Submissions, page 86.

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With respect to the second condition, I have already concluded that the

Appellant played an active role in the management of the Income Funds, that he sat

at the apex of the chain of command and that he directed and concurred in the

distribution of profits to unitholders including the RRSP Trust. Even if he was not

at all times the actual trustee of an Income Fund, I find that he would nonetheless

determine who would act in that capacity. However, the difficulty once again for the

application of subsection 56(2) is that the units of the Income Fund were acquired

using funds from the RRSP Trust and thus it had a legal entitlement to the pro-rata

distributions. Despite the active role played by the Appellant, I am not convinced

that the “allocation” of the income was made at his “direction” or with his

“concurrence” within the contemplation of subsection 56(2).

The application of the third condition is also problematic. On the one hand, it

can be said that the payments were for the benefit of the Appellant “or for the benefit

of another person”, being the RRSP Trust, whom he “wished to benefit” and that,

were it not for the existence of the RRSP Trust, the payments “would have been

included in his income” as the annuitant, had it “been received by him”. However

the difficulty once again for the application of subsection 56(2) in this context is the

fundamental feature of the RRSP regime that all forms of income accrue on a tax-

exempt basis for the benefit of the annuitant who is entitled to withdraw funds at a

later date and is subject to taxation at that time.

In order to satisfy the fourth condition, the Court would have to be satisfied

that income payments would have been included in the Appellant’s income, had it

been received by him. This is the notion of constructive receipt. As noted above, the

Supreme Court of Canada has clarified that the application of subsection 56(2) does

not extend to dividend income that, “by its very nature, cannot satisfy the fourth

condition, absent a sham or subterfuge” (McClurg and Neuman, supra).

In this instance, the Court must similarly conclude that subsection 56(2)

cannot extend to income generated by investments held within an RRSP because it

is payable to the RRSP and not to the annuitant. The notion of constructive receipt

does not arise because an annuitant is not entitled to the income until such time as

an actual withdrawal is effected. Moreover, the fact that the Appellant held units of

the Income Funds in his personal capacity and received pro-rata distributions

accordingly, would not extend the application subsection 56(2) to all income

payments made by the Income Funds to the RRSP Trust.

The Court has already concluded in this instance that there was no sham or

window dressing. If the Supreme Court of Canada was able to conclude as it did in

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Neuman, supra, that “absent a sham or subterfuge”, dividend income should not be

captured by subsection 56(2), I would similarly be loathe to extend the application

of that provision to income generated by investments held within an RRSP.

Though I need not reach a conclusion on the matter, I would opine that the

RRSP statutory regime is a complete code for the taxation of all benefits derived

therefrom. In particular, as will be seen below, income generated by non-qualified

investments is specifically addressed by subsection 146(10.1).

Subject to any further considerations in the context of GAAR, I would allow

the appeal in connection with the reassessments made pursuant to subsection 56(2).

The Excess Contributions

The Minister has assessed the Appellant on the basis that the amounts paid by

the Income Funds to the RRSP, described above as the Distribution Transactions

made in respect of the 2004 to 2011 taxation years, were over-contributions to his

RRSP. In order to provide an analytical framework for this issue, it is necessary to

review some of the more relevant concepts of the RRSP regime.

Subsection 146(5) of the Act provides that contributions to an RRSP are

deductible from a taxpayer’s income up to certain dollar limits calculated as 18 per

cent of the previous year’s “earned income” subject also to an allowable yearly

maximum known as the “RRSP dollar limit”, both defined terms: 146(1). If a

taxpayer participates in a registered pension plan, the deduction limit is reduced

accordingly. If a taxpayer does not contribute to an RRSP in any given year or does

not contribute the maximum permissible amount, those amounts accumulate from

one calendar year to another and may be deducted in later years. Subsection 146(1)

provides a detailed definition of “RRSP deduction limit” and “unused RRSP

deduction room” but it is not necessary for the purposes hereof to review those

concepts in any further detail.

If a taxpayer makes over-contributions to an RRSP, also known as “excess

contributions”, subsection 204.1(2.1) of Part X.1 of the Act provides for a tax of 1%

calculated monthly on the “cumulative excess amount”, as further defined in

subsection 204.2(1.1), until such time as the excess amount is withdrawn. A $2,000

cumulative over-contribution grace amount or “cushion” is excluded from this

calculation: 204.2(1.1)D. See Roy v. The Queen, 2019 TCC 50. All withdrawals from

an RRSP are taxable pursuant to paragraph 56(1)(h) and subsection 146(8) (Andaluz

v. the Queen, 2015 TCC 165, para. 10) and this includes the withdrawal of un-

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deducted over-contributions except that the taxpayer may be entitled to an offsetting

deduction if the excess contribution is withdrawn within a prescribed period, as

provided for in subsection 146(8.2). See Vale v. The Queen, 2004 TCC 107 and

Pelletier v. the Queen, 2006 TCC 237. Until such time as the excess contributions

are withdrawn, the 1 % tax continues to accrue.

Subsection 204.3(1) provides that a taxpayer who has made excess

contributions must, within 90 days from the end of each calendar year, file a return

in prescribed form estimating the amount of tax payable under Part X.1 “in respect

of each month in the year” and pay the tax to the Receiver General. For individuals,

the prescribed form is the T1-OVP: Hall v. The Queen, 2016 TCC 221 (“Hall”). It

is not disputed in this instance that the form was not filed by the Appellant.

I will add that subsection 204.1(4) is a relieving provision that allows a

taxpayer to seek a waiver of the tax (if assessed) if it is established “to the satisfaction

of the Minister” that the “excess amount or cumulative excess amount…arose as a

consequence of reasonable error” and “reasonable steps” were taken to eliminate the

excess. Subsection 220(3.1) provides for relief against interest and penalties,

including penalties payable for failing to file a T1-OVP. Both of these provisions

provide the Minister with a form of “discretionary relief”: Connolly v. Canada

(National Revenue), 2019 FCA 161 (paras.22-24). It is not disputed in this instance

that the Appellant did not seek relief under either provision.

The Respondent argues that the steps taken to constitute the Income Funds

were not legally effective such that they were not qualified investments for RRSP

purposes or alternatively, that they were a sham or window dressing and that the

Minister was entitled to re-characterize the Distribution Transactions as excess

contributions to the RRSP. The Minister also argues that the Income Fund structure

was in fact an attempt to avoid Part X.1 tax on the excess contributions, relying on

GAAR (that will be addressed separately).

Position of the Appellant

The Appellant argues that he made annual contributions to the RRSP Trust,

that he claimed a corresponding deduction and that he was assessed accordingly for

each of the subject taxation years. He claims that these amounts were within his

RRSP deduction limit and that at no time was there a “cumulative excess amount”

as defined by subsection 204.2(1.1).

Page: 115

Consistent with his argument that the Income Funds were qualified

investments, the Appellant argues that the amounts alleged to have been excess

contributions to the RRSP Trust, were not the property of the Appellant. They were

income generated by investments held by the Income Funds that remained in the

RRSP Trust, administered by CIBC Trust, as trustee. The Appellant maintains that

he never re-contributed those amounts to the RRSP Trust.⁶⁸

The Appellant also argues that he filed a personal income tax return and was

assessed accordingly. He maintains that there is no requirement that he file a separate

return known as a T1-OVP for over-contributions. To the extent that this Court has

concluded otherwise in Hall, supra (an appeal heard under the Informal Procedure),

the Appellant urges the Court to disregard the decision.

The Appellant also argues that the amount of $136,654,427 assessed for the

2005 taxation year (in connection with the 2003-4 Income Fund) pertained to a

reorganization of certain of its investments (…) involving the Foremost Ventures

Trust and that this income “was distributed by the TOM 2003-4 Income Fund to the

RRSP Trust substantially by a distribution in kind which did not increase the fair

market value of the RRSP Trust”.⁶⁹The Appellant also argues that the assessment

of that amount fails to account for a loss of $129,876,648 suffered by the RRSP Trust

on the disposal of the units in 2008.

Analysis and Conclusion

It is apparent that the actual contributions made to the RRSP Trust during the

subject taxation years are not really in issue. It is not seriously disputed that the

Appellant made contributions within the RRSP deduction limits, that these amounts

were deducted from income and that he was assessed accordingly.

The issue to be addressed is whether the Distribution Transactions can be

properly characterized as excess contributions or as a “cumulative excess amount”.

The Court notes at the outset that there is some confusion as to the quantum

of the assessed amount for 2005 since the RRSP Trust subscribed for 3,821,850 units

of the 2003-4 Income Fund at $40 per unit for a total subscription amount of

$152,874,000, as set out in the table above entitled “Acquisition Transactions”. The

Appellant argues that this was in fact an exchange or “transfer-in kind”, also known

⁶⁸Notice of Appeal, paragraph 31.

⁶⁹Notice of Appeal, paragraph 29.

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as a ‘swap’ that did not have the effect of increasing the value of the RRSP Trust. In

other words, the Appellant argues that the RRSP Trust subscribed for units of the

2003-4 Income Fund valued at $152,874,000 and that the subscription amount was

satisfied by the transfer of the FMO units. Despite this, the Minister has indicated

that the amount allegedly contributed to the RRSP as an excess contribution in 2005

was $136,654,427 as set out in the table above entitled “Distribution Transactions”.

This discrepancy was not explained but the Court finds that if the Appellant was to

be assessed on the basis that there were excess contributions, he would be entitled

to the benefit of the lesser amount.

In any event, since the Minister has agreed that FMO was a qualified

investment as long as the units were held directly in the RRSP Trust and since the

Minister has not suggested that the exchange or swap, as described above, was

contrary to the provisions of the Act, I find there is good reason to agree with the

Appellant that the alleged contribution of $136,654,427 cannot be characterized as

an excess contribution.

By the same token, the Appellant cannot claim a credit of $129,876,648 as a

result of the loss allegedly suffered by the RRSP Trust on the disposal of the 2003-

4 Income Fund units in 2008. Without reaching a conclusion as to whether there was

a loss or not, it is apparent that any loss suffered by the RRSP Trust should be

entirely disregarded. All losses suffered by an RRSP (for example, investments that

are purchased within the RRSP and later disposed of for less than book value) would

simply reduce the amount of capital that could be withdrawn or transferred to a

Registered Retirement Income Fund at a later date. All such losses are otherwise

inconsequential for income tax purposes.

It is also apparent that the Respondent is attempting to re-characterize the

Distribution Transactions, being the income generated by the Income Funds as an

excess contribution or “cumulative excess amount” relying on sham or window

dressing (as well as GAAR that will be reviewed separately). The Supreme Court of

Canada has indicated (as cited above), that legal relationships between taxpayers

must be respected, unless there is a sham in which case “[r]e-characterization is only

possible if the label attached by the taxpayer to the particular transaction does not

properly reflect its actual legal effect” (Shell Canada, supra, para 39).

The Court has already concluded that the Income Funds were not qualified

investments but that there was no sham or window dressing. As a result the Court

agrees with the Appellant that the amounts described as the Distribution

Transactions, cannot casually be re-characterized as excess contributions. As

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indicated in the previous section dealing with subsection 56(2), the Act sets out a

complete code or regime for the taxation of benefits derived from an RRSP including

income or gains generated by non-qualified investments.

In the end, having found that there was no sham or window dressing, I find

that the Minister was not entitled to assess the Distributions Transaction as excess

contributions pursuant to subsection 204.1(2.1). As indicated in the previous section

dealing with subsection 56(2), that would be subject to a GAAR analysis.

Statute-Barred Years

a) The Grenon Appeal

Part I Reassessments

Having concluded that the Minister was not entitled to assess the Appellant

pursuant to subsection 56(2), I will nonetheless address the statute-barred issue.

The Part I Reassessments relate to the 2008 and 2009 taxation years and it is

not disputed that the Appellant filed T1 income tax returns for those years and that

initial notices of assessment were issued by the Minister as follows:

Taxation Year

2004

Notice of Assessment Date

March 29, 2006

2005

2006

2007

2008

May 3, 2006

April 20, 2007

May 27, 2008

July 15, 2009

The Appellant signed a waiver (Form T2029) on June 15, 2012 in connection

with the 2008 taxation year and on February 28, 2013, the Minister issued the Part I

Reassessments with respect to the 2008 and 2009 taxation years, relying on

subsection 56(2), as reviewed above. The 2009 taxation year involved a nil

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assessment and the income inclusion for that year had the effect of reducing a non-

capital loss carried back to 2006 by the same amount.

The Appellant has not suggested that this assessment was statue-barred.

Part X.1 Reassessments

Having concluded that the Minister was not entitled to assess the Appellant

on the basis that the Distribution Transactions were excess contributions, I will

nonetheless address the statute-barred issue.

As summarized above, the Part X.1 Reassessments relate the 2004 to 2011

taxation years and it is not disputed that the Appellant did not file an Individual Tax

Return for RRSP, PRPP and SPP Excess contributions also known as a “T1-OVP”

for those years. The Minister issued T1-OVP assessments on March 1, 2013 that

were confirmed on July 24, 2014 but the late filing penalties were deleted.

The issue here is whether the assessments (or reassessments) made pursuant

subsection 204.3(2) for the 2004 to 2007 taxation years were statute-barred. It is not

disputed that the waiver referenced above did not refer to Part X.1 of the Act.

The Appellant alleges that the normal reassessment period for the 2004 to

2007 taxation years expired on May 8, 2011 for the purposes of Part I and that this

similarly applies to any assessment pursuant to Part X.1. The Appellant argues

further that there has not been a misrepresentation pursuant to subsection 152(4) that

would allow the Minister to reassess beyond the normal reassessment period.

The Respondent maintains that subsection 204.1(2.1) imposes a monthly tax

of 1 % per month on the “cumulative excess amount” of any contribution to an RRSP

and subsection 204.3(1) provides that a taxpayer shall file a prescribed return and

pay the tax within “90 days after the end of each year”. It is argued that subsection

204.3(2) authorizes the Minister to issue notices of assessment:

204.3(2) Subsections 150(2) and 150(3), sections 152 and 158, subsections 161(1)

and 161(11), sections 162 to 167 and Division J of Part I are applicable to this Part

with such modifications as the circumstances require.

As a result, the Respondent argues that certain provisions of Part I are

incorporated by reference into Part X.1 with such modifications as are necessary

under the circumstances. This includes paragraph 152(3.1)(b) which provides that

the definition of “normal reassessment period” shall be “the period that ends three

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years after the earlier of the sending of a notice of original assessment under this Part

(…) or the sending of an original notification that no tax is payable by the taxpayer

for the year”.

The Respondent argues that there has long been an “interplay between Part 1

of the Act and other Parts of the Act as it relates to the filing of returns and the power

of the Minister to issue assessment or reassessments”.⁷⁰In particular, the Respondent

relies on the decision of Hall v. The Queen, 2016 TCC 221 (“Hall”) where the

taxpayer had made excess contributions to an RRSP and had similarly claimed that

the assessment pursuant to subsection 204.3(1) was statute-barred because the

Minister had already issued original assessments under Part 1 and had not adduced

any evidence to suggest that there had been any kind of a misrepresentation.

In dismissing the appeal, Justice d’Auray explained the issue as follows:

[16] (…) Mr. Hall was required to file a Return under subsection 204.3(1), which

is in Part X.1 of the Act. Part X.1 applies when a taxpayer has over contributed to

his or her RRSP.

[17]

Subsection 204.3(1) of the Act, requires a separate return, which is

different from the returns filed under Part I. Additionally, the tax payable under

Part X.1 is a separate tax from the tax payable under Part I. Subsection 204.3(1)

requires a taxpayer to pay the tax payable under this Part (X.1), within 90 days of

year end.

[18]

Since Part X.1 outlines a separate tax, requiring a separate return from

Part I, a return filed under Part I is not applicable to the timing requirements set out

in subsection 204.3(1). This approach applies in the same manner to several other

parts of the Act.

[19]

This Court in Gretillat v Canada, [1998] TCJ No. 143, 98 DTC 1483,

dealt with a similar issue to this appeal, involving Part X.4 of the Act, which applies

to excess contributions to an RESP. The Court held that:

[14] The tax payable under Part X.4 of the Act by a subscriber to an

RESP on an excess amount as defined in Part X.4 is a separate tax

from the tax payable under Part I of the Act.

[20]

Further, the Court in Gretillat, found that the assessment period applicable

to Part X.4 did not begin with the filing of a return under Part I, but rather started

when the taxpayer was assessed by the Minister for tax payable under Part X.4.

⁷⁰Written Submissions of the Crown, volume 3 of 3, paragraph 43.

Page: 120

[21]

The respondent cited Cable Mines & Oils Ltd v Minister of National

Revenue, 61 DTC 641, in support of their position that a return filed under Part I

would not begin the assessment period for the tax payable under Part X.1. The

Court in Cable Mines & Oils Ltd held that:

[20] ...an assessment issued under the provisions of section 123(10)

is an original assessment in respect of withholding tax and is a quite

different assessment from any original assessment issued under

section 46 in respect of a taxpayer’s own income....

(…)

[23]

Subsection 204.3(2) states that section 152 of the Act applies to Part X.1

of the Act, “with such modifications as the circumstances require”. As a result of

subsection 204.3(2), the limitation periods in subsection 152(3.1) apply to Part X.1,

with modification. The three year assessment period begins on the sending of a

notice of an original assessment.

[My emphasis]

The position taken in Hall, supra, notably the obligation to file a T1-OVP

Return was confirmed by the Federal Court of Appeal in Connolly v. Canada

(National Revenue), 2019 FCA 161 (para 20-21).

In the end, the Respondent argues “that several Parts of the Act each outline

a separate tax, require a separate return and create separate timing requirements,

unaffected by whether a Part I reassessment is statue-barred.”⁷¹

The Respondent also argues that the Minister was authorized to issue the

Notices of Reassessment (deleting the late filing penalties) of August 13, 2014 on

the basis of subsection 165(3), also incorporated by reference by subsection

204.3(2), since the Appellant had filed Notices of Objection on May 28, 2013 to the

initial assessments and the Minister was required to respond.

Analysis and conclusion

I agree with the submissions of the Respondent, as summarized above, and

with the conclusions reached in Hall and Connolly, supra. Subsection 204.3.1(a)

requires the filing of a “prescribed form…without notice or demand” that is distinct

from the T1 income tax return required to be filed pursuant to Part I.

⁷¹Written Submissions of the Crown, volume 3 of 3, paragraph 46.

Page: 121

Secondly, since the Appellant had not filed the T1-OVP return, the Minister

had never issued “a notice of original assessment” or “an original notification that

no tax is payable” as set out in paragraph 152(3.1)(b), incorporated by reference into

Part X1.1, by subsection 204.3(2).

As a result, the Court concludes that the reassessments made pursuant to Part

X.I in connection with the 2004 to 2007 taxation years were not statute-barred.

b) The RRSP Appeal

As summarized above, the Part 1 and Part XI.I Assessments were issued on

March 6, 2013, in connection with the 2004 to 2009 taxation years, both of which

were confirmed on July 24, 2014.

It is not disputed that the RRSP Trust was included in Specimen Plan RSP

322-010 (the “Specimen Plan”), that CIBC Trust filed T3GR forms on a timely basis,

that taxes were paid to the Receiver General and finally, that Trust Notices of

Assessment were issued by the Minister as follows:

Tax Year

2004

Trust Notice Assessment Date

February 15, 2006

May 17, 2006

Tax Assessed

$1,014,654

$55,864

2005

2006

June 27, 2007

$31,739

2007

July 16, 2008

$21,354

2008

July 15, 2009

$9,151

2009

June 9, 2010

$8,247

It is also not disputed that the RRSP Trust was not listed as a taxable plan

because CIBC Trust was of the view that it was not subject to Part I or Part XI.1 tax.

The Appellants allege that the 2004 to 2008 taxation years are statute-barred.

Page: 122

The Part I Assessments were issued pursuant to subsection 146(10.1) or in the

alternative, on the basis of sham, window dressing or GAAR. Subsection 146(10.1)

provides that where a trust that is governed by a RRSP holds property that is a non-

qualified investment, “a tax is payable (…) on the amount that its taxable income for

the year would be if it had no income or losses from sources other than non-qualified

investments and no capital gains or losses other than from dispositions of non-

qualified investments”. In this instance, the Minister has assessed the RRSP Trust

for the income paid by the Income Funds to the RRSP Trust, described herein as the

Distribution Transactions.

The Part XI.1 Assessments were issued pursuant to subsection 207.1(1) or in

the alternative, on the basis of sham, window dressing or GAAR. Subsection

207.1(1) provides that where, at the end of any month, a trust governed by a RRSP

“holds property that is” not “ a qualified investment (…) the trust shall, in respect of

that month, pay a tax equal to 1 % of the fair market value of the property at the time

it was acquired by the trust of all such property held by it at the end of the month.”

In this instance, the RRSP Trust was assessed for the fair market value of the units

of the Income Fund acquired by the RRSP Trust, also described herein as the

Acquisition transactions.

Paragraph 207.1(1)(a) excludes from the calculation of the 1 % tax, the fair

market value of non-qualified investments which have already been included in the

income of the annuitant by virtue of subsection 146(10). In this instance, the

Appellant was not assessed pursuant to the latter provision, such that the exclusion

does not apply.

Subsection 207.2(1) provides that “a taxpayer to whom this Part applies shall

(…) file with the Minister a return for the year under this Part in prescribed form and

containing the prescribed information, without notice or demand therefor” and

“estimate in the return the amount of tax, if any, payable by it under this Part in

respect of each month in the year” and pay the amount to the Received General.

Subsection 207.2(2) addresses the liability of the plan administrator or trustee

and provides that where “the trustee of a trust that is liable to pay tax under this Part

does not remit (…) the amount of the tax within the time specified in subsection

207.2(1), the trustee is personally liable to pay on behalf of the trust the full amount

of the tax” and is entitled to recover the amount so paid from the trust.

Position of the Appellants

Page: 123

The Appellants argue that the “Trust Notices of Assessment” issued by the

Minister in response to the filing of the T3GR forms by CIBC Trust, as noted above,

were all “original assessments” for purposes of the normal reassessment period.

The Appellants have advanced several arguments to support this position.

i) Streamlined Reporting Process for RRSP Income

It is argued that under the Act and the Regulations, the T3GR is a prescribed

form that is intended to meet the filing requirements pursuant to paragraph 150(1)(c),

subsection 207.2(1) of the Act, and section 204 of the Regulations.

Paragraph 150(1)(c) dealing with “trusts and estates” provides as follows:

150 (1) Subject to subsection (1.1), a return of income that is in prescribed form

and that contains prescribed information shall be filed with the Minister, without

notice or demand for the return, for each taxation year of a taxpayer,

(…)

(c) in the case of an estate or trust, within 90 days from the end of the year;

Subsections 204(1) and (2) of the Regulations⁷²provide as follows:

204 (1) Every person having the control of, or receiving income, gains or profits

in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity, shall

make a return in prescribed form in respect thereof.

(2) The return required under this section shall be filed within 90 days from the

end of the taxation year and shall be in respect of the taxation year.

(…)

CIBC argues that the Minister has made a policy choice and that since it

administers “hundreds of thousands, or even millions, of RRSPs (…) it would be

unduly onerous” for both trustees and the Minister to consider individual returns and

that to avoid this, the Minister “has adopted a practical scheme to facilitate tax

reporting” that involves a “straightforward ‘group’ reporting procedure.” It allows

trustees that administer a specimen plan “to use the same methodology and

information to make any determinations about any tax payable” and having

“mandated such a system”, it is argued that it would be manifestly unfair for CRA

⁷²Income Tax Regulations, C.R.C., c. 945.

Page: 124

to be permitted “to deny taxpayers the rights that would have been preserved (…) if

CRA had adopted a different system”.⁷³

ii) Guidance from the Minister regarding RRSP Tax Filings

It is argued that the Minister “has published guidance regarding the filing of

the T3GR form indicating that it was meant for RRSPs to report nil income under

Parts I and XI.I” and that this “process promotes efficiency in the manner in which

RRSPs report” any tax liability pursuant to Part I and Part XI.⁷⁴

CIBC refers to Information Circular 78-14R3 dated April 1, 2001 and

Information Circular 78-14R4 dated July 1, 2006 (the “Circulars”) and argues that

the earlier versions referred to the T3G form (later replaced by the T3GR form) and

instructed trust companies to file a single return for RRSPs under a specific specimen

that would inform CRA “that a group of trusts ha[s] no tax liability” and more

specifically, that it could be used to “inform CRA that the group of trusts has no tax

liability, or has a tax liability of less than $2.00.” In the prior versions of the Circular,

if the RRSP was liable to tax in excess of $2.00, the T3G form could not be used

alone and a form T3IND was also required. If the T3G form was not filed within 90

days of the year-end, CRA could demand that a T3IND be filed “for each RRSP,

RRIF, or RESP in the group that would have been included in the T3GR form.” In a

later version of the Circulars (“CRA Filing Circular Version 4”), it was stated that

the T3GR form was the prescribed return for RRSPs under for paragraph 150(1)(c),

subsection 207.1(1) and 207.2(1) of the Act and section 204 of the Regulations.

CIBC argues that the T3GR did “not change in any material way from 2004

to 2009” and that a “T3 form is required only where the trust has Part I income to

report”.

iii) Purpose of Limitation Periods in Tax Matters

The Appellants argue that the Act sets out a three-step framework for

limitation periods that involves i) the filing of a return ii) the requirement to assess

that return with all due dispatch and finally iii) a reassessment by the Minister

⁷³Written Submissions of the Appellant, CIBC Trust Corporation, page 29-31.

⁷⁴Written Submissions of the Appellant, CIBC Trust Corporation, page 31-34.

Page: 125

provided she does so within the normal reassessment period of three years as set out

in subsections 152(3.1)(b) and (4).

The Appellants argue that the Supreme Court of Canada has emphasized that

“the purpose of limitation periods is generally to preclude claims where evidence

has grown stale, to promote certainty (…) and ensure that individuals are secure in

their reasonable expectations” that they will not “be held to account for ancient

obligations”, relying on Markevich v. Canada, 2003 SCC 9, para. 19 and Produits

Forestiers St-Armand Inc., The Queen, 2003 TCC 696, para 59.

CIBC argues that the Respondent’s suggestion that only T3 returns are

“original assessments” for purposes of the limitation period is contrary to the

jurisprudence noted above and “would give rise to a continuous and unpredictable

assessment period for millions of RRSPs in Canada that report nil income.”⁷⁵

iv) The T3GR Forms Included the RRSP Trust

CIBC argues that the uncontradicted evidence at the hearing was that a T3GR

form that included the RRSP Trust as part of the Specimen Plan, had been filed for

each subject taxation years because it did not hold non-qualified investments and

was not a taxable RRSP. It is argued again that this form was intended to confirm

that a RRSP has “no liability for Part I and Part XI.1 tax” and that “a taxpayer is

entitled under the Act to file a return where none is required to obtain an assessment

and ‘start the clock’ under subsection 152(3.1).”⁷⁶

v) Acceptance of T3GR Forms by the Minister

CIBC argues that section 152 of the Act requires that the Minister assess

returns with all due dispatch and that she did so in this instance by “issuing Original

Assessments”, as noted above. It is argued that these assessments were mailed to

CIBC Trust offices in Toronto and not to an individual plan holder. It is argued

further that it is incorrect for the Respondent to assert that the T3GR only assessed

“taxable accounts” and that it was intended to assess all RRSPs included in the

specimen plan, including the RRSP Trust, “thus triggering the start of the three year

reassessment period under subsection 152(3.1)”, relying on Provincial Paper Ltd. v.

MNR, [1954] C.T.C. 367, paras 11-12 (Exch. Ct. Can).⁷⁷

⁷⁵Written Submissions of Appellant, CIBC Trust Corporation, page 35-35.

⁷⁶CIBC Submissions, page 35-36.

⁷⁷CIBC, page 36.

Page: 126

vi) The CRA had full notice of the RRSPs in the Specimen Plan

As described by the fact witnesses, “CIBC submitted with each T3GR a list

of all taxable accounts, including the annuitant’s name, SIN, amount of tax payable,

and the reason for the tax” and “for RRSPS that were not taxable, CIBC World

Markets maintained information that would be available to CRA upon request.”

It is argued that the “T3GR specify that information about non-taxable RRSPs

must be kept (…) and presented to the Minister upon request”. Since the Minister

had knowledge of the RRSPs under the Specimen Plan, it was able to “audit the

trustee’s books and records” but it did not do so in connection with the RRSP Trust.⁷⁸

vii) The Part 1 Assessment and Part XI.I Reassessments are Statue-

Barred

CIBC reiterates that the “Original Assessments” confirm that the RRSP Trust

was not liable for Part I and Part XI.1 tax for each of the 2004 to 2008 taxation years

and that the normal reassessment period ended three years later and as a result, they

are statute-barred. It is argued that the Minister designed and issued the T3GR form

and related tax reporting process through which RRSP trusts report Part I and Part

XI.1 tax and that the ‘group nature’ of the process should not prevent individual

RRSP account holders from receiving the benefit of the limitation period.

It is asserted that CIBC Trust “scrupulously” followed the CRA reporting

requirements, that the Minister had all the information on hand and “could have

audited and reassessed sooner but elected not to do so” and the Minister’s attempt to

reassess the RRSP Trust “is the very mischief that limitation periods are designed to

prevent”.⁷⁹

viii) There was no Misrepresentation Attributable to Neglect,

Carelessness or Wilful Default

CIBC denies that there was a misrepresentation at the time the T3GR forms

were filed in connection with the RRSP Trust and that the “Minister cannot allege a

misrepresentation by the taxpayer involving propositions of law or mixed law and

fact - provided the taxpayer’s position is reasonable.”

⁷⁸CIBC, page 37.

⁷⁹CIBC, page 38-39.

Page: 127

In the alternative, if there was a misrepresentation, it was not “attributable to

neglect, carelessness or wilful default” since “CIBC Trust’s filing position was at all

times thoughtfully considered and reasonably held” and this was “evident from (…)

the due diligence undertaken by CIBC Trust”. This included the fact that the

declaration of trust stipulated that the annuitant had sole responsibility to determine

what investments were qualified under the Act but also that CIBC Trust undertook

appropriate due diligence steps in connection with private placements including a

review of the relevant documentation and reliance on the Legal Opinions. CIBC

Trust argues that “[r]eliance by a taxpayer on professional opinions is reasonable

and prudent behavior that precludes the Minister from reassessing beyond the

normal reassessment period”.

In the end, CIBC Trust argues that a taxpayer “does not have to make up for

any inadequacies of the ministerial assessment process, but has merely to file a return

according to the provisions of the Act”: Regina Shoppers Mall Ltd. v. R. [1991] 1

C.T.C. 297 (F.C.A.) (para 18), and that CIBC did precisely that.⁸⁰

Position of the Respondent

The Respondent points to the testimony of CIBC fact witness Kerri Calhoun

and her agreement on cross-examinations that “there was a distinction between a tax

return and an information return” and that “at no point” did CIBC Trust receive “a

notice that [the RRSP Trust] had no tax payable under Part I or Part XI.1 of the Act”.

According to the Respondent, Ms. Calhoun also agreed that the Minister had

“assessed based on the information in the T3GR Returns as filed by CIBC” and that

had there been “income (…) from non-qualified investments, then CIBC would have

to file a T3 Return of Income”.⁸¹

Part 1 Assessments

The Respondent argues that subsection 150(1) of the Act imposes an

obligation on trusts to file a tax return and that the prescribed form is the T3 Trust

Return. However, subsection 150(1.1) provides that the obligation to file a return

does not arise where no Part I tax is payable by certain individuals and since

subsection 104(2) deems a trust to be an individual for purposes of the Act, there is

no filing obligation for an RRSP trust unless it has Part I tax liability.

⁸⁰CIBC, page 39-43.

⁸¹Written Submissions of the Crown, volume 3 of 3, page 12.

Page: 128

In this instance, it is argued that the tax liability arose by virtue of subsection

146(10.1) which seeks to tax income from a source that is not a qualified investment.

The Respondent argues that the Part I Assessments were “original”

assessments for the 2004 to 2009 taxation years because the RRSP Trust had not

filed a T3 Return. As well, the RRSP Trust had not previously been assessed and

had not been notified by the Minister that no tax was payable by it pursuant to Part

I. Accordingly, it is argued that “the issuance of the respective original assessments

commenced the time period by which the Minister was required to issue any

reassessments within the normal reassessment period.”⁸²

The Respondent argues that the Appellants’ position that the limitation period

commenced with the issuance of the Trust Notices of Assessment is mistaken since

the CIBC Trust was under an obligation to self-assess and “the T3GR Return was

the prescribed tax and information return in respect of the Part X.1 tax liability but

not the Part I tax liability which required the filing of a T3.” The Respondent argues

moreover that the T3GR Returns filed by CIBC Trust were assessed as filed and tax

was paid in respect of the plans listed therein but not the RRSP Trust.

The Respondent reiterates, relying on Hall, supra, that “different Parts of the

Act impose separate taxes, require separate returns and create separate timing

requirements” and that the tax liability pursuant to subsection 146(10.1) is different

from the tax liability arising from subsection 207.1(1).

Part X.I Reassessments

The Respondent reiterates that Part XI.I is a separate tax requiring a separate

return, as explained in Hall, supra. Although CIBC Trust filed a T3GR Return on a

timely basis and Trust Notices of Assessment were issued accordingly, those

assessments have “no legal effect on the computation of the normal reassessment

period for the Grenon RRSP Trust” because it was not listed as a taxable RRSP.

The Respondent argues that “the entire premise of the (…) statute-barred

submissions is based on the false notion that the Act treats the filing of the T3GR

Returns and an ensuing notice of assessment as fixing the tax liability of the

specimen plan as a whole as if it was a separate taxpayer” but “a group of trusts

under a specimen plan are not a separate taxpayer under the Act.”

⁸²Written Submissions of Respondent, volume 3 of 3, page 26.

Page: 129

Although the Respondent acknowledges that the prescribed form for Part XI.1

is the T3GR Return, she argues that that Act prevails “over the regulations” and that

the Court must seek an interpretation that reconciles “any tension or conflict between

the two”, as explained by the Supreme Court of Canada in Friends of Oldman River

Society v. Canada (Minister of Transport), [1992] 1 SCR 3 (“Oldman River”). In

that decision, it was held that “an Act of Parliament must prevail over inconsistent

or conflicting subordinate legislation” and “there is a presumption that the legislature

did not intend to make or empower the making of contradictory enactments”.

The Respondent indicates that the subject Specimen Plan included between

“364,506 exempt plans in 2004 and 241,403 in 2009” and that in “the same period”

CIBC Trust “reported taxable plans that ranged from 160 in 2004 to 45 in 2009”.

The Respondent argues that it would be absurd to conclude that the Minister “would

effectively forego its statutory duty to audit and assess tax to RRSPs composed

millions of taxpayers in a specimen plan, of which only a small percentage, as low

as 1-2%, are reported as taxable trusts. The Respondent also argues that it would be

absurd to think that the normal reassessment period that applies to taxable trusts

listed on the T3GR upon receipt of the Trust Notices of Assessment, would also

apply to non-taxable trusts, “which represent the vast majority of trusts under a

specimen plan.” It is argued that Parliament could not have intended this result by

“allowing the Governor in Council to make regulations that would impose (…) an

obligation that is not otherwise provided for in the Act.”

The Respondent indicates that the “T3GR Return is both a tax and information

return”. The “tax” portion relates to the taxable trusts but the “information” portion

relates to the non-taxable trusts and “this information includes the aggregate assets

being held by the specimen plan as well as the number of exempt plans (…).” For

these plans, the Respondent indicates that all that was required was that the CIBC,

as trustee, maintain and make available upon request, a list of the names of each

annuitant or subscriber and their social insurance number.”

The Respondent agrees with the CIBC that “for reasons of efficiency in the

Minister’s administration and enforcement of the RRSP regime (…) the filing of the

T3GR group returns have developed to cover RRSPs in a specimen plan” involving

“hundreds of thousands, if not, millions of RRSPs in a specimen plan” but that

“absent the CRA’s practice of accepting T3GR Returns for ease of administration,

the Act itself requires individual filing of trust returns.” But it is argued that CRA’s

objective of providing for a “streamlined reporting process” and the publication of

“Information Circulars are not determinative of the proper interpretation and

Page: 130

application of the interplay between the Act and the Regulations in relation to the

legal effect of” the Trust Notices of Assessment.

The Respondent concludes by indicating that the issuance of the Trust Notices

of Assessment, as noted above, did not have the effect of commencing the statutory

period for the Minister to assess Part I or Part XI.I tax.

Was there a Misrepresentation?

The Respondent argues in the alternative that there was a “misrepresentation

attributable to neglect, carelessness or willful default” that would allow the Minister

to assess the RRSP Trust beyond the normal reassessment period.

The Respondent argues that CIBC Trust should have known that the Income

Funds were not qualified investments for RRSP purposes, that they “blindly

accepted” the Appellant’s “representations as the controlling trustee” of the Income

Funds and his “opinion that a lawful distribution” had been completed.

The Respondent alleges that CIBC did so “without any scrutiny” and that it

“made no attempt to confirm the veracity of the legal opinions on which they relied”

and did not consider that the Trustee’s Certificate was signed by the annuitant of the

Grenon RRSP Trust nor consider that the Appellant’s conflict of interest “as, qua

trustee and controlling unitholder” of the Income Funds he sought to promote and

“qua annuitant of the Grenon RRSP Trust”.

The Respondent states that reliance on legal opinions or professionals does

not allow a taxpayer to “declare it was not negligent.” The Respondent relies on

Snowball v. The Queen [1996] 2 CTC 2513, cited with approval in Vine Estate v.

The Queen, 2015 FCA 125, where it was held that “negligence in the preparation of

an income tax return retains its consequences under subparagraph 152(4)(a)(i)

whether it be the negligence of the taxpayer personally or that of the accountant or

other tax return preparer who is his or her agent.” The Respondent claims that he

authorities “collectively stand for the proposition” that CIBC Trust could not

“blindly rely on professionals to assert it acted with due diligence and expect this to

protect it from” being reassessed beyond the normal reassessment period.”

The Respondent argues finally that the CIBC Trust cannot shift away its

burden or responsibility to ensure that investments are qualified investments by

claiming that the RRSP Trust was self-directed and the annuitant was contractually

responsible to determine whether an investment was in fact a qualified investment.

Page: 131

Analysis and Conclusion

On the one hand, I agree with the Appellants that the T3GR Return was the

prescribed form intended by CRA to meet the filing requirements of RRSP trustees

pursuant to paragraph 150(1)(c) and subsection 207.2(1) of the Act and section 204

of the Regulations and that it was intended as a streamlined process for the reporting

of group RRSPs involving hundreds of thousands of plans under one specimen plan.

It is also not in dispute that CRA published guidance in the form of

Information Circulars for the completion of the T3GR Return. The form is entitled

“Group Income Tax and Information Return for RRSP, RRIF (…) or RDSP Trusts”

and the pre-printed portion instructs trustees to “attach a list of all taxable RRSPs

(…) registered under this specimen plan” and that “a comparable list of RRSPs that

are not taxable must be available upon request.” The form also specified that “to

report taxable income (…) trustees must complete a T3 Trust Income Tax and

Information Return”.

As helpful as the information noted above may be, it is well-established that

CRA administrative practices or guidelines “are not the determinative factor” and

that the Court “must turn to the statute itself” for the application of the Act: Imperial

Oil v. the Queen, 2006 SCC 46, para 59.

As noted by the Respondent, the number of taxable RRSPs reported during

the subject taxation years was a mere fraction of the total number included as part of

the Specimen Plan. Since the fact witnesses confirmed that CIBC managed

“hundreds of thousands, if not millions” of RRSP plans within different specimen

plans, it can be assumed that other specimen plans would also similarly include only

a small fraction of taxable plans. In that context, it seems apparent that the T3GR

Returns were accepted by CRA as “group” returns for administrative purposes only.

Since the provisions of the Act must prevail over subordinate legislation (Oldman

River, supra), I find that the T3GR Returns were not intended to override a trustee’s

other reporting obligations arising from the Act, notably the obligation to file a T3

Return pursuant to paragraph 150(1)(c) or to report taxable income arising from

subsection 146(10.1). I note that the trustee’s reporting obligations were specified

on face of the pre-printed form.

The “streamlined” administrative process, as described above, placed the onus

on CIBC Trust, as trustee, to identify RRSPs within the Specimen Plan that held

non-qualified investments, an obligation that reflects the notion that “the process of

Page: 132

tax collection relies primarily upon taxpayer self-assessment and self-reporting”: R.

v. Jarvis, 2002 SCC 73, para 49.

The filing of the T3GR Return in accordance with subsection 207.2(1)

triggered the Minister’s obligation to “examine the return” in accordance with

subsection 152(1) and “send a notice of assessment” to CIBC Trust being “the

person by whom the return was filed” pursuant to subsection 152(2).

Subsection 152(3) clarifies that “liability for tax (…) is not affected by an

incorrect or incomplete assessment or by the fact that no assessment has been made”

(My emphasis).

In accordance with subsection 152(4), the Minister could then “at any time

make an assessment, reassessment or additional assessment” as long as she did so

within the “normal reassessment period” as defined in paragraph 152(3.1)(b) being

the earlier of three years from “the sending of an original notice of assessment” or

“an original notification that no tax is payable by the taxpayer for the year.”

The issue before the Court is whether the “normal reassessment period” that

applied to “taxable plans” that had been “assessed”, should be extended to the non-

taxable plans listed in the T3GR Return including the RRSP Trust.

CIBC urges the Court to conclude that the limitation period extends to non-

taxable plans because, inter alia, it “scrupulously” followed CRA administrative

guidelines and the minister issued “original” Trust Notices of Assessment. It is also

argued that it would be “manifestly unfair” to taxpayers who held non-taxable plans

and who might have otherwise taken steps to preserve their rights.

I do not agree and conclude that the Appellants’ position should be rejected.

I find that the Minister fulfilled her statutory obligations when she examined

the T3GR Returns for each of the subject taxation years and issued the Trust Notices

of Assessment. However, I must conclude that she did so only in connection with

the taxable plans and not in connection with the non-taxable plans that were listed

for information purposes only, including the RRSP Trust.

As noted above, subsection 152(3) provides that “liability for tax” is not

affected “by the fact that no assessment has been made.” That provision, when read

with the definition of the “normal reassessment period” and the requirement that

there be an “original notice of assessment” or an “original notification that no tax is

Page: 133

payable”, leads me to conclude that the Trust Notices of Assessment did not have

the effect of commencing the “normal reassessment period” for the non-taxable

plans listed in the Specimen Plan including the RRSP Trust.

Consequently, I agree with the Respondent that the filing of the T3GR Returns

and the ensuing Trust Notices of Assessment could not “fix the liability of the

specimen plan as a whole as if it was a separate taxpayer” and I must therefore

conclude that the limitation period could not extend to the non-taxable trusts

included in the Specimen Plan and listed as part of the “Information” portion of the

T3GR Return unless or until a T3 Return had been filed and assessed.

It follows that I must reject the Appellants’ submission that the Trust Notices

of Assessment issued in connection with the Specimen Plan were “original”

assessments for all non-taxable plans including the RRSP Trust. I therefore conclude

that the Part 1 Assessments and the Part XI.I Reassessments were not statute-barred.

Having reached that conclusion, it is not necessary to address the

Respondent’s alternative argument that there was a “misrepresentation” that was

“attributable to neglect, carelessness or wilful default” pursuant to subsection 152(4)

such that the Minister could reassess beyond the “normal reassessment period”. That

said, I will say that I have some reservations about the administrative steps described

by the CIBC fact witnesses and question whether they were sufficiently robust in a

context where the RRSP Trust was acquiring millions of dollars of units in a private

placement for which the annuitant was also the trustee and promoter, putting him in

an obvious conflict of interest for all information provided including the selection of

outside legal counsel who delivered the Legal Opinions. Moreover, I find that the

Legal Opinions relied upon by CIBC Trust suggest that an independent investigation

was not in fact carried out and that these were in fact “qualified opinions” inasmuch

as they relied on information set out in the Trustee Certificates signed by the

annuitant. They also specified that they had “relied on the facts represented (…) by

James T. Grenon” and that, if the facts differed “from those presented” the opinion

might not be valid.

In the end, I am not convinced that legal counsel and, by extension CIBC

Trust, undertook the level of due diligence that would have been expected or

required to conclude that the Income Funds were in fact qualified investments under

the Act and in particular, whether a “lawful distribution” had actually taken place.

The application of GAAR

Page: 134

GAAR is an argument of last resort that assumes that a taxpayer has otherwise

complied with the provisions of the Act. If this Court has wrongly concluded that

the Income Funds were not qualified investments, then this analysis must assume

that they were qualified investments and the question is whether there was an

avoidance transaction that was contrary to the GAAR.

Pursuant to subsection 245(4), a taxpayer will be denied a tax benefit resulting

from an avoidance transaction if that result can be considered abusive tax avoidance.

In the seminal decision of Canada Trustco, supra, the Supreme Court of Canada

provided some background on the enactment of GAAR:

16. The GAAR draws a line between legitimate tax minimization and abusive tax

avoidance. The line is far from bright. The GAAR’s purpose is to deny the tax

benefits of certain arrangements that comply with a literal interpretation of the

provisions of the Act, but amount to an abuse of the provisions of the Act. (…)

The Supreme Court summarized the analytical framework as follows: (para

66):

1. Three requirements must be established to permit application of the GAAR:

(1) A tax benefit resulting from a transaction or part of a series of transactions

(s. 245(1) and (2));

(2) that the transaction is an avoidance transaction in the sense that it cannot be

said to have been reasonably undertaken or arranged primarily for a bona fide

purpose other than to obtain a tax benefit; and

(3) that there was abusive tax avoidance in the sense that it cannot be

reasonably concluded that a tax benefit would be consistent with the object,

spirit or purpose of the provisions relied upon by the taxpayer.

2. The burden is on the taxpayer to refute (1) and (2), and on the Minister to

establish (3).

3. If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes

to the taxpayer.

4. The courts proceed by conducting a unified textual, contextual and purposive

analysis of the provisions giving rise to the tax benefit in order to determine why

they were put in place and why the benefit was conferred. The goal is to arrive at a

purposive interpretation that is harmonious with the provisions of the Act that

confer the tax benefit, read in the context of the whole Act.

Page: 135

5. Whether the transactions were motivated by any economic, commercial, family

or other non-tax purpose may form part of the factual context that the courts may

consider in the analysis of abusive tax avoidance allegations under s. 245(4).

However, any finding in this respect would form only one part of the underlying

facts of a case, and would be insufficient by itself to establish abusive tax

avoidance. The central issue is the proper interpretation of the relevant provisions

in light of their context and purpose.

6. Abusive tax avoidance may be found where the relationships and transactions as

expressed in the relevant documentation lack a proper basis relative to the object,

spirit or purpose of the provisions that are purported to confer the tax benefit, or

where they are wholly dissimilar to the relationships or transactions that are

contemplated by the provisions.

7. Where the Tax Court judge has proceeded on a proper construction of the

provisions of the Income Tax Act and on findings supported by the evidence,

appellate tribunals should not interfere, absent a palpable and overriding error.

a) Was there a tax benefit?

The onus is on the Appellants to convince the Court of the absence of a « tax

benefit” that is defined at subsection 245(1) as “a reduction, avoidance or deferral

of tax or other amount payable under this Act (…)”

Determining if there was a tax benefit “involves a factual determination” but

“the magnitude of the tax benefit is not relevant at this stage”⁸³. As explained by the

Supreme Court, “[i]f a deduction against taxable income is claimed, the existence of

a tax benefit is clear, since a deduction results in a reduction of tax” but in other

situations “the existence of a tax benefit might only be established upon a

comparison between alternative arrangements (…)”⁸⁴. It was later clarified that such

an “alternative arrangement must be one that might reasonably have been carried out

but for the existence of the tax benefit”: Copthorne Holdings Ltd. v. Canada, 2011

SCC 63 (“Copthorne”), para 35.

The Appellants argue that the various investments made by the RRSP Trust

did not result in a tax benefit “any more than the investments made by anyone else’s

registered retirement savings plan would be a tax benefit to them”. It is argued that

it cannot be said that the Appellant made “unlimited, indirect, tax-free contributions

⁸³Canada Trustco, paragraph 19.

⁸⁴Canada Trustco, paragraph 20.

Page: 136

to the Grenon RRSP Trust”, as alleged by the Respondent, since the investments

were made by the RRSP Trust and it was entitled to the returns.

The Appellants also submit that there was no tax benefit to the RRSP Trust

because a taxpayer cannot receive a tax benefit by avoiding a consequence that

would never have occurred. It is argued that the RRSP Trust would never have

deliberately invested in non-qualified investments and that complying with the

provisions of the Act to avoid being subject to tax, notably Part XI.1 tax, is not a tax

benefit. Fundamentally, the Appellants argue broadly that tax planning by itself is

not a justification for the application of the GAAR.

In summary, the Respondent argues that Appellant established an elaborate

scheme to take advantage of the RRSP regime and ensure that income generated

from investments that he directly or indirectly controlled would accrue on a tax-

exempt basis and that he would directly or indirectly be able to make contributions

to the RRSP Trust in excess of the permissible amounts.

I find that there was a “tax benefit” as that term is defined.

Parliament has recognized that many legislative “schemes” described in the

Act provide valuable tax benefits, including the RRSP regime⁸⁵.

The most obvious benefits associated with an RRSP are the deduction of

contributions and the accrual of income and gains on a tax-exempt basis with the

possibility of withdrawing funds upon retirement when the taxpayer is potentially

subject to a lower tax rate. Taxpayers are required to select from a long list of

“qualified investments” and to avoid “non-qualified investments” as well as

elaborate strategies to withdraw funds without paying tax, also known as RRSP-

stripping transactions. See for example: Chiasson v. The Queen, 2016 TCC 95.

By complying with the Act, taxpayers are entitled to valuable tax benefits. If

there are tax consequences for not complying with the Act, that does not lead to the

conclusion that RRSPs do not provide a tax benefit. The suggestion that the RRSP

regime does not provide a tax benefit would surprise ordinary Canadians. I find that

Parliament clearly intended it as a tax benefit for all taxpayers.

At first blush, it can be said that the Appellant’s objectives were typical of any

annuitant of a self-directed RRSP who assumes responsibility for the selection of

⁸⁵Canada Trustco, paragraph 34.

Page: 137

investments and plays an active role in the acquisition and disposition of such

investments. But the Appellant wanted more. He wanted to select investments ‘and’

manage them in a way that was not normally possible for investments held in an

RRSP. His intention was to assume an active role in the day-to-day management of

the underlying businesses or investments acquired by the RRSP Trust.

Since a taxpayer’s decision to contribute to an RRSP results in a tax benefit,

I agree with the Respondent that it is not necessary to consider a comparison with

an alternative arrangement that might reasonably have been undertaken by the

Appellant. However, it is relevant to note that the Appellant was not interested in the

acquisition of passive investments or in a portfolio of publicly-traded securities that

were at arm’s length from him. He had no interest in such investments as this would

not have allowed him to achieve his dual objective of selecting investments and

assuming an active role in their management.

It is obvious to the Court, as it certainly must have been for the Appellant at

the time, that he could have withdrawn funds from the RRSP Trust to acquire and

manage those investments. However, he understood that such a withdrawal would

have triggered a substantial tax liability. By establishing the Income Funds, the

Appellant was able to avoid any tax liability associated with a withdrawal and all

profits generated by the Income Funds and the underlying investments would

continue to accrue in the RRSP Trust on a tax-exempt basis. This arrangement was

beneficial to him. It was a tax benefit within the meaning of subsection 245(1).

b) Was there an avoidance transaction?

As noted in Canada Trustco, the second requirement for GAAR is that “the

transaction giving rise to the tax benefit be an avoidance transaction” within the

meaning of subsection 245(3) and that “the function of this requirement is to remove

from the ambit of GAAR transactions (…) that may reasonably be considered to

have been undertaken or arranged primarily for a non-tax purpose” (para 21).

The Supreme Court has explained that the expression “series of transactions”

generally refers to a number of transactions that are “pre-ordained in order to

produce a given result” with “no practical likelihood that the pre-planned events

would not take place in the order ordained”, quoting from Craven v. White, [1989]

A.C. 398, at p. 514, a decision of the House of Lords also cited with approval by the

Federal Court of Appeal in OSFC Holdings Ltd. v. Canada, 2001 FCA 260

(“OSFC”).

Page: 138

As further explained in Canada Trustco, subsection 245(3) provides that

GAAR does not apply to a transaction that “may reasonably be considered to have

been undertaken or arranged primarily for bona fide purposes other than to obtain

the tax benefit” and that “if there are both tax and non-tax purposes to a transaction,

it must be determined whether it was reasonable to conclude that the non-tax purpose

was primary. If so, the GAAR cannot be applied to deny the tax benefit” (para 27).

The Supreme Court explained that this involves a “factual analysis” and

contemplates “an objective assessment of the relative importance of the driving

forces of the transaction” (para 28). The “taxpayer cannot avoid the application of

GAAR by merely stating that the transaction was undertaken or arranged primarily

for a non-tax purpose” and “the trial judge must weigh the evidence and determine

if it is reasonable to conclude that the transaction was not undertaken or arranged

primarily for a non-tax purpose” (para 29). The Court then noted as follows:

31. (…) Parliament recognized the Duke of Westminster principle “that tax

planning — arranging one’s affairs so as to attract the least amount of tax — is a

legitimate and accepted part of Canadian tax law” (p. 464). Despite Parliament’s

intention to address abusive tax avoidance by enacting the GAAR, Parliament

nonetheless intended to preserve predictability, certainty and fairness in Canadian

tax law. Parliament intends taxpayers to take full advantage of the provisions of

the Income Tax Act that confer tax benefits. Indeed, achieving the various policies

that the Income Tax Act seeks to promote is dependent on taxpayers doing so.

32. Section 245(3) merely removes from the ambit of the GAAR transactions that

may reasonably be considered to have been undertaken or arranged primarily for a

non-tax purpose. Parliament did not intend s. 245(3) to operate simply as a business

purpose test, which would have considered transactions that lacked an

independent bona fide business purpose to be invalid.

The Supreme Court noted that “transactions (…) undertaken or arranged

primarily for family or investment purposes would be immune from the GAAR

under s. 245(3)” noting that “Registered Retirement Savings Plans (RRSPs) are one

example” and that “Parliament recognized that many provisions of the Act confer

legitimate tax benefits notwithstanding the lack of a real business purpose” (para

34).

As noted by the Supreme Court (para 66, infra), the Appellants have the onus

of convincing the Court of the absence of an avoidance transaction.

It is argued that by establishing the Income Funds, the Appellant was merely

attempting to broaden his RRSP investment horizon and that by investing in those

Page: 139

funds, he “achieved the same purposes as would any investment in the wide universe

of mutual fund trusts, income funds and public companies that owned subsidiary

entities that carried on businesses.” The Appellants argue that “[m]any income funds

and public corporations are in fact wholly-owned entities that carry on business,

acquire shares of private companies, own partnership interests, own non-mutual fund

trust units or invest in debt of such entities” and “the Act does not restrict them from

owning any such investments” and the “shares or units of such corporations or

mutual fund trusts are (...) qualified investments for any RRSP.” It is argued that the

“use of mutual fund trusts as investment entities is widespread in Canada” and that

they are often structured as qualified investments to attract funds held in RRSPs.

It is also argued that “[c]omparing a direct investment by an RRSP in a private

operating business with an investment in a mutual fund trust that owns an operating

business is not an appropriate comparison to determine if there is a tax benefit” as

“an RRSP would not invest directly in such business” as “it is not permitted” to do

so. It is argued that “if it desired to earn investment return from a business, it would

need to invest in a mutual fund trust or public corporation to achieve it”. It is argued

finally that “offering units in the Income Funds to investors to raise capital is also

not an avoidance transaction.”

In the end, it is argued that the primary purpose of acquiring units in the

Income Funds was to generate a return on investment for the RRSP Trust and that

this was not an avoidance transaction because it was made based on a “primary bona

fide non-tax purpose”.⁸⁶

I disagree and find that there was an “avoidance transaction”.

As noted above, the Supreme Court has recognized (Canada Trustco, para 34)

that the RRSP regime as a whole gives rise “directly or directly” to a tax benefit

albeit a legitimate one that is part of a broad legislative scheme that Parliament has

sought to encourage and promote but within certain limits.

The Appellant states that he was merely seeking to broaden his RRSP

investment horizon and generate a return on investment. He argues that he was

“primarily motivated by a bona fide non-tax purpose” so that the GAAR should not

apply.

⁸⁶Written submissions of CIBC Trust – paragraph 270-281.

Page: 140

I do not agree and find that the Appellant’s mere assertion that he was

primarily motivated by a non-tax purpose is of limited probative value. The assertion

is also self-serving and should be given little weight.

When determining whether there was an avoidance transaction as

contemplated by subsection 245(3), the Court must weigh the evidence and consider

the “relative importance of the driving forces of the transaction.” (Canada Trustco,

para 28).

Having considered the evidence in this instance, I find that the steps

undertaken by the Appellant to constitute and establish the Income Funds as

qualified investments were calculated and deliberate. By his own admission, he

undertook an exempt distribution of securities relying on the OM and OME with the

intention of meeting or exceeding the minimum requirements of the Act, notably of

the definition of a mutual fund trust as set out in Regulation 4801. In other words,

his primary motivation was to ensure technical compliance with the Act and not to

raise capital. In fact I have already concluded that the Appellant was not genuinely

interested in raising capital from a wide array of investors and that, given the actual

amount of capital raised per Income Fund, it seems apparent that the Investors were

mere pawns in the entire scheme as contemplated by the Appellant. Moreover, the

RRSP Trust already had substantial financial assets and no plausible explanation

was provided to the Court as to why the Appellant sought to complete a distribution

of securities in this instance other than to establish what was intended to be a

qualified investment for RRSP purposes. I find that the primary purpose of so doing

was to create vehicles that he would control using funds from the RRSP Trust. The

Appellant personally acquired a fraction of a percentage point of units in the initial

distribution and shortly thereafter directed that the RRSP Trust (and other Insiders)

acquire as much as 99% of the units. I find that these steps were “pre-ordained in

order to produce a given result” with no likelihood that the remaining “pre-planned

events would not take place in the order ordained”.

In the end, I find that all of these steps were avoidance transactions because

the Appellant’s primary motivation was to establish the Income Funds to avoid the

normal tax consequences associated with a withdrawal of funds from an RRSP or

the acquisition of non-qualified investments that would have resulted in taxable

income. I conclude that there was “an avoidance transaction” and that it cannot be

said that the impugned transactions were undertaken “primarily for bona fide

purposes other than to obtain a tax benefit” as set out in paragraph 245(3)(a).

c) If so, was the avoidance transaction ‘abusive’?

Page: 141

As noted in Canada Trustco, the “third requirement for the application of the

GAAR is that the avoidance transaction giving rise to a tax benefit be abusive. The

mere existence of an avoidance transaction is not enough to permit the GAAR to be

applied. It must also be shown to be abusive under s. 245(4).”

As explained by the Supreme Court, it is “for the Minister who seeks to rely

on the GAAR to identify the object, spirit or purpose of the provisions that are

claimed to have been frustrated or defeated, when the provisions of the Act are

interpreted in a textual, contextual and purposive manner” (Canada Trustco, para

65).

The Supreme Court indicated that “the analysis of the misuse of the provisions

and the analysis of the abuse having regard to the provisions of the Act read as a

whole are inseparable” thus agreeing with the trial judge⁸⁷and that “the central

question is, having regard to the text, context and purpose of the provisions on which

the taxpayer relies, whether the transaction frustrates or defeats the object, spirit or

purpose of those provisions”⁸⁸. The Supreme Court emphasized the importance of a

“unified interpretive approach” and indicated as follows:

44. The heart of the analysis under s. 245(4) lies in a contextual and purposive

interpretation of the provisions of the Act that are relied on by the taxpayer, and the

application of the properly interpreted provisions to the facts of a given case. The

first task is to interpret the provisions giving rise to the tax benefit to determine

their object, spirit and purpose. The next task is to determine whether the

transaction falls within or frustrates that purpose. The overall inquiry thus involves

a mixed question of fact and law. The textual, contextual and purposive

interpretation of specific provisions of the Income Tax Act is essentially a question

of law but the application of these provisions to the facts of a case is necessarily

fact-intensive.

45. This analysis will lead to a finding of abusive tax avoidance when a taxpayer

relies on specific provisions of the Income Tax Act in order to achieve an outcome

that those provisions seek to prevent. As well, abusive tax avoidance will occur

when a transaction defeats the underlying rationale of the provisions that are relied

upon. An abuse may also result from an arrangement that circumvents the

application of certain provisions, such as specific anti-avoidance rules, in a manner

that frustrates or defeats the object, spirit or purpose of those provisions. By

contrast, abuse is not established where it is reasonable to conclude that an

⁸⁷Paragraph 39.

⁸⁸Paragraph 49.

Page: 142

avoidance transaction under s. 245(3) was within the object, spirit or purpose of the

provisions that confer the tax benefit.

As further summarized by Rothstein J.,⁸⁹there will be “a finding of abusive

tax avoidance; 1) where the transaction achieves an outcome the statutory provision

was intended to prevent; 2) where the transaction defeats the underlying rational of

the provision or; 3) where the transaction circumvents the provision in a manner that

frustrates or defeats its object, spirit or purpose”, relying on Canada Trustco (para

45) and Lipson v. Canada, 2009 SCC 1 (“Lipson”) (para 40).

Position of the Respondent

The Respondent contends broadly that the “RRSP provisions (…) operate as

a complete code” intended to provide an incentive for taxpayers to save for

retirement and that “it includes rules designed to ensure that taxpayers can only

invest in certain types of property (…)” The Respondent argues that the RRSP

provisions must be considered as a whole, relying on Copthorne, supra, para 91,

where Rothstein J. indicated that “relevant provisions are related “because they are

grouped together” or because they “work together to give effect to a plausible and

coherent plan” (R. Sullivan, Sullivan on the Construction of Statutes (5th ed. 2008),

at pp. 361 and 364).”

Those provisions include subsection 146(4) that provides that “no tax is

payable (…) by a trust on the taxable income of the trust for a taxation year (…) if

the trust was governed by a registered retirement savings plan” unless, as set out in

paragraph 146(4)(b) “the trust has carried on any business or business in the year.”

Specifically excluded from the ambit of this provision, is income from non-qualified

investments that is taxable pursuant to subsection 146(10.1).

The Respondent argues that an RRSP can only invest in a detailed list of

“qualified investments” described in the Act and the Regulations most of which seek

to ensure, directly or indirectly, that investments are at arm’s length from the

annuitant and that there is no opportunity for self-dealing. If a taxpayer acquires a

non-qualified investment, all forms of income derived from that investment is

subject to tax pursuant to subsection 146(10.1). The annuitant is also subject to tax

on the fair market value of the investment at the time it was acquired pursuant to

subjection 146(10) (as that provision existed during the Relevant Period) or

⁸⁹Copthorne Holdings, paragraph 72.

Page: 143

alternatively, to a tax of 1% calculated monthly pursuant to subsection 207.1(1) until

such time as the non-qualified investment has been removed from the RRSP.

The Respondent argues that Parliament has always intended that investments

made by an RRSP should be at arm’s length from the annuitant and that this was

clarified in the May 23, 1985 Federal Budget when the Minister of Finance outlined

a plan to permit an RRSP to invest in small businesses, notably Canadian- controlled

private corporations (“CCPCs”) and limited partnerships. However, the Minister of

Finance noted as follows:

To ensure that such investments are limited to genuine arm’s-length situations, an

investment in a corporation by an RRSP of a significant shareholder of the corporation,

will be considered not to be at arm’s length. Similarly, a member of a partnership or an

employee of a corporation will be considered not to deal at arm’s length with the

corporation if it is controlled by him alone or together with other partners or employees.⁹⁰

The RRSP regime also includes various provisions to establish a monetary

limit on the quantum of contributions to an RRSP. It does so by providing that a

taxpayer may make deductible contributions up to the “RRSP dollar limit” or

“unused RRSP room” as defined. If those limits are exceeded, the taxpayer will,

subject to certain limited exceptions, be subject to a tax of 1 % calculated monthly

pursuant to subsection 204(2.1).

Position of the Appellant

As previously noted, the Appellant argues that all Income Funds met the

definition of a “mutual fund trust”, as defined, i.e. that there were at least 150

investors who had each acquired units for proceeds of at least $500.

The Appellant argues that there are no provisions in the Act that prevent

taxpayers from controlling businesses held in an RRSP or from investing in an entity

that is not at arm’s length from the annuitant or where the annuitant acts as promoter.

It is argued that the object and spirit of the subject tax provisions “was to permit

RRSPs to invest in mutual fund trusts and public company shares without any

restriction on the type of business (…) and without regard for the arm’s length

dealing in the underlying investments” as long as they provided “bona fide

commercial investment returns”. It is argued that the Act “imposes tax

consequences” to ensure that an annuitant does not “obtain the personal use of the

⁹⁰Canada, Department of Finance Canada, Securing Economic Renewal budget papers (Ottawa: Department of

Finance, 1985).

Page: 144

assets of the RRSP and “cannot over-contribute”. It does so by providing that any

benefit or withdrawal must be included in income pursuant to subsection 146(8) and

any over-contribution is subject to a penalty of 1 % per month under Part X.I. It is

argued that the overall purpose of the RRSP rules is to permit tax-free accumulation

of income (…) from bona fide investments” and “this is what occurred in this case”.

With respect to the nature of qualified investments, the Appellants argue that

the object and spirt of the legislative scheme “is to restrict them to investments in

certain types of property” as described in the Act and Regulations. It is argued that

the “list of qualified investments is long and precise”, that “millions of taxpayers

rely on these rules as the consequences of holding non-qualified investments are

severe” and as such the “provisions are intended to clearly specify exactly what is

permitted”.

The Appellants argue that there are no restrictions from holding units of

publicly traded mutual fund trusts or shares of publicly traded companies but

acknowledges that certain limitations do exist. For example, it is noted that “debt of

a public corporation or a subsidiary qualifies, but general debt of a private

corporation does not”. As well, “mortgages qualify, but only if they are fully secured

by real estate situated in Canada and the debtor is an arm’s length person.”

For private company shares, the Appellants note that Parliament has enacted

a “connected shareholder test” effectively restricting ownership by an RRSP to 10%

of the shares. However, it is argued that there is no suggestion of a similar restriction

for units of a mutual fund trust and there is “no foundation for the assertion that a

mutual fund trust must raise capital in equal or pro rata fashion.” All that is required

is that there be a minimum of “150 investors holding at least a block of units”, being

a “minimum investment threshold”.

It is argued that the Appellant “should not be denied the tax exemption

ordinarily applicable to income earned by RRSPs simply because the annuitant was

the promoter of the Income Funds” and “the RRSP was the largest investor” or that

“the annuitant exercised day to day operations” of the Income Fund’s “commercial

businesses and property.” It is argued finally that “no provision or policy of the Act

supports a denial of the application of subsection 146(4) in this case”.

The Appellants also refer to an amendment made pursuant to the March 2011

federal budget that introduced the concept of a “prohibited investment” thus

extending the anti-avoidance rules already in force for tax-free savings accounts. As

explained by the Appellants, as a result of the amendment, ownership of 10% or

Page: 145

more of the units of a mutual fund trust became a “prohibited investment” subject to

the grandfathering provisions.

It is argued that in light of the “new imposition of new taxes on annuitants and

the grandfathering rules, among other things, these 2011 amendments constituted

changes to the law and not merely clarifications”. The Appellants rely on Canada v.

Oxford Properties Group Inc., 2018 FCA 30 (“Oxford Properties”), a decision of

the Federal Court of Appeal that provided as follows:

[86] Whether an amendment clarifies the prior law or alters it turns on the

construction of the prior law and the amendment itself. As explained,

the Interpretation Act prevents any conclusion from being drawn as to the legal

effect of a new enactment on the prior law on the sole basis that Parliament adopted

it. Keeping this limitation in mind, the only way to assess the impact of a subsequent

amendment on the prior law is to first determine the legal effect of the law as it

stood beforehand and then determine whether the subsequent amendment alters it

or clarifies it.

Analysis and conclusion

I find that there is good reason to conclude that the requirements of subsection

245(4) have been met and that the avoidance transactions were abusive.

A review of subsection 146(4) leads me to conclude that Parliament intended

that income from investments made by an RRSP would not be taxable subject to two

important limitations, being (a) that the trust has not “borrowed money” or (b) that

it has not “carried on any business or businesses in the year”. In the latter case, the

RRSP is subject to taxation on the realized business profits (including 100% of

capital gains). Income from non-qualified investments taxable pursuant to

subsection 146(10.1) is also specifically excluded.

A textual, contextual and purposive analysis of subsection 146(4) leads me to

conclude that it is one of the foundational provisions of the RRSP regime. Having

set out the broad proposition that “no tax is payable (…) by a trust on the taxable

income of the trust for a taxation year”, it provides that the tax-exempt status of

income earned in an RRSP will not apply if it has “carried on any business or

businesses”. What is the meaning of that phrase?

Since the RRSP regime provides that annuitants may invest in a long list of

qualified investments, typically units, shares or debt instruments of publicly-traded

mutual fund trusts or publicly-traded companies that will necessarily be involved in

Page: 146

commercial activities, I find that the exclusion of income derived from “any business

or businesses” must be taken to refer to a business that is somehow associated with

or not at arm’s length with the annuitant.

The notion that qualified investments must not be controlled by an annuitant

and must be at arm’s length is supported by the comments made by the Minister of

Finance in the May 23, 1985 Federal Budget, as noted above.

As such, I find that the object, spirit and purpose of subsection 146(4) is to

prevent an annuitant from making tax deductible contributions (at great cost to the

public treasury, at least in the short term) and then using those funds for business

purposes and thus take advantage of the tax-exempt status of the plan.

Although the administration of an RRSP involves a plan administrator or

trustee, I find that the subject provision is primarily directed at the annuitant. It must

be taken to mean that income earned from qualified investments, being investments

that are not “non-qualified investments”, will accrue on a tax-exempt basis but not

so if the annuitant has somehow managed to use the contributions or accumulated

assets in the RRSP to operate a business that is not at arm’s length.

I find that the notion that investments held by a RRSP must generally be at

arm’s length is the only plausible interpretation for the exclusion of income derived

from “any business or businesses”. It seems apparent that the provision seeks to,

eliminate or avoid the mischief associated with self-dealing by annuitants in

pension-like assets. This analysis becomes more obvious with a review of the

permissible investments described in the Act and the Regulations that are intended

as an exhaustive list of permissible investments.

The Appellant is correct in stating that units of publicly-traded mutual fund

trusts or limited partnerships or shares of publicly-traded companies are permissible

investments and that there are no restrictions on the percentage of units or shares

that may be held by an annuitant. I find that Parliament has so provided because they

are typically at arm’s length from an annuitant or at least are subject to a minimum

level of regulatory oversight according to the securities legislation. Similarly,

“annuities” must be are acquired “from a licensed annuities provider” and “a bond,

debenture or note” must be issued by a “credit union” or “cooperative corporation”

or by several recognized international development banks, for example. All of these

“issuers” are subject to some form of regulatory oversight.

Page: 147

The list of permissible investments includes gold and silver coins or bullion

that are produced by the “Royal Canadian Mint” and are acquired by the RRSP plan

“directly from the Royal Canadian Mint” or from “a specified corporation.”

There are numerous other examples where Parliament was evidently satisfied

that there was a sufficient level of regulatory oversight that it did not matter if an

annuitant was associated with or not at arm’s length with the issuer.

As noted by the Appellant, there are other instances where Parliament has

used different language and has specifically referred to the notion of an arm’s length

relationship with the annuitant. For example, mortgages are permissible investments

for RRSPs as long as the debtor or any person not at arm’s length with the debtor, is

not the annuitant. If the debtor is the annuitant or a person not at arm’s length with

the annuitant, the loan must be insured by an accredited or recognized insurer. Also,

as recognized by the Appellant, there is nothing to prevent an annuitant from

acquiring a substantial position including a control position of publicly traded

mutual fund trusts or corporations but in other instances, such as private company

shares or limited partnerships, Parliament has restricted the RRSP from acquiring

more than 10% of the shares or units.

I turn to the paragraph (d) of Regulation 4801 that sets out the definition of a

“mutual fund trust”. I have already concluded that it should be read conjunctively

such that it required a lawful distribution of units according to the laws of the

provinces to no less than 150 investors with a minimum investment of $500.

The Appellant is correct in stating that there is nothing in the statutory

language to suggest that all investors had to invest the same amount (subject to the

minimum amount set out in the OM) or that one or several investors could not

acquire a control position in the mutual fund trust as part of the lawful distribution.

Of course, as the Court has already noted, none of the Investors in this instance

actually acquired more that the minimum number of units in any of the Income

Funds. However, since the units of the mutual fund trust would, as defined, would

not be publicly traded and thus would be subject to limited regulatory over-sight, if

any, I find that the object, spirit and purpose of the provision was to ensure that there

would be a wide dispersal of ownership amongst at least 150 investors or in other

words that it would be “widely-held”. Although the provision does not specifically

address the issue of control by one or more investors or establish a bright-line test, I

find that the acquisition by the RRSP Trust of 99% of the units of the Income Funds

defeated the object, spirit and purpose of the provision and was contrary to the

Parliament intention that a mutual fund trust was to be widely held. It was certainly

Page: 148

not within the contemplation of Parliament that a mutual fund trust that was a

qualified investment for RRSP purposes would effectively become one investor’s

alter ego.

With respect to the amendments made in 2011, I do not agree with the

Appellant’s assertion that they established new law or that the Minister was trying

to apply them on a retroactive basis in this instance. I find that the legislation merely

clarifies and bring a certain amount of specificity to the existing RRSP provisions,

notably the number or percentage ownership that an RRSP can hold in various

qualified investments. Fundamentally, it does not address or modify the basic notion

in subsection 146(4) that funds held in an RRSP cannot be used to carry on a business

that is associated with or not at arm’s length with the annuitant.

I thus have no difficulty in concluding that the Appellant sought to abuse the

RRSP regime and the provisions of the Act by establishing the Income Funds and

that this was contrary to subsection 245(4) of the Act.

The Appellant did so by initially taking steps to meet the minimum technical

requirements of the Regulation 4801. Once the Income Funds were constituted and

in his capacity as the annuitant of the self-directed RRSP Trust, he directed that it

acquire in excess of 99% of the units of each Income Fund (alone or with the other

Insiders). I find that he sought to achieve an outcome that the provisions of the Act

were intended to prevent. I find that this defeated the object, spirit and purpose of

subsection 146(4) and the definition of a mutual fund trust that Parliament intended

would be widely-held.

Secondly, as the annuitant of the RRSP Trust, the Appellant was also the

promoter of the Income Funds. He acted as trustee or determined who would be

appointed in that capacity and assumed the day-to-day management of the Income

Funds including the underlying businesses or investments, the purchase of which

were essentially financed in all instances (except those involving the other Insiders)

by assets held in the RRSP Trust. I find that this defeated the object, spirit and

purpose of subsection 146(4) that seeks to exclude income generated by “any

business or businesses” that are not at arm’s length with the annuitant.

Moreover, it is apparent that the Appellant was able to directly or indirectly

access funds from the RRSP Trust in the form of loans from the Income Funds to

himself personally or to legal entities that he owned or controlled. I find that this is

the very mischief that Parliament intended to guard against when it provided that

income generated from investments being “any business or businesses” that were

Page: 149

associated with or not at arm’s length from the annuitant, would not accrue on a tax

exempt basis within the RRSP but would be subject to taxation. This was contrary

to subsection 146(4).

I thus have no difficulty in concluding that the scheme established by the

Appellant was an avoidance transaction that resulted in an abuse of the provisions

of the Act and the Income tax Regulations and that it “would result directly or

indirectly in an abuse having regard to those provisions (…) read as a whole” as

contemplated in subsection 245(4).

To paraphrase Rothstein J, in Copthorne Holdings, I find that the avoidance

transactions undertaken by the Appellant 1) achieved an outcome the statutory

provisions were intended to prevent 2) defeated the underlying rational of the

provisions and 3) circumvented the provisions in a manner that frustrated or defeated

its object, spirit and purpose.

I find that it would not be reasonable to conclude that the avoidance

transactions undertaken by the Appellant were within the object, spirit and purpose

of Regulation 4801 or subsection 146(4) that sought to confer a benefit.

d) Determination of tax consequences

Having concluded that the tax avoidance transactions undertaken by the

Appellant were abusive, the next step is to determine the tax consequences. This

matter was succinctly addressed in Lipson where the Supreme Court of Canada

indicated that:

[51] When considering the application of s. 245(5), a court must be satisfied that

there is an avoidance transaction that satisfies the requirements of s. 245(4), that s.

245(5) provides for the tax consequences and that the tax benefits that would flow

from the abusive transactions should accordingly be denied. The court must then

determine whether these tax consequences are reasonable in the circumstances. (…)

Subsection 245(5) provides that (a) “any deduction, exemption or exclusion

in computing income (…) may be allowed or disallowed in whole or in part” or (b)

“may be allocated to any person” or (c) “the nature of any payment or other amount

may be recharacterized, and” (d) “the tax effects that would otherwise result from

the application of other provisions of this Act may be ignored” and the Court may

consider any of (a) to (d) “in determining the tax consequences to a person as is

reasonable in the circumstances in order to deny a tax benefit that would, but for this

section, result, directly or indirectly, result from an avoidance transaction.”

Page: 150

The position of the Appellants

CIBC Trust argues that if the GAAR applies, the RRSP Trust “should not be

taxed under Part I and Part XI.I in order to deny the tax benefit that would otherwise

result” and that the Minister should have assessed “Mr. Grenon directly under any

of subsections 146(8) or 146(10) to obviate the tax benefit”.

It is argued that the Minister “should not be able to sustain recovery under the

GAAR” against the RRSP Trust where the Minister “elected not to assess using

available sections of the Act that would have eliminated the potential tax benefits

alleged by the Crown.”

CIBC Trust argues that subsection 146(8) applies where an annuitant has

received a benefit from an RRSP, though the existence of a benefit in this instance

is denied. In addition, it is argued that if the Minister determined that the Income

Funds were non-qualified investments, Mr. Grenon should have been assessed

directly pursuant to subsection 146(10) (as it read during the Relevant Period) and

had this been done, an assessment pursuant to subsection 201.7 of Part XI.I would

not have been required.

Further and in the alternative, it is argued that the GAAR should not apply to

tax the value of the units of FMO (held in the RRSP Trust prior to the Relevant

Period) that were transferred to the 2003-4 Income Fund in exchange for units

thereof of equivalent value. It is argued that this transaction did not give rise to an

increase in the value of the RRSP Trust and thus should not be subject to the GAAR.

It is also argued that although subsection 207.1 (2) uses the word “tax”, it is

really “a penalty designed to discourage annuitants from keeping non-qualified

investments within an RRSP.” It is argued that the Court “must look through the

label given to a compulsory payment to determine its true character” and that “a tax

is designed to raise revenue while a penalty is designed to deter behaviour”. Since

subsection 207.1(1) “imposes sanctions for behaviour that is intended to be

discouraged,” it bears the “fundamental characteristic of a penalty.”

In support of that proposition, the Appellants rely on Copthorne Holdings Ltd.

v. The Queen, 2007 TCC 481 (affirmed on other grounds, 2009 FCA 163) which

involved the assessment of a 10 % penalty under subsection 227(8) for the taxpayer’s

“failure to deduct or withhold tax”. It was argued that “a penalty should not be

imposed as a consequence of the successful application of GAAR (…) since a

taxpayer can never file or pay anything on the basis that GAAR applies, without the

Page: 151

Minister first initiating the application of GAAR.” The Tax Court agreed finding

that “a successful GAAR assessment prevents the Minister from applying penalties

under subsection 227(8).”⁹¹Justice Campbell indicated as follows:

[77] It is only because of the application of GAAR that the liability to pay the

withholding tax arises. The question therefore is whether the Appellant becomes

liable to pay a penalty under subsection 227(8) when it was not technically required

to withhold tax under the relevant provisions of the Act. I do not think that a GAAR

assessment can give rise to penalties for non-compliance with the technical sections

of the Act. First, the GAAR is not a penalty provision. If a transaction, or series of

transactions, runs afowl (sic) of GAAR, the remedy specified in subsection

245(2) is that tax consequences will be determined that are reasonable in the

circumstances in order to deny a tax benefit that would otherwise result from the

transaction. Subsection 245(2) does not indicate that a successful GAAR

assessment will cure the deficiency in the scheme of the Act but merely that the tax

benefit resulting from the technical application of the section will be denied.

e) Analysis and Conclusion

As noted by the majority of the Supreme Court of Canada in Lipson, the

application of the GAAR may create uncertainty for taxpayers but it cannot be

ignored:

52. (…) To the extent that it may not always be obvious whether the purpose of a

provision is frustrated by an avoidance transaction, the GAAR may introduce a

degree of uncertainty into tax planning, but such uncertainty is inherent in all

situations in which the law must be applied to unique facts. The GAAR is neither

a penal provision nor a hammer to pound taxpayers into submission. It is designed,

in the complex context of the ITA, to restrain abusive tax avoidance and to make

sure that the fairness of the tax system is preserved. A desire to avoid uncertainty

cannot justify ignoring a provision of the ITA that is clearly intended to apply to

transactions that would otherwise be valid on their face.

[My emphasis]

The notion that the GAAR involves some uncertainty and that a taxpayer

cannot self-assess for the GAAR was addressed in Quinco Financial Inc. v. The

Queen, 2016 TCC 190, where Bocock J. noted that “a tax benefit and avoidance

transaction remain the purview of the taxpayer who authors, executes, and bears the

onus at trial of disproving. These are within the taxpayer’s records, affairs and

viewscape” (para 32).

⁹¹Paragraph 78.

Page: 152

In this instance, Mr. Grenon must be taken to have known and understood that

he was assuming certain risks that were inherent in the tax scheme that he chose to

implement. In particular, the OM cautioned all prospective investors that if the units

in the proposed fund were acquired in an exempt plan and it was later determined

that the units were not a “qualified investment”, the investors would be required to

pay tax on the income and pay a tax of 1% calculated monthly on the value of the

units acquired until they were removed from the exempt plan. In find that this is a

direct reference to the Part XI.I tax that the Appellants now argue is a penalty tax.

As indicated above, when a taxpayer acquires a non-qualified investment in

an RRSP, the Minister is (or was during the Relevant Period) given the choice

between assessing the annuitant based on the fair make value of the non-qualified

investment at the time it was acquired pursuant to subsection 146(10). Alternatively,

where the Minister had not done so, the RRSP Trust was required to file a prescribed

form and pay a tax of 1 % calculated monthly on the value of the non-qualified

investment until such time as it was removed from the RRSP. The Appellants have

not argued that the tax arising pursuant to subsection 146(10) is a penalty and I see

no reason to conclude that the tax that may be assessed in lieu thereof, by virtue of

Part X.I, should be characterized as a penalty. Furthermore, I do not accept the

Appellants’ argument that the Minister could have “avoided” the Part XI.I tax on the

RRSP Trust had she assessed the annuitant directly pursuant to subsection 146(10).

The Minister may choose one or the other.

I turn to the “tax consequences” based on a finding that the GAAR applies.

With respect to the reassessment made in the Grenon Appeal pursuant to

subsection 56(2), it is apparent that the amounts paid by the Income Funds to the

RRSP Trust during the 2008 and 2009 taxation years can best be characterized as

income from non-qualified investments described as the Distribution Transactions.

Although I have already concluded that subsection 56(2) would not normally

extend to income generated by non-qualified investments, I find that the Minister

would have been entitled to “recharacterize” the “nature of the payment” pursuant

to paragraph 245(5)(a) and as a result, were it not for the assessments made in the

RRSP Trust Appeal, I would have upheld the reassessment made on the basis of the

GAAR. However, since the amounts that the Minister has sought to tax pursuant to

subsection 56(2) form part of the Distribution Transactions, I find that this would

result in a duplication of the tax which the Minister has also sought to impose on the

RRSP Trust pursuant to subsection 146(10.1). I find that this cannot be considered

“reasonable in the circumstances” as contemplated in subsection 245(5) and thus

Page: 153

conclude that the Minister could only assess the Distribution Transactions pursuant

to either subsection 56(2) or subsection 146(10.1), but not both. The Respondent has

also conceded this point.

With respect to the reassessment made in the Grenon Appeal pursuant to

subsection 204.2(1) of the Act, being the Part X.I Assessment, it is again apparent

that the amounts paid by the Income Funds to the RRSP Trust in respect of the 2004

to 2011 taxation years, constituted income from non-qualified investments described

herein as the Distribution Transactions that are subject to an assessment made

pursuant to subsection 146(10.1) in the RRSP Trust Appeal. Although it might have

been possible to conclude that the Minister was entitled to “recharacterize” the

“nature of the payment” made as an “excess contributions” pursuant to paragraph

245(5)(a), I find that this cannot be considered “reasonable in the circumstances” as

contemplated in subsection 245(5) since the Minister has assessed the RRSP Trust

for the same amounts pursuant to subsection 146(10.1).

With respect to the assessments made against the RRSP Trust pursuant to

subsection 146(10.1) whereby the Minister has assessed the payments described as

the Distribution Transactions, I find that the Minister would have been entitled to

“recharacterize” the “nature of the payment” made as income or gains from non-

qualified investments pursuant to paragraph 245(5)(a). As a result, subject to the

foregoing, I would have upheld the reassessment made pursuant to the GAAR.

Having concluded as such, I would again agree with the Appellants that the

RRSP Trust would be entitled to a credit in the amount of $136,654,427 that the

Minister has included as part of the Distribution transactions for the 2005 taxation

year since that amount represented the value of the units issued by the 2003-4

Income Fund in exchange for the units of FMO. The amount should thus be excluded

from the calculation as it reflected an exchange transaction that did not actually

increase the value of the RRSP Trust and was not income.

With respect to the reassessments made pursuant to subsection 207.1(2), being

the Part XI.I Reassessments, having concluded that the tax avoidance transactions

undertaken by the Appellant were abusive and contrary to the GAAR, I find that the

Minister was entitled to assess the RRSP Trust for a tax of 1 % calculated monthly

“on the fair market value of the non-qualified investments at the time they were

acquired” (described herein as the Acquisition Transactions), being the normal tax

consequences that apply to non-qualified investments where the Minister chooses

not to assess the annuitant pursuant to subsection 146(10).

Page: 154

With respect to the late filing penalties, I would have adopted the reasoning

of Campbell J. in Copthorne, 2007 TCC 481, and deleted those penalties.

For greater clarity, I would add that the assessment made pursuant to

subsection 207.1(2) would include the sum of $152,874,000 described as part of the

Acquisition Transactions, being the fair market value of the FMO units transferred

from the RRSP Trust to the 2003-4 Income Fund in November 2005.

As a publicly traded mutual fund trust, FMO was a qualified investment for

RRSP purposes as long as it remained in the RRSP Trust but not so once the FMO

units were transferred to the Income Fund in exchange for units therein.

I would also reject the argument that the RRSP Trust should be entitled to a

credit for the loss allegedly suffered by the RRSP Trust in 2008 in connection with

the disposition of the units acquired from the 2003-4 Income Fund, as described

above. I reach this conclusion because and the RRSP regime does not contemplate

the deduction of losses suffered within an RRSP. Moreover, subsection 207.1(1)

contemplates a tax of 1% calculated monthly based on the fair market value of the

non-qualified investment “at the time it was acquired by the trust”. This would

include all the units of the 2003-4 Income Fund.

CONCLUSION

The Court has concluded that the steps undertaken by the Appellant to

establish the Income Funds were not legally effective such that they were not

qualified investments for RRSP purposes. I now turn to the various assessments,

reflecting the fact that these assessments were heard together on common evidence.

Grenon Appeal

The Court has already concluded that absent a sham, subterfuge or other

vitiating circumstances (Neuman, para 33 and Ludco, para 69), the application of

subsection 56(2) should not extend to income generated by investments held in an

RRSP, even if the conclusion is that they are non-qualified investments. For reasons

set out above, I find that an assessment pursuant to the GAAR would not be

“reasonable in the circumstances” as contemplated in subsection 245(5). I would

thus allow the appeal from the reassessments made pursuant to subsection 56(2).

The Court has similarly concluded that absent a sham, subterfuge or other

vitiating circumstances, income generated by investments held in an RRSP should

Page: 155

not be characterized as “excess contributions” and be subject to an assessment

pursuant to subsection 204.1(2.1). For reasons set out above, I find that an

assessment pursuant to the GAAR would not be “reasonable in the circumstances”

as contemplated in subsection 245(5). I would thus allow the appeal from the

assessment made pursuant to subsection 204.1(2.1).

RRSP Appeal

Since the Court has concluded that the Income Funds were not qualified

investments for RRSP purposes, it follows that the Minister was entitled to assess

the RRSP Trust on the income generated by the Income Funds pursuant subsection

146(10.1) with the applicable late filing penalties.

As noted above in the context of GAAR, this would exclude the sum of

$136,654,427 (the amount described by the Respondent as part of the Distribution

Transactions for the 2005 taxation year) since that amount resulted from the transfer

of the FMO units held in the RRSP Trust to the 2003-4 Income Fund and thus did

not constitute income from a non-qualified investment. I would thus allow the appeal

from the assessment made pursuant to subsection 146(10.1) and refer the matter back

to the Minister for reconsideration and reassessment in light of this finding.

Finally, since the Court has concluded that the Income Funds were not

qualified investments, it follows that the Minister was entitled to assess the RRSP

Trust pursuant to subsection 207.1(1) and 207.2(3). For greater clarity, this would

include the units of the 2003-4 Income Fund acquired by the RRSP Trust during the

2005 taxation years valued at $152,874,000 in exchange for the FMO units. I would

thus dismiss the appeal from the reassessment made pursuant to these provisions.

The parties will have 60 days from the date of hereof to provide written

submissions regarding costs. Such submissions shall not exceed 15 pages for each

party.

These Further Amended Reasons for Judgment are issued in substitution for the

Amended Reasons for Judgment dated April 27, 2021 to correct typographical

errors.

Signed at Ottawa, Canada, this 1^stday of June 2021.

“Guy R. Smith”

Page: 156

Smith J.

Page: 157

Appendix A – The Read-ins

As noted in the above Reasons for Judgment, the Court ordered that the parties

submit written submissions on the issue of contextual read-ins arsing as a result of

subsection 100(1) of the Rules which provides as follows:

100 (1) At the hearing, a party may read into evidence as part of that party’s own

case, after that party has adduced all of that party’s other evidence in chief, any part

of the evidence given on the examination for discovery of

(a) the adverse party, or

(b) a person examined for discovery on behalf of or in place of, or in addition to the

adverse party, unless the judge directs otherwise,

if the evidence is otherwise admissible, whether the party or person has already

given evidence or not.

(…)

(3) Where only part of the evidence given on an examination for discovery is read

into or used in evidence, at the request of an adverse party the judge may direct the

introduction of any other part of the evidence that qualifies or explains the part first

introduced.

Tax Court of Canada Practice Note 8, titled “Use of Discovery/Undertakings”,

July 19, 2001 (“Practice Note 8”) which governs the use of examinations for

discovery and undertakings as evidence at trial provides as follows:⁹²

i. Each party intending to read in discovery evidence must serve a notice in

writing on any other party no later than four days before the commencement of

the hearing. This notice must indicate each page number and the lines of the

transcript of the undertaking and part of the answer that the party intends to

read into evidence.

ii. If an adverse party intends to request the judge allow for the introduction of

evidence given in discovery that qualifies or explains the other party’s read-ins

pursuant to subsection 100(3) of the Rules, that party must serve a similar

notice in writing not less than two days before the commencement of the

hearing.

Position of the Appellant

⁹²Tax Court of Canada Practice Note No. 8 (amended), Use of Discovery/Undertakings, July 19, 2001.

Page: 158

In written submission, the Appellant has identified 19 contextual read-ins to

the Minister`s reduced in trial read-ins.⁹³The Appellant submits that either (i) the

Minister should be required to read-in the original full list of proposed read-ins

provided prior to trial, in which case the Appellant’s original contextual read-ins

ought to be allowed or (ii) if the Minister is permitted to read-in only the reduced list

provided at trial, then the Appellant ought to be permitted to read-in the revised

contextual read-ins identified for this reduced list.⁹⁴

The Appellant contends that neither section 100 of the Rules nor Practice Note

8 permit or contemplate a party narrowing its read-ins between the pre-trial notice

and the date the read-ins are submitted to the Court.⁹⁵Such action would run counter

to the purpose of Practice Note 8 which is intended to (i) avoid surprise at trial and

(ii) avoid misuse of the discovery transcript by requiring advance notice and

allowing an adverse party to review and seek additional read-ins for context.⁹⁶The

Appellant submits that the proposed contextual read-ins are appropriate,

proportional, and that they give context by way of explanation, amplification,

contradiction, or qualification.⁹⁷

Further, the Appellant rejects the Minister’s argument that certain of their

proposed contextual read-ins are inadmissible as hearsay on the basis that the

Minister cannot argue that a portion of her own evidence is hearsay.⁹⁸Specifically,

the Appellant argues that the read-ins are the Minister’s evidence such that if any of

her read-in depends for their context on hearsay evidence, then the whole read-in is

hearsay not just the contextualization. The Appellant argues that the Minister’s

position would allow it to “cherry-pick the transcript, omitting certain parts

providing context, and then argu[ing] that the Court should take in the evidence

context-free because to do otherwise would render such evidence inadmissible.”⁹⁹

Position of the Minister

The Minister submits that it was entirely appropriate for her to tender a

reduced portion of the identified read-ins on the basis that those read-ins not tendered

⁹³Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at tab 2.

⁹⁴Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at para 16.

⁹⁵Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at para 12.

⁹⁶Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at para 10.

⁹⁷Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at para 19.

⁹⁸Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 29, 2019.

⁹⁹Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 29, 2019.

Page: 159

only restated evidence already introduced in either direct or cross-examination of

the Appellant’s witnesses.¹⁰⁰

Regarding the Appellant’s contextual read-ins proposed pursuant to

subsection 100(3) of the Rules, the Minister argues that subsection 100(3) provides

no absolute right for the Appellant to introduce contextual read-ins.¹⁰¹The Minister

opposes four of the Appellant’s proposed contextual read-ins on the basis that they

are oath-helping, constitute hearsay evidence, or do not qualify or explain the

Minister’s read-in.¹⁰²The contested proposed contextual read-ins are as follows:¹⁰³

Respondent Read-Ins

Appellant’s Contextual

Respondent’s objection

Read-Ins¹⁰⁴

Witness

Question

979-981

Witness

Question

1.

Mr. Grenon

973

Does not contextualize or

explain the Minister’s read-

in; the witness Mr. Grenon

should have testified to the

content of the additional

read-in at trial; and to the

extent that he did, the

Mr. Grenon

proposed read-in amounts

to an attempt to introduce

prior consistent statements

or oath-helping.

2.

309-330

Mr. Grenon

based on

U/T #5A

The proposed read-in is

hearsay and the appellants’

have not provided evidence

that an exception to the rule

against hearsay applies.

Mr. Grenon

information

provided by

Devon Wagner,

a representative

of Grant

Thornton

3.

2090-2099 Mr. Grenon

U/T #85

The last sentence of the

read-in is hearsay and does

not reference the source of

the information such that

Mr. Grenon

¹⁰⁰Court File 2014-3401(IT)G, Letter from the Respondent regarding read-ins, March 13, 2019.

¹⁰¹Court File 2014-3401(IT)G, Letter from the Respondent regarding read-ins, March 13, 2019.

¹⁰²Court File 2014-3401(IT)G, Letter from the Respondent regarding read-ins, March 13, 2019.

¹⁰³Court File 2014-3401(IT)G, Letter from the Respondent regarding read-ins, March 13, 2019.

¹⁰⁴Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at Tab 2.

Page: 160

the Court cannot evaluate if

an exception to the rule

against hearsay may apply.

4. Mr. Grenon

76-83

Mr. Grenon

84-87

Does not qualify or explain

the Minister’s read-in which

stands on its own as self-

contained evidence.

Analysis

In tendering a reduced list of read-ins at trial, the Minister relies on this

Court’s holding in Envision Credit Union v R, 2010 TCC 353¹⁰⁵(“Envision”) in

which Justice Webb (as he then was) considered the application of section 100 of

the Rules. He held that a party seeking to read-in questions from discoveries ought

to edit the list so that the read-ins only deal with questions not asked of the witness

during the hearing.¹⁰⁶Specifically, he held that to “read in questions that are the same

questions as were asked at the hearing with the same answers being given is not (…)

appropriate. Such questions and answers would not be admissible as they simply

repeat the evidence of the witness and therefore would be excluded as prior

consistent statements.” (para 34)

As such, the Minister argues that it was appropriate for her to edit her list of

read-ins following the examination and cross-examinations at hearing so as to

remove any portions dealing with evidence already adduced at trial.¹⁰⁷

In essence, subsection 100(3) permits a party, other than the party reading in

part of the discovery, to request that the Court allow additional portions of the

discovery to give context to the proposed read-ins. As was confirmed by Justice

Campbell in Blackmore v R, 2012 TCC 108, (“Blackmore”),¹⁰⁸subsection 100(3)

grants the judge discretion to allow the introduction of additional portions of the

discovery evidence and does not grant an absolute right to an adverse party to have

additional portions of the examination introduced into evidence.

In GlaxoSmithKline Inc. v R., 2008 TCC 324 (“GlaxoSmithKline”), Chief

Justice Rip outlined a detailed approach to determining whether contextual read-ins

should be permitted by a trial judge. He¹⁰⁹likened subsection 100(3) of the Rules to

¹⁰⁵Envision Credit Union v R, 2010 TCC 353.

¹⁰⁶Envision Credit Union v R, 2010 TCC 353 at para 34.

¹⁰⁷Court File 2014-3401(IT)G, Letter from the Respondent regarding read-ins, March 13, 2019.

¹⁰⁸Blackmore v R, 2012 TCC 108 at para 4.

¹⁰⁹GlaxoSmithKline Inc v R, 2008 TCC 324 at Appendix I.

Page: 161

section 289 of the Federal Court Rules, which the Federal Court in Canada (Minister

of Citizenship & Immigration) v. Odynsky, [1999} FCJ No 1389 (Fed T.D.)

(“Odynsky”)¹¹⁰held had the purpose of ensuring “that evidence from a transcript of

examination for discovery which is read in as evidence at trial is placed in proper

context so that it is seen and read fairly, without prejudice to another party that might

arise if only a portion of the content relevant at to a fair understanding of the

evidence read in is given”.

In determining whether proposed read-ins qualified or explained evidence

such that the Court is not mislead by one party leaving out a relevant portion of the

evidence, Justice Rip considered (i) the continuity of thought or subject matter; (ii)

the purpose of introducing the evidence in the first instance and whether it can stand

on its own; (iii) fairness in the sense that evidence should, so far as possible,

represent the complete answer of the witness on the subject-matter of the inquiry so

far as the witness has expressed it in the answers he has given on his examination

for discovery and finally (iv) whether the material is truly connected to the [opposing

party’s] read-ins or whether it amounts to evidence which should have been entered

in the [party’s] witnesses’ testimony.

Justice Boyle followed this approach in Morguard Corporation v. R. 2012

TCC 55 (“Morguard”) (at Appendix 1, para. 8),¹¹¹in which the Minister chose not

to read-in all of the passages it had originally notified the Appellant it would be

reading in. The Appellant sought to read-in the remaining passages which the

Minister had originally proposed to read-in, but the Minister objected. Justice Boyle

summarized Justice Rip’s approach as follows:

1) whether the desired additional read-ins share continuity of thought or subject

matter addressed by the deponent in the portions of the discovery read in by the

adverse party;

2) whether the portion read in by the adverse party can stand on its own and fulfill

the purpose for which the adverse party read them into evidence; put another way,

would the additional read-ins either advance or complete, or discredit or frustrate,

the adverse party's purpose?

3) whether the desired additional read-ins provide the Court with the opportunity

to arrive at a more complete understanding of what the deponent said on the

¹¹⁰Canada (Minister of Citizenship & Immigration) v Odynsky¸ [1999] FCJ No 1389 (Fed T.D.).

¹¹¹Morguard Corporation v R, 2012 TCC 55 at Appendix 1 at para 8.

Page: 162

particular subject matter in question in the totality of the answers given in his or her

examination for discovery and reflect fairness to both parties.

Justice Boyle also noted that the appropriate “scope of the search for

completeness should be having regard to the deponent's ‘answers’ on discovery on

the ‘subject matter’ and not to the deponent's specific answer to the specific question

being asked and which was read-in by the adverse party.”¹¹²

In Blackmore, Justice Campbell held that, to the extent Justice Boyle’s

decision in Morguard is to be interpreted to allow additional read-ins for

clarification, not only with respect to the specific answers given to a specific

question, but also to the subject matter of the proceeding generally, such an

interpretation would grant too broad a meaning to subsection 100(3) and would

permit parties to use read-ins to get in evidence ‘by the back door.’ (para. 10).¹¹³

Instead, Justice Campbell suggested that Justice Boyle was referring to the subject

matter of the deponent’s answer(s) at discovery. However, Justice Campbell held

that this interpretation would still allow for a much broader interpretation of

subsection 100(3) than courts had previously followed. As such, Justice Campbell

relied on the reasoning in GlaxoSmithKline in applying the following approach to

the proposed contextual read-ins (para 12):¹¹⁴

“Whether the Court could be mislead by the omission of this portion of the

examination for discovery; whether the additional read-ins amounted to evidence

that should have been addressed through the Appellant's testimony during the

hearing; and, whether the evidence fairly represented the entire response of the

witness on the subject matter of that response to the Respondent's read-ins given

during the discovery proceedings”.

In my view, Justice Boyle’s comments that subsection 100(3) “is not narrowly

restricted and limited to the completeness of the deponent’s answer to the specific

question read-in but can extend to all of the deponent’s answers to questions on the

particular subject matter in appropriate circumstances” appropriately restricts the

Court to permit only those read-ins which provide context to the questions being

read-in by an opposing party. This interpretation allows enough flexibility to ensure

the Court is not mislead by questions being read-in by one party without the

appropriate context while being narrow enough to ensure parties cannot use

contextual read-ins to enter evidence which ought to have been tendered through

¹¹²Morguard Corporation v R, 2012 TCC 55 at Appendix 1 at para 9.

¹¹³Blackmore v R, 2012 TCC 108 at para 10.

¹¹⁴Blackmore v R, 2012 TCC 108 at para 12.

Page: 163

examination at trial. As such, in determining whether to permit the Appellant to

introduce the contested read-ins, the Court should consider:

•whether the proposed contextual read-in shares continuity of thought or

subject matter addressed by the deponent in the portions of the discovery read-

in by the adverse party;

•whether the proposed contextual read-in would allow the Court with the

opportunity to gain a complete understanding of what the deponent said on the

subject matter addressed by the read-in the addition proposes to contextualize;

•whether the Court would be mislead as to what the deponent said on a subject

matter by the omission of the proposed contextual read-in; and

•whether the portion read-in by the adverse party stands on its own.

I now turn the remaining proposed contextual read-ins.

Contextual Read-in #8

The Minister’s read-in of questions 979 to 981 from the discovery of Mr.

Grenon deals with the interaction between the TOM Capital 2003-1 VT and external

corporations owned directly or indirectly by him. In particular, the read-in contains

an admission from Mr. Grenon that there was a loan from TOM 2003-1 VT to

Colborne Capital, a company owned directly or indirectly by Mr. Grenon.

The Appellants’ proposed contextual read-in appears to be directed at Mr.

Grenon’s position that the businesses were structured for bona fide business reasons,

both within and outside the Income Fund structure, and that the loans were legally

effective, legitimate transactions at arm’s length rates.¹¹⁵

The Minister’s position is that the Appellant’s proposed contextual read-in

does not contextualize or explain the Crown’s read-in. There is minimal continuity

of thought between the read-in and the contextual read-in, the read-in fairly presents

Mr. Grenon’s evidence, and the Court would not be misled by the exclusion of the

contextual read-in.

I find that contextual read-in #8 is admissible. There is continuity of subject

matter between the Minister’s read-in and the Appellant’s contextual read-in,

namely with respect to Mr. Grenon’s intentions in structuring the Income Funds and

¹¹⁵Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at tab 2:8.

Page: 164

their relationship to entities outside the structure. The read-in concerns Mr. Grenon’s

answers from a mere six pages earlier in the discovery transcript. The Appellant’s

contextual read-in clarifies the admission as to the loan found in the Minister’s read-

in.

Contextual Read-in # 10

This items relates to the Corporate Appeals but I will nonetheless deal with it

here.

The Minister’s read-in of questions 309 to 330 of Mr. Grenon’s examination

for discovery concerns Grant Thornton’s valuation of the TOM Capital 2003-4

Income Fund units at the time of the Foremost Reorganization.¹¹⁶Specifically, at

questions 327 to 330, there is a discussion of whether the valuators mistakenly

identified the transaction as arm’s length. Included in the read-in is the Minister’s

request for an undertaking as to the Appellant’s position going to trial as to whether

Mr. Grenon’s characterization as being ‘arm’s length’ in the Grant Thornton

valuation was an error.

The Appellant’s proposed contextual read-in is the fulfilment of his

undertaking to provide their position going to trial. The answer provides that “Mr.

Grenon's understanding from talking to Devon Wagner at Grant Thornton is that this

term was used correctly in the valuation and it refers to the bulk of the unitholders

of [Tom Capital 2003-4] before the subscription being arm's length to him.”¹¹⁷

The Minister’s position is that this is inadmissible as hearsay and is an out of

court statement adduced for the truth of its contents that should have been provided

by Mr. Wagner himself on oral testimony.

In find that contextual read-in #10 is admissible. It shares the same subject

matter and provides the Court with the necessary information to fully understand the

evidence adduced by the Minister’s read-in. The answer is a response to a question

asked by counsel for the Minister on the same subject and the Minister’s read-in

contains the very question to which the Appellant s’ contextual read-in provides an

answer. The contextual read-in concerns Mr. Grenon’s position and is not evidence

of the truth of the statement.

¹¹⁶Court File No. 2014-3401(IT)G, Crown’s Book of Read Ins, February 22, 2019 at tab 13.

¹¹⁷Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at tab 2:10.

Page: 165

Contextual Read-in #16

The Minister’s read-in of questions 2090 to 2099 of Mr. Grenon’s

examination for discovery concerns certain payments made by Century Services and

other payers on behalf of the Income Fund subscribers.¹¹⁸The Appellant’s

contextual read-in is a response to an undertaking to identify which company

Century Services is in relation to the Income Fund structure. The Appellant’s

contextual read-in identifies the corporation as the general partner of Century

Services LP in which the sole limited partner is TOM Capital 2003-2 Venture

Trust.¹¹⁹However, the answer goes further, stating that “Mr. Grenon is advised that

Ms. Bruce repaid [Century Services] for the subscription funds shortly thereafter.”

The Minister’s position is that the contextual read-in is inadmissible on the basis of

hearsay.

Contextual read-in #16 is admissible for the purpose of providing context as

to how Century Services fits into the mutual fund structure. However, contextual

read-in #16 is not admissible on the basis of hearsay for the purpose of proving as a

fact that Ms. Bruce repaid Century Services for the subscription funds. As the

statement is an out of court statement adduced for the truth of its contents, it is

hearsay. No exception to the hearsay rule applies. The contextual read-in must be

“otherwise admissible” for the purpose of section 100 of the Rules.

Contextual Read-in #18

This item also relates to the Corporate Appeals.

The Minister’s read-in of questions 76 to 83 of Mr. Grenon’s examination for

discovery deals with the reasoning for the Foremost Reorganization. Specifically, it

includes an admission from Mr. Grenon that the corporate appellant purchased units

in the Foremost Reorganization, at least in part, due to the opportunity to benefit

from a tax perspective through ending up with a capital dividend account.¹²⁰

The Appellant’s contextual read-in canvasses the questions asked

immediately after those contained in the Minister’s read-in.¹²¹The Appellant’s

contextual read-in concern the scope of the Foremost Reorganization and that, to

Mr. Grenon, the steps involving the Corporate Appellants were not part of the

¹¹⁸Court File No. 2014-3401(IT)G, Crown’s Book of Read Ins, February 22, 2019 at tab 48.

¹¹⁹Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at tab 2:16.

¹²⁰Court File No. 2014-3401(IT)G, Crown’s Book of Read Ins, February 22, 2019 at tab 61.

¹²¹Court File 2014-3401(IT)G, Letter from the Appellants regarding read-ins, March 4, 2019 at tab 2:18.

Page: 166

Foremost Reorganization. The Appellant’s contextual read-in also concern the tax

perspective and how the capital dividend account was intended to be created.

The Minister’s position is that the Appellant’s contextual read-in is

inadmissible because it does not qualify or explain the Minister’s read-in.

Contextual read-in #18 is admissible. The Appellant’s contextual read-in

further explains the Minister’s read-in concerning the tax perspective of certain steps

in the Foremost Reorganization. The Appellant’s contextual read-in contains follow-

up questions to the Minister’s read-in, concerns the same subject, fulfills the purpose

of demonstrating Mr. Grenon’s understanding and intention in the transaction, and

provides for a more complete understanding of the subject.

Page: 167

2021 TCC 30

CITATION:

COURT FILE NO.:

STYLE OF CAUSE:

2014-3401(IT)G 2014-4440(IT)G

JAMES T. GRENON AND THE RRSP

TRUST OF JAMES T. GRENON BY ITS

TRUSTEE CIBC TRUST

CORPORATION AND HER MAJESTY

THE QUEEN

PLACE OF HEARING:

DATE OF HEARING:

Ottawa, Ontario

February 11, 12, 13, 14, 15, 18, 19, 20, 21,

22, 2019 and September 9, 10, 11, 12 13,

2019

REASONS FOR JUDGMENT BY: The Honourable Justice Guy R. Smith

DATE OF JUDGMENT:

June 1, 2021

APPEARANCES:

Counsel for the Appellant:

John J. Tobin

Linda Plumpton

James Gotowiec

Cy M. Fien

Brandon Barnes Trickett

Ari M. Hanson

Aron W. Grusko

Counsel for the Respondent: Ifeanyi Nwachukwu

Christopher Kitchen

Tanis Halpape

Jeremy Tiger

Page: 168

COUNSEL OF RECORD:

For the Appellants:

Name:

Cy M. Fien

Brandon Barnes Trickett

Ari M. Hanson

Aron W. Grusko

Firm:

Fillmore Riley LLP

Name:

John J. Tobin

Linda Plumpton

James Gotowiec

Firm:

Torys LLP

For the Respondent:

Nathalie G. Drouin

Deputy Attorney General of Canada

Ottawa, Canada