REASONS FOR JUDGMENT
The appellant, Gerbro Holdings Company (Gerbro),
is appealing from two assessments made by the Minister of National Revenue (Minister) with respect to its taxation years ending on
December 31, 2005 and December 31, 2006 (Relevant Period).
The two appeals were heard on common evidence. The Minister's assessments
imputed to Gerbro income of $841,803 for 2005 and $754,210 for 2006 under
section 94.1 of the Income Tax Act (ITA) in respect of Gerbro's
investments in the following five offshore investment (hedge) funds
(collectively, the Funds):
The Raptor Global Fund Ltd. (Raptor);
Endowment Advisors Ltd. (Arden);
3. M. Kingdon Offshore Ltd. (Kingdon);
4. Haussmann Holdings N.V. (Haussmann); and
5. Caxton Global Investments Ltd. (Caxton).
Section 94.1 is an anti-avoidance provision
which applies where (1) a taxpayer's interest in a non-resident entity
derives its value, directly or indirectly, primarily from portfolio investments
in listed assets, and (2) it may reasonably be concluded, having regard to
all the circumstances, that one of the main reasons for the taxpayer acquiring,
holding or having the interest in the non‑resident entity was to pay
significantly less Part I taxes than would have been payable if the
taxpayer had held the portfolio investments directly. I will refer to the rules
set out in section 94.1 as the offshore investment fund property rules (OIFP
The essence of the Respondent's position is that
all the Funds derived their value primarily from portfolio investments and that
Gerbro, being a sophisticated investor, invested with an intention to reduce or
defer Canadian taxes, as contemplated by the concluding part of the subsection.
This position is premised on the low or non‑existent taxation in the
jurisdiction in which the investment vehicles of the Funds were located, on the
fact that the hedge funds selected made no distributions to their shareholders,
as well as on the existence of other tax‑motivated transactions that Gerbro
entered into over time.
The Appellant, on the other hand, argues that
section 94.1 does not apply since neither of the two above-stated
requirements is met. It submits that (1) the Funds did not derive their
value primarily from portfolio investments in listed assets, and (2) that
none of Gerbro's main reasons for investing in the Funds was to reduce or defer Canadian taxes. In its Amended Notice of Appeal, the Appellant
stated that it invested in the Funds to complement its investments in
traditional long equities, in order to meet its primary objective of capital
preservation which is set out in its investment guidelines.
The evidence adduced at trial does not support
the Appellant's position that the Funds did not primarily derive their value, directly or indirectly, from portfolio investments in listed assets.
However, the appeal must succeed on the basis that, having regard to all the
circumstances, it may reasonably be concluded that none of Gerbro's main
reasons for investing in the Funds was to defer or avoid Canadian taxes as
contemplated by the OIFP Rules.
The parties have agreed on some of the relevant facts and these are set out in a Statement of Agreed Facts
(Partial) which is attached as Appendix A to these reasons for judgment. I
will summarize the key facts.
In 1986, the late Gerald Bronfman left a
substantial inheritance for Marjorie Bronfman in a spousal trust (MB Trust)
and Gerbro was established as a holding company tasked with investing the MB
Trust's capital and income during Ms. Bronfman's
lifetime. Gerald Bronfman's last will and testament further provided that the
remaining capital and income would go to Marjorie's four children following her
In the Relevant Period, Ms. Bronfman had already reached the age of
88 years, which was why Gerbro's investments had to be liquid.
Ms. Nadine Gut held the position of
president of Gerbro. Before being appointed president,
she had been a part‑time (from the company's inception) and then full‑time
(as of June 1990) employee of Gerbro.
Gerbro was a Canadian-controlled private corporation incorporated under the Canada Business
Corporations Act 
with a fiscal year‑end of December 31, and its sole shareholder
was the MB Trust.
Gerbro chose to use independent money managers to manage its investments since
it did not have the resources in-house to actively manage its own portfolio.
Nonetheless, Gerbro expended significant resources to make allocation decisions
with respect to the MB Trust's capital in accordance with the applicable investment
Gerbro's board of directors adopted its first
written investment guidelines in 1992,
in which they codified the capital preservation
investment philosophy Gerbro already adhered to. Subsequent amendments to the
1992 investment guidelines did not change Gerbro's investment philosophy of
capital preservation. In essence, the amendments to the investment guidelines
refined Gerbro's policies for selecting managers as well as its portfolio
allocation guidelines. They also updated historical figures influencing the
minimum expected return requirement for achieving capital preservation, such as
the rate of inflation and Gerbro's operating costs. A set of investment
guidelines adopted in April 2002 (2002 Guidelines) was still in force
at the beginning of the Relevant Period, but was updated by a new set of
guidelines in April 2005 (2005 Guidelines). The
2002 Guidelines included an appendix that was a checklist for selecting
and replacing investment managers.
Although Gerbro's main
objective was capital preservation, like most investors, it had as a secondary
objective earning a return consistent with prevailing market expectations. This
meant that if the markets were achieving good returns, Gerbro also wanted to
benefit from the higher than normal returns, subject to the level of volatility
Moreover, the money Gerbro invested had to be allocated to investments that (i) were liquid,
(ii) provided Gerbro with sufficient cash to pay its yearly operating
costs as well as its yearly tax liabilities, and (iii) provided
Marjorie Bronfman with enough cash to sustain her lifestyle and to fully carry
out her philanthropic endeavours.
Gerbro referred to the applicable investment guidelines to make its investment allocation decisions.
To achieve the objective of capital preservation, the 2005 Guidelines
fixed a minimum return of 6.5%. The prevailing rate of inflation, the operating
expenses of Gerbro and the annual expenses of Marjorie Bronfman were
considered in order to arrive at this target rate of return. To this expected
return criterion, the 2005 Guidelines attached a target volatility of 10%,
which served as a gauge of risk.
In addition, the 2005 Guidelines set upper and lower allocation percentages for five distinct asset classes as
Bonds [Fixed Income]
Directional [Hedge] Funds *
Non-directional [Hedge] Funds
* The maximum allocation for equities and
directional funds combined is 60%.
** International equities as a sub group of
equities could have an allocation of 0% to 30% of the combined portfolio.
Nadine Gut's testimony established that Gerbro rigorously followed its well‑defined objectives set out in its
investment guidelines. In the Relevant Period, the percentages Gerbro actually
allocated to each of the five asset classes were consistent with the
above-referenced allocation percentages.
At its inception, Gerbro retained SEI
Investments, an investment management firm, to build a suitable portfolio.
Subsequently, Gerbro did much of the due diligence work
preceding allocation decisions internally, and its allocation decisions were
presented to and approved by its investment committee (Investment Committee).
From 1993 to 2001, Gerbro retained Sandra Manzke
from Tremont (a consulting firm located in the state of New York) to act
as a consultant in searching for hedge fund managers. Ms. Manzke helped Gerbro identify potential hedge fund managers which had at least three
years of proven positive returns and at least $100 million of assets under
management. Most managers Tremont suggested to Gerbro were based in the
Gerbro argued forcefully that it did not
restrict its search for managers to United States managers and
supported this assertion with examples of some Canadian managers it had historically
invested with. From 2003 to 2006 it invested in Maple Key Limited Partnership,
but divested itself of that investment due to disappointing returns. Gerbro
redeemed an investment it had made around the year 2000 with another Canadian
manager, Boulder Capital Management, later renamed Silvercreek Limited
Partnership, due to accounting fraud related to the Enron scandal.
In the early 1990s, Gerbro invested amounts of
$1 to $2 million with celebrity world hedge fund managers such as George Soros.
In those years Gerbro benefited from the exceptional
returns those hedge fund managers produced on currency plays.
It appears from the minutes of Gerbro's board of
directors' meeting held on January 28, 1993 that Gerbro considered adding hedge
funds to its portfolio as a means of protecting itself from a potential
meltdown of financial markets.
This suggestion originated from one director, Mr. Schechter, who spoke about
the benefits of increasing Gerbro's percentage allocation to hedge funds.
The investments in the Funds ensued
progressively. In 2005, Gerbro acquired and held shares in Raptor, Arden,
Kingdon and Haussmann. In 2006, Gerbro acquired and held shares in Caxton,
Raptor and Haussmann.
All the Funds were subject to annual management
fees, ranging from 1% to 3%. Moreover, all the Funds, aside from Haussmann, had
to pay an incentive performance fee ranging from 10% to 30% above a high-water
Another similarity is that all the Funds were
located in low‑tax jurisdictions and therefore paid only a nominal amount
of tax, if any at all. Raptor and Arden were registered as exempted companies
under the Companies Law of the Cayman Islands. Kingdon and
Haussmann were incorporated in the Netherlands Antilles. Lastly, Caxton was
registered as an exempted company under the laws of the British Virgin Islands.
Gerbro submitted that it could not replicate the
investment strategies of the Funds for lack of exact knowledge about the
investments each Fund carried and for want of the financial resources required to
replicate sophisticated investment strategies. The lack of exact knowledge also
meant that it could not calculate the amount of Part I tax that it would
have paid if it had hypothetically held the Funds' investments directly. The
competitive advantage of each Fund consisting in the research leading up to
investment decisions and in the alternative trading strategies their respective
managers used, the Funds did not disclose their basket of assets to investors.
In some cases, notably Raptor, the managers provided information on select
trades after the fact.
Gerbro contends that it was never invited to
invest in the onshore vehicles of the Funds. It should be noted that all
investments in the Funds had equivalent onshore
investment vehicles in the United States, except for Haussmann. When an investor
was admitted to invest in the Funds, the manager would direct the investor to
the appropriate investment vehicle. Given that the hedge funds were unregulated
investments, the managers had full discretion to accept an investor, and if the
investor was accepted, to decide in which investment vehicle that investor could
subscribe for shares.
According to Ms. Gut's testimony, the
jurisdiction that the fund was located in was not relevant in deciding whether
to invest in any of the Funds.
The information about the low-tax jurisdiction was in the offering
memorandum of each Fund. The memoranda were only provided to Gerbro as a
formality prior to it making an investment. At that point, the Investment
Committee had already made the decision to subscribe for shares.
Although the managers of the Funds had a
discretionary power to declare dividends, they did not declare any dividends
for Raptor, Caxton, Arden and Kingdon in the Relevant Period. Gerbro received
relatively small dividends from Haussmann as compared to the size of its
investment in that Fund, which exceeded $5 million at all times during the
Relevant Period. The dividends it received from Haussmann were in the amounts
of $8,915.82 in 2005 and $26,311.44 in 2006.
While they had many similarities, the Funds were distinct in the strategies that they employed and
should be described separately in some detail.
Haussmann is a hedge fund of funds, which means
that Haussmann achieved capital appreciation by building a portfolio composed of other hedge funds. The fund was managed by a group of advisors,
including Mirabaud, a bank with which Gerbro transacted business.
Coincidentally, Haussmann also invested in Raptor and Kingdon. Haussmann was able
to invest in a multitude of funds since it pooled money from many investors.
That investment fell within Gerbro's directional
hedge fund asset class, and the hedge funds Haussmann invested with were
allowed to buy and sell securities, options, commodity futures and foreign
The hedge funds were also allowed to engage in
leveraging and in sophisticated trading strategies using derivatives.
Gerbro's stated reasons for investing in Haussmann were twofold.
Firstly, it wanted to gain access to many hedge funds to which it could not have
access on its own. Haussmann was able to get access to them because of the
large amounts of money it invested. At the time, the fund had $4 billion worth of
assets under management. Gerbro asserts that, due to this economic disparity alone, it could
not have replicated Haussmann's strategy.
Secondly, by investing with Haussmann, Gerbro benefited from a wealth of knowledge
about financial markets which Haussmann had acquired from speaking to many
managers it had either invested with or considered investing with.
In addition, Haussmann is the only one of the Funds that is
publicly traded. Its stock traded on the Irish Stock Exchange. The fact that it is publicly
traded was relevant to the extent that Haussmann would have qualified as an
exempt interest under the proposed foreign investment entity rules (FIE Rules), which rules will be
addressed later on in my reasons.
Raptor was managed by James Pallotta and had approximately $9 billion worth of assets under management when Gerbro invested in
2005. The iconic Paul Tudor Jones brought James Pallotta into the
Tudor Group, and Mr. Pallotta formed the Raptor fund under the umbrella of the
Tudor Group. Gerbro was never extended the opportunity to invest directly with
Paul Tudor Jones, but Mirabaud brokered a sale of Raptor shares to
This investment fell within Gerbro's directional
hedge fund asset class and was primarily in equities, both long and short, and
in related derivatives. These types of investments included common stocks,
preferred stocks, warrants, options, bonds, repurchase agreements, reverse
repurchase agreements and contracts for differences.
Gerbro's only stated reasons for investing were
James Pallotta's past performance, his reputation in the industry and
Raptor's low historical volatility.
These reasons appear in an internal memorandum dated February 28, 2005
from Daniel Conti, a Gerbro employee, to Ms. Gut.
The fund is set up as a master‑feeder
structure, where Raptor is an offshore feeder fund for Raptor Global Portfolio
Ltd (Global), the master fund.
Global was the legal entity that traded in all of the assets, however, its
objectives were aligned with those of Raptor. James Pallotta offered
investment advice to Global through the Tudor Investment Corporation, a
The Raptor Global Fund Limited Partnership (Raptor LP) was the onshore
feeder fund for Global.
Subject to limited exceptions, anyone with ties
to the United States, whether an individual or a corporation, was excluded from
holding shares in the Raptor feeder fund.
Instead, such persons could have been invited to invest in the onshore Raptor
Arden was managed by Averell H. Mortimer
and was a fund of funds. Mr. Mortimer provided advice through Arden Asset
Management Inc., a company incorporated under the laws of New York of which he
was the president.
This investment fell within Gerbro's
non-directional hedge fund asset class, that is, its focus was on finding
investments with low correlation to equity financial markets. To achieve this
low correlation, Arden invested in other hedge funds that traded in, among
other things, securities, fixed-income instruments, derivatives on the
fixed-income instruments, commodity futures, options on futures, securities of
companies undergoing extraordinary corporate transactions and securities of
companies in difficulty.
Gerbro's only stated reason for investing in
Arden was Averell H. Mortimer's ability to achieve market-neutral
returns which introduced diversification into, and reduced volatility in, Gerbro's
portfolio. According to Ms. Gut, adding Arden to its portfolio would
significantly reduce the portfolio's volatility. This statement was
supported with statistical analyses that Gerbro
conducted in 2005.
The investment was thus expected to contribute to achieving Gerbro's target
volatility of 10%.
On December 1, 2005, in response to the
proposed FIE Rules, Gerbro entered into a year-end transaction whereby it sold
all of its Arden shares to its wholly-owned subsidiary
Woodrock Canada Inc. (Woodrock) by way of a reduction of capital.
The purpose of this transaction was to efficiently comply with the proposed FIE
Rules. Selling the Arden shares to Woodrock allowed Gerbro
to remain exposed to Arden while optimizing its Canadian tax structure in light
of the FIE Rules.
This year-end transaction triggered a capital gain of $523,689 in Gerbro's 2005
Gerbro made its first investment in Kingdon in
1994, and did so because of the reputation and
performance of its manager, Mark Kingdon. Gerbro's management team was
impressed with Mark Kingdon's credibility and integrity.
The investment in Kingdon fell within Gerbro's directional hedge fund asset class.
In 2005, Kingdon was structured as a stand-alone
fund and received investment advice from Kingdon Capital Management LLC, a
Kingdon used an internally developed asset allocation model to allocate its
assets primarily among investments in common stock and bonds.
On December 1, 2005, Gerbro entered into a
year-end transaction whereby it sold all of its shares of Kingdon to Woodrock
by way of a reduction of capital in response to the proposed FIE Rules.
This year-end transaction triggered a capital gain of $1,769,977 in Gerbro's
2005 fiscal year.
In 2006, when given the opportunity to subscribe
for shares in Caxton, Gerbro invested because of Caxton's performance and the
fund's low correlation with other investments in Gerbro's portfolio. The low
correlation was due to the fact that Caxton traded primarily in commodities and
that commodities had low correlation with equity markets. Gerbro attributed
Caxton's success to its manager Bruce Kovner. 
The fund was set up as part of a master-feeder
structure in which Caxton was an offshore feeder fund for Caxton International
Limited (Caxton Limited), the master fund. Caxton Limited was
a subsidiary of Caxton, and was the legal entity that purchased, held and sold all of the assets. Its objectives were aligned with those
of Caxton. Bruce Kovner offered investment advice to Caxton Limited through
Caxton Associates LLC, a Delaware company. Caxton Global Investments (USA) LLC
was the onshore feeder fund for Caxton Limited.
Gerbro submits that, in the auditor’s report, Mr. Joseph Armanious
incorrectly calculated tax that would otherwise have been payable if Gerbro had
held the Funds’ investments directly. The auditor did not have an exhaustive
list of the trades with the adjusted cost base and proceeds of disposition for
each asset, nor did he have any information about the timing of the
dispositions during the year. To make up for the lack of information, the
auditor calculated the taxes otherwise payable using information available in
the Funds' financial statements. He looked at the total amount of realized
gains in the year for each of the Funds, which were expressed in United States
dollars, regardless of when the gains were realized during the year. He pursued
his calculation by converting the realized gains appearing on the financial
statements into Canadian dollar gains using the Bank of Canada average exchange
rate for each fiscal year. Finally, the auditor multiplied the converted Canadian
dollar gain by Gerbro's tax rate for the Relevant Period to obtain the amount
of taxes otherwise payable with respect to each Fund. The auditor
compared these amounts with the negligible amount of tax each Fund paid
offshore and arrived at the conclusion that the Funds paid significantly less
tax than would have been payable if Gerbro had held the Funds' investments
directly. Joseph Armanious, the auditor for the CRA, testified at trial
that this was the process he followed.
The Appellant vigorously defends the position
that the calculation of Canadian income taxes otherwise
payable contained in the auditor's report is flawed. In that regard, the
Appellant emphasizes that the auditor's calculation was legally inaccurate
since it is at odds with the recognized method set out in Gaynor (H.R.) v. M.N.R.
Gerbro further argues that the practical
impossibility, due to the nature of investments in hedge funds, of calculating
the amount of tax otherwise payable points up the fact that this factor should
not be given a great deal of weight in inferring an intention to avoid or defer
taxes. As previously explained, hedge funds, in order to maintain their
competitive advantage, do not disclose the nature and timing of specific trades.
The Respondent added the fact that Gerbro's
directors were knowledgeable about tax matters, given their professional
backgrounds, and therefore could not have been unaware of the significant tax
benefits associated with investing in the Funds when they approved them.
Ms. Gut and David G. Broadhurst held a chartered accountant’s
professional designation, while Samuel Minzberg and Hillel W. Rosen
were lawyers with a leading law firm. Of these lawyers, the former had a
practice in taxation and the latter in mergers and acquisitions.
Moreover, the Respondent lists numerous
documents that allegedly prove that Gerbro always considered the reduction or
avoidance of tax when investing in hedge funds, which involved discussions
about the efficient reallocation of assets from one manager to another in
segregated accounts, tax‑motivated transactions to respond to the FIE
Rules or judgments on the tax efficiency of existing or potential investments.
She adds that the “one of the main reasons” test
is applied not only to the reasons for investing at the moment at which the
investment is made, but also to the reasons for continuing to hold the
investment in the non-resident entity.
In addition, the Respondent points to the Funds' policy of reinvesting income rather than
making distributions to its shareholders as an indicator that the managers of
the Funds considered the Canadian tax aspect.
The Respondent also criticizes Gerbro for having
called only Ms. Gut to testify regarding Gerbro's main reasons for investing in the Funds, rather than calling other employees to corroborate
Ms. Gut's version. She asks the Court to draw a negative inference from this.
On the topic of equivalent Canadian investments, the Respondent rejects Gerbro's assertion that they
did not limit their search for hedge funds to United States hedge funds, as
well as the broader assertion that there were no comparable Canadian hedge
funds with equivalent characteristics to those of the Funds.
While the Appellant called Mr. Luis Seco
to testify as to the accuracy of that opinion, the Respondent urges the Court
to discard his expert report. The reason put forward is that the report is
non-compliant with the Code of Conduct for Expert Witnesses, Schedule III
to the Tax Court of Canada Rules (General Procedure).
As regards the qualification of the Funds'
investments as portfolio investments in listed assets, the Respondent summarized, to the extent of her understanding, the type of investments each
Fund primarily derived its value from. On the assumption that the term “portfolio
investments” is more encompassing than the type of passive investments that
would trigger the foreign accrual property income (FAPI) rules, the
respondent asks that the Court conclude that the Funds derived their value
primarily from portfolio investments in listed assets.
Finally, the Respondent brought it to the
Court's attention that, when Gerbro communicated in writing with the CRA in
response to certain requests for information during the audit stage, Gerbro
referred to the nature of the investment in each of the Funds as being “[a]sset appreciation through portfolio investments”. In
cross-examination Ms. Gut stated that Gerbro's characterization likely
mirrored words used in the Funds' offering memoranda and that she understood “portfolio
investment” to mean a group of investments.
Section 94.1 of the ITA is the applicable
provision in the case at bar, and it reads as follows:
94.1(1) If in a taxation year a taxpayer holds or has an interest in
property (referred to in this section as an “offshore investment fund
(a) that is a share of the capital stock of, an interest in,
or a debt of, a non-resident entity (other than a controlled foreign affiliate
of the taxpayer or a prescribed non-resident entity) or an interest in or a
right or option to acquire such a share, interest or debt, and
(b) that may reasonably be considered to derive its value,
directly or indirectly, primarily from portfolio investments of that or any
other non-resident entity in
(i) shares of the capital stock of one or more corporations,
(ii) indebtedness or annuities,
(iii) interests in one or more corporations, trusts, partnerships,
organizations, funds or entities,
(v) real estate,
(vi) Canadian or foreign resource properties,
(vii) currency of a country other than Canada,
(viii) rights or options to acquire or dispose of any of the
(ix) any combination of the foregoing,
and it may
reasonably be concluded, having regard to all the circumstances, including
(c) the nature, organization and operation of any
non-resident entity and the form of, and the terms and conditions governing,
the taxpayer’s interest in, or connection with, any non-resident entity,
(d) the extent to which any income, profits and gains that
may reasonably be considered to be earned or accrued, whether directly or
indirectly, for the benefit of any non-resident entity are subject to an income
or profits tax that is significantly less than the income tax that would be
applicable to such income, profits and gains if they were earned directly by
the taxpayer, and
(e) the extent to which the income, profits and gains of any
non-resident entity for any fiscal period are distributed in that or the
immediately following fiscal period,
that one of the
main reasons for the taxpayer acquiring, holding or having the interest in such
property was to derive a benefit from portfolio investments in assets described
in any of subparagraphs 94.1(1)(b)(i) to 94.1(1)(b)(ix) in such a
manner that the taxes, if any, on the income, profits and gains from such
assets for any particular year are significantly less than the tax that would
have been applicable under this Part if the income, profits and gains had been
earned directly by the taxpayer, there shall be included in computing the
taxpayer’s income for the year the amount, if any, by which
(f) the total of all amounts each of which is the product
(i) the designated cost to the taxpayer of the offshore investment
fund property at the end of a month in the year
is multiplied by
(ii) 1/12 of the total of
(A) the prescribed rate of interest for the period that includes
that month, and
(B) two per cent
(g) the taxpayer’s income for the year (other than a capital
gain) from the offshore investment fund property determined without reference
to this subsection.
The first issue in this appeal is whether the
Funds derived their value, either directly or indirectly, primarily from “portfolio
investments” in listed assets (Value Test). To answer this question the
Court will define the term portfolio investment and then determine if the Funds
primarily derived their value from such investments. If they did, the Court
will ascertain whether the portfolio investments are investments in assets
listed in subparagraphs 94.1(1)(b)(i) to (ix).
The second issue is whether it may reasonably be
concluded, having regard to all the circumstances, including those mentioned in
paragraphs 94.1(1)(c) to (e), that one of Gerbro's main reasons
for investing in the Funds was to pay less tax than would have been payable
under Part I of the ITA if the portfolio investment had been held directly
In its Amended Notice of Appeal, the Appellant
disagreed as to the calculation of the imputed income in the event that the
Court should conclude that both the Value Test and the Motive Test have been
met. However, this question was not argued before me in either the written
submissions or in open court. I therefore conclude that this last point is no longer
Before dissecting each issue, I will first
address the question of the burden of proof with respect to the respondent's
assumptions of mixed fact and law. I will then give an overview of the foreign
affiliate regime, section 94.1 and the proposed FIE Rules, which were
It is trite law that in tax appeals a taxpayer has the onus of
proving on a balance of probabilities that the Minister's assumptions of fact are
not true, and that, absent such evidence, the assumptions will stand.
The assumptions of fact must be “precise and accurate so that the
taxpayer knows exactly the case it has to meet”: Anchor Pointe Energy
Ltd. v. Canada, 2003 FCA 294,  F.C.J. No. 1045 (QL),
at paragraph 23.
Assumptions of law or mixed fact and law are not binding on this
Court, regardless of the fact that they could have or should have been stricken
from the pleadings. To hold otherwise would be to divest this Court of its
power to rule on questions of law. In Kopstein et al. v. The Queen, 2010
TCC 448, 2010 DTC 1307, Justice Jorré, ruling on a motion to strike, enunciated
this proposition in the following way:
 In assessing whether it is
appropriate to strike a paragraph of a pleading one must bear in mind the
practical effect of the paragraph.
 In this
context one must bear in mind that an invalid or irrelevant assumption does not
cast an onus upon an appellant just because it was pleaded. For example, if on
discovery it turns out that an assumption was never made then there is no onus
on the appellant to disprove it; if the respondent wishes to rely on that
particular fact, the respondent will have to prove it. Similarly, if what is
pleaded as an assumption of fact is simply a conclusion of law and no
underlying facts for that conclusion of law have been assumed elsewhere then
there is no obligation on an appellant to disprove that.
Furthermore, this Court should not be required to extract the
factual components from assumptions of mixed fact and law when these
assumptions are incorrectly pleaded. See Anchor Pointe, supra, at
paragraph 27. Properly pleading assumptions of fact is incumbent on the
Respondent when drafting her reply.
By order dated May 27, 2014 in the present appeals, (Gerbro
Inc. v. R., 2014 TCC 179,  6 C.T.C. 2010), Woods J. denied
the Appellant's motion to strike the assumptions in paragraphs 19 (ff),
(zz), (ttt) and (pppp) of the Reply in respect of the 2005 taxation year, and
paragraphs 14.35, 14.73 and 14.94 in the Reply in respect of the 2006
It is clear from her reasons for order that she denied the motion because of
the “fresh step” rule, in section 8 of the Tax Court of Canada
Rules (General Procedure). In disallowing Gerbro's motion to strike,
Justice Woods enforced the policy behind the “fresh step” rule, which is
to ensure that the appeal process moves forward, and not backwards as that
would risk unduly prolonging the appeal process. Allowing the motion to strike
would have resulted in the Crown being granted leave to amend its reply to
extract the factual assumptions underlying its assumption of mixed fact and
law, and that in turn would have necessitated further discovery.
Justice Woods did not make any legal findings as to the effect of
the inappropriate assumptions at trial. She noted that the strategy of Gerbro's
counsel of waiting to bring the motion to strike might have worked against
Gerbro, since it was now barred from having the assumptions struck. This does
not address the matter of the effect of those assumptions at trial, which,
according to Kopstein, should not have the effect of placing the onus on
Gerbro. As a matter of fact, Justice Woods stated, at paragraph 31 of
her order, that “[i]f it were not for the potential application of the fresh
step rule, the purpose test assumptions should be struck out with leave to amend
to extricate the factual elements.”
The Supreme Court in Canada (Director of
Investigation and Research) v. Southam Inc., 
1 S.C.R. 748 distinguished questions of mixed law and fact from purely
factual or legal questions with the following example:
35. . . . Briefly stated, questions of law are
questions about what the correct legal test is; questions of fact are questions
about what actually took place between the parties; and questions of mixed
law and fact are questions about whether the facts satisfy the legal tests.
A simple example will illustrate these concepts. In the law of tort, the
question what “negligence” means is a question of law. The question whether the
defendant did this or that is a question of fact. And, once it has been decided
that the applicable standard is one of negligence, the question whether the
defendant satisfied the appropriate standard of care is a question of mixed law
and fact. I recognize, however, that the distinction between law on the one
hand and mixed law and fact on the other is difficult. On occasion, what
appears to be mixed law and fact turns out to be law or vice versa.
Thus, it can be concluded that the assumptions in
paragraphs 19 (ff), (zz), (ttt), and (pppp) of the 2005 reply
are assumptions of mixed fact and law. The same is true for the assumptions in
paragraphs 14.35, 14.73 and 14.94 of the 2006 reply. Justice Woods
pointed out the existence of at least two legal questions in the Minister's
assumptions, namely: “What is a portfolio investment?" and "When do
tax considerations satisfy the purpose test?” (Gerbro, supra, at
paragraph 30.) I agree.
The Respondent must now cope with assumptions of mixed fact and
law in her reply that are for all intents and purposes ineffective in placing
on the Appellant the burden of proving that its investments in the Funds were
portfolio investments or that the Motive Test was met. Given the analysis below,
the ineffective assumptions are of no consequence.
The foreign affiliate rules in Division B,
subdivision i of Part I of the ITA existed for over a decade before
the OIFP Rules were enacted in 1984.
Since their inception in 1972, the foreign affiliate rules have been modified
substantially over the years, both before and after the OIFP Rules were
In brief, the foreign affiliate regime is made
up of two components. Those components are the current inclusion of foreign
accrual property income of a controlled foreign affiliate (CFA) of a
taxpayer resident in Canada (subsections 91(1) and 95(1)), and the foreign
affiliate dividend regime (FA dividend regime), which deals with the
taxation of dividends when they are received by Canadian residents from foreign
corporations (sections 90 and 113).
The two components produce various tax outcomes
on two main axes. Simply put, the taxation outcomes will depend on whether the
foreign corporation in which the interest is held is a foreign affiliate or a
and whether the income earned is active or passive. The FAPI rules apply when a
controlled foreign affiliate earns FAPI (passive investment income, such as
interest, rent, royalties or dividends.) The FA dividend rules apply as long as
the foreign corporation is a foreign affiliate, not necessarily controlled by
Canadian residents. A CFA, on the other hand, will have to determine, with regard to passive
income, if it has FAPI, which will be taxed on an imputation basis.
Subsequently, if the CFA pays a dividend it will still be subject to the FA
A first observation is that a Canadian taxpayer stands
to benefit through income deferral from an investment in a non-controlled
foreign affiliate earning passive income, as long as the taxpayer does not
receive dividends, the caveat being that the OIFP Rules do not apply. The
Canadian taxpayer will instead be taxed annually on non-distributed FAPI of a
CFA. In substance, the ITA will ignore the foreign legal construct in arriving
at the net income of the Canadian taxpayer, thereby effectively bringing the
income earned by the non-resident corporation into the Canadian tax base.
The Federal Court of Appeal in Lehigh Cement
Ltd. v. Canada, 2014 FCA 103,  3 F.C.R. 117, 
4 C.T.C. 107 at paragraph 19, aff'g 2013 TCC 176,  5 C.T.C.
2010, highlighted the fact that Canadian taxpayers can easily manipulate the
tax status of a non-resident corporation they invest in so as to obtain the
desired tax savings. In anticipation of this mischief, the foreign affiliate
regime includes at paragraph 95(6)(b) an anti-avoidance provision which
denies the benefit of acquiring or disposing of shares in a non-resident entity
when the principal purpose of those actions is to reduce or defer the payment
of tax. It should be noted that prior to the facts that arose in the Lehigh decision
and prior to a technical amendment in 2001, the applicable test was a “one of
the main reasons” test rather than a “principal purpose” one. The following
passage summarizes the findings of the Court on the manipulation of the tax
status of non-resident corporations:
19 The “foreign affiliate” status of a non-resident
corporation, which is dependent on the non-resident corporation's ownership
status, can give rise to tax savings for a Canadian taxpayer because of the
ability to claim a deduction offsetting the amount of the dividends included
into income. And often the Canadian taxpayer can easily manipulate that status
to get those tax savings. For example, it can transform a non-resident
corporation into a “foreign affiliate” by acquiring more shares in it. Or it
can dispose of shares to avoid the non-resident corporation from becoming a “controlled
foreign affiliate.” In this context, “taxpayers jockey to get on the right side
of the distinctions to take advantage of the rules”: Vern Krishna, The
Fundamentals of Canadian Income Tax (9th ed., 2006) at page 1327.
In Trans World Oil & Gas Ltd v. Canada,
 1 C.T.C. 2087 (TCC), aff'd,  3 C.T.C. 37 (FCA),
Judge Bowman, as he then was, held that Trans World U.S. could not deduct the
active business losses incurred by it when it was a CFA of the Appellant's
majority shareholder, Mr. Phillips, against the FAPI it generated in
subsequent years when it was a CFA of the Appellant corporation, Trans World
Oil & Gas Ltd. In passing Judge Bowman summarized the objective of the FAPI
regime as follows:
. . . The object behind the FAPI rules was to discourage Canadians from
parking investments in offshore companies (usually tax havens), or, if they
did, at least to require them to pay taxes currently on the income so
generated. . . .
The decision of the Federal Court of Canada –
Trial Division in Canada Trustco Mortgage Co. v. Minister of National
Revenue,  2 C.T.C. 308, aff'g  2 C.T.C. 2728 (TCC)
reiterated the purpose of FAPI and the elementary fact that the FAPI regime does
not capture income from an active business. In 1995, amendments were adopted to
carve out investment business income from active business income, which amendments
were not applicable when the facts of that case occurred. That decision is
important as it was the first time that the courts were called upon to explore
the meaning of “active business” in respect of FAPI. The following
passages are relevant:
18 Under the Act provision is made, in relation to the
computation of income, in Division B, concerning Computation of Income,
Subdivision i, concerning Shareholders of corporations not resident in Canada,
for certain income to be included as income of a Canadian shareholder. Within
that subdivision, ss. 90 and 91 provide that income of a Canadian taxpayer is to
include certain amounts in respect of dividends received or other payments on
behalf of shares held in a corporation not resident in Canada. Other sections
deal with aspects of the earnings from foreign corporations, and s. 95 deals
with “foreign accrual property income”, here called “FAPI”. The statutory
provisions are complex, but it is agreed, and it is clear, that FAPI as
provided for in that section, for the years in question, did not include income
from an active business. . . .
. . .
25 At the relevant time there was
no definition of “active business” as that term is used in paragraph
95(1)(b). It has since been defined for purposes of FAPI by amendment
of the Act in 1995, following the decision of the Tax Court in this case. That
amendment expressly excluded from “active business” of a controlled foreign
affiliate an “investment business carried on by the affiliate...”. Thus the
amendment would appear to exclude the income in issue here from income gained
from an active business. From the amendment it seems the income here in
question would now be FAPI. That amendment has no application in this case.
Parliament enacted section 94.1 in 1984 to
fill the void caused by the fact that only a direct interest in a CFA could
give rise to an imputation of FAPI. As indicated in paragraph (1)(a)
of section 94.1, the OIFP Rules apply only to an interest in a
non-resident entity other than a CFA or a prescribed non‑resident entity.
The enactment of section 94.1 of the ITA in
1984 was Parliament's reaction to the marketing to the Canadian population at
large of interest roll-up funds, which avoided FAPI. However, it is
contentious whether the OIFP Rules capture only the types of income that
would be considered FAPI if the non-resident entity in which the interest was
held was a CFA
or whether they can apply to other types of income (including active income).
Reportedly as early as the beginning of the
1980s, brokers started selling to Canadian taxpayers investments in interest
roll-up funds the sole purpose of which was to help Canadian taxpayers minimize
their tax liability on returns from risk-free investments in government bonds.
The schemes were variations of the following scheme: promoters would set up in
known tax havens a mutual fund which invested exclusively in government of
Canada bonds or similar assets. The reason for investing in government bonds
was that interest routinely paid to the offshore mutual fund was exempted from
Canadian withholding tax.
In addition, the brokers marketed the mutual funds in such a way that Canadian
investors would not be subject to FAPI. Successfully avoiding the
FAPI regime meant that the yearly interest income could accrue tax-free
within the offshore mutual fund. Canadian taxpayers therefore obtained a tax
deferral benefit and would only be taxed upon the disposition of their mutual
fund interest many years later. More often than not, the disposition of the
mutual fund interest gave rise to capital gains.
After the coming into force of section 94.1
in 1984, there was general consensus that the OIFP Rules ended the spread
of interest roll-up funds.
To remedy the continued use of offshore
investment funds to defer Canadian taxes, Parliament proposed the first
iteration of the FIE Rules in 1999 following the publication of the Report
of the Technical Committee on Business Taxation.
The critics of the existing section 94.1 pointed to the lack of
information about taxpayers' offshore arrangements, difficulty in establishing
the requisite intent, and an arbitrary mechanism for imputing income.
After a long process of revisions and public
consultations, the proposed FIE rules were ultimately never adopted.
As a result of the abandonment of the FIE Rules, the ITA reverted to the
long‑forgotten OIFP Rules. It is worth noting that the OIFP Rules
were enhanced through various measures shortly after the abandonment of the
Section 94.1 has been examined but once, in
Walton v. The Queen, 98 DTC 1780 (TCC).
The breadth of the OIFP Rules and their
relationship to the foreign affiliate regime will be determined largely by the
meaning that is attributed to the expression “portfolio investment”. Absent a
definition in the ITA, the meaning to be assigned to this expression must be
determined pursuant to a textual, contextual and purposive analysis: Canada
Trustco Mortgage Co. v. Canada, 2005 SCC 54,  2 S.C.R. 601, at
5.3.1 The Plain
Commercial Meaning of Portfolio Investment in an International Investment
The use of the word portfolio to qualify the term
investment implies that the meaning of portfolio investment must be distinct
from that of the term investment without that qualifier, that much is clear. On
this premise, investments in assets listed in subparagraphs 94.1(1)(b)(i)
to (ix), which include shares and bonds, do not automatically constitute
portfolio investments. The Value Test, which involves determining if the
non-resident entity derives its value primarily from portfolio investments in
listed assets, is a two-step test. Firstly, it must be determined whether the
non-resident entity derives its value, either directly or indirectly, primarily
from portfolio investments. Upon a finding that it does not, the OIFP Rules
cannot apply. In the contrary case, it must be determined whether the portfolio
investments were made in listed assets.
It is worth noting that the meaning of the more
commonly used expression “investment portfolio” should not be identified with that
of “portfolio investment” in section 94.1.
The Respondent refers me to the Black's Law
Dictionary definitions of the words “portfolio” and “investment”, which are
substantially the same as the definitions appearing in the Concise Oxford English
Dictionary (12th ed.) and Canadian Oxford Dictionary.
Those individual terms are defined in Black's Law Dictionary as follows:
portfolio. . .
. 1. The various securities or other investments
held by an investor at any given time. An investor will often hold several
different types of investments in a portfolio for the purpose of diversifying
. . 1. An expenditure to acquire property
or assets to produce revenue; a capital outlay.
. . .
2. The asset
acquired or the sum invested. 
Both parties refer me to the definition of “placement
de portefeuille”, the equivalent expression to portfolio investment in the
French version of the ITA, in the Dictionnaire de la comptabilité et de la
However, the parties disagree as to the interpretation thereof. The definition
reads as follows:
Placement de portefeuille
Syn. et var. valeur de portefeuille; titre en portefeuille;
titre immobilisé de l'activité de portefeuille (fr); TIAP (FR)
Placement à long terme ne visant pas à créer des liens d'association avec
l'entité émettrice des titres en cause.
The definition in the “Dictionnaire de la comptabilité
et de la gestion financière” is most similar
to the since deleted definition found in the CICA Handbook when
section 94.1 was enacted. I accept the Respondent's point that the
definition in the CICA Handbook serves a different purpose and should not be
blindly imported in the section 94.1 context.
The purpose of the CICA Handbook is to create an accounting standard for the reporting
of long‑term investments in financial statements, whereas the purpose of
the ITA is to levy tax. The CICA Handbook is a useful reference tool for
accountants, but should only be regarded as an interpretative aid in relation
to tax legislation: Canderel Ltd. v. Canada,  1 S.C.R. 147 at
The Respondent further quotes the Moneyterms
online definition, which defines “portfolio investments” as an “investment made
by investors who are not particularly interested in involvement in the
management of a company”.
(Respondent's Book of Authorities, Tab 43.)
I have come across two other definitions of the
term “portfolio investment” as used in the international investment context.
The first is the definition of the International Monetary Fund in its 1977 Balance
of Payments Manual (Manual),
and the second is from the International Bureau of Fiscal Documentation, IBFD
International Tax Glossary (IBFD).
The Manual defines portfolio investment in a negative sense as an
investment other than a foreign direct investment:
423. The category for portfolio investment adopted for this Manual
covers long-term bonds and corporate equities other than those included in the
categories for direct investment and reserves. The definitions of those
instruments, which are adapted from the definitions in the United Nations’ A
System of National Accounts (SNA) are as follows . . .
Because portfolio investment is defined in a negative sense,
understanding the concept of foreign direct investment is necessary. The Manual
defines foreign direct investments as foreign investments that are made with
the intention to exercise “significant influence over the operations of the
enterprises”. This is contrasted with portfolio investments, which are
primarily acquired because of the “likelihood of an appreciation in … value”. Recognizing the
difficulty in classifying property in one or the other category, the Manual
provides the following guidance:
412. When foreign ownership is
concentrated in the hands of one investor or group of associates, the
percentage chosen as providing evidence of direct investment is typically quite
low – frequently ranging from 25 per cent down to 10 per cent. Since the
previous edition of the Manual was prepared, the apparent tendency has been
toward adopting percentages at the lower end of that range. That tendency seems
to have developed in growing recognition of the fact that – especially for
large corporations of the type that are likely to engage in multinational
operations – a small, organized group of stockholders may well have an
influence in management that is much more than proportionate to its share in
the equity capital.
The IBFD definition also includes thresholds of
ownership in classifying an investment as a portfolio investment. The
definition reads as follows:
Investment (1) Term in fairly common use, typically
for a relatively small shareholding in a company, e.g. below 10%, held without
regard to the underlying business of the company and its relationship with that
of the shareholder. Often used in the context of tax treaties where such
shareholdings, in contrast with direct investment, are generally subject to a
higher rate of withhold tax. . . .
A last definition, provided by counsel for the
Respondent during oral argument, is that of the eminent tax scholar Vern Krishna
and reads as follows:
Debt or equity investments in a
corporation that do not provide the investor with substantial ownership or
influence in the management of the corporation. Typically, equity ownership of
less than 10% of a corporation is considered to be a portfolio investment.
 The common thread between the various definitions is that they
consider portfolio investments to be investments over which the investor does
not exercise significant control, but merely wishes to passively benefit from an
appreciation in value.
 I therefore find that the ordinary commercial meaning of portfolio
investment in the international investment context is an investment in which
the investor (non-resident entity) is not able to exercise significant control
or influence over the property invested in.
 Since the OIFP Rules do not specify thresholds for determining
whether or not a non-resident entity is taking a controlling interest, this
determination will have to be made on the facts. Taken as a whole, the
definitions suggest thresholds ranging from 10% to 25% ownership. However, one
should be cognizant of the fact that a small group of well-organized investors
could have a controlling interest while having less than 10% ownership,
especially in the case of sizeable investments.
 A helpful indicator of a controlling interest is that the
investments are usually long-term investments acquired at a premium to gain
access to some level of control. This suggests that portfolio investments are
passive investments that do not entail active management of, or control over,
the operations of the underlying investment in any manner whatsoever.
Investments that are bought and sold within a short time are more compatible
with portfolio investment classification.
 The only difficulty with these definitions of portfolio investment is
that they are awkward to apply to investments in some of the assets listed in
paragraph 94.1(1)(b), notably investments in foreign currency. For
instance, what is a substantial or controlling interest in foreign currency?
The drafting of the OIFP Rules is sloppy in this respect, but insufficient on
its own for there to be any derogation from the commercial meaning of portfolio
investment. This is not particularly problematic, since investments in foreign
currency are unlikely to be a primary income‑generating source for a bona
fide business other than an investment business. The application of the
controlling interest test to real estate is even less problematic since a
portfolio of wholly owned buildings would not be caught by the definition of
 According to the definition I have accepted, the same investment
could be classified differently with respect to different persons. For example,
a minority shareholder with a small block of shares may be deriving value from
a portfolio investment, whereas another shareholder, who has a controlling
interest, will not be.
 The contextual interpretation of “portfolio investment” is
inconclusive since it adds nothing more than the fact that there is a link
between the OIFP Rules and the foreign affiliate regime.
being said, the OIFP and FAPI regimes are intertwined. The OIFP Rules only
apply when the FAPI regime does not since they suppose that the non-resident
entity in which the interest is held is not a CFA.
 The regimes are further intertwined since the computation of FAPI as
defined in subsection 95(1) requires the inclusion of the amount
determined under variable C of the definition, and this involves the
application of a look-through rule in certain circumstances in which a
CFA is interposed between the Canadian investor and a non-resident entity to
which the OIFP Rules would apply.
purpose of the OIFP Rules is compatible with the ordinary commercial meaning of
portfolio investment, as it achieves the objective of capital export
the obvious policy objective in 1984 was to put an end to certain financial
arrangements, notably interest roll-up funds, one can also say that section
94.1 was adopted to achieve better capital export neutrality with respect to
non-controlling interests in foreign entities. For the purposes of the latter
objective, it is appropriate that the OIFP Rules be more extensive than the
FAPI rules. This is so because the Canadian resident is not presumed to have
acquired its interest in the non-resident entity in order to exercise
significant influence over important management decisions. Such an intention
would be more compatible with an interest in a foreign entity which falls
within the definition of a CFA.
underlying policy of the OIFP rules is to make Canadian residents subject to
income tax on all inherently passive and tax‑motivated offshore
investments made through non-controlled foreign intermediaries.
The objective is to ensure that capital export neutrality is achieved. In theory, capital
export neutrality means that the decision of a taxpayer to make investments
offshore should be a neutral decision which is not tax‑driven. The
arguments in favour of capital export neutrality for
portfolio investments as a matter of fairness are particularly compelling, and
all the more so as the concern about the need for Canadian businesses to maintain
competitiveness abroad is less convincing for portfolio investments over which
the non-resident entity does not exercise any significant level of influence or
control. The oft-cited counter‑argument to capital export neutrality is
most persuasive for investments in controlled foreign entities that are
operating in a free-market environment with other competitors.
one cannot overlook the fact that the section 94.1 regime is called the
offshore investment fund property regime. This is no coincidence,
as I find that it confirms the intention of Parliament to achieve better
capital export neutrality for non-controlling investments in investment funds.
 The Appellant points to statements of the then Minister of Finance,
the Honourable Marc Lalonde, to convince the Court that the OIFP Rules
were not meant to apply to non-resident entities engaging in a bona fide active
The Supreme Court of Canada stated in Doré v. Verdun (City), 
2 S.C.R. 862, at paragraph 14, that a Minister's comments could be
used to support an interpretation, but cautioned that such comments “are not
binding on the courts, and their weight can vary, inter alia in light of
other factors that may assist in interpreting . . .” Minister Lalonde's
statement, while true in most factual circumstances, will prove to be false
where the underlying investments of a foreign investment business are
nonetheless portfolio investments.
 To interpret the OIFP as being a mere backstop to the FAPI
rules, as argued for by the Appellant, is problematic. It is problematic from
the standpoint of the principles of statutory interpretation since there is an
insufficient link between the relevant provisions for the clear commercial
meaning of “portfolio investment” to be overridden. I observe with regard to the
FAPI and OIFP provisions (i) that they are found in the same subdivision
of the ITA and (ii) that one applies when the interest in the non-resident
entity does not qualify as a CFA. A major difference, however, is that the FAPI
definition refers to, among other things, income from an active business and
includes various deeming rules, whereas the OIFP Rules refer to an
altogether different term: portfolio investments.
 The Appellant's arguments for limiting the application of
section 94.1 such that it serves as a backstop to the FAPI rules appear to
be contradictory. The Appellant submits that “portfolio investment” should only
include investments that could otherwise give rise to FAPI, and then proceeds
to state that, due to the imputation mechanism that is based on a prescribed
rate, portfolio investments should be limited to risk-free investments.
The contradiction lies in the fact that the FAPI definition is not limited to
risk-free investments; it is circumscribed in a very detailed manner on the
basis of active versus passive income. I presume that the Appellant's argument
is based on an undue narrowing of the OIFP policy objective of ending the
propagation of interest roll-up funds. I am not persuaded by this argument.
 Moreover, the architecture of the ITA leads me to conclude that the
term portfolio investment can include inventory of an active investment
business since actively trading in such inventory does not turn a
non-controlling interest into a controlling one. The fact that the
investment business uses sophisticated investment instruments or strategies
does not alter this conclusion. Neither does the interposing of other
corporations or entities to hold these types of investments, since the value of
the fund would continue to indirectly derive its value from portfolio
investments. If Parliament had wanted to exclude inventory of investment
businesses it would have used analogous language to that of the foreign
affiliate rules prior to the amendments carving out investment businesses. As a
matter of fact, there was a recommendation made in 1986 by the Joint Committee
on Taxation of the Canadian Bar Association and the Canadian Institute of
Chartered Accountants that the Department of Finance clarify the meaning of the
phrase “portfolio investments” such that it would “not include property held as
inventory, for resale.”
This recommendation was never adopted. In fact, the concept of “portfolio
investments” relates to the different types of property listed in
section 94.1, which may very well include property held as inventory of an
active investment business. I am of the view that Parliament's choice of words
in the OIFP Rules works against the Appellant.
 For all these reasons, I find that the FAPI rules and the OIFP Rules
have different criteria for their application and that they cannot apply
simultaneously. However, the fact that certain types of investments would not
generate FAPI does not automatically mean that the OIFP Rules do not apply. To
ascertain that neither regime applies, one must conduct two distinct analyses,
taking into account the characteristics of each regime.
 After reviewing the facts of the case, I find on balance that the
Funds derived their value primarily from portfolio investments and that, absent
evidence to the contrary, those investments were made primarily in listed
 The Funds need only primarily derive their value from
portfolio investments. This means that holding a minimal amount of controlling
interests that are not portfolio investments or that are portfolio investments
in non‑listed assets is insufficient to result in the Value Test not
 The case law has interpreted “primarily” to mean “most important” in
the context of the ITA: Will-Kare Paving & Contracting Ltd. v. R.,
 3 C.T.C. 200 (FCA), at paragraph 8, aff'd  1 S.C.R.
915. This meaning should be imported into the OIFP Rules, which would mean
that the Funds must derive more than 50% of their value from portfolio
investments. The reason for importing the meaning of “primarily” from Will-Kare,
supra (which dealt with the definition of “qualified property” in
subsection 127(9) of the ITA for the purpose of the investment tax credit
in subsection 127(5)), is that the same words are presumed to have the
same meaning throughout a statute: R. v. Zeolkowski,
 1 S.C.R. 1378, at 1387; Ruth Sullivan, Sullivan
on the Construction of Statutes, 6th ed. (Markham Ont.: LexisNexis,
2014), at pages 217 to 218.
 Even though the Respondent cannot rely on her assumptions, as
drafted, that the Funds derived their value primarily from portfolio
investments in listed assets, the evidence before me has convinced me on
balance that such was the case. While most of the evidence adduced at trial
pertained to the Motive Test, the Statement of Agreed Facts (Partial) and the
offering memoranda for the Funds (Exhibit A‑1, Tabs 3 and 5 to
13) assist me in this finding.
 According to that evidence, the Funds did not take controlling
interests with a view to exercising significant influence or control over the
operations of the companies or entities they invested in, the investments
being, to a large extent, in publicly traded securities or commodities. The
investments the Funds acquired, either directly or indirectly, were made
strictly with a view to capital appreciation, which is more compatible with a portfolio
 A brief overview of each Fund's strategy demonstrates this. Raptor
and Kingdon invested predominantly in equities and related derivatives. Caxton
on the other hand, invested heavily in commodities and currencies. Finally,
Arden and Haussmann invested in non-controlling interests in other hedge funds
to obtain diversification benefits. The Funds were investment businesses and
their investments fall squarely into the portfolio investment classification.
 I come to the same conclusion on the second aspect of the Value
Test, which consists in determining whether the portfolio investments were made
in assets listed in subparagraphs 94.1(1)(b)(i) to (ix). Shares, debt,
options and currencies are explicitly mentioned therein. Futures or warrants
fall under the catch-all subparagraph 94.1(1)(b)(viii) that lists “rights
or options to acquire or dispose of any of the foregoing”. The only investments
that might not fit snugly into these categories are cash-settled derivatives,
such as swaps or contracts for differences, if they are not directly or
indirectly linked to the other listed assets.
 According to the tax literature, hedge funds make use of swaps and
other derivatives for various purposes. Even though hedge funds seem to make
extensive use of such derivatives, there is evidence before me to establish
that such instruments were not primary income‑generating sources for the
The offering memoranda state that the amount actually invested in such assets
was minimal. On the evidence provided, I conclude that the Funds derived their
value primarily from sophisticated trading strategies involving stocks and
bonds, futures, currency, options and related investments.
 Moreover, Gerbro's argument that the Funds did not derive their
value from portfolio investments is a legal one and hinges on a narrow reading
of the meaning of portfolio investment, which I have rejected.
 I now turn to the thorny Motive Test.
 This appeal raises the novel issue of applying the Motive Test in
section 94.1 to hedge funds located in low-tax jurisdictions. Subject to
the foregoing comments, hedge funds or funds of funds will meet the Value Test.
The application of the OIFP Rules therefore hinges on the Motive Test. In
applying the Motive Test, one should not lose sight of the particular
characteristics that distinguish hedge funds from traditional long equity or
 The following basic information on hedge funds may be drawn from the
evidence, including the testimony of Ms. Gut and of
Mr. Luis Seco, the expert called by the Appellant. The term hedge
fund refers to a wide range of unregulated investments that offer alternative
patterns of returns to those of traditional fixed-income instruments, such as
corporate bonds or government bonds, and stocks. Hedge funds are diametrically
opposed to exchange‑traded funds (ETFs), a type of investment merely replicating
market indices or other patterns of returns. Hedge funds, on the other hand, seek
to actively produce returns that are not correlated with the market as measured
by stock indices such as the S&P 500, the Dow Jones Industrial Average
or the NASDAQ Composite. These uncorrelated returns are referred to in
investment jargon as absolute returns. The ability of a hedge fund to
consistently produce absolute returns is tied to the pedigree of the manager.
 Hedge funds are not regulated. There is no prescribed legal form to
be adhered to in order for a pooled investment vehicle to qualify as a hedge
fund. Thus the investment vehicle of the hedge fund might be structured as a
corporation having legal personality, such as the Funds, or be a fiscally
transparent partnership, such as Maple Key, Maple Key Plus and Silvercreek.
 Achieving absolute returns goes beyond using sophisticated
investment strategies such as short-selling or convertible debt arbitrage, or
using derivative products. It requires the outlay of millions of dollars in market
research. These large fixed costs and the expertise required make it
prohibitive for most investors to replicate the returns, and this makes hedge
funds that have historically been successful in producing large risk-adjusted
returns very attractive investments.
 Furthermore, the fee structure creates an incentive for investment
managers to operate under the hedge fund model, as it rewards them for
producing high returns. The fee structure is made up of a fixed percentage of the
assets under management, generally between 1% and 3%, and a substantial
performance fee, generally in the range of 10% to 30%, for returns above the
high-watermark. A manager's level of compensation is directly correlated with his
success in consistently producing high returns. Over time, a manager's ability
to produce high risk-adjusted returns will increase his ability to raise
capital, which will sustain an upward trend in the manager’s compensation.
 A direct implication of the incentive for managers to operate under
a hedge fund model is that access to such managers is often only possible under
such a model, rather than under a more traditional segregated investment
 Broadly speaking, the Motive Test is concerned with whether one of
the Canadian investor's main reasons for investing in the non-resident entity
was to derive a benefit therefrom. The type of benefit that is contemplated is
a significant reduction in, or deferral of, Part I Canadian taxes on
the income, profits or gains derived from the portfolio investment.
 The wording of the test is unequivocal in requiring that a
comparison be made. This comparison involves looking at the amount of foreign
taxes paid by the non-resident entity in a given year on the income, profits
and gains realized from portfolio investments. The amount of foreign taxes
paid, if any, must be compared to the Part I Canadian taxes that would be
payable in that same year if the investor earned the income, profits or
gains from the portfolio investments directly. The test uses a fiction to make
the comparison and is purely hypothetical. The investor being able to hold the
underlying investments is thus of no consequence for the purpose of the
 Using the same reference year for determining if there is a benefit
for the purpose of the Motive Test is crucial, because of the time‑related
value of money. A fundamental idea in finance is that money available at the
present time is worth more than the same amount in the future due to its
potential earning capacity. Therefore, a dollar today is worth more than a
dollar in the future. Deferring income tax is a benefit (a dollar of tax paid
today is more valuable to the public purse than a dollar of tax paid many years
down the road. This is the very essence of an income tax deferral benefit.) I
mention this because it was argued more than once that Gerbro did not obtain a significant
tax benefit since it would pay more Canadian tax when it redeemed its shares in
the Funds at a later date.
This may very well be true, but is simply not relevant for determining the
requisite benefit for purpose of the Motive Test. In fact, Gerbro's position
would severely undermine the OIFP Rules in their application to any tax deferral
benefit that they seek to capture. Its position is untenable.
 The correct comparison is the amount of foreign tax paid in either
2005 or 2006 on the profit, income and gains realized from the portfolio
investments versus the amount of Canadian Part I tax that Gerbro would
have paid in 2005 and 2006 if it had held the portfolio investments directly. A
significant difference, in any given year, between these amounts is the
type of benefit contemplated. The Motive Test does not require an exact
calculation of the benefit as it is a test of intention. In light of the words “it
may reasonably be concluded” preceding the description of the Motive Test in
section 94.1, what is to be considered is whether it is objectively reasonable
to conclude that such a benefit was contemplated. (See The Queen v. Wu,
98 DTC 6004 at page 6006.)
 Contrary to Gerbro's submission,
the amount of foreign tax paid is a relevant consideration under the OIFP Rules
because this amount, or the absence of such amount, will dictate whether or not
there is a deferral benefit to begin with. If the foreign taxes paid are
similar to the taxes that would be payable on the income in Canada, there is no
deferral benefit and it would be superfluous to look at intention. This is not
the case in the present appeal since the Funds were all located in low-tax
jurisdictions. In the present appeal, the Motive Test plays an important role.
 The factual question is then quite simply whether it can reasonably
be concluded that one of Gerbro's main reasons for investing or holding
its interests in the Funds was to obtain the benefit in question. Whether it
may reasonably be considered that Gerbro in fact obtained the contemplated
benefit is a factor to be taken into account under paragraph 94.1(1)(d),
but is not the only factor. One must still scrutinize the circumstances to
determine if obtaining the benefit was a main reason or an ancillary one.
 The Court has the discretion to exclude the portion of Mr. Luis
Seco's expert report comparing the returns of the Funds with those of other,
Canadian hedge funds as it is technically non-compliant with the new Code of
Conduct for Expert Witnesses in Schedule III to the Tax Court of
Canada Rules (General Procedure) (Code of Conduct). Subsection
145(3) of the Rules gives the Court this power and uses the word “may” in
introducing the possibility of excluding an expert report. The new subsection 145(3)
reads as follows:
(3) If an expert
fails to comply with the Code of Conduct for Expert Witnesses, the Court may
exclude some or all of their expert report.
 In addition, the new Code of Conduct is explicit as to the contents
of any expert report. Such reports should include “the facts and assumptions on
which the opinions in the report are based”, as well as “any literature or
other materials specifically relied on in support of the opinions”. According
to paragraph 145(2)(a) of the Rules, the expert report shall “set
out in full the evidence of the expert”. (Emphasis added.) The amended section 145
and the new Code of Conduct have been in effect since February 7, 2014.
The current version now mirrors the Federal Courts Rules, sections 52.1
to 52.6 and 279 to 280.
 In Bekesinski v. Canada, 2014 TCC 35,  T.C.J. No. 33
(QL), at paragraphs 27 and 28, it was ruled that the plain and obvious meaning of
“full statement” of the evidence in the former version of section 145
required that “the underlying data collected, quantitative analysis employed and
the ratios calculated to support [the expert’s] opinion” be specifically
included in the expert report. This was thus a requirement even before the
recent amendments to section 145 of the Rules, and remains one today in
light of the amendments.
 In Bekesinski, at paragraph 13, Justice Campbell also
cites Judge Dussault's decision in Mathew et al. v. The Queen, 2001
DTC 742 (TCC) in asserting that the underlying purpose of section 145 of
the Rules is procedural fairness.
 On the facts, the gravity of the non-compliance in the present case
can be distinguished from that in Bekesinski. In that case, the forensic
document chemist tasked with identifying the true date on which a director
signed a notice of resignation only stated her conclusions in her report,
without disclosing the process she followed or the underlying data. The
underlying data were in a working document of the expert, which the litigant
decided to withhold. In contrast, Mr. Seco, in his report, only omits to list
the data used to calculate the returns of the Funds; there was therefore only a
partial omission of data.
 Mr. Seco's omission became apparent during his cross-examination.
The raw data that Mr. Seco used to calculate the average return of the Funds,
the associated standard deviation and the correlation of the Funds to equity
markets from 2003 to 2006 were not attached to his expert report. Not only were
these quantitative data not provided to the Respondent, but Mr. Luis Seco
failed to indicate, in Section II, “Materials Relied On”, the use of such
data in his report. During cross-examination, Mr. Seco stated that he obtained
the missing data electronically directly from the Funds' managers. He sought to
diminish the importance of this omission by stating that the information was
readily obtainable from the managers themselves. The following passage confirms
the absence of the data in the report:
If you analyzed until
September 2003, you only had the Haussmann Memorandum for January 2003. Where
was the data coming from for January to September?
That came from Haussmann directly.
That is not listed in your report.
It is not listed no.
Your data for Haussmann from January 2003
to September 2006 came directly from Haussmann.
It came from our database.
You include that in your report?
. . .
The data that you obtained for Arden after
October 2003 to September 2006, where did that data come from?
That did not come from the company. We just
entered the data as it was.
You spoke to Arden or you looked at a
Yes. We had it, and then we used it.
That information is not provided in your
report, the data that you used?
Similarly, if we look again at page 5 and
we look at Kingdon, we see that the Confidential Explanatory Memorandum is
dated January 1, 2005. Where did you get the data from January 2005 to
The same as before. This data was all
there, and we obtained it.
You obtained it from Kingdon directly or
from a database?
I don't remember. I do not remember.
You don't know where the data came from?
I do not remember where the data came from.
The data is not contained in your report?
So we can't verify the calculations in the
You could if you get the data.
. . .
Do they give you information by phone or do
they actually send you the data?
They send you the data.
They send you data electronically, and you
didn't include it in your report.
No, I did not include it in the report.
 The Respondent was provided with a CD containing the complete data
of the Canadian Hedge Watch Database on March 20, 2015, that is, more than
90 days before the trial was resumed on June 22, 2015. The implication of
this is that the Respondent could have replicated the calculations of all the
average returns, the standard deviation of returns (annualized volatility) and the
correlations (comparison of investments) for the Canadian funds that were used for
the purpose of the comparison of annualized returns in Exhibit D of the
The same is not true for the figures for the Funds, which Mr. Seco
compared with the Canadian funds.
 The fairness of the trial may be affected if the incomplete expert
report is allowed. This fairness argument is somewhat weakened, however, because
the Respondent could have obtained the missing information by contacting the
managers of the Funds. Still, one should be mindful of the fact that the
Respondent had no way of knowing where the information actually came from until
its source was divulged in cross-examination. It might be added that it was not
incumbent on the Crown to verify the compliance of Gerbro's expert report.
 The concerns about the missing data relate to the question of
whether there were any Canadian funds comparable to the Funds in the Relevant
Period. I give no weight to Mr. Seco’s conclusion on this point because of
the missing data and some inconsistencies in the application of the criteria he
used in his comparison.
 The other question submitted to Mr. Seco concerned the state of
the Canadian hedge fund market in the Relevant Period. He emphatically stated
that the Canadian hedge fund market was in a state of infancy.
 Mr. Seco’s assertion is problematic because of the lack of depth in
his analysis leading up to his conclusion. He relied heavily on the size of the
Canadian market relative to the worldwide hedge fund market at the time. His
position further appears to be based on a report, commissioned in 2005 by the
Investment Dealers Association of Canada, by the Task Force to Modernize
Securities Legislation in Canada.
This study also expressed the opinion that the Canadian hedge fund market was
in its infancy in 2005 and 2006 due to its small size relative to the worldwide
hedge fund market.
 As the Crown pointed out, Mr. Seco’s analysis did not benchmark
the size of the Canadian market to that of the markets in other jurisdictions
such as the United States. It was also unclear whether the location of the
management company or the location of the investment vehicle was used in
attributing a hedge fund to a given jurisdiction. As explained in the facts
section of these reasons, funds with feeder structures have both onshore and
offshore feeders. The management company for each of the Funds, however, was
located in the United States. One wonders how these Funds are classified in
Mr. Seco’s analysis and whether the offshore feeder is still classified as
a United States fund since this is the nationality of the manager providing the
investment advice. To take it one step further, what is troubling with the
methodology is that it is unclear whether the investment vehicle of Canadian
funds was located offshore or onshore.
 All in all, I do not find it proper, in the circumstances, to give any
weight to Mr. Seco’s conclusions.
 While the Motive Test is not a purely subjective test, a finding as
to intention and the importance of an intention is a factual determination
intrinsically linked to the evidence provided at trial: Minister of National
Revenue v. Furnasman Ltd.,  F.C. 1327,  C.T.C. 830 (FCTD) at pages
1336‑37 F.C., 836‑37 C.T.C. The stated reasons must be objectively reasonable,
taking into account the surrounding circumstances of the investments in the fund,
notably the factors listed in paragraphs 94.1(1)(c) to (e).
 A person's reasons for doing something are intrinsically personal,
and each reason, should there be more than one, can be given different weight when
the person makes a decision. Therefore, a main reason is subsumed in the larger
subset of the reasons category.
 The Act is replete with specific anti-avoidance provisions, and the
criteria for their application can be more or less difficult to satisfy
depending on the wording used. Clearly a “one of the reasons” test is less
difficult to meet than a “one of the main reasons” or a “one of the main
 Although there is an abundance of anti-avoidance provisions in the ITA
that use the “one of the main reasons” test, the case law has predominantly
applied the test with regard to subsection 256(2.1), formerly
subparagraph 138(3)(b)(ii)A, which is a specific anti-avoidance
provision in the associated corporations rules limiting the multiplication of claims
for the small business rate.
 The case law applying the “one of the main reasons” test and the “one
of the main purposes” test is instructive as to the legal principles applicable
in making an appropriate factual determination. Those principles, as adapted
for the purpose of the OIFP Rules, can be summarized as follows:
(1) A taxpayer's reasons for investing can be disclosed or undisclosed,
and the fact that a tax-avoidance reason is undisclosed, as is often the case,
does not prevent a court from inferring that such a reason existed; Symes v.
Canada,  4 S.C.R. 695 at 736;
(2) There can be more than one main reason for investing in a
non-resident entity: Groupe Honco Inc v. The Queen, 2013 FCA 128, 2014
DTC 5006, at paragraph 24, aff'g 2012 TCC 305, 2013 DTC 1032;
(3) The Motive Test is not a sine qua non test under which the
Court must conclude that tax avoidance was not a main reason for investing if
it is convinced that the taxpayer would have invested notwithstanding the absence
of any tax benefit: Continental Stores Ltd. v. The Queen, 79 DTC 5213 (FCTD)
at 5217; Honeywood Ltd. et al. v. The Queen,  C.T.C. 38 (FCTD); contra:
Jordans Rugs Ltd. et al. v. M.N.R.,  C.T.C. 445 (Ex. Ct.).
(4) It is improper to conclude that resulting tax savings automatically
lead to the inference that obtaining those tax savings must have been a main
reason for investing: Les Installations de l'Est Inc. v. Canada, 
2 C.T.C. 503 (FCTD), at 509‑10; Saratoga Building Corp. v. M.N.R.,
 2 C.T.C. 2074 (TCC), at 2086; and
(5) Choosing to invest in a non-resident entity when there was the
possibility of investing in another vehicle triggering a larger tax liability
is not necessarily determinative of a tax benefit main reason; Alpine
Furniture Co. Ltd. et al. v. M.N.R., 68 DTC 5338 (Ex. Ct.), at 5345.
 With these principles in mind, and on the basis of the evidence, I
conclude that, while tax deferral was an ancillary reason prompting Gerbro to
invest in the Funds, none of its main reasons was tax deferral as
contemplated in subsection 94.1(1). I agree with the Respondent that
Gerbro is understating the tax deferral benefit of investing in the Funds. Tax
deferral, although not explicitly stated, must reasonably be inferred to have
been one of the reasons, conscious or subconscious, for investing in the Funds.
 It is possible that Gerbro held the sincere belief that it was
investing solely to achieve its capital preservation objective, but this
is not objectively a reasonable conclusion having regard to all the
circumstances. The more reasonable view is that compelling business reasons and
the managers' reputations were Gerbro's dominant reasons for investing.
 The nature, organization and operation of the Funds and the
characteristics of Gerbro's interests therein do not clearly point to tax
deferral being a main reason for investing.
188.8.131.52 Clarifying the Difference between “Main” Reasons and Ancillary
 The line between a main reason and a secondary reason is difficult
to draw, especially if the reason is undeclared, since it must then be inferred
from the relevant circumstances that a particular reason could perhaps be
elevated to “main reason” status. Once it has been determined what the
requisite benefit is for the purpose of the Motive Test, the determination of
whether tax deferral was one of Gerbro's main reasons is entirely factual.
 A starting point for discerning the meaning of “main” is the New Oxford
Dictionary of English definition thereof, according to which a “main”
reason would be a reason that is more important than the others.
 The definition in the New Oxford Dictionary of English reads
Main adjective [attrib.]
chief in size or importance: a main road ¦the main problem is
one of resources. . . .
 This method of proceeding is compatible with the approach followed
by Décary, J. in Lenco Fibre Canada Corp. v. The Queen, 79 DTC
5292 (FCTD), at 5293:
. . . the word “main” must be given its significance.
In the French language version of the statute, the corresponding word is
“principaux”. Not every reason will meet this standard. Thus, even where the
reduction of taxes payable is a reason, a judgment must still be made as to
whether it was a main or principal reason.
 One can argue that the more important a reason for investing is, the
harder it will be to elevate another reason, such as obtaining a tax deferral
benefit, to the same level. This is of particular importance in the present case,
in which I recognize the extreme importance that investing in the Funds had within
Gerbro's overall investment strategy.
 In contrast, an investment offshore that could otherwise be held
directly or that was not particularly attractive commercially would clearly not
pose such difficulties. The only reason for investing in that case, one might
suggest, would be to benefit from tax deferral and the conversion of income to
capital gains. This reason would not have to be weighed against others.
 The reasons that Gerbro invested in the Funds were manifold, and can
be summarized as follows:
1) To obtain
2) To reduce the overall volatility of its portfolio;
3) To invest
with trustworthy individuals; and
4) To hold liquid
These reasons all feed into the overarching bona fide
commercial reason for investing, which, according to the evidence, was
extremely important for Gerbro. Moreover, the volatility component of the
investments was unaffected by the fact that they were made in a low‑tax
jurisdiction, and this factor was key. Indeed, Gerbro was facing a situation in
which it might have to redeem its shares in the Funds at any time (in the event
of the death of Ms. Bronfman). In this context, low volatility was an
important factor to be considered in the investment decision as it contributed
to lowering the risk associated with the investment. That being so, it is not
unreasonable to assert that the tax reason that was inferred took a back seat
in Gerbro’s investment decision and in its continuing decision to hold the
investments in the Relevant Period. Obtaining the tax benefit may have been a reason,
but was not a main reason as it was less important than Gerbro’s commercial
reason for investing.
 It was admitted that the Funds, because of their tax‑exempt status
offshore, were subject to very low tax or no tax at all. However, the nature of
the Funds and the strategies they employed, as thoroughly described in the
facts section of these reasons, made them, from an objective point of view, very
attractive investments for non-tax reasons. The Appellant went to great pains
to describe the attractiveness of the returns.
 Gerbro did not hold large interests in the Funds, which suggests
that the Funds’ structure was not being artificially manipulated to obtain a tax
deferral. The nature of hedge funds as a turnkey investment is compatible with
this view. Gerbro played no role in structuring the Funds. In contrast, the
taxpayer in Walton, following tax advice, carefully structured the
share-capital of the non-resident entity.
 Gerbro was very concerned with the reputation of the managers it
invested with because of the very nature of the Funds. In fact, the managers of
the Funds had full control over the funds invested; Gerbro did not hold a large
percentage of the outstanding shares of the Funds; nor did Gerbro have any
control over the Funds.
 Even if one were to give no weight to the expert opinion of Mr.
Luis Seco, it appears obvious that the reputation of a manager of an
unregulated offshore investment vehicle, which because of its very nature has
custody of the funds invested, was extremely important. A major concern with
pooling funds in an investment vehicle, as opposed to using segregated funds,
is the greater risk of fraud. A dishonest manager of a pooled fund can more
easily orchestrate a ponzi scheme, which would compromise investors’ chances of
recouping any portion of their initial investments. This counterparty risk is
different than the inherent risk that is associated with investing in
speculative vehicles. The facts in Den Haag Capital, LLC v. Correia, 2010
ONSC 5339,  O.J. No 4316
(QL), exemplify an unfortunate occurrence involving fraud. The hedge fund
manager in that case went so far as to forge bank documents.
 The choice of investing in the Funds must be understood within
Gerbro's overall investment strategy. The Respondent failed to take this aspect
into account when weighing the reasonableness of Gerbro's argument that the tax
deferral was merely ancillary to its other – dominant and main – reasons.
Gerbro believed, as laid out in its investment guidelines, that its investments
in the Funds were necessary in order to achieve the desired overall risk/return
combination. The importance of this is reinforced by the fact that access to
the managers of the Funds was only possible for Gerbro through offshore hedge
funds, and these types of alternative investments only made up a part of
Gerbro's investment portfolio.
 It should be added that Gerbro's control over the timing for cashing
in its investments was important. The liquidity of the investments was in line
with Gerbro’s objective of being able to dispose of the investments at a
moment's notice were Ms. Bronfman to pass away. Indeed, these liquidity considerations
must have been important to Gerbro, since one may think that unregulated
investments are harder to sell and consequently less liquid. In the present
case, with regard to all of the Funds, Gerbro had full discretion to redeem its
shares, with prior written notice of 30 to 60 days, at the end of each quarter,
subject only to a two‑year lock-up period for Raptor and Kingdon.
 It may reasonably be considered that Gerbro would have paid
significantly more taxes if it hypothetically held the Funds' investments
directly. The Funds realized gains in the year, which were not taxed in the jurisdiction
in which the Funds were resident. When one considers the amount of gains which it
would have realized if it had made the same investments in Canada, it stands to
reason that Gerbro would have paid significantly more taxes. This is true even
if the exact amount of tax savings cannot properly be quantified because the
managers did not disclose the timing of their transactions.
 I recognize that the auditor's method of calculating the taxes
otherwise payable by Gerbro is at odds with the calculation prescribed in Gaynor,
and since that decision, in subsection 261(2) of the ITA, but this does not alter
the fact that it may reasonably be considered that Gerbro benefited from a
significant deferral benefit. The theoretical possibility that any tax savings
could be eliminated by equivalent foreign exchange losses is conjectural, and would
have been even more so at the time the investments were made.
 The fact remains that the non-resident Funds operated in a
frictionless tax environment. It is true that income received by the Funds
could have been subject to withholding tax in other jurisdictions, but there is
no evidence that this was a major concern.
 The fact that Gerbro could not and did not wish to hold the
investments directly for lack of resources and capacity to build a comparable
mix of assets only goes to reinforce its bona fide business reason for
investing in the Funds.
 Lastly on this point, the fact that Gerbro did not and could not
calculate the exact amount of Part I tax it would have paid if it had held the
investments directly before it decided to invest in the Funds raises the
question of whether the tax deferral reason was simply a reason for investing or
a main reason for doing so.
 The factor in paragraph 94.1(1)(e) also favours the
conclusion that Gerbro benefited from a tax deferral since the Funds, with the
exception of Haussmann, never distributed any income as dividends or otherwise,
and Haussmann paid very small dividends. The gains the Funds realized offshore
would not be taxed in Gerbro's hands until Gerbro redeemed its shares.
 A careful analysis of the Funds’ offering memoranda reveals that
they all had dividend policies, but did not expect to be paying dividends in
the near future.
 For reasons that are unknown to this Court, Haussmann declared
dividends in the Relevant Period. Compared to the sizeable investment of Gerbro
in Haussmann, those dividends were insignificant.
 No evidence was presented at trial to establish what the managers'
motivations were for structuring the Funds as offshore corporate entities, nor
did the Respondent make any assumptions as to what those motivations were.
 There are other legitimate reasons for not distributing income, such
as maximizing the future return on investment through compounding returns.
There is an analogy to be made with high-tech start-ups that systematically reinvest
their earnings so as to produce higher future returns. All we know for certain
is that Gerbro did not take part in structuring the Funds and that it subscribed
for whatever shares of the Funds were offered to it. This being said, the
question the Motive Test is concerned with remains: what were Gerbro's main
reasons for investing in and holding the shares of the Funds?
 Gerbro benefited from a significant tax deferral even with
respect to its investment in Haussmann, but there is no indication that this
factor elevated the tax deferral reason to main reason status.
 Gerbro’s actions in response to the FIE Rules, notably the
year-end transactions, are not helpful in allowing us to infer an intention to
defer taxes given that the considerations under the very complex FIE Rules
 The notable difference between the proposed FIE Rules and the OIFP Rules
is the absence of an intention test in the former. As a
matter of logic, income would have been imputed yearly under the FIE Rules even
to an investor that did not meet the Motive Test under the OIFP Rules. The
planning considerations are different for the two sets of rules.
 The Crown’s argument that Gerbro’s year-end transactions demonstrate
that obtaining a tax deferral was an important consideration in the investment
in the Funds is incorrect. In addition to the fact that the application of the FIE
Rules is not subject to a motive test, the year-end transactions triggered
gains in the year they were effected
and therefore removed any deferral benefit. The actions Gerbro took pursuant to
the proposed FIE Rules do not colour its intention for the purpose of the Motive
Test and are irrelevant.
 Given the high importance of the other business motives Gerbro had
for investing in the Funds, it is not unreasonable to conclude that obtaining
the tax deferral was of lesser importance. This should therefore not be
elevated to the status of a main reason. The tax deferral motive that may be
inferred from the location of the Funds in a low‑tax jurisdiction and from
the lack of distribution is at most an undisclosed secondary reason. Both the
commercial reality of investing in hedge funds and the documented investment
strategy support this finding.
 Ms. Gut's credible testimony confirmed the finding that,
notwithstanding that Gerbro derived a tax deferral benefit from investing in
the Funds, the benefit was not a main reason for investing. A key factor in
this determination is the rigorous process that Gerbro documented over the
years and which was thoroughly explained at trial.
 As previously mentioned, the Motive Test is not a sine qua non test,
but turning that test on its head could have worked against Gerbro. Evidence
that Gerbro would not have continued to invest if the tax deferral benefit had
been removed would have been fatal to its position. The Respondent did not try
to convince the Court that Gerbro would not have continued to invest. The fact
that Gerbro continued to invest notwithstanding the imputation of income under
the objective criteria of the FIE Rules, though not conclusive, confirms
the reasonableness of my factual determination. Even so, tax deferral could
have been one of the main reasons for the investments. Nonetheless, I have found
on the facts that this tax deferral reason was merely ancillary since it was
less important to Gerbro than the commercial reasons.
 Ms. Gut's statements that none of the reasons for investing in the
Funds were tax motivated, though merely a starting point, were tested against
the objective reality to determine that this position was reasonable. Judge
Bonner followed this method in Walton, supra, in concluding that
the only reason for holding the interest in the non-resident entity was
to pay less Canadian taxes than if the taxpayer had held the shares directly.
He stated at paragraph 15 of the decision that “[n]o business-driven non tax
reason for the use of Murdoch and Company was suggested.” Gerbro has convinced
me that it was otherwise in its case.
 In assessing Ms. Gut's credibility I was guided by the decision of
the British Columbia Court of Appeal in Faryna v. Chorny,  B.C.J.
No. 152 (QL),  2 D.L.R. 354. The principles laid out therein state
that the trier of facts must consider surrounding circumstances as well as a
witness's demeanour in assessing credibility. In addition, the trier of facts
must determine whether the testimony is in “harmony with the preponderance of
the probabilities which a practical and informed person would readily recognize
as reasonable in that place and in those conditions” (at paragraph 11 QL).
 More concretely, in the following passage in Nichols v. Canada,
2009 TCC 334,  T.C.J. No. 231 (QL), Justice Valerie Miller
enumerated factors to consider in determining whether a witness is credible:
assessing credibility I can consider inconsistencies or weaknesses in the
evidence of witnesses, including internal inconsistencies (that is, whether the
testimony changed while on the stand or from that given at discovery), prior
inconsistent statements, and external inconsistencies (that is, whether the
evidence of the witness is inconsistent with independent evidence which has
been accepted by me). Second, I can assess the attitude and demeanour of the
witness. Third, I can assess whether the witness has a motive to fabricate
evidence or to mislead the court. Finally, I can consider the overall sense of
the evidence. That is, when common sense is applied to the testimony, does it
suggest that the evidence is impossible or highly improbable.
 Accordingly, I find that Ms. Gut's testimony was highly credible and
in harmony with the preponderance of probabilities. Her testimony was logical,
and there were no fundamental internal or external contradictions. Her testimony
as to the absence of a tax motive for investing in the Funds was not
contradicted by documentary evidence. On the contrary, such evidence supported
Gerbro's rigorous investment selection process as described by Ms. Gut in
a detailed and clear fashion. The documents supported Gerbro's dominant
business reason for investing. Also, there was in Ms. Gut's demeanour no
hesitation that might have hinted at deceit.
 The Crown sought to impeach Ms. Gut’s credibility because of
the discrepancy between her testimony about the size of the Canadian hedge fund
market and the figure Mr. Seco reported. She testified it was $8 billion
in size in the Relevant Period versus the $26 billion figure Mr. Seco
presented. The contradiction is overstated given the size of the global hedge
fund market (US$ 1.1 trillion). In addition, when the $26.6 billion
figure appearing in the task force report in Appendix E of Mr. Seco’s
expert report is broken down into its components the gap between it and the
$8 billion figure narrows. The size of stand‑alone hedge funds and
funds of hedge funds, which were the types of investments Gerbro was interested
in, was only $6.4 billion. Another $1.6 billion invested in Canadian funds was
held by foreigners. The sum of those figures, coincidentally, is exactly the
amount that Ms. Gut reported. She stated that the $8 billion was the figure she
was given at the time. It is reasonable to assume that whoever reported the
figure to Ms. Gut would have adapted it in light of Gerbro’s needs and excluded
the amounts invested by large institutional pension funds, for instance, or the
investments in “principal protected notes”.
 Further, I refuse to draw a negative inference from Gerbro not
calling other employees to corroborate Ms. Gut's testimony. On the authority of
Milliken & Co. v. Interface Flooring Systems (Canada) Inc.,  F.C.J.
No. 129 (QL) (FCA), the Respondent urges the Court to draw such a negative
Besides the comments in paragraph 11 of the decision being obiter, the
facts in Milliken must be distinguished. Milliken stands for the
proposition that failure to call a witness on an essential element of the case
allows the court to draw the natural inference that the witness not called would
have given unfavourable evidence.
 Similarly, in Schafer v. Canada, 2013 TCC 382,  T.C.J.
No. 335 (QL), Justice Sheridan drew a negative inference from the taxpayer
not having called other witnesses to enlighten the Court on important questions
the taxpayer could not answer himself. The following passage summarizes Justice
29 There ended Mr. Schafer's testimony. Portions of it have
been quoted at length in these Reasons for Judgment to give a sense of the
implausible nature of many of his answers, prime among them the account set
out directly above. The transcripts also reveal a certain evasiveness: key
questions about why or how certain things had been done went unanswered, his
justification being his lack of involvement in the business side of the
practice. Yet, in spite of acknowledging this “shortcoming” and having gone
to some pains to inform the Court of his extensive legal background, Mr.
Schafer chose not to call those to whom he had delegated these tasks. He
offered no explanation as to why he had not called Mrs. Schafer or the
Accountant, leaving the impression that their absence was more litigation
strategy than amateur oversight. In all the circumstances, I accept the
submission of counsel for the Respondent that the Court ought to draw a
negative inference from the Appellants' failure to call Mrs. Schafer and/or the
Accountant to answer questions that Mr. Schafer insisted he could not.
 Gerbro did not fail to introduce valid evidence as to its reasons
for investing in the Funds, nor was Ms. Gut evasive in her responses. Who
better to testify concerning Gerbro's reasons than its CEO? Calling other
employees, in light of the documentary evidence submitted, would only have
prolonged the trial. In these circumstances, the choice not to call other
witnesses was open to Gerbro's counsel in managing their client's appeal.
 The evidence adduced at trial supports the position that the Funds
primarily derived their value, directly or indirectly, from portfolio
investments. However, the appeal must succeed on the factual determination that
although Gerbro benefited from income tax deferral by investing in the Funds,
this was not a main reason for investing. The conclusion that it was not
a main reason is reasonable considering that the business reasons for investing
in the Funds overshadowed any tax benefit obtained incidentally.
 The appeals are allowed and the reassessments are referred back to
the Minister of National Revenue for reconsideration and reassessment on the
basis that Gerbro did not have to report for the taxation years ended on
December 31, 2005 and December 31, 2006 income in the amounts of
$841,803 and $754,210 respectively imputed to it under section 94.1 of the
 If either of the parties requests to make submissions on costs, both
will have to file written submissions with the Registry on or before
August 31, 2016. If no submissions are received, the Appellant will be
awarded one set of costs for the two appeals (2012‑739(IT)G and 2012‑4194(IT)G).
Signed at Ottawa,
Canada, this 22nd day of July 2016.