Citation: 2017 TCC 174
MAJESTY THE QUEEN,
MAJESTY THE QUEEN,
MAJESTY THE QUEEN,
MAJESTY THE QUEEN,
MAJESTY THE QUEEN,
MAJESTY THE QUEEN,
These are appeals by Lynn Cassan, Kenneth Gordon, Dana
Tilatti, Howard Platnick, Steven Chu and Katherine Lee Sang (collectively, the
“Appellants”) of reassessments fixing the income tax consequences of their
participation in a structure called the EquiGenesis 2009-II Preferred
Investment Limited Partnership and Donation Program (the “Program”)
that was created and marketed by EquiGenesis Corporation (“EquiGenesis”)
in 2009. The appeals were heard on common evidence.
The basic components of the Program vis-à-vis the
Appellants are an investment, substantially funded by a loan, in limited
partnership units of a limited partnership and a transfer of money to a
charitable foundation, also substantially funded by a loan. EquiGenesis
promoted the Program on the basis that a participant in the Program would be
entitled to a non-refundable charitable donation tax credit for the 2009
taxation year and to deductions from income for interest and fees payable over
The Minister of National Revenue (the “Minister”)
reassessed the 2009 and 2010 taxation years of the Appellants to deny the non-refundable
charitable donation tax credit claimed in respect of the Program for the 2009
taxation year and to deny the deductions from income claimed in respect of the
Program for the 2009 and 2010 taxation years. The Minister also included in
income each Appellant’s proportionate share of income the Minister says was
deemed by subsection 12(9) of the Income Tax Act (Canada) (the “ITA”) and paragraph 7000(2)(d) of
the Income Tax Regulations (the “ITR”) to be realized by the limited
The parties filed a statement of agreed facts
(partial), a copy of which is attached as Appendix A to these reasons. The
structure of the Program is shown graphically in Appendix B to these reasons.
Six fact witnesses and three expert witnesses testified
for the Appellants:
Kenneth Gordon, the sole shareholder of
EquiGenesis, a participant in the Program and one of the Appellants;
Dana Tilatti, a participant in the Program and
one of the Appellants;
Howard Platnick, a participant in the Program
and one of the Appellants;
Steven Chu, a participant in the Program and one
of the Appellants;
Katherine Lee Sang, a participant in the Program
and one of the Appellants;
Lynn Cassan, a participant in the Program and
one of the Appellants;
Howard Rosen, a principal of FTI Consulting Inc.
(“FTI”), who was qualified as an expert in
business valuation and corporate finance;
Jerrold Marriott, the president of Eastmount
Financial Consulting Limited (“Eastmount”), who
was qualified as an expert in credit rating and structured finance capital
Andrew Scott Davidson, the managing Director of
Duff & Phelps (“D & P”), who was
qualified as an expert in business and security interests.
Three fact witnesses and one expert witness testified
for the Respondent:
Mary Zhang, a private banker working with TD
Wealth private clients;
Louis Tilatti, the spouse of Dana Tilatti and a
participant in similar programs offered by EquiGenesis in 2005, 2010 and 2012;
Christine Spettigue, an auditor with the Canada
Revenue Agency (the “CRA”) involved in the audit of the Program; and
Howard Edward Johnson, a corporate finance
advisor with Campbell Valuation Partners Limited (“CVPL”), who
was qualified as an expert in the valuation of debt instruments, in the
valuation of equity securities and in corporate finance.
Mr. Kenneth Gordon testified first for the Appellants.
He is the president, sole owner, sole shareholder, sole director and senior
officer of EquiGenesis. Mr. Gordon is a lawyer and a member of the Law Society of
Upper Canada. Mr. Gordon is also one of the 59 taxpayers who participated
in the Program (I will refer to these 59 taxpayers collectively as the “Participants” and individually as a “Participant”).
Mr. Gordon described the role of EquiGenesis and
himself in connection with the Program as follows:
Q. . . . What is EquiGenesis’s role in connection with the ‘09
A. EquiGenesis played a variety of rules [sic]. It
was the creator, the structurer, the distributor, and it was the manager. So we
played all those functions and we –– we did so and we have a compliment [sic]
of people in our office who are specifically trained to be able to properly
implement and manage these programs throughout their entire life.
Q. Let’s talk about you in particular, what has your role been
day-to-day in these programs?
A. My role has been to specifically oversee everything that
happens related to from beginning to end of these programs. So I am intimately
involved in the structuring, in the reviewing and drafting of documents and
overseeing drafting of documents by counsel, in the preparation of marketing
materials, in overseeing the marketing process with clients and potential
clients and their advisors and I am extremely involved on a day-to-day basis in
the ongoing management of these programs, some of which extend like the one
today, the ‘09 program, for up to 20 years.
Mr. Gordon described the history of the Program
and the structure and operation of the Program. The basic structure used in the
Program was first employed in 2003 and then again in 2004, 2005 and 2006.
According to Mr. Gordon, no program was offered in 2007 or 2008 because
the 2005 and 2006 programs were under audit by the CRA and it was not
considered prudent to offer new programs until these audits were completed.
 In early 2009, the taxpayers participating in the 2005 and 2006
programs, including Mr. Gordon, were advised in writing by the CRA that
the audit of those programs had been terminated and that no reassessments were
to be issued.
 After meeting with the auditor to obtain an understanding of the
reasoning behind the decision not to reassess, Mr. Gordon decided to
proceed with the creation of the Program on the basis that it should follow the
structure of the 2005 and 2006 programs as closely as possible. Mr. Gordon stated that
EquiGenesis offered further programs in 2010, 2011 and 2012 on the same basis.
 In cross-examination, Mr. Gordon testified that the term of the
program for 2010 had been shortened to 10 years and that an additional option
on maturity had been added.
The additional option involves an exchange of the limited partnership units
issued to participants in the 2010 program for mutual fund trust units and a
donation of the latter to a charity.
Mr. Gordon stated that this option could not be added to the Program
because of conditions laid down in paragraph 38(a.3) of the ITA.
 Each Participant in the Program was required to purchase a minimum
of ten limited partnership units (the “LP Units”)
in the EquiGenesis 2009-II Preferred Investment Limited Partnership (the “2009 LP”) for $36,140 per LP unit. Of the total
purchase price of $36,140 per LP Unit, $32,000 was funded by a loan (a “Unit Loan”) from aIncome 2009 Finance Trust (“FT”) and the balance of $4,140 was funded by the
Participant from the Participant’s own resources.
 FT acquired the funding for the initial advances of the Unit Loans
from a credit facility provided by third-party lenders. In
cross-examination, Mr. Gordon stated that at the time each of the Unit
Loans was advanced he was not aware of either the identity of the third-party
lenders or the details of the loans made by them to FT.
 To obtain a Unit Loan, a Participant was required to complete a unit
loan application and assignment form (a “ULAA Form”). The ULAA Form was prepared by
FT’s counsel in consultation with EquiGenesis’ counsel. The form required the
Participants to disclose within ranges specified on the form the Participants’
gross personal annual income, their gross household annual income, their assets
and their liabilities.
 In cross-examination, Mr. Gordon stated that he was not
required to provide any document to support his income or net worth as
disclosed on his ULAA Form.
Mr. Gordon also stated that he did not disclose liabilities associated
with his participation in previous programs on the basis that these liabilities
would not have any impact on the net worth he disclosed on the form and on the
basis of his belief that FT was focussing on the borrower’s ability to meet the
cash flow requirements with regard to the loan.
 Article 2.02 of the ULAA Form provided for additional advances to the
Participant that would be added to the principal amount of that Participant’s Unit
Loan. Mr. Gordon explained the purpose of this provision as follows:
The purpose of that section is to provide the opportunity for the
lender at its sole discretion to make annual additional advances which would be
added to the principal of the outstanding loan and would be used to pay
interest from the prior year.
. . .
The intention was that interest -- there was a mechanism in place at
the sole discretion of the lender that would allow it the opportunity to, if
appropriate, to make additional advances to fund the interest from the prior
year, and this would happen every year before the end of February to satisfy
the Income Tax Act requirement that interest was paid within 60 days of year
 Articles 2.03 and 2.06 of the ULAA Form stated that the principal
amount of the Unit Loan bore interest at 7.85% per annum and that the Unit Loan
matured on February 15, 2019. Articles 2.04 and 2.05 of the ULAA Form described
the loan arrangement fee and the loan maintenance fee respectively. Article
2.07 of the ULAA Form stated that the Unit Loan would be evidenced by a
promissory note, and Mr. Gordon testified that each Participant executed a
The form of promissory note used stated that the Unit Loan matured on
February 15, 2019.
 Mr. Gordon explained the February 15, 2019 maturity
date of the Unit Loans as follows:
Q. You said that the loan matures at February 15th, 2019,
earlier in your evidence?
Q. We see that at article 2.06 on page 26 [of the ULAA Form]?
Q. What happens at maturity?
A. At maturity the loan becomes fully payable, both all
principal and accrued interest to that date, and must be paid in full.
Q. It’s a 20-year program so why is it designed so that the
loan matures halfway through?
A. Although the program was intended to potentially reach 20
years it’s essential from a tax perspective that the debt mature in a period
within the first 10 years so there had to be bona fides terms of re-payment [sic]
within 10 years, and that was what drove the requirement to have the debt paid
in full by that date.
 Mr. Gordon testified that the Participants were advised that
the Unit Loan had to be repaid on maturity and that they were not given any
written or verbal assurance that the loan would be renewed or extended. He pointed to statements to
this effect made in Article 5 of the ULAA Form and in the confidential offering
memorandum for the Program (the “COM”).
 With respect to EquiGenesis’ role on the maturity of the Unit Loan,
Mr. Gordon stated:
Q. What did EquiGenesis tell participants about EquiGenesis’s
role in potentially refinancing the loans?
A. We told them that there was the potential at 10 years prior,
just prior to the date the loan matured, that we would, to the extent possible,
investigate options, but no options had been, have been investigated yet and no
options have been considered at the time.
 In cross-examination, Mr. Gordon stated that if a sufficient number
of Participants wanted to refinance the Unit Loan, EquiGenesis would do what it
could on a best efforts basis to assist in finding a replacement lender. Mr. Gordon also stated
that on maturity the loans for the 2003, 2004, 2005 and 2006 programs had been
replaced with new loans from special-purpose entities and that over 90% of the
participants in the 2003 program had refinanced.
 Under the terms of the Unit Loan, the 7.85% annual interest had to
be paid by the Participant no later than February 28 of the year following the
year in which the interest accrued. For example, the interest that accrued on a
Unit Loan during 2011 had to be paid by February 28, 2012. If the interest was
not paid by a Participant by a certain deadline, the Participant was deemed to
have requested an additional cash advance from FT equal to the amount of that
interest, subject to the discretion of FT to refuse the additional advance.
 Mr. Gordon explained the intention behind the additional
advances and the means employed to make the advances as follows:
Q. Mr. Gordon, can you explain for the Court
how these additional advances work?
A. The additional advances are intended to
facilitate the participants’ obligation to fund interest every year within 60
days of year end so as to avoid violating the Limited Recourse Debt Rules and
creates [sic] a mechanism that provides the ability of the lender to --
on an annual basis -- determine whether or not the client or the participant or
I should say the borrower is creditworthy enough or at least not in default of
any of its obligations and therefore entitled to receive an advance.
To the extent that the lender has approved the
participants for the advance, then, every year prior to February 28th, the
lender will make two advances. One advance in an aggregate amount in respect of
the participants who borrowed in respect of the partnership loan and that
advance is made on an aggregate basis from the lender to the general partner of
the partnership, which is authorized under the loan documentation as an agent
to receive those funds on behalf of each of the participants.
The amount the GP will receive is an aggregate amount
equal to the combined amount of interest owing on each of the borrowers
pursuant to their partnership loans for the prior fiscal period. The lender
will advance that amount to the general partner. The general partner will
receive that amount and re-pay [sic] it back to the lender on behalf of
each of the borrowers who have borrowed under the loan agreements.
The lender will receive that amount, account for it as
a payment on account of the prior 12 months’ interest during the prior fiscal
period and then will immediately increase the loan amount, the principal of the
borrower’s loan amount to account for that additional advance. That is how the
interest is paid annually within 60 days of year end for each of the borrowers
who purchased limited partnership units.
 Mr. Gordon stated that while a request to FT for an advance was
made automatically if a Participant did not pay the prior year’s accrued
interest by the deadline, the advance itself was not automatic but was at the
discretion of FT.
Mr. Gordon provided a detailed explanation of the steps taken to effect
each year’s advances, including the role played by TD Canada Trust, which was
described as follows:
Q. Tell us about the bank and the bank’s role in this process?
A. The bank played a significant role in this process in that
the funds and the transaction for this closing all took place in the early
years at the branch of the TD Canada Trust here in Toronto. All of the parties
involved in the transaction have bank accounts at the same branch of the TD Canada
What would happen is the representatives of Finance Trust would
initially deposit the advance amount in cash from Finance Trust into their
account at the TD Bank. Then the TD Bank would walk those funds through the
appropriate transaction paying them from the lender, Finance Trust, to either
EquiGenesis or the GP as the case may be and then paying those funds back to the
lender and documenting the entire process on a manual basis, the deposits, the
transfers, the receipts, and so on.
The process is fully documented as the cash originating from Finance
Trust flows through each of the relevant parties and eventually back to Finance
 In more recent years, the bank has employed electronic processing
managed by FT, which eliminates the need for the parties to attend at the bank
branch to effect the annual advances.
 Each Participant pledged to FT his or her LP Units as security for
the Unit Loan and this security interest was perfected by delivery of the LP
Unit certificates to FT. In addition, the 2009 LP and its general partner, the
EquiGenesis 2009–II Preferred Investment GP Corp. (the “GP”), entered
into a priority agreement with FT that gave FT priority over the 2009 LP and GP
with respect to any claim over the LP Units.
 Each Participant was required to pay to FT a one-time loan
arrangement fee of $125 per LP Unit purchased by the Participant (the “LA Fee”).
Commencing on February 1, 2011, each Participant was required to pay to FT an
annual loan maintenance fee of $30 per LP Unit purchased (the “LM Fee”) and
to pay to the GP an annual administration fee of $95 per LP Unit purchased (the
“Admin Fee”). Of this $95, $25 was an agent service fee paid to the
individuals who sold the Program to taxpayers and $70 was retained by the GP
for the ongoing administration of the Program.
I will refer to the LA Fee, the LM Fee and the Admin Fee collectively as the “Fees”.
 For each LP Unit issued to the Participants, the 2009 LP used $1,565
to cover issue costs for the LP Units and invested $34,575 in debt instruments
(the “Linked Notes”)
issued by Leeward Alternative Financial Asset 2009 Corporation (“Leeward”), a
corporation formed under the laws of the British Virgin Islands (“BVI”).
 On the maturity of the Linked Notes on December 31, 2028, Leeward is
required to pay the 2009 LP the principal amount of the Linked Notes (i.e.,
$34,575 per LP Unit issued to Participants) and a return on the principal
amount determined at that time as the greater of two amounts. Each such amount
is calculated by reference to a notional portfolio of assets, which I will
refer to as “Portfolio A” and “Portfolio B”. As security for its obligations under the Linked Notes, Leeward
granted the 2009 LP a security interest over all of its assets pursuant to the
terms of a general security agreement.
 For each LP Unit issued, Leeward lent $32,000 of the amount received
from 2009 LP for the Linked Notes to aIncome 2009 Deposit Trust (“DT”) and DT
immediately lent the same amount to FT. Each of these loans bears interest at
7.85% per annum and matures on December 31, 2028. DT granted Leeward a security
interest over all its assets and FT granted DT a security interest over all its
 Although Mr. Gordon stated that he did not have knowledge of
FT’s activities, he agreed that since FT was a special-purpose entity created
to participate in the Program it was logical to assume that FT used the
proceeds of the loan from DT to repay the third-party lenders.
 In cross-examination, Mr. Gordon stated that the funds advanced
by FT passed sequentially through each party’s bank account at TD. Rather than each Participant
having a bank account, the General Partner received the funds advanced by FT in
its capacity as agent for the Participants.
 For each LP Unit issued, Leeward invested $2,575 in Class D notes
(the “Man Notes”) issued by AHL Investment Strategies SPC, a Cayman Islands
corporation managed by Man Investments Limited (“Man”). The
return on the Man Notes was dependent on the return realized on an underlying
pool of assets managed by Man.
 A Participant who agreed to acquire LP Units was given the
opportunity to borrow from FT a second amount equal to $10,000 per LP Unit
purchased by the Participant (the “TGTFC Loan”) on the condition that
the amount of the TGTFC Loan be transferred by the Participant to The Giving
Tree Foundation of Canada (“TGTFC”). Of the 59 Participants in the Program 58 chose to take advantage
of this aspect of the Program (I will refer to these 58 Participants
collectively as the “TGTFC
Participants” and individually as a “TGTFC Participant” and I will refer to this aspect of the Program as the “TGTFC Program”).
 The TGTFC Loan matured on February 15, 2019 and bore interest at
7.85% per annum. Each TGTFC Participant was required to pay to FT in respect of
this loan a one-time loan arrangement fee of $35 per LP Unit purchased by that
Participant. FT acquired the funding for the initial advance of the TGTFC Loans
from the credit facility provided by the third-party lenders.
 Of the total interest on the TGTFC Loan of 7.85% per annum, each
TGTFC Participant was required to pay 3.75% per annum in cash from his or her
own resources no later than February 28 of the following year. The balance of
4.1% per annum was also payable no later than February 28 of the following
year. However, if the 4.1% was not paid by a TGTFC Participant by a certain
deadline, that participant was deemed to have requested an additional cash
advance from FT equal to the amount of that interest, subject to the discretion
of FT to refuse the additional advance.
 Mr. Gordon stated that the only substantive difference between
the Unit Loan and the TGTFC Loan was the requirement that a TGTFC Participant
pay a portion of the interest accruing on the TGTFC Loan from his or her own
resources and not from an advance by FT.
 In cross-examination, Mr. Gordon was asked about his
understanding of the credit review conducted by FT prior to advancing Unit
Loans or TGTFC Loans. He stated that his understanding at the time of the
closings in 2009 was that FT conducted credit checks and PPSA searches of all
However, after his first examination for discovery he was advised by a representative
of FT that FT did not perform credit checks of the Participants with respect to
the first two of the four closings for the purchase of LP Units. Instead,
credit checks were being performed by FT by the end of October 2009, which was
after the first two closings, for which PPSA (Personal Property Security Act)
searches were done in the absence of credit checks. He was also advised by FT that it had not performed credit checks
prior to making additional advances to Participants in 2010 and 2011. Mr. Gordon stated that he had no personal knowledge of FT
performing credit checks and was not able to provide documentary evidence of credit checks
performed by FT.
 Each TGTFC Participant transferred the amount of his or her TGTFC
Loan and a further $200 per LP Unit purchased by the TGTFC Participant (for a
total of $10,200 per LP Unit purchased by the TGTFC Participant) to TGTFC under
the terms of a pledge executed by the TGTFC Participant and TGTFC (I will refer
to the total amount transferred to TGTFC by the TGTFC Participants as the “Transferred Property”). TGTFC issued each TGTFC Participant a charitable donation
receipt in an amount equal to the face value of the amount transferred by that
Participant to TGTFC.
 The pledge required TGTFC to invest 98.04% of the face amount
transferred to it by a TGTFC Participant in debt obligations (the “TGTFC Notes”) issued by Leeward. This equated to an investment in TGTFC Notes
of $10,000 per LP Unit purchased by the TGTFC Participant.
 As well, the pledge required TGTFC to hold the TGTFC Notes until
maturity on December 31, 2028. In cross-examination, Mr. Gordon stated
that the agreement of TGTFC to lend Leeward 98.04% of the Transferred Property
was essential to the structure. He also stated that by participating in the
Program TGTFC recognized that it was a closed structure:
The charity always had an option to take funds that it received as a
donee and invest the way they wanted to. By participating in this structure
they recognized it was a closed structure. It was a structured finance vehicle
and as such it was intended to match the elements of two earlier versions
previously done. So in respect of that element, to the extent that the charity
received donations through this structure, they agreed to invest them as laid
out in the original memorandum of understanding.
 Leeward issued TGTFC two TGTFC Notes, on December 15, 2009
and December 30, 2009 respectively.
The TGTFC Notes each bore interest at the rate of 4.75 % per annum. Leeward was
required to pay TGTFC an amount equal to 1.75% of the TGTFC Notes in December
2010 and an amount equal to 3.75% of the TGTFC Notes on December 31 of each
subsequent year until maturity.
The balance of the interest payable on the TGTFC Notes accrued and was payable
by Leeward to TGTFC on maturity. In cross-examination, Mr. Gordon
confirmed that the amount of Leeward’s liability to TGTFC for every $102,000
transferred to TGTFC by a TGTFC Participant (that is, per 10 LP Units purchased
by a TGTFC Participant) would be $134,402 (or $13,440.20 per LP Unit).
 Mr. Gordon
explained how the 3.75% per annum (or $375 per $10,000 of TGTFC Loan) was paid
to TGTFC, as follows:
Q. What happens to the $375 in respect of the donation loan
A. Two separate things happen in respect of that money. First,
I will walk you through the legal flow of those funds as anticipated by the
diagram. Then I will secondarily tell you exactly how those funds flow from a
The $375 of the $500 is intended to flow from the donor directly to
Finance Trust. Finance Trust will receive that money and account for it to
reduce the interest owing on an annual basis on the donation loan. Finance
Trust then immediately, at the same time, has a matching obligation to pay that
$375 to Deposit Trust on account of the loan agreement entered into between
Finance Trust and Deposit Trust.
Similarly, Deposit Trust has a matching obligation to pay $375 to
Leeward on account of the loan agreement entered into between Deposit Trust and
Leeward. Then immediately Leeward has a matching obligation to pay the same
$375 through to The Giving Tree on account of its commitment by issuing the
charity investment note which requires a 3.75 percent annual payment. The 3.75
percent on a $10,000 original investment is exactly 3.75 percent.
It means that notionally the $375 flows through each of these
parties. What actually happens is, after the funds are collected and they are
aggregated in EquiGenesis’s trust account, each of the relevant parties –– being
the lender –– sorry, Finance Trust, Deposit Trust, and Leeward sign what we
refer to as an omnibus direction.
 To secure its obligations under the TGTFC Notes, Leeward granted
TGTFC a security interest over all of its assets, which had priority over any
other security interest granted by Leeward, with the result that the TGTFC
Notes ranked ahead of the Linked Notes.
Mr. Gordon explained the importance of the security provided to TGTFC as
A. . . . We felt it was essential when this structure was put
together that there be very specific security arrangements in place that would
put the charity in first position and would put the partnership in second
position to be certain they would be able to receive what they are entitled to
be paid under their contracts. This document outlines all of those security
Q. Why is it important that the charity be in first position?
A. The parties agreed that, by the charity participating in
this structure and by agreeing to commit to entering into a contract with
Leeward, in return the charity would be the first entity entitled to be paid
out of all of the assets incorporated into this structure. That would provide
the charity sufficient certainty to be able to realize on the full value of
what they were owed under the charity note.
 Each TGTFC Participant executed a direction which instructed TGTFC
how to disburse 90% of its annual cash income from the TGTFC Notes purchased
using that participant’s transfer to TGTFC. The direction included a list of
charities and each TGTFC Participant was required to pick a maximum of four
charities from that list and designate the percentage to be paid annually by
TGTFC to that particular charity. Mr. Gordon stated that to the end of
2015 TGTFC had received cash payments under the TGTFC Notes totalling $2.3
million and that TGTFC had retained $232,000 and distributed the balance as set
out in the directions from the TGTFC Participants.
 Leeward lent to DT the proceeds from issuing the TGTFC Notes and DT
immediately lent the same amount to FT. These loans have a maturity date of
December 31, 2028 and bear interest at 7.85% per annum. As stated above,
Mr. Gordon agreed that it was logical to assume that FT used the proceeds
of the loan from DT to repay the third-party lenders.
 A Participant could exit the Program in one of three ways: on the
maturity of the Program on December 31, 2028, by requesting the redemption of
the LP Units after the ninth year of the Program, or by selling the LP Units to
a third party approved by the 2009 LP and FT.
Mr. Gordon described exit on maturity as the “expected route”. The redemption route was available to Participants once annually
after the ninth year of the Program.
 With respect to selling the LP Units, Mr. Gordon pointed to
language in the COM indicating that there was no market for LP Units and that
it may be difficult or even impossible for unit holders to sell them. Mr. Gordon stated that
no Participant had sold LP Units but that participants in earlier programs had
on a few occasions sold partnership units. He described four situations in
which participants in earlier programs sold partnership units on their own and
two situations in which EquiGenesis was able to find purchasers for the limited
He further stated that EquiGenesis did not have arrangements with any entity to
buy the LP Units at any time.
 Mr. Gordon noted that although Participants were not told to
expect a capital gain on the disposition of their LP Units, one of the two
disposition scenarios (Scenario B) in the term sheets for the Program provided
to Participants contemplated a capital gain on the disposition of LP Units.
Mr. Gordon described the two scenarios as follows:
Scenario A was intended to provide an analysis as to the financial
repercussions on maturity if a unit holder held the units to maturity. Scenario
B was designed to indicate the financial repercussions or results for somebody
who was able to sell their units prior to maturity.
In that case, it was assumed that the units themselves were treated
as capital property. As a result, the disposition of [sic] the sale of
those units to a third party would trigger a capital gain income inclusion as
opposed to a full income inclusion.
 Mr. Gordon described the cash flow results set out on two
versions of the term sheet provided to Participants resident in Ontario. The
first version assumed a donation to TGTFC while the second version assumed no
donation. In light of the various assumptions made in each term sheet, the two
scenarios suggested that on the maturity of the Program a taxpayer that
transferred property to TGTFC as part of the Program would be cash positive in
the amount of $218,000 while a taxpayer that did not transfer property to TGTFC
would be cash positive in the amount of $436,000.
 In cross-examination, Mr. Gordon was asked about a computer
model of the Program that allowed the user to test a variety of variables.
During this questioning, Mr. Gordon confirmed that if the Man Notes held
by Leeward had an average return of 9.61% per annum to maturity on
December 31, 2028 then the value of that investment would be $134,470
per 10 LP Units, which would provide Leeward with sufficient funds to discharge
its $134,402 obligation to TGTFC under the TGTFC Notes.
 Mr. Gordon also summarized what would be paid on maturity by
Leeward to the 2009 LP, as follows:
The first calculation you do on maturity is you take the value of
the notional value owing under the contract and you compare that with the
actual value of assets that Leeward has on liquidation, reduce the actual
assets that Leeward has on liquidation by the amount owing to the charity to
satisfy its obligations on the charity note and the lessor [sic] of
those two remaining amounts is what will be paid to the partnership.
 Accordingly, on the maturity of the Linked Notes on
December 31, 2028, the amount that will be paid by Leeward to the
2009 LP will never be greater than the assets of Leeward at that time less the
amount payable by Leeward to TGTFC regardless of the amount Leeward owes to the
2009 LP under the Linked Notes. In addition, if the Man Notes perform above the
historical return of 18.1% per annum, the potential shortfall appears to
increase rather than decrease.
If Leeward does not pay the full amount of the return owing to the 2009 LP
under the Linked Notes, the 2009 LP is expected to claim a deduction from
income under paragraph 20(1)(p) equal to the shortfall.
 In cross-examination, Mr. Gordon stated that there were two
authorized representatives of the Participants: EquiGenesis and Osler, Hoskin
He agreed that the costs incurred in assisting the Participants had been
quantified in an answer to an undertaking.
 Dana Tilatti is a manager for contracts and billing with Unisys
Mrs. Tilatti testified that she and her husband, Louis Tilatti, make their
investment decisions jointly and that they participated in similar programs
offered by EquiGenesis in 2005 and 2006. She stated that, after the CRA had audited the previous programs
and decided not to reassess, she and her husband decided to participate in the
 Mrs. Tilatti understood that the Program was closely modelled
after the 2005 and 2006 programs offered by EquiGenesis and she believed that
she had a fairly good understanding overall of what the Program involved, and
this was based on her review of the documents provided by EquiGenesis, which
included opinions from FTI and a law firm.
In cross-examination, Mrs. Tilatti stated that she had no direct contact
with anyone from EquiGenesis and that she obtained information about the
Program from her husband, who in turn obtained the information from a
representative of EquiGenesis.
EquiGenesis provided Mr. Tilatti with a spreadsheet to calculate the
optimal number of units to purchase but he instead used a tax preparation
program to determine that 10 LP Units satisfied their requirements.
 Mrs. Tilatti described the Program as involving two components:
an investment component and a charitable donation component. Mrs. Tilatti
and her husband decided that she would purchase 10 LP Units, which was the
minimum investment allowed.
 In cross-examination, Mrs. Tilatti testified that she funded
the $361,400 purchase price of 10 LP Units with $41,400 of her own money and a
She signed both the subscription form for the 10 LP Units and the application
for the Unit Loan on December 1, 2009.
The Unit Loan and the subscription for LP Units were both approved on
December 30, 2009.
Mrs. Tilatti understood that the interest over the term of the Unit Loan
would be approximately $229,000 but that she would not have to use her own
money to pay that interest. Instead, the lender would automatically advance an
amount to pay the interest on an annual basis. Mrs. Tilatti did not try to negotiate a lower rate of interest
for the Unit Loan because “that’s
how the program was structured” and it was a
take it or leave it arrangement.
 Mrs. Tilatti’s counsel asked her what the 2009 LP did with the
money provided by investors and she answered:
The investment that was provided by the investors and the units,
they were –– the units were used as a pledge for a loan that was taken out for
financing of these units.
 Mrs. Tilatti testified that a second loan was provided to her
to fund the donation component of the Program and that the LP Units were also
used to support that loan.
 Mrs. Tilatti described what she hoped to accomplish by
participating in the Program:
. . . my husband and I were looking for an investment component to
realize some tax savings, but at the same time were looking to be able to
donate to a charity which EquiGenesis allowed us to do.
 Mrs. Tilatti’s counsel asked her about Scenario A and Scenario
B and her intention with respect to the length of time she would participate in
Q. What is your understanding of what those scenarios depict?
A. The scenario A assumes that the participants in the program
will stay with the program until the program is dissolved at its maturity.
Scenario B assumes that the participant does not stay till the end of maturity,
that he will exit prior to the maturity date at some point.
Q. What is your understanding of what scenario –– at least back
in 2009 when you decided to participate, what was your understanding of what
scenario was more likely?
A. Based on the discussions between my husband and I the most
likely scenario was scenario A, that we stay with the program till its
Q. Regardless of your understanding of the likelihood, at the
day you decided to participate in the ‘09 program what was your intention with
respect to the length of time you participated in the program?
A. We would have been the total length
as it was presented to us in terms of the exhibit that we’re looking at.
Q. Are you aware of anyone who would
be interested in purchasing the units from you?
A. I am not.
 In cross-examination, Mrs. Tilatti stated that she intended to
hold the investment for 20 years and that the capital gain contemplated by Scenario
B was not considered as a possibility because Scenario B addressed early redemption.
 Mrs. Tilatti testified that most of the investment decisions
made by her and her husband are long-term decisions and that the 20-year time
horizon of the Program fit into the time horizon they had set for themselves.
 Mrs. Tilatti’s counsel asked her a series of questions
regarding the LP Units and her investment in the 2009 LP:
Q. . . . When you decided to participate in the program had
anyone told you that the units would be resold or repurchased?
A. That was not my understanding.
Q. Had anyone told you that the price that you paid would be
refunded to you?
Q. Had anyone told you what the future price or value of the
units would be?
Q. Was it your understanding when you decided to participate in
the program that the outcome was certain or uncertain?
A. Since there were some investments made there was a certain
element of risk involved in the EquiGenesis 2009 program.
 Mrs. Tilatti’s counsel asked her about the Unit Loan and the
TGTFC Loan (collectively, the “Program Loans”)
and her understanding of her responsibility concerning those loans:
A. We were certainly responsible for both loans. Every year in
the month of February we had to make a payment, which was shown in the previous
exhibit in the amount of $5,000 and, as I said, we were responsible for all the
interest payments. It was all on us. It’s in our name.
Q. What would happen if you failed to pay? What was your
understanding of what would happen if you failed to make a required payment?
A. We were on the hook. We have to pay. We were responsible and
we would have to liquidate assets. We are the ones who are responsible for the
 Mrs. Tilatti’s counsel asked her about the ULAA Form and the
fact that she did not list the loans taken out for prior EquiGenesis programs
The reason why we did not include them here is because the loans
that we have taken out for the EquiGenesis programs in the past were offset by the
investment in the program. So the net impact was a zero as far as we were
concerned and that’s why they’re not listed here.
 Mrs. Tilatti’s counsel asked her what would happen if the Unit
Loan was not refinanced after 10 years:
If we could not refinance the loan then we would be on the hook to
pay the loan back ourselves. So there was a certain element of risk to it.
 In cross-examination, Mrs. Tilatti was asked to reconcile the
non-disclosure of the loans from the earlier programs with the potential
personal liability for the amount of the Unit Loan:
Q. You also said that to the extent the investment didn’t pay
off the way you hoped you would be on the hook for it?
A. That’s correct.
Q. To me that doesn’t make sense. If you understood there was a
chance you’d be on the hook for it why did you think you shouldn’t list it on
this credit application form?
A. This is part of EquiGenesis so they know what our, the loan
and the investment are, that’s why. It’s not something they didn’t know. It’s
not information that wouldn’t be known to them. They’re aware of all the items
and the programs we participated in.
Q. The lender wasn’t EquiGenesis; right?
A. The way it’s structured the lender knows as well, the way
the program is structured. This is nothing new to them, so-to-speak.
 Mrs. Tilatti’s counsel asked her about the refinancing of a
loan provided to her as part of the 2006 program offered by EquiGenesis. After
consulting the package of documents provided to her by counsel (Exhibit A-16),
she stated that the original loan was from “Income
Finance Trust” and that it bore interest at 7.25 percent per annum. In
2016, the original loan was refinanced by a loan from CB 2016 Income Finance
Corporation, which bore interest at 6.45 percent per annum.
 Mrs. Tilatti’s counsel then asked her how she planned to repay
the Unit Loan on the maturity of the Program:
A. There is an investment note that is offsetting this loan, so
at maturity the note will generate hopefully enough income that will offset the
loan so the net amount will be zero. So we will be breaking even. That’s the
assumption we are investing under and participating in the program.
Q. If the investment does not perform well such that it’s not a
break-even how do you propose to repay the shortfall?
A. We as the investor in the EquiGenesis program would be
responsible for any shortfalls at the maturity date. We will have to pay from
our own pocket, in other words.
Q. At this point in time, sitting here today, are you aware of
any reason why you wouldn’t be able to meet your obligations under the ‘09
A. I’m not aware of any at this time.
 Mrs. Tilatti stated that the above information about the
refinancing of the Unit Loan also applied to the TGTFC Loan. In cross-examination, Mrs. Tilatti stated that she expected
EquiGenesis to assist in the refinancing of the Program Loans.
 Mrs. Tilatti’s counsel asked her about the donation component
of the Program. Mrs. Tilatti testified that she elected to have her
donation split among four charities after being told not to select more than
four. She explained her reasons for picking the four charities as
The Make-A-Wish Foundation Canada is a very well-known Canadian
charity that helps out many sick children and so that’s the one that I have
selected because of the helping of children and it’s a national charity. So
that is the reason for selecting that. And the other charity, the Bloorview
Kid’s Foundation, that I was familiar with.
My former co-worker’s daughter was born with a certain condition and
she was looked after at the Bloorview Children’s Hospital which is not too far
from where I work so I knew very specifically about what kind of work they did.
And the other two charities had presence in Ontario and that’s what
we were looking at, to help kids in Ontario.
 Mrs. Tilatti stated that, if the list of charities had related
to causes that she did not want to support, she would not have participated in
the Program. In cross-examination, Mrs. Tilatti stated that she signed the
pledge to TGTFC on December 1, 2009 but that it was “quite
possible” that she was not aware of the list of charities until December
 Mrs. Tilatti stated that TGTFC would distribute the money it
received to the charities. When asked by her counsel why 98.04% of the amount given to TGTFC
was described as a “separate giving of enduring
property”, she stated that the structure required the money to stay with
TGTFC through its investment in Leeward and that the charities get annual
payments from the investment.
 In cross-examination, Mrs. Tilatti was asked about the
donations listed in her 2006 through 2008 and 2010 through 2013 income tax
returns. Counsel also asked about the magnitude of her self-funded
Q. Is that a fair statement that you have never given ––
outside of taking on a loan to give to a charity you’ve never given $50,000 or
$100,000 or anything above that from your own pocket to a charity; is that
A. I think so.
 In cross-examination, Mrs. Tilatti testified that she applied
for the TGTFC Loan on December 1, 2009 and that the loan was approved
on December 30, 2009.
Mrs. Tilatti understood that the interest rate on the TGTFC Loan was the
same as on the Unit Loan – 7.85% – and that her LP Units were posted as
security for the TGTFC Loan. She also understood that the total cost of borrowing under the
TGTFC Loan was $71,639.32. She confirmed that, as with the Unit Loan, the terms of the TGTFC
Loan were offered on a take it or leave it basis.
 With respect to the dates of the pledge to TGTFC and the approval of
the TGTFC Loan, Mrs. Tilatti had the following exchange with counsel for
Q. My question is if you made a donation to the charity on
December 1st, or how could you have made a donation to the charity on December
1st of $102,000 if your loan hadn’t been approved until December 30th?
A. I understand your question, but this program was handled
through EquiGenesis and that’s why the documents have been addressed the way
they have. I’m sure if it was turned down I wouldn’t have been able to make
that donation and it would have been withdrawn.
 Mrs. Tilatti testified that she made an annual payment of
$5,000 and that part of this payment was applied to pay 3.75% annual interest on
the TGTFC Loan, or $3,750. The remainder of the interest on the TGTFC Loan was
paid “from the investment”. She stated that she had never defaulted on the payments she was
required to make.
 In cross-examination, Mrs. Tilatti agreed that EquiGenesis
filed notices of objection on her behalf for her 2009 and 2010 taxation years. She
understood that the payment for this service was covered by the annual fees
paid to EquiGenesis. Mrs. Tilatti also stated that EquiGenesis had recently asked
her to contribute to the cost of legal fees.
 Dr. Platnick is a medical doctor. He purchased 65 LP Units in
the Program on the recommendation of his accountant. The
number of LP Units was picked by his accountant and was based on advice from
EquiGenesis. Dr. Platnick understood the number of LP Units to have been
based on his projected income for 2010.
 Dr. Platnick subscribed for the 65 LP Units on July 30, 2009.
The subscription price of the 65 LP Units was $2,349,100. Dr. Platnick
understood that to purchase the LP Units he had to apply for a loan, which he
did on July 30, 2009, the amount of the loan being $2,080,000. The
subscription for the LP Units was approved by EquiGenesis on August 12, 2009
and the Unit Loan was approved by FT on the same date.
 Dr. Platnick testified that he met with and received materials
from a representative of EquiGenesis and forwarded those materials to his
accountant. He made sure that his accountant talked directly to the
representative and that his accountant and the representative conversed back
and forth. He also forwarded the materials to a relative who is tax lawyer and
talked with him to “see what he thought about it”.
However, he did not read all the documents himself before signing.
 Dr. Platnick explained why he decided to participate in the
Program as follows:
I participated in the program for several factors; one,
I had previous experience that was excellent with EquiGenesis. I was happy with
their service and product. I had the past experience I just talked about. I
won’t go into it again. I had high income those years. I liked the design of
the program. I liked the fact that there was a charity component where I could
give back money directly to some charities that I was comfortable with. And
again, putting it together I didn’t –– I saw this as an opportunity but I sat
down with my accountant and I let him make the ultimate decision. I was going
by his recommendations.
 Dr. Platnick understood that there were two components to the
Program – the investment component and the donation component – and that the
donation component was optional. He also understood that each component was
funded by a loan and that the two loans would mature about halfway through the
term of the Program and would have to be refinanced or be paid off. He stated that if the loans were not refinanced he would be
responsible for them and would have to pay them off.
 In cross-examination, he acknowledged that the interest on his Unit
Loan would be approximately $1.5 million over the term of that loan but he
stated that “the investments over the period of time
would hopefully perform well enough to cover the interest payments”. With respect to his knowledge at the time he applied for the loan,
he had the following interchange with counsel for the Respondent:
Q. When you say “now” –– at the time, you didn’t know that?
A. I didn’t know all the exact workings of all the loans and
everything. I had a general understanding. I assumed there was some type of
Q. If I said you had to put your unit loan that you were
purchasing up as security, is that your understanding?
A. Yes, the units.
Q. Is it fair to say you didn’t have any knowledge of the
lender in this case, Finance Trust?
Q. Prior to signing on to this loan, you didn’t do any
independent research of this lender?
 In addition to his $2,080,000 Unit Loan, on July 30, 2009 Dr. Platnick
applied to FT for a TGTFC Loan of $10,000 per LP Unit or $650,000. The
application was accepted by FT on August 12, 2009. The interest that
would be payable over the term of the TGTFC Loan was $467,752.47.
 In cross-examination, Dr. Platnick testified that he did not
try to negotiate with FT the terms and conditions of the two loans, that the
interest rate on the Unit Loan was higher than on his personal lines of credit
but did not stand out as unusual, that he probably could not have financed the
amount of either loan with his own funds and that he did not seek either loan
from a bank. He acknowledged that he simply accepted the deal as presented by
 At the time he applied for the Unit Loan and the TGTFC Loan,
Dr. Platnick had obligations in respect of the 2004, 2005 and 2006
EquiGenesis programs totalling $2,895,489.55.
 Dr. Platnick’s counsel asked him why he did not disclose loans
from earlier programs in his credit application for the Program:
The way I understood it with the earlier programs is there were
loans in an amount let’s say a hundred thousand that was invested for a similar
amount and it would grow over time, so I viewed it as I wasn’t including the
hundred thousand invested in my net worth. I wasn’t including the loan in the
net worth. I looked at it look a wash.
 In cross-examination, Dr. Platnick further explained why he did
not disclose these amounts on his loan application:
Q. You didn’t view it as you would a personal loan?
A. I viewed it as a personal loan, but
I didn’t –– because there was the corresponding investment that I knew –– I was
hoping would grow over time, it would cover it off. I didn’t include the
investment part in my net worth statement. I didn’t include the debt showing on
the liability side because they would cancel each other out.
Q. Let me just stop you there and ask you what you mean by you
didn’t include the investment component in your net worth. What does that mean?
A. I would view it that if you borrowed the money and I took
that money –– the units I had had value at least equal to the loan. That is
what I am saying. With the loan, I purchased the units which have equal value
to the loan. When this –– years later when this thing would wrap up and finish
there would be enough in the investment side to cover off the loan.
Q. You viewed your investment being valued as –– it was just
over 2 million. That is what you borrowed for the units?
 Dr. Platnick stated that he was not personally aware of any
credit check performed by FT either at the time he applied for the loans or after
 Dr. Platnick’s counsel asked him what the 2009 LP did with the
funds he invested:
A. I don’t know the exact amounts, I think the funds, some are
used for fees for the program but I think the bulk of it, the majority of it,
was used for a donation to charity and some of it might have been invested. I
don’t know the exact numbers.
Q. What do you know about the investment?
A. My understanding is the investment was put in a mutual fund
called Man and that that was the main investment vehicle.
Dr. Platnick testified that he
researched Man on the Internet to determine its long-term investment returns
and concluded that they were “very good, excellent”.
 Dr. Platnick’s counsel asked him about the refinancing of the
Q. At the time when you entered into the program what did
EquiGenesis tell you about the refinancing process?
A. At the very beginning?
A. I don’t remember specifically that we had a long
conversation on that, but what I did know from the early programs is that, well
–– well, let me re-phrase. I understood there would be refinancing at some
point and EquiGenesis would assist with it. It wouldn’t be my responsibility to
start going out to banks or looking for a new mortgage or loan myself.
 The foregoing also represented his understanding of the refinancing
of the TGTFC Loan.
 Dr. Platnick’s counsel asked him what his understanding was of
the donation component of the Program:
The donation component, what I understood is similar, there’s also a
donation loan and the charity doesn’t necessarily get the funds immediately,
their funds are invested and every year they’re getting a percentage similar to
like an endowment fund.
 Dr. Platnick explained why he participated in the donation
aspect of the Program:
Q. Let’s turn to the donation program. You told us earlier that
the donation program was optional; did you participate in that aspect of the
A. I –– that was one of the things that attracted me to this
product was that there was a large donation to a charity. So although there was
an investment and some tax minimization, but there was also a large amount of
the, money actually getting through to charities and that was important to me
in choosing this program.
Q. Before participating in the EquiGenesis programs had you
made donations to charity?
A. I donate to charity every year.
Q. Is there any difference between the charities you –– sorry,
the donations you made outside of the EquiGenesis program and the donations you
A. I would say no difference except the amount was larger
through the EquiGenesis program.
Q. Why was it larger?
A. Because of the structure of the program and the loans.
 In cross-examination, counsel suggested to Dr. Platnick that
the cash flow associated with participation in the Program was his main
motivation for participating in the Program. He responded as follows:
I disagree with that. I did this program knowing there was a large
charitable donation. Although I didn’t necessarily have the name The Giving
Tree or the specific charities at the time, I had worked with EquiGenesis on
the other programs.
They had come through with reputable charities I was comfortable
with. I knew in my conversations with Cori Simms there were going to be
reputable charities I could donate to. That was an important component of the
program to me. I would say it is not true or accurate that it was mainly the
tax savings or deferrals that drew me to this program.
 Dr. Platnick’s counsel asked him what he knew about TGTFC on
July 30, 2009 when he signed the donation loan application:
Q. If you turn to page 90, this is the last page of the
donation loan application and assignment form before the exhibits, can you tell
us around what date you signed this document?
A. July 30, 2009.
Q. At that time did you know the name The Giving Tree?
A. I didn’t specifically know the name The Giving Tree at that
Q. What did you know at that time?
A. I knew that I had done other programs with EquiGenesis
prior, very similar in structure and they brought me an excellent roster of
charities to collect [sic] from, so having that knowledge gave me
comfort that they would come through with a similar situation of excellent
charities to choose from and I was told that they were working on it and they
were going to have the list soon.
Q. How was that information communicated to you?
A. That was communicated directly by Miss Sims [sic].
Q. By e-mail? In a letter? In a meeting?
A. I’m not sure. I mean, I think it was
maybe more than once it was communicated. Might have been face-to-face. May
have been a phone call as well.
Q. When did you learn the name The Giving
A. I think that was later in the fall,
possibly December, early December.
 Dr. Platnick testified that he received the list of charities
at a later date, that he thought that it was an excellent list of charities and
that he would not have participated if the list had contained charities that he
did not think should be supported. He
testified that the charities would receive funds from the Program over the 19-year
term of the Program.
 In cross-examination, Dr. Platnick confirmed that at the time
he signed the pledge to TGTFC, on July 30, 2009, he was not aware of the name
of the foundation and he was not aware of the list of charities. Dr. Platnick signed the direction to TGTFC, in which he
selected charities, on December 14, 2009. He
could not recall when he learned of the name of TGTFC but he believed it was in
late November or early December 2009. He stated that he received the list of
charities after the December 1, 2009 date inserted in the pledge to
TGTFC that he had signed on July 30, 2009.
 Also in cross-examination, Dr. Platnick confirmed that his
charitable donations for 2004, 2005, 2007, 2008, 2010 and 2011 were as set out
in Exhibits R-34, R-35, R-36, R-37, R-38 and R-40.
 Dr. Platnick described his understanding of Scenario A and Scenario
I understood that when the program finished or wrapped up 19 years
later that there’s two possible outcomes labelled scenario A and scenario B.
Scenario A would be an outcome where the investment, some of the investment
increase would be taxable as an income. So I would be scenario A paying a
higher amount of tax compared to scenario B where there might be a buyer or
somebody that purchases the units prior to the end of the program which would
generate a capital gains which would be taxed at a different rate.
 Dr. Platnick testified that when he entered into the Program he
understood that Scenario A would be more likely even though Scenario B was
better from a financial and tax perspective. He “understood that there might not be a buyer for the units at
the end, that was –– that was an unknown, a bit
of a risk”. In cross-examination, Dr. Platnick agreed that he was hoping for
 With respect to risks associated with his participation in the
Program, Dr. Platnick had the following exchange with his counsel:
Q . . . did anyone ever tell you that the units you were
purchasing would be resold or repurchased?
Q. Did anyone ever tell you the price you paid would be
refunded to you?
Q. Did anyone ever tell you what the future price or value of
the units would be?
Q. When you decided to participate in this program was it your
understanding that the outcome was certain or uncertain?
A. Uncertain in the final scenarios, yes.
 Counsel asked Dr. Platnick about the refinancing of the 2004
and 2005 EquiGenesis programs in which he participated.
 Dr. Platnick confirmed that he owed $853,889.63 at the time of
the refinancing of the 2004 program and suggested that, while it was a large
number, he could have refinanced this amount on his own but that it would have
taken time. In fact, he was given options by EquiGenesis and he elected to have
the debt refinanced by a new lender with the assistance of EquiGenesis. The new financing was in place by September 24, 2014. The
interest rate on the new debt was 1.25% higher than on the debt it replaced
(7.25% versus 6%).
 Dr. Platnick selected the same option to refinance his debt
under the 2005 program. The interest rate on the new debt was 0.13% lower than on
the debt it replaced (6.62% versus 6.75%).
 Dr. Platnick testified that he made annual payments under the
Program and that the majority of each payment was used to pay some of the
interest on the TGTFC Loan, with the balance being used to pay fees. He stated
that he had not defaulted on these annual payments.
 In cross-examination, Dr. Platnick testified that he authorized
EquiGenesis to file two notices of objection on his behalf. He agreed that he left the filing of the notices of objection to
EquiGenesis. He also stated that in 2015 he had sent a cheque to EquiGenesis for
legal representation in response to a letter but he could not recall the amount
or any other details.
 Dr. Chu is a dentist who purchased 10 LP Units. Dr. Chu
appeared to have a very limited understanding of the Program, which he
summarized as follows:
To me, it was just a program that would return over that period of
time and your primary deduction would be at the beginning and then there are
residuals at the end, subsequent to that. Aside from that, I don’t really
understand the program.
 With respect to the donation component of the Program, Dr. Chu
If the charity were to receive money and I would receive a tax
receipt where both parties benefited, I thought it would be a good thing to do.
A lot of the dentists nowadays, they set up –– what do you call it ––
professional corporations which, if I was probably not involved with donating
to the charities, I would probably do that.
Because I was already a part of this, I never set up a corporation. I
think about three-quarters or two-thirds do that nowadays. I just like the idea
that charity got the money just like I liked the idea that the film industry
got their money to do –– it is something like –– if both parties benefited, I
just liked the idea. I have done the deals with EquiGenesis before. I was
comfortable with them.
 Dr. Chu testified that he knew nothing about Scenario A or Scenario
B. With respect to the risk, he testified:
You have to sign for a loan for a period of time and your worst case
scenario is –– they would use the money to invest which in the end would pay
off the loan and if there was a short fall [sic] you would be
responsible for the shortfall.
 Dr. Chu suggested that if there was a shortfall he would
address it by working or by selling one of his properties. He also understood
that, if he refused to pay, “someone would come and
 Dr. Chu testified that he received a package of documents and
signed where indicated by tabs. He did not review the documents or understand
their contents. He explained his approach as follows:
Q. Do you often sign documents without reading them or
A. With this program, yes, because either you are part of it or
you are not part of it. I think it would be equivalent to, for example, if you
buy a house or condo and they give you a stack of 12 or 15 pages to sign. If
you trust your lawyer, you just sign them. The same thing with this program, it
was the same as before. I would just sign them.
 Dr. Chu testified that no one told him that his 10 LP Units
would be resold or repurchased, that the purchase price of the LP Units would
be refunded to him or that the LP Units would have a certain value in the
 At the time he signed the documents to participate in the Program,
Dr. Chu understood that there was at least one loan and that the loan bore
interest, which he described as being part of the Program. He also understood that the loan was for the entire term of the
Program but that at some point it would have to be renewed or refinanced.
 Dr. Chu recalled picking two charities but he did not recall
his reasoning for his choices. He
did not know when the charities he picked were to receive money from his
donation. He did understand that he would not receive anything back from the
charities but that he would be given a tax receipt for $102,000.
 Dr. Chu did not understand the reporting he received from
EquiGenesis and he simply passed everything on to his accountant. Dr. Chu confirmed that he made annual payments as requested by
EquiGenesis but he did not know what the payments were for.
Katherine Lee Sang
 Dr. Sang is a medical doctor who purchased 10 LP Units in the
Program because that was the minimum purchase allowed. Dr. Sang
understood that she was giving money to charity and would be receiving a tax
receipt. She described the tax receipt as a major reason for participating in
the Program and indicated that she used the tax savings to help fund a trip to
 In cross-examination, she agreed that she had an understanding of
the tax savings as a whole and of those from the donation when she signed the
documents and that she was looking for this benefit when she signed up for the
Program. Dr. Sang had the following exchange with counsel for the
Q. If I put this proposition that while you might have liked
the idea of helping a charity or two, the reason that you agreed to participate
in this program was because of the tax savings it provided?
A. Definitely, but it also helped the charity, which is an
Q. And that Corey Sims [Cori Simms] had told you about ‘05 and
the ‘06 program passing audit so you thought this would be a good idea as well?
Q. In our review of your donated history you hadn’t really
seemed to donate more than $75 outside of the EquiGenesis programs, and I put
the proposition to you that you would not have paid 102,000 to a charity if it
came from your own savings?
Q. You never would have taken on a personal loan to make such a
payment to a charity?
 Dr. Sang testified that she often gave small amounts to charity
and that the Program allowed her to make a large donation because of the TGTFC
Loan. In cross-examination, Dr. Sang agreed that, if one ignores the
donations under the Program and the 2011 EquiGenesis program, she had donated
to charity $20 in 2004 and 2005, nothing in 2006 and 2007, $50 in 2008, $20 in
2009, $60 in 2010, nothing in 2011, 2012 and 2013 and $75 in 2014.
 When asked by her counsel how the donation played into her decision
to participate in the Program, she replied:
Very much. Because I’ve never given that much to charity and that
would be a good thing. So I thought it was a win/win situation.
 She understood that TGTFC would receive the donation as soon as she
received the TGTFC Loan and that TGTFC would disburse the funds to the
charities she picked as soon as it was able to do so. She understood that no
part of her donation would be returned to her.
 In cross-examination, Dr. Sang testified that she accepted the
donation amount of $102,000 because that was what the Program required for a
purchase of 10 LP Units. Dr. Sang did not know anything about the mandate
of TGTFC, did not do due diligence regarding TGTFC on the Internet and did not
even know TGTFC was a charity.
 Dr. Sang also acknowledged that she did not know which
charities the funds would go to when she signed a direction on
September 21, 2009.
She did recall completing the direction to TGTFC stipulating her choice of
charities on December 28, 2009 and agreed that she did not know the charities
until that date.
She understood that the $102,000 she donated to TGTFC would be distributed to
the charities in the proportions she chose and she had no knowledge of the
 Dr. Sang assumed that, when her Unit Loan of $320,000 matured,
EquiGenesis would find another lender, but recognized that that was not
guaranteed. With respect to the repayment of the Unit Loan and the TGTFC Loan,
she had the following exchange with her counsel:
Q. How do you plan to pay them back?
A. Well, I’m hoping their investments will pay back like in
Sentinel Hill, but if not then they will come out of my personal finances.
Q. What would happen if you simply chose not to pay?
A. I think I have to pay.
Q. Why do you think that?
A. Because it’s a loan and I did a promissory note that’s
Q. If you failed to comply with your obligations under that
note, what happen [sic]? Why do you have to pay?
A. Maybe I go to jail, I don’t know. But I would pay it any
 Dr. Sang testified that no one told her that her 10 LP Units
would be resold or repurchased, that the purchase price of the LP Units would
be refunded to her or that the LP Units would have a certain value in the
future. She understood that the outcome was uncertain “[b]ecause of fluctuations in investments and nobody knows the
future”. She stated that she made annual payments to the Program and that
she had not defaulted on any payment. When asked what the payments were for,
she stated that she was not quite sure.
 In cross-examination, Dr. Sang testified that she was not
concerned about the lender or the interest rate on the loans because the rate
was part of the Program and she trusted EquiGenesis. She agreed that she did
not make any attempt to vet the lender, negotiate different terms or look for
financing elsewhere. She did not understand the loan applications and did not
understand how the interest on the loans would be paid.
 Dr. Sang’s counsel asked her about Scenario A and Scenario B:
Q. Now, if you look at the far right-hand side of the document
there is a scenario A and a scenario B; do you see that?
Q. What do those scenarios refer to?
A. I don’t really know much about it, but I guess what happens
at the end of the program, a couple different scenarios. Doesn’t mean much to
 In applying for the two loans, Dr. Sang did not disclose her
liability in respect of her participation in Sentinel Hill because she was not
aware of the details of that liability. Dr. Sang
was also not aware of any credit check or verification performed by FT nor was
she asked to provide additional information or updates to FT.
 Dr. Sang testified that EquiGenesis prepared her notice of
objection on her instructions, that EquiGenesis was paying for legal
representation but that in February 2016 she had contributed $50 per LP
Unit ($500 in total) toward the cost of such representation. Dr. Sang could not recall if she had provided input on the content
of her notice of objection but she agreed that she did not provide any
 Ms. Cassan is a lawyer and a patent and trademark agent who
purchased 10 LP Units in the Program. She testified that she could have
purchased more but did not want to take on the associated liability.
 Ms. Cassan testified that she did not understand the Program
very well at all at the time she decided to participate but that now she
understands it reasonably well.
 Ms. Cassan understood the main risk with the Program to be the
investment risk because of the leveraged nature of the structure. In deciding
to participate, she drew comfort from the report prepared by FTI dated
December 15, 2009.
She testified that she checked out Man Investments and “they seemed like a very reasonable investment provider based
in the U.K.”
 In cross-examination, Ms. Cassan had the following exchange
with counsel for the Respondent regarding the relative importance of the
investment and the donation aspects of the Program:
Q. I want to put to you something and I want your comment on
the proposition I’m about to put to you. Wasn’t the charity component of this
program –– prior to deciding to participate, wasn’t the charity component for
you –– and pardon the expression –– a no-brainer in the sense that your real
concerns were whether the tax deductions that EquiGenesis was advertising, your
concern was whether those would work for your personal situation and really the
charity component of the program, there wasn’t a real decision to make on that
front, it was if I do the investment of course I’m going to do the charity?
A. That’s what attracted me to the whole program. I wouldn’t
have ever considered the investment were it not for the charities.
Q. I put it to you it wasn’t so much about deciding to
participate in the donation program; it was more about –– your decision was
more about whether I’m going to invest in EquiGenesis or not?
A. To me it looked like a wonderful thing for the charities, a
worthwhile thing, and whether or not I wanted to incur that liability and
investment risk was the real question.
 Ms. Cassan testified that she was responsible for paying the
Unit Loan and the TGTFC Loan and that the loans would have to be refinanced
before the end of ten years but that no arrangements were in place and
EquiGenesis had not indicated to her that it would play a role in the
She imagined that all the Participants would get together to find a new lender
but if that did not happen she believed she could obtain the necessary
financing from a bank.
She testified that she could not imagine a scenario in which she would not be
able to refinance but if such a scenario arose she had the option of redeeming
the LP Units or finding a buyer for them.
In cross-examination, Ms. Cassan testified that it would make sense for
EquiGenesis or Mr. Gordon to help facilitate the refinancing of the loans.
 In cross-examination, Ms. Cassan testified that she signed the
documents required to participate in the Program on December 18, 2009
and that she applied for a Unit Loan on that date. She
understood that the Unit Loan bore interest at 7.85%, that the interest on the
loan was paid by additional advances and that she would owe approximately
$550,000 at the end of the term of the loan.
Ms. Cassan testified that she did not do research on FT, that she would
not have paid her bank 7.85% interest at the time, that the interest rate was
dictated by the structure and that she did not try to negotiate a different
interest rate or seek financing elsewhere.
Ms. Cassan gave similar responses with respect to the TGTFC Loan. Ms. Cassan also testified that she was not aware of any credit
checks being done on her by FT and that FT had not asked her for updates on her
financial status on an annual basis.
 Ms. Cassan testified that she really liked the charitable
Q. What did you like about it?
A. I liked that it was for a long time, you know, rather than
give a charity a bunch of money and having them blow it or whatever it was like
an annuity. So it was safe. It was an ongoing, stable income for the charities
so it seemed to me to be ideal.
 In cross-examination, Ms. Cassan testified that, apart from giving
to TGTFC, she had donated to just over ten charities during 2009 including one
donation of $1,500. She also confirmed in general terms the donations she had made from
2004 through 2008 and from 2010 through 2012, which ranged from $100 to $1,555
per year. She made no donations in 2013 and 2014.
 Ms. Cassan stated that she understood that she could not donate
to TGTFC if she did not purchase LP Units and that her donation to TGTFC was
fixed by the number of LP Units she purchased. Ms. Cassan
signed the direction to TGTFC on December 21, 2009; she could not recall if on
December 18, 2009 she knew the identity of the charities that TGTFC
would send money to.
 Ms. Cassan recognized that she could obtain certain of the tax
benefits of the Program without participating in the donation component:
Q. So could you have obtained the items on row 2, the total tax
deductions, without participating in the charitable donation program?
A. I could have, but it was really the charitable program that
attracted me to the program, the whole program. I wouldn’t have done it but for
the charitable aspect.
 Ms. Cassan testified that staying in until the end of the
20-year term of the Program, that is, Scenario A, was the more likely scenario
because that was how the program was designed and there was no market in which
she could sell the LP Units. She hoped to repay the loans at that time from the investment
component of the structure but stated that she would be responsible for any
 In cross-examination, Ms. Cassan acknowledged that EquiGenesis
had provided her a term sheet showing a 15-year scenario but she denied that it
was her expectation that she would be in the Program for less than 20 years. She stated that, if she did decide to sell her LP Units before the
end of 20 years, Mr. Gordon would be the first person she would call
because he is familiar with the Program and he has contacts.
 Ms. Cassan testified that no one told her that her 10 LP Units
would be purchased from her, that the purchase price of the LP Units would be
refunded to her or that the LP Units would have a certain value in the future.
 Ms. Cassan testified that she made annual payments in respect
of the Program by cheque and that she had never defaulted on a payment.
 In cross-examination, Ms. Cassan testified that she appointed
EquiGenesis as her representative in dealing with the CRA and acknowledged that
two notices of objection were filed on her behalf – one for her 2009 taxation
year and one for her 2011 taxation year. She also stated that she did not pay
for the filing of the notices of objection but that in 2016 she was asked to
pay $50 per LP Unit for legal costs.
 Ms. Zhang is an employee of TD who works with TD Wealth private
clients; she appeared under subpoena. Ms. Zhang described her relationship
with Mr. Gordon and her responsibilities with respect to the Program as
Mr. Gordon and I had a client and a banker professional
. . .
I would accept the client’s directions in order to process the
transactions that’s directed to me by the client.
 Ms. Zhang testified that the EquiGenesis “in trust” account was opened in November 2003, and
that the EquiGenesis 2009-II Preferred Investment LP, EquiGenesis 2009-II
Preferred Investment GP, aIncome 2009 Finance Trust, aIncome 2009 Deposit Trust
and Leeward Alternative Financial Asset 2009 Corporation accounts were all
opened in July 2009.
 Ms. Zhang identified two cerlox bound volumes. The first contained
in Tab 3 a record of all transactions through the FT account from August 6, 2009
to March 1, 2015. The second contained a record of all transactions through the EquiGenesis
account from August 6, 2009 to March 1, 2015.
 Ms. Zhang testified that the record of the EquiGenesis account
showed under the heading “trans[action] description”
that 56 of the cheques to be deposited in that account had been returned.
 In cross-examination, Ms. Zhang confirmed that a cheque could
be returned for a number of reasons but that the most common reason was
insufficient funds. Ms. Zhang further confirmed that she had not inquired as to
whether the obligations represented by the 56 cheques were met at a later time.
 Mr. Tilatti is a consulting engineer and is the husband of Mrs. Tilatti.
Mr. Tilatti did not participate in the Program but did participate in the
2005, 2010 and 2012 programs offered by EquiGenesis. The Respondent subpoenaed
Mr. Tilatti to testify.
 Mr. Tilatti was asked about an Excel spreadsheet created by
Q. And could you describe what this e-mail’s about?
A. Um, I recall that EquiGenesis developed an
Excel program, software program, to help investors in deciding what the
appropriate number of units would be for their situation to purchase.
Q. What did that mean to you, “the appropriate
number of units for your situation”?
A. Well, I think it’s based on your income and
your tax situation and what impact ‘x’ number of units would have on your tax
 The spreadsheet recommended a number of LP Units based on the inputs
of the user. Mr. Tilatti testified that he looked at the spreadsheet and
concluded that it was not as useful as his own tax software. He also stated that he did not use the Excel spreadsheet.
 Mr. Tilatti was shown printouts generated by Excel, including
one printout showing a recommendation to purchase 10 LP Units. Mr. Tilatti
testified that he was not familiar with the printouts, that he had not asked
EquiGenesis for the printouts and that the income shown on the printouts did
not match his or Mrs. Tilatti’s income.
 Mr. Tilatti was shown a document presenting a 15-year scenario
for the Program. Mr. Tilatti testified that he did not ask EquiGenesis for
the document and he did not recall receiving it.
 Ms. Spettigue is a large case auditor with the CRA and has been
employed by the CRA for 23 years. Ms. Spettigue was responsible for
issuing the reassessments of the Appellants and the other Participants.
 Ms. Spettigue testified that the CRA did not rely on the
general anti‑avoidance rule in section 245 to deny the tax benefits
claimed by the Appellants as a result of their participation in the Program.
 Ms. Spettigue indicated that she computed the income inclusion
under subsection 12(9) of the ITA and section 7000 of the ITR by
referring to the terms of the Linked Notes. In
particular, she referred to page 8 of the Linked Note, which describes the
calculation of the variable return amount. She explained her approach as
A. If you turn to page 8 of that note, there is a calculation
of the variable return amounts which I think has been talked about before, the
portfolio A or portfolio B and how that is calculated. It is also calculated on
the basis that ––
I think it is 27 that says that it will be calculated as if –– four
times per year as if it is the maturity date. As that could be the maturity
date, I looked at each of the four quarters and picked the maximum amount based
on the calculation of portfolio B, which is the Dow Jones Canada Select
Dividend Fund I think.
Q. Why did you use portfolio B and not portfolio A?
A. At the 200 percent –– because it is calculated at the 200
percent of the Dow Jones amount, we determined that would be the higher amount.
Q. Could you explain how you determined the partnership income
for the 2009 and 2010 taxation years?
A. I went to the Dow Jones website and downloaded the actual
fund numbers. I looked at –– for instance, this particular linked note has the
August 12th closing date. If you start at that date and go –– then we took the
quarterly amounts. In 2009, we just looked at the December one because
basically it hadn’t started until August.
Basically, the return amount between –– the gain between the August
12 date and the December –– end of December date –– took the difference and
calculated that percentage and what that return amount would be less the ACB of
the amounts, of the actual note itself. We calculated a return.
 Ms. Spettigue stated that the period ending
December 30, 2009 was too short to warrant a calculation and
that for the quarter ending September 30, 2010 she used numbers
prepared by EquiGenesis, even though she did not believe they yielded the
maximum possible amount for the period.
 Ms. Spettigue explained why the reassessment to include
$145,400 of income in Ms. Cassan’s 2011 taxation year was reversed:
A. Originally, I used the same approach and calculated March
being the highest amount. Then as it turned out with consultations with the
Department of Justice, we determined we would go with a December 31st year, so
I actually asked my colleague to recalculate it all and determine
whether or not it was accurate. As of December 2011 –– the March one was really
quite high, but by the end of December relative to March, it had fallen off. It
actually became a tiny loss, so we did not add any income to anybody’s 2011.
 Ms. Spettigue explained that she originally miscalculated the
Appellants’ income inclusions for 2009 and 2010 and described a chart that set
out the original and corrected calculations for those years.
 In cross-examination, Ms. Spettigue stated that she took over
the file from Mr. Guy Alden after he retired in March 2012. She stated
that after that date she did not meet with EquiGenesis and did not collect any
additional information from EquiGenesis, FT, DT, Leeward, Man or TGTFC.
Mr. Howard Rosen
 Mr. Rosen is a chartered accountant (1981), a chartered
business valuator (1984) and a principal of FTI. He was qualified as an expert
in business valuation and corporate finance. Mr. Rosen stated in a
statutory declaration that “[m]y opinion today is as
set out in each of my 2009 reports”.
 FTI was retained by EquiGenesis to prepare two reports in 2009 that
were provided to the Participants. The first report is dated July 30, 2009 and
the second report is dated December 15, 2009 (individually, the “July 30 EquiGenesis Report” and the “December 15 EquiGenesis Report” and collectively,
the “EquiGenesis Reports”).
 FTI was also retained by TGTFC to provide a report to TGTFC (the “TGTFC Report”). The
TGTFC Report is dated December 15, 2009. All
three reports were signed by Mr. Rosen and by Mr. Vimal Kotecha, CA,
CBV. I will refer to the EquiGenesis Reports and the TGTFC Report,
collectively, as the “FTI Reports”.
 Under the heading “2. Scope of Services”
in the retainer letter from FTI to EquiGenesis dated June 24, 2009, FTI states that it was asked to provide EquiGenesis with “our opinion of the fair market value of certain aspects” of
 The EquiGenesis Reports address the same questions but at different
dates. The July 30 EquiGenesis Report provides opinions as at the date of the
report while the December 15 EquiGenesis Report provides opinions as at
November 30, 2009. Section 1.4 of each of the EquiGenesis Reports
describes the opinions requested by EquiGenesis as follows:
You have requested our opinions, [as of a current date] [as at November 30, 2009],
of the following:
a. The commercial reasonableness of the prescribed interest rates
of the various proposed debt instruments, specifically;
i. the aIncome 2009 Finance Trust (“Lender”) loan agreements with
the Investors / Donors (the “Investor Notes” and “Donor Notes”, respectively);
ii. the Leeward loan agreement with the LP (the “LP Notes”);
iii. the Leeward loan agreement with the Charity (the “Charity
iv. the Leeward loan agreements (the “Leeward Agreements”) with
aIncome 2009 Deposit Trust. (“Lender Affiliate”);
b. The commercial reasonability of the expected rate of return on Leeward’s
investment in the Man Notes;
c. The commercial reasonableness of the Investor’s investment in
d. The ability of the Charity to realize on its security; and,
e. That the fair market value of the Charity Notes, if they were
issued as of the date of this report, would be equal to the face value of
$10,000 per unit.
 Section 2.1 of the EquiGenesis Reports sets out the following
Based on the scope of our review, the explanations provided to us,
and subject to the assumptions, qualifications and restrictions noted herein,
in our opinion [as at the date of this report] as at November 30, 2009:
a. The prescribed interest rates of the various proposed debt
instruments are commercially reasonable, specifically:
i. the Investor Notes and Donor Notes with the Lender of 7.85%;
ii. the variable return on the LP Notes;
iii. the Charity Notes of 4.75%; and,
iv. the Leeward loan agreements with the Lender Affiliate of
b. The expected rate of return on Leeward’s investment in the Man
Notes is commercially reasonable;
c. The investment in LP units by Investors is commercially
d. The Charity will be able to realize on its security at the
maturity date; and,
e. The fair market value of the Charity Notes, if they were issued
as of the date of this report, would be equal to the face value of $10,000 per
 The EquiGenesis Reports were based on the assumptions set out in
section 6 of the reports. The
December 15 EquiGenesis Report added a third assumption to the effect that the
data reviewed as at November 30, 2009 had not materially changed as
of the date of the report. The two common assumptions are:
a) The income tax laws prevailing at the valuation date will
continue to prevail in the foreseeable future.
b) The Investors will have sufficient net assets and income to
allow the Unit and Donation Loan agreements between the Lender and the
Investors, having an initial term of no longer than 10 years, to be refinanced
for a further term upon their maturity[.]
 In addition to these assumptions, Mr. Rosen testified that:
I would assume for all investors who were not part of EquiGenesis,
[except] for Mr. Gordon who was not arm’s length to EquiGenesis, but for
the investors who were, there is an arm’s-length relationship between them and
We have Finance Trust and Deposit Trust, the lender and lender
affiliate, that are at arm’s length to the investors and EquiGenesis. We have
Leeward Alternate Finance Asset 2009 Corporation, which we have been calling
Leeward, itself another arm’s-length party. We have Man Investments, another
arm’s-length party. Then we have the charitable foundation, yet another arm’s-length
party. Transactions between arm’s-length parties are assumed to take place on
an arm’s-length basis.
 Apart from the effective dates and the assumptions, the only
material difference between the two EquiGenesis Reports is that the July 30
EquiGenesis Report had a different scope of review as some of the material
agreements were not available at the time that report was prepared. Mr. Rosen
read the caveat set out in the report:
“As of the date of this report” -- the July report “–– we have not
been provided with certain agreements that relate, in particular, to the
charities/donation element of the program and specifically we have not reviewed
–– ”(As read.)
 Mr. Rosen stated that the missing agreements were available at
the time the December 15 EquiGenesis Report was prepared and that the
additional agreements did not alter the opinions expressed in the July 30
EquiGenesis Report. As well, the methodology employed to reach the conclusions in the
reports did not change.
 Mr. Rosen explained the meaning of “fair
market value” and “commercial reasonability”
as used in the EquiGenesis Reports as follows:
Q. How do you define fair market value for this mandate?
A. Fair market value is generally accepted in Canada to be the
highest price available in an open and unrestricted market between informed and
prudent parties acting at arm’s length and under no compulsion to act expressed
in terms of cash.
. . .
Q. How did you define “commercial reasonability” in the context
of this work?
A. In paragraph 1.5, following this section, I set out
commercial reasonability to be the characterization of an investment or aspect
of an investment such as the interest rate that is reflective of appropriate
arm’s-length market factors taking all relevant risks, benefits, and
responsibility [in]to consideration.
An investment would be commercially reasonable if it is expected to
provide a return commensurate with all the risks of the particular investment
considered. The rate of return would be considered commercially reasonable if
it was reflective of all of the risks an investor was exposed to in an
 Mr. Rosen’s opinion regarding the fair market value of the
TGTFC Notes is based on his understanding that the notes provided TGTFC with a
first charge against all of the assets of Leeward and on his conclusion that
the 4.75% interest rate on the TGTFC Notes is commercially reasonable.
 With respect to the first point, Mr. Rosen explained that,
because of the first charge, TGTFC would initially have, for each $10,000 of
principal of the TGTFC Notes (i.e., the TGTFC Note principal amount per LP
Unit), security of approximately $44,575 comprising Leeward’s investment in the
Man Notes of $2,575 per LP Unit and the principal amount of the loans to
Participants of approximately $42,000 per LP Unit. This security was expected
to grow to just over $200,000 at the end of the Program, at which time Leeward
would owe TGTFC about $13,440 per LP Unit.
 Mr. Rosen stated that the Man Notes were probably less
important, that he “would feel most comfortable putting
most of the emphasis on the charity notes, on the investor notes” and
that the primary collateral for the TGTFC Notes comes from the loans to the
 The expected value of the security held by TGTFC at the end of the
20-year term of the TGTFC Notes was based on assumptions regarding the Man
Notes and the loans to the Participants. In particular, Mr. Rosen assumed
that the Man Notes would yield an annual return of 15.4%, which was based on
historic returns for the AHL Diversified Program over a period of 13 years and
eight months, and that the Participants would refinance their loans at the end of
the initial 10-year period with loans that would be due no later than
December 31, 2028. He also assumed – on the basis of his reading of the relevant
agreements - certain cash flows if any portion of the principal or interest
owing under the Unit Loans or the TGTFC Loans was repaid prior to maturity.
 In cross-examination, Mr. Rosen acknowledged that the predicted
return on the Man Notes was based on the return on the Man AHL Diversified plc
notes rather than the Class A AHL Diversified CAD
notes that Leeward acquired. Mr. Rosen pointed to the explanation in
footnote 22 of the EquiGenesis Reports, which highlights the factors that may
result in performance differences between the two notes and states that the
less than three-year trading history of the CAD notes was insufficient to
predict the performance of the Man Notes over 20 years, although it did track
the plc notes during that approximately three-year period.
 With respect to the second point, Mr. Rosen expressed the
opinion that the TGTFC Notes were low risk because of the security attached to
the notes and that, in considering whether the 4.75% interest rate on those
notes was commercially reasonable, one had to compare the rates on other low-risk
20-year debt. Mr. Rosen stated that as of November 30, 2009, the rate on
long-term Government of Canada bonds was 3.85%, which represented the risk-free
rate. The rate on 20-year provincial bonds, which he considered to be a very
safe investment, was in the range of 4.5% to 4.7%. The rate on 20-year Canadian
corporate bonds, which he considered to be a riskier investment, was 5.3%.
 Mr. Rosen also looked at the implicit interest rates on 20-year
residual bonds, which are bonds that will be redeemed for their face amount on
maturity but that do not pay interest while they are outstanding. The implicit interest rate on the Government of Canada
residual bond was 4.05% while the implicit interest rates on the provincial and
corporate residual bonds ranged from 4.9% to 6.6%. Mr. Rosen viewed the
TGTFC Notes as less risky than the provincial and corporate residual bonds
because 3.75% of the 4.75% interest rate was paid annually.
 Section 5.13 e) of the EquiGenesis Reports
states that the internal rate of return (IRR) of the TGTFC Notes is 5.11%. Mr. Rosen
stated that this was an error and that the IRR should be 4.75%. He also stated
that this error “is not relevant to the ultimate
conclusion” that the interest rate of 4.75% was commercially reasonable. This conclusion regarding the reasonability of the interest rate in
turn supported the view that each $10,000 of principal of the TGTFC Notes had a
fair market value of $10,000.
 In addition to assuming the refinancing of the Unit Loans and the
TGTFC Loans, section 5.23 of the EquiGenesis Reports
addresses a scenario in which the Participants’ loans are not refinanced. The
conclusion in that case is that the per‑LP Unit fair market value of the
TGTFC Notes is still $10,000. When asked why he looked at this scenario,
Mr. Rosen stated:
There is no guarantee that the loans will be refinanced or that they
will be able to be refinanced. There is no certainty in the future. Because of
that, you have to look at what the economic impact is if they cannot be
 With respect to the 7.85% annual rate of interest on the Unit Loans
and the TGTFC Loans, Mr. Rosen opined that 10-year mortgage rates plus an
additional premium that takes into account the covenant of each Participant
were an appropriate measure of the reasonability of that rate. Mr. Rosen described his analysis and conclusion as follows:
Based on the risk profile and the characteristics of these loans,
the unit loan and the donation loan, in comparison to 10-year conventional
mortgages, I concluded that they were riskier than the rate on the 10-year
conventional mortgage and that the rate of 7.85 percent was reasonable.
. . .
Q. What were the rates you observed for conventional mortgages?
A. I observed posted rates, and I observed discounted rates. The
discounted rates were about 250 basis points less than the rate on these notes.
 Mr. Rosen acknowledged that the EquiGenesis Reports did not
enumerate the factors supporting the conclusion that the 7.85% rate was
 However, the EquiGenesis Reports do indicate that the conclusion is
based on two additional assumptions. Section 5.3 b) of the EquiGenesis Reports
states in part:
. . . Our determination of the additional risk premium considers the
fact that a complete credit review will be performed initially and prior to any
new loan on or after February 15, 2019 on the entire loan amount (which
includes loans for interest payments) and that the Investors are individuals
with substantial net worth14; and
Footnote 14 in the EquiGenesis Reports states:
We understand that Investors must be “Accredited Investors”, as
defined in National Instrument 45-106 ‒ Prospectus and
Registrations Exception having a net worth in excess of $1 million (excluding
their personal residence) or having annual net income of at least $200,000 or
annual net family income of at least $300,000 or may otherwise qualify as
Accredited Investors pursuant to National Instrument 45-106.
 Mr. Rosen acknowledged that he did not conduct a detailed
review of the creditworthiness of each Participant.
 In cross-examination, Mr. Rosen acknowledged that his analysis
of the interest rates on the Unit Loans and the TGTFC Loans was dependent on
the assumption that the Participants were creditworthy:
I think the creditworthiness was the assumption and given that they
were creditworthy within the structure would their security provide a risk
profile that was consistent with a market instrument that I could measure.
 Mr. Rosen went on to describe the “accredited
investor” assumption as follows:
I believe it’s safe to say that it was an important assumption and
so I gave it weight, yes. I gave it important weight.
 Mr. Rosen was also asked about the credit check assumption:
Q. . . . So what was that assumption based on?
A. I was advised by EquiGenesis that that would be the process.
Q. What do you mean by “complete credit review” in this
A. In my opinion that would be a review that was sufficient
from the lender’s point of view to satisfy themselves that the borrowers were
Q. And to get a level of detail as to how would that be
achieved in your experience, are you suggesting that it would be the need to
determine the assets and liabilities of these individuals, would that form part
of the complete credit review?
A. I think that would depend on who the lender is and I think
the lender would be in a position to respond to that specifically, but I think
it’s safe to say that lender[s] should be reasonably diligent in determining
the creditworthiness of borrowers.
 Mr. Rosen addresses the creditworthiness of the Participants in
a rebuttal report of FTI dated July 30, 2015 (the “FTI Rebuttal Report”), which was prepared in
response to an expert report of Campbell Valuation Partners Limited dated June
29, 2015 (the “CVPL Report”). The FTI Rebuttal Report is a response to the CVPL Report but only
to the extent that the latter report identifies issues in the FTI Reports. I
will describe the opinions in the FTI Rebuttal Report in my description of the
opinions in the CVPL Report.
 Mr. Rosen assessed the loans from Leeward to DT and from DT to
FT on the same basis as the loans to the Participants.
Mr. Rosen described the analysis as follows:
The ultimate security for these loans, the ultimate risk in these
loans was exactly the same as the investments loans made by the investors, for
the unit loan and the donation loan. Because the ultimate security and risk was
the same, I concluded that the rate would be the same.
 Mr. Rosen assessed the return on the Linked Notes issued by
Leeward to the 2009 LP by reviewing the average 15-year returns on the
investments notionally included in Portfolio A and Portfolio B. The total
weighted average compound return for the investments in Portfolio A was 9.90%. The
return for the Dow Jones Canada Select Dividend Index (Portfolio B) was 9.96%
and 200% (the weighting factor) of that return was 19.92%. Mr. Rosen concluded
at section 5.11 of the EquiGenesis Reports that “the
anticipated interest rates on LP Notes [Linked Notes] are commercially
 Counsel for the Appellants asked Mr. Rosen about the value of
the Linked Notes prior to their maturity date:
Q. Is there any way to determine, prior to the maturity date,
how much the linked note is actually worth?
A. You can observe it from time to time. Because it doesn’t
become operable until the maturity date, there is no way to know until maturity
 Mr. Rosen explained his analysis of the commercial
reasonableness of the investments in the 2009 LP as follows:
. . . In terms of assessing commercial reasonableness of an
investment in the LP, it was important to determine if the investors would
receive sufficient funds from the investment to retire their obligations and,
in addition, to earn a return commensurate with the risk. That is set out in
 Mr. Rosen testified that the value of the LP Units was
dependent on the value of the assets of Leeward available to settle the Linked
Notes. This value would be the amount due from DT and the value of the Man
Notes less the amount payable to TGTFC on the TGTFC Notes. The value is stated to be $189,180. The analysis of
the value of the Man Note uses the return over 13 years and eight months on the
AHL Diversified Program to determine the expected return on the Man Notes of
15.4% per annum. On the basis of this value and a total out-of-pocket
investment of $13,500 per LP Unit, the compound annual return to Participants
is just under 4%.
 Mr. Johnson was qualified as an expert in the areas of
valuation of debt instruments, valuation of equity securities and corporate
 Counsel for the Appellant objected to Mr. Johnson being
qualified as an expert in credit ratings. In the voir dire, Mr. Johnson
did not suggest he was an expert in credit ratings and counsel for the Respondent
did not seek to qualify Mr. Johnson as an expert in credit ratings.
Counsel for the Appellants submitted that, because Mr. Johnson used a
corporate bond rating methodology in his expert report, he should not be
qualified as an expert for the purposes of his report. Mr. Johnson stated
that credit rating is included in courses in advanced corporate finance and in
chartered financial analyst programs, that he used the corporate bond rating
methodology as a tool and that he had employed a similar approach in other
situations. With respect to the import of the credit rating, he stated:
. . . the credit rating serves solely for the purpose of
establishing where that note falls or the debt instrument falls on the
risk-reward spectrum and in helping to identify public market securities that
may be somewhat comparable to the fixed income instrument at hand.
 In his expert report, Mr. Johnson does not provide an opinion
regarding Leeward’s credit rating but rather uses his estimation of Leeward’s
credit rating as part of his valuation methodology.
Mr. Johnson does not need to be an expert in credit rating to assume a
credit rating so as to apply a valuation methodology that is within his area of
expertise. Rather, the accuracy of Mr. Johnson’s assumption goes to the
weight to be given to his conclusions. I
therefore did not accept the Appellants’ submission regarding Mr. Johnson’s
qualification as an expert.
 The CVPL Report addressed five issues. Mr. Johnson states that
the first two issues together address the fair market value per LP Unit of the
property transferred by a Participant to TGTFC. The first issue is the fair
market value of the property and the second issue is the impact on that value of
the requirement for TGTFC to invest in the TGTFC Notes all but $200 per LP Unit
(or 98.04%) of the amount transferred. The two issues are intertwined and are
therefore addressed together.
 In Mr. Johnson’s opinion, the fair market value of all but $200
of the donation per LP Unit is dependent on the fair market value of the TGTFC
Notes. To determine that value, Mr. Johnson considers the interest rate on
the TGTFC Notes as well as the callability and liquidity of the TGTFC Notes.
 Mr. Johnson’s analysis of the interest rate in turn involves
consideration of the following:
a. the terms and conditions [of the TGTFC]
b. the risk free rate of return available in the market at the
date of the issuance of the [TGTFC Notes] in or around December 2009;
c. the yield on Canadian mortgages with comparable remaining
terms to maturity;
d. the reported corporate bond spreads by credit rating in
2009 as reported by Reuters;
e. the implied rate of return required on the Man Notes to
settle the [TGTFC] Notes when they mature on December 31, 2028;
f. the credit market conditions that prevailed in 2009 and
the impact on interest rates;
g. the financial position and risk profile of Leeward[,] being
the issuer of the [TGTFC] Notes; and,
h. the financial position and risk profile of the individual
 With respect to the security for the TGTFC Notes, Mr. Johnson
expresses the view that the Participants were in substance lending money to
themselves. Mr. Johnson explains the importance of this viewpoint to his
analysis of the security as follows:
. . . And the essence here is the -- the unit loan and the donation
loan ultimately are secured by two items, one you have the Man Notes, the Man
Units for $2,575 which will probably change in value over time, and ultimately
you have the personal net worth of the investors themselves. So while the
investors are high net worth investors there’s no specific assets beyond the
Man Notes that are securing their obligation to pay the donation loan and the
 On this point, the CVPL Report states:
The security against the Charity Notes [TGTFC Notes] is a claim to
the present and after-acquired assets of Leeward including a claim against the
Investors and their investment in the Units. Referring to the diagram of the
Investment Program flow of funds at paragraph 4.9, we note the
a. the Investor borrows $32,000 per Unit from
Finance Trust to invest in the Units. This $32,000 is paid to EquiGenesis LP as
part of the subscription proceeds of $36,140 per Unit;
b. EquiGenesis LP uses the subscription
proceeds to invest $34,575 in Linked Notes with Leeward. The remaining $1,565
is paid out as fees to third parties. The $34,575 includes the $32,000 in proceeds
originally borrowed by the Investor;
c. Leeward uses the $34,575 to invest $2,575
in the Man Notes and lends $32,000 to Deposit Trust;
d. Deposit Trust lends the $32,000 from Leeward to Finance
e. the $32,000 originally borrowed by the Investor
from Finance Trust, is thereby returned to Finance Trust through the circular
flow of the funds.
Having consideration for the foregoing, of the original investment
in the Units of $36,140, $1,565 is paid out in fees to third parties, $32,000
flows back in a circular flow of funds to the lender (i.e. Finance Trust) and
only $2,575 is invested in the Man Notes. In effect from a financial
perspective, the security of the investment in the Units is only comprised of
$2,575 of underlying assets. Therefore, the Charity Notes with a face value of
$10,000 are secured by only $2,575 of assets at December 31, 2009.
 Mr. Johnson stated that, notwithstanding the wording in the
last paragraph, he did not ignore the net worth of the Participants. He
explained the position set out in section 6.10 of the CVPL Report as follows:
No, looking back I should have said $2,575 of specific assets. That’s
also or there could be significant assets related to an individual’s net worth.
The challenge, as I’ll talk about, is there’s no or very little visibility into
the net worth of those individual investors over a very long 19-year period. So
at the end of that 19 years if and when the investors are called upon to
satisfy their obligations some may have significant net worth and others may
have little or no net worth and therein lies one of the main issues I have in
this program, is the level of uncertainty over such a long period of time for a
significant element of the security.
 Mr. Johnson expressed the opinion that, given the terms of the
TGTFC Notes, the holder was exposed to a moderate level of risk and that an
appropriate interest rate had to reflect this risk.
 For comparison, Mr. Johnson considered the risk-free interest
rate represented by Canadian government bonds and US Treasury securities (4% to
4.42%), the interest rate on conventional 5-year and 10-year Canadian mortgages
(5.34% to 6.9%) and the interest rate on publicly traded U.S. corporate bonds
(5.66% to 16.89%, depending on the corporation’s official credit rating). Mr. Johnson also considered, as a proxy for the risk on the
TGTFC Notes, the rate of return (9.1%) required on the Man Notes in order to
discharge the TGTFC Notes. Finally, Mr. Johnson considered the credit market conditions
in 2009, the financial position and risk profile of Leeward (which he assumed
to be equivalent to a B- to BB+ credit rating, using a corporate debt rating
methodology) and the financial position and risk profile of the Participants.
 Mr. Johnson concludes that the interest rate on the TGTFC Notes
should fall within the range of 9.1% to 14.4%. This yields a fair market value
of $5,919 (at 9.1%) to $3,470 (at 14.4%). Mr. Johnson then adds a
callability discount of $87 (at 9.1%) to $72 (at 14.4%) and
a marketability discount of 10% (at 9.1%) to 15% (at 14.4%). The result is a per-LP Unit fair market value of the donation to
TGTFC in the range of $2,889 to $5,249.
 The third and fourth issues addressed by Mr. Johnson consider
the value of the economic benefits provided to the Participants by the Unit
Loans and the TGTFC Loans over the terms of 9 years and 19 years.
 Mr. Johnson first considers the interest rate on the TGTFC
Loans, the capitalization of the interest on the loans, the security given to
FT, the application form and process, the lack of financial covenants, the
credit market conditions in 2009 and his experience with debt and capital
markets and concludes that the TGTFC Loans are not commercially reasonable debt
 With respect to the interest rate on the TGTFC Loans, Mr. Johnson
observes that the interest rate is 0.5% to 1.25% above the 10-year mortgage
rate of 6.60% to 7.35% available in 2009. In
his view, a commercial lender would require a higher interest rate premium
because the TGTFC Loans were not secured by real property but by $2,575 per LP
Unit and because the principal amount of the loans increased rather than
decreased during the term of the loans.
 Mr. Johnson observed that interest rates on senior secured
corporate debt with similar terms to maturity and a credit rating of B- to BB+
would range from 7.16% to 9.49% and that corporate bond spreads reported by
Reuters for the same rating implied a range of 12.6% to 14.1%. He concludes
that the fair market value of the interest rate on the TGTFC Loans is in the
range of 10% to 14%. While he notes that the Unit Loans would demand a higher interest
rate because of greater risk, he assumes the same rate for those loans.
 On the basis of this range of interest rates, Mr. Johnson
concludes that the economic benefit for the TGTFC Loan is between $1,475 (at
10%) and $3,578 (at 14%) per LP Unit. The economic benefit for the Unit Loan is
between $5,301 (at 10%) and $12,762 (at 14%) per LP Unit.
 Mr. Johnson performs a similar analysis for a 19-year term and
concludes that the TGTFC Loans and Unit Loans should bear interest over that
term of between 13% and 15%. On the basis of this range of interest rates, the economic
benefit for the TGTFC Loan is between $4,828 (at 13%) and $5,855 (at 15%) per
LP Unit. The economic benefit on the Unit Loan is between $18,857 (at 13%) and
$22,593 (at 15%) per LP Unit.
 The fifth and final issue is the economic value to Participants of
the cash flow generated by the Program. In a nutshell, he concludes that,
depending on the term (9 or 19 years), the tax treatment at the end of the term
(income or capital gain) and certain other assumptions, the cash flow benefits
range from a negative number per LP Unit to $25,080 per LP Unit.
Mr. Jerrold Marriott
 Mr. Marriott was qualified as an expert in the areas of credit
rating and structured finance capital markets. Mr. Marriot’s expert report
(the “EFCL Report”)
focusses on the credit rating assumed by Mr. Johnson in the CVPL Report.
The issues raised by Mr. Marriott are summarized in the ECFL Report as
Mr. Johnson erred in his methodological approach to both the
rating of Leeward and the analysis of the fair market value of the Charity
Notes [TGTFC Notes], specifically in:
(i) The use of a corporate rating approach in the assessment of
Leeward and the Charity Notes;
(ii) The use of US interest rates in establishing risk free
rates and comparative bond spreads;
(iii) Failing to recognize the full quantum of security
available to support the Charity Notes;
(iv) The use of the required rate of return on the Man Notes as
a proxy for the risk of the Charity Notes; and
(v) Overestimating the financial risk of investors/obligors.
 The report goes on to state Mr. Marriott’s view as to the
The factors which should have been considered and the methodology
which should have been employed include:
(i) The use of a structured finance rating methodology to assess the
credit quality of the Charity Notes [TGTFC Notes];
(ii) The use of appropriate Canadian interest rates in establishing
risk free rates and comparative bond spreads;
(iii) The use of Canadian structured finance transactions as
potential benchmarks for the establishment of fair market value interest rates;
(iv) Recognition of the first priority security provided to the
Charity Notes and the additional recourse available to support the Charity
(v) Recognizing both assets and liabilities acquired by investors
participating in the transaction as well as available data to support investor
default projections; and
(vi) The use of a joint probability of default determination on the
rating of the Charity Notes.
 Mr. Marriott provides a detailed discussion of each of the
above points in the balance of his report.
 Mr. Marriott concludes that if one had applied his methodology,
the TGTFC Notes would have been rated at A and not B- to BB+. Schedule II of
the EFCL Report, titled “Summary of Comparative
Canadian Structured Finance Transactions”, indicates for A-rated
structured finance debt with terms of 3 to 5 years interest rate spreads of
1.85% to 3.34%, with all but one issue falling in the 2.63% to 3.34% range. These spreads translate into interest rates ranging from
3.95% to 6.44% if one uses for the risk-free rate, the rate on Canadian
government bonds of comparable terms (6.03% to 6.44%, omitting the one
Mr. A. Scott Davidson
 Mr. Davidson was qualified as an expert in the areas of
business valuation and security interests. Mr. Davidson was asked to
review and comment on the opinions expressed in the CVPL Report regarding the
fair market value of the property transferred to TGTFC and the value of the
economic benefits received by the Participants as a result of the TGTFC Loans
and the Unit Loans, and to the extent that adjustments are required, to provide
such adjustments as at December 1, 2009. As well, Mr. Davidson
was asked to comment on the value of cash flow benefits associated with an
investment in the 2009 LP and on whether participation in the donation program
enhanced these benefits. Mr. Davidson tendered an expert report authored
by him and Mr. Chris Polson (the “D&P
 Section 3.0 of the D&P Report sets out the conclusions of the
report. Mr. Davidson disagrees with Mr. Johnson’s assessment of the
fair market value of the TGTFC Notes on the grounds that:
1. The low end of Mr. Johnson’s
range of interest rates for the TGTFC Notes (9.1%) is based on the minimum return required on the Man Notes in order to repay the
TGTFC Notes. This rate is an internal rate of return (IRR), which is neither a
measure of the risk inherent in the TGTFC Notes nor the rate of return an arm’s
length investor would require for bearing that risk. The IRR is merely
information to be taken into consideration.
2. The high end of Mr. Johnson’s range of interest rates
for the TGTFC Notes (14.4%) is based on his credit analysis of Leeward and
fails to properly consider a number of factors that mitigate the risk of the
TGTFC Notes and support a lower rate, including:
a. The senior claim of the TGTFC Notes over the assets of Leeward;
b. The financial position and creditworthiness of the
Participants, who provide a significant portion of the collateral for the TGTFC
c. The effective cross-guarantee of the obligations of Leeward
under the TGTFC Notes by all the Participants, which results from the fact that
the collective obligations of the Participants under the TGTFC Loans and the
Unit Loans are pooled in Leeward by virtue of the loans by Leeward to DT.
3. The callability discount of 13 to 24 basis points is too
4. The marketability discount is based on studies of restricted
stock, which generally exhibit greater price risk (volatility) and are subject
to more restrictive limitations on their transfer or sale than the TGTFC Notes.
As a result, the illiquidity discount is too high.
 Mr. Davidson also concludes that the interest rate charged on
the TGTFC Loans and the Unit Loans is within the range of reasonability and
therefore no benefit is received by the Participants as a result of these
loans, that Mr. Johnson’s assessment of the economic benefit from
investing in the 2009 LP is subject to a number of assumptions, that apart from
the donation receipt none of the economic benefits identified by Mr. Johnson result
from the donation to TGTFC and that participation in the donation program
diminishes the value of the LP Units.
 Mr. Davidson provides an analysis in support of each of his
conclusions. With respect to the value of the TGTFC Notes, Mr. Davidson
expresses the following views:
1. According to Mr. Marriott’s expert report, the use of a
corporate bond rating methodology for structured finance instruments such as
the TGTFC Notes is not appropriate;
2. Leaving aside the first point, the application of the
corporate bond rating methodology is flawed. Specifically, Mr. Davidson
disagrees with the market data used to establish the corporate bond yield of
14.4% and points out the lack of an objective framework or analysis justifying
the credit rating attributed to Leeward;
3. The circumstances of Leeward support an analysis of the risk
associated with the TGTFC Notes that is based on the ratio of Leeward’s assets
to its obligations under the TGTFC Notes but do not support the debt-to-equity
analysis used in the CVPL Report;
4. The 9.1% IRR on the Man Notes required to repay the TGTFC
Notes is not a proxy for an appropriate discount rate on the TGTFC Notes. An
IRR is a calculation of cash flows that net to a present value of zero and does
not reflect the factors that an investor would consider when establishing a
discount rate. In addition, the IRR on the Man Notes does not take into account
Leeward’s other assets, being the amounts owed to it by DT, which are
reflective of the TGTFC Loans and the Unit Loans owed by the Participants.
5. The creditworthiness of the Participants is understated
because of the failure to treat the LP Units as an asset that offsets the Unit
Loans, the utilization of a loan-to-annual-income ratio when there is no
expectation that the loans will be repaid from income, the exclusion of the
principal residences of the Participants from their net assets and the failure
to recognize that Leeward has recourse to the amounts owed by all Participants. With respect to the last point, section 6.3.30 d) of the D&P
Most importantly, the ratios
exhibited only reflect the collateral (net worth) associated with a single
Investor. In actual fact, to satisfy the obligations owing on the Charity Note
[TGTFC Notes] the Charity [TGTFC] can look to the totality of Leeward’s assets,
which include the collateral provided by the entire pool of 59 high net worth
Investors. Thus, in the event of a single Investor’s default on his or her
Donation Loan [TGTFC Loan], the proceeds from other Investors’ Unit Loans will
be utilized to repay the balance of the defaulting Investors’ Donation Loan.
Since the assets within Leeward exceed the aggregate Charity Note obligations,
this pooled collateral is effectually a form of “cross-guarantee”, whereby the
net worth of multiple investors provides security against the outstanding
balance of the Donation Loan.
6. The callability and marketability
discounts are both overstated and are incorrectly applied to the $200 cash
component of the donation per LP Unit. The data relied upon to determine the
callability discount suggests a discount of 5 basis points (not 13 to 24 basis
points). Reliance on the restricted stock study used to determine the
illiquidity discount results in an overstatement of the discount because,
unlike restricted stock, the TGTFC Notes are transferrable with Leeward’s
consent (not to be unreasonably withheld); restricted stock is equity and
therefore more volatile than a fixed-income investment; the more temporally
relevant discount from the study relied upon is 8.25% which, for the foregoing
reasons, overstates the discount for the TGTFC Notes; and the majority of the
interest on the TGTFC Notes is paid annually.
 Mr. Davidson disagrees with Mr. Johnson regarding the economic
benefits attributed to the Unit Loans and the TGTFC Loans. In reaching this
conclusion, Mr. Davidson assumes that the Participants are dealing at
arm’s length with FT and that therefore the 7.85% interest rate on these loans
is an arm’s length market rate.
Mr. Davidson reiterates his disagreement with the credit rating
methodology underlying Mr. Johnson’s analysis of the benefits to
Participants from the loans, but also observes that it is inappropriate to use
the credit rating of Leeward to determine the interest rate on the TGTFC Loans
and the Unit Loans because Leeward is not the borrower.
Mr. Davidson also states that it is illogical for the rates on the TGTFC
Loans and Unit Loans to be so similar to the rate on the TGTFC Notes given the
additional collateral (the Man Notes) in Leeward.
 Mr. Davidson provides an alternative methodology for computing
the fair market value of the donation to TGTFC per LP Unit and the value of the
“alleged” economic benefits associated with the
loans. These analyses adopt the following meaning of commercially
reasonable and fair market value:
For purposes of this report, our references to commercially
reasonable and reasonable can be taken to mean the characterization of an
aspect of an investment (such as the interest rate) as a range that is
reflective of appropriate arm’s length market factors taking all relevant
risks, benefits and responsibilities into consideration. A rate of return would
be considered reasonable if it was commensurate with all of the risks an
investor was exposed to in the investment.
To the extent that the interest rates associated with these
securities are deemed to be a reasonable return, then it would follow that the
face value of the security would also reflect its fair market value. . . .
 Mr. Davidson uses two approaches (identified as Method A and
Method B) to value the TGTFC Notes. Method A yields a value of $10,000 while Method B yields a value
 Method A assumes that the Man Notes have a value on the valuation
day of $2,575 but no future return. In effect, the $2,575 starting value of the
Man Notes is treated as if it is put aside on the valuation day thereby
reducing the amount at risk under the TGTFC Notes from $10,000 to $7,425. To compensate for the fact that TGTFC does not have direct access
to these funds, Mr. Davidson adds a scenario in which the $2,575 is
discounted by 10%, increasing the principal at risk under the TGTFC Notes from
$7,425 to $7,683. The no-discount and discount scenarios yield interest rates
on the adjusted principal of the TGTFC Notes of 6.4% and 6.18% respectively.
 Mr. Davidson then compares these rates with the implied yield
on 20-year Canadian government bonds (4.22%), the coupon rate associated with
structured finance issues in late 2009 (rate of 5.5% to 6.5% based on certain
assumptions, including an A credit rating for the TGTFC Notes), the posted and
effective residential mortgage rates for 2009 (rate of 5.0% to 6.5% based on
certain assumptions and extrapolations) and the implied rate for corporate
bonds during December 2009 (rate of 5.87% to 6.56% based on Mr. Davidson’s
credit rating of A to AA+ for the TGTFC Notes).
Mr. Davidson concludes on the basis of these rates that 5.5% to 6.5% is an
appropriate range for the market rates available during late 2009. Mr. Davidson then adds a callability discount of 0 to 5 basis
points and an illiquidity discount of between 4.125% and 8.25%, which result in
a range of 5.82% to 7.22%.
As the range computed for the adjusted principal of the TGTFC Notes (6.18% to
6.4%) falls within this range, the fair market value of the TGTFC Notes is their
face value of $10,000.
 Method B disregards the Man Notes entirely and values the TGTFC
Notes with regard only to the collateral provided by the Unit Loans and the
TGTFC Loans (realized through Leeward’s loans to DT). To do this, the rate of
4.75% on the TGTFC Notes is compared to the market range determined under
Method A of 5.5% to 6.5% and the net present value of the TGTFC Notes is
computed on this basis. The net present value of the TGTFC Notes is then
adjusted to reflect the callability discount range and illiquidity discount range
determined under Method A. The result is a fair market value for the TGTFC
Notes in the range of $7,201 to $8,651, with a midpoint of $7,950.
 Because Method B gives no weight to the Man Notes, Mr. Davidson
concludes that the fair market value of the TGTFC Notes must significantly
exceed the bottom end of the range:
Our overall conclusion as to the fair market value of
the Charity Note [TGTFC Notes] is that it is well in excess of $7,950 in a
range that extends to $10,000 [per LP Unit]. If asked for a specific point
estimate we would select an amount at or towards the higher end of that range.
 To value the economic benefits of the TGTFC Loans and the Unit Loans,
Mr. Davidson compares the rates on those loans with Canadian government
bonds of similar maturities (3.38%), 10-year fixed mortgage rates (5.5% to 7.0%
after certain adjustments), implied interest rates on 10-year corporate bonds
(6.23% to 7.23% after adjustments for a credit rating ranging from A to BBB),
and an estimate of the interest rate on a 20-year loan to high-net-worth
investors based on discussions with Canadian financial institutions and other
available market data (rate of 6.29% to 7.66% based on an extrapolation from
short-term rates). Mr. Davidson concludes that the rate on the TGTFC Loans and
the Unit Loans is higher than the benchmark rates but is within a range of
reasonability. Accordingly, the fair market value of the loans is their face
amount, and no benefit is received by the Participants as a result of these
 In preparing the analysis and opinions in the D&P Report,
Mr. Davidson made the following assumptions in addition to specific
assumptions in the body of the report:
a) The financial and other information relied upon in
completing our analysis, as referenced within this D&P Report, is accurate;
b) The Lender conducted the necessary due diligence that it
considered appropriate in assessing the creditworthiness of each Investor;
c) The Unit Loans and Donation Loans [TGTFC Loans] issued by
the Lender are full-recourse in nature;
d) It was not anticipated that the Investors would repay the
principal balance of their loans from the proceeds of their annual income;
e) The fair market value of the Charity Note [TGTFC Notes] and
the economic benefits associated with the Loans [Program Loans] did not change
materially between July 1, 2009 and December 31, 2009;
f) The security arrangements associated with the Charity Notes
is [sic] as we have described. They maintain the primary claim over all
of the assets of Leeward;
g) There were no conflicts of interest between the Investors,
Leeward, and the Charity in terms of how the funds associated with the Man
Notes would be invested during the term of the Charity Note;
h) The default rate observed on Prior EquiGenesis Programs is
a reasonable proxy for the default rate anticipated in connection with the 2009
i) Permission to transfer the Charity Notes will not be
unreasonably withheld by Leeward;
j) Investors are unlikely to repay their Loans early which, in
turn, means that Leeward is unlikely to call the Charity Notes; and
k) The Investors who participated in the 2009 Program were of a
reasonably comparable credit quality to the individuals who participated in the
Prior EquiGenesis Programs.
of the Appellants
 The Appellants describe the Program as a self-contained structured
finance investment program and gifting tax shelter marketed to high-net-worth
individuals that was designed to perform within a projected range over its
20-year life. The Appellants submit that the Program was properly implemented,
that each element was legally effective, that the Participants were fully at risk
for the amounts borrowed to finance their donations to TGTFC, and that the
charities chosen by the Participants to receive amounts from TGTFC have
received and will continue to receive substantial amounts of “income”.
 The Appellants submit that the Minister’s reassessments of the
Appellants to include income of the 2009 LP is wrong because the 2009 LP did not
have any deemed income under subsection 12(9) of the ITA. The Appellants submit
that the amount of income earned by the 2009 LP on the Linked Notes could not
be known until the maturity of the Linked Notes, when the obligation to pay out
under the Linked Notes crystallizes. Section 7000 of the ITR does not create
interest income where none exists and does not require the recognition of
phantom income based on the fluctuating value of Portfolio A and Portfolio B
from time to time. The Appellant submits that amendments addressing “linked notes” proposed in the 2016 Federal Budget
confirm that section 7000 does not impute income to the 2009 LP in the
circumstances in issue in these appeals.
 The Appellants submit that the interest on the Unit Loans and the Fees
should be deductible even if no income is attributed to the 2009 LP in respect
of the Linked Notes until the maturity of the Linked Notes.
 The Appellants submit that the Participants had a reasonable
expectation of gross income at the time they purchased LP Units even if that
gross income would not be realized for many years and even if that income was
in the form of a taxable capital gain on LP Units. Accordingly, on the basis of
the decision of the Supreme Court of Canada in Ludco Enterprises Ltd. v. Canada,
2001 SCC 62,  2 S.C.R. 1082 (“Ludco”),
the Appellants were entitled to deduct the interest on the Unit Loans because
the Unit Loans were borrowed money used for the purpose of earning income from
a business or property and the interest was paid pursuant to a legal obligation
to pay interest on the Unit loans.
 The Appellants submit that the decision in Swirsky v. The Queen,
2013 TCC 73, affirmed 2014 FCA 36, can be distinguished because in that case
the Tax Court found that there was no evidence that the spouse of the taxpayer
believed or expected, at the time she acquired the shares in issue, to earn dividend
income from the shares. Here, the Appellants expected to hold the LP Units for
the term of the Program and expected, on the maturity of the Linked Notes, to
earn income on the LP Units that would assist in the payment of their Unit
 The Appellants submit that, for the same reasons, the Minister was
wrong to deny the deduction of the Fees.
 The Appellants submit that the donation component of the Program
complies with the ITA. Specifically, each of the Appellants had the intention
to donate and did in fact donate money to TGTFC, which resulted in
impoverishment by the amount donated, and none of the Appellants received any
benefit from any person in exchange for the donation. The Appellants submit
that the law does not require altruism and does not require that the donation
be economically irrational in order for it to qualify as a gift. In addition,
the fact that the Appellants may have been motivated by the tax benefit
resulting from their donations to TGTFC does not vitiate their intention to
 The Appellants submit that once the Appellants paid $10,200 per LP
Unit to TGTFC the gift to TGTFC was complete. The requirement for TGTFC to
invest 98.04% of the amount received from the Appellants in the TGTFC Notes was
designed to create an endowment fund or enduring gift. The Appellants submit
that donors are entitled to require a charity to manage donated funds in a
particular manner by requiring the charity to create an endowment fund from
which only the income will be available for the charity’s use.
 The Appellants submit that the direction to TGTFC to invest in the
TGTFC Notes issued by Leeward did not result in a benefit to the Appellants.
The 4.75% rate on the TGTFC Notes, while less than the rates on the Program
Loans, was a fair market rate and the Respondent has the burden of proving
 The Appellants submit that the fair market value of the donations by
the Appellants to TGTFC must be considered from the perspective of the
Appellants at the time of the donations. Neither the common law nor subsection
248(32) entitles the Minister to substitute her judgment as to what a
reasonable rate would have been, and it is sufficient that the rate on the
TGTFC Notes was within a range of reasonable amounts. The testimony of
Mr. Rosen and Mr. Davidson confirms that the interest rate on the
TGTFC Notes was commercially reasonable and that the TGTFC Notes had a fair
market value equal to their face value.
 The Appellants submit that Mr. Johnson’s analysis of the rate
on the TGTFC Notes was fundamentally flawed. In particular, the low end of the
range was premised on the erroneous assumption that only the Man Notes would be
available to repay the TGTFC Notes, does not reflect the risk inherent in the
nature of the investment and results in the commercially absurd outcome that a
shorter duration results in a higher internal rate of return (IRR). The high end
of the range was based on an assessment of Leeward’s credit rating using the
wrong methodology; Mr. Johnson was not qualified to opine on Leeward’s
credit rating; and the US interest rates used to determine the discount rate
are not indicative of Canadian rates because of differences with regard to
inflation, monetary policy and exchange rates.
 The Appellants submit that the facts in these appeals are
distinguishable from those in Maréchaux
v. The Queen, 2010 FCA 287 (“Maréchaux”), Kossow v. The Queen, 2013 FCA 283 (“Kossow”) and The Queen v. Berg,
2014 FCA 25 (“Berg”) because the TGTFC
Loans are not shams, are full-recourse loans as regards the Appellants and bear
interest at a commercially reasonable rate, as confirmed by the evidence of
Mr. Rosen and Mr. Davidson. In addition, TGTFC has a first priority
security interest in the assets of Leeward, and the Appellants have
subordinated their interests to that of TGTFC. Consequently, in contrast to the
taxpayers in Maréchaux, Kossow and Berg, the Appellants
are truly impoverished. The Appellants submit that this is confirmed by the
fact that, by participating in the donation aspect of the Program, the
Appellants substantially reduced the return they could otherwise have earned
through the investment in the 2009 LP alone and assumed greater risk in the
form of a second full-recourse loan.
 The Appellants submit that their liability for the amounts payable
under their Program Loans is not illusory and
that to the date of these appeals any participant who has defaulted has been
pursued and, if necessary, sued. The COM advised the Appellants of this
liability. The Appellants submit that the Respondent has not established that
any portion of the Program Loans is returned to the Appellants or is used to
reduce the legal effect or economic impact of the Program Loans or that any
circle is broken by the fact that TGTFC must be paid first by Leeward or by the
fact that the amount payable under the Linked Notes on maturity may not be
sufficient to pay the Program Loans.
 Finally, the Appellants submit that the general anti-avoidance rule
in section 245 (the “GAAR”) cannot apply in
respect of subsections 143.2(6.1), (7) and (12) because subsection 143.2(6) was
not in force in 2009 but was enacted with retroactive effect in 2013. However,
even if the GAAR can apply in such circumstances, the transactions in issue did
not misuse or abuse subsections 143.2(6.1), (7) or (12).
of the Respondent
 The Respondent submits that, for one of four alternative reasons, the
Appellants are not entitled to the non-refundable charitable donation tax
credits claimed under section 118.1 in respect of amounts they transferred to
TGTFC in 2009:
1. The payments by the Appellants to TGTFC are not gifts for the
purposes of section 118.1 of the ITA. The tax credit provided by section 118.1
is intended to defray a portion of the economic cost of a gift but is not
intended (i) to be a means by which a taxpayer can turn a profit from a
donation, or (ii) to be used to facilitate, enhance or optimize a tax deferral
arrangement. The payments by the Appellants to TGTFC were part of an interconnected
series of transactions designed to provide cash-flow benefits, were not
voluntary, were not the result of any benefaction or detached and disinterested
generosity and did not result in impoverishment.
2. If the payments by the Appellants to
TGTFC are gifts for the purposes of section 118.1 of the ITA, under subsection 248(31)
the eligible amount of the gifts is nil. Under subsection 248(32) of the
ITA, the eligible amount of a gift is reduced by the amount of the advantage, if
any, in respect of the gift. The advantage in respect of the gifts of the
Appellants exceeds the amount of the gifts so the eligible amount of the gifts
is reduced to nil. The advantage to each of the Appellants includes the economic
benefit of below market interest rates on the Program Loans as well as the
principal amount of the Program Loans because the loans are limited-recourse
debts in respect of the gifts under subsection 143.2(6.1) of the ITA.
3. If the payments by the Appellants
to TGTFC are gifts and the eligible amount of the gifts is not nil, no amount is included in the “total charitable gifts” of the
Appellants because the receipts issued to the Appellants by TGTFC do not
satisfy the requirements of subsection 118.1(2) of the
ITA and subsection 3501(1) of the ITR. Paragraphs 3501(1)(h.1) and (h.2) of
the ITR require the receipt to include a description of the advantage, if any,
in respect of the gift and the amount of the advantage (paragraph 3501(1)(h.1))
and the eligible amount of the gift (paragraph 3501(1)(h.2)). The receipts
issued by TGTFC did not include this information.
4. If the payments by the Appellants to TGTFC are gifts, the
eligible amount of the gifts is not nil and the receipts issued by TGTFC comply
with subsection 118.1(2) of the ITA and subsection 3501(1) of the ITR, the
non-refundable tax credits of the Appellants resulting from the gifts should be
denied under the GAAR. The relevant transactions are avoidance transactions
that result in abusive tax avoidance because they defeat the underlying
rationale of subsection 118.1(3) of the ITA, circumvent subsection 143.2(7) in
a manner that frustrates its object, spirit or purpose and achieve an outcome
that subsections 143.2(7) and (12) are intended to prevent.
 The Respondent further submits that each of the Appellants failed to
include in income his or her share of the interest income that was deemed by
subsection 12(9) of the ITA and paragraph 7000(2)(d) of the ITR to accrue to the
2009 LP on the Linked Notes.
 Alternatively, the Respondent submits that if no interest is deemed
by subsection 12(9) of the ITA and paragraph 7000(2)(d) of the ITR to accrue to
the 2009 LP on the Linked Notes then the deduction from income claimed by the
Appellants for interest payable on the Unit Loans should be denied because the
Unit Loans are not borrowed money used for the purpose of earning income from a
business or property.
 I will address the issues raised in these appeals in the order set
out above under the heading “Position of the Respondent”.
Transfers of Property by the Appellants to TGTFC Were Not Gifts
 The first position put forward by the Respondent is that the
transfers of property by the Appellants to TGTFC were not gifts for the purposes
of section 118.1 of the ITA. The Respondent submits that the Appellants did
not, and did not have the intent to, impoverish themselves. The Respondent
further submits that the Appellants did not transfer the property by way of
benefaction or “detached and disinterested generosity”
and therefore lacked the liberal intent or animus donandi to support the
existence of a gift.
 The Respondent also submits that the transfers of property to TGTFC
were not voluntary. Specifically, while the Appellants voluntarily decided
whether to participate in the TGTFC Program, the transfers of property to TGTFC
by the Appellants were made pursuant to contractual obligations as part of a
preordained series of transactions. In particular, as a condition of receiving
the TGTFC Loan, the Appellants were required to execute a pledge under seal
providing for the payment of $10,200 per LP Unit to TGTFC, which was in turn
obligated to invest all but $200 of the funds in the TGTFC Notes.
The Guiding Principles
 To address the Respondent’s first position, I have adopted the
framework for the analysis of private law principles set out by the Supreme
Court of Canada in Backman v. Canada, 2001 SCC 10,  1 S.C.R. 367
(“Backman”). In that case, the issue was
whether there was a partnership under Canadian law. If there was, the tax
result sought by the appellant would be achieved.
 The Court made the following statements regarding the use of private
law concepts in the ITA:
The term “partnership” is not defined in the Act. Partnership is a
legal term derived from common law and equity as codified in various provincial
and territorial partnership statutes. As a matter of statutory interpretation, it
is presumed that Parliament intended that the term be given its legal meaning
for the purposes of the Act: N. C. Tobias, Taxation of Corporations,
Partnerships and Trusts (1999), at p. 21. We are of the view that, where a
taxpayer seeks to deduct Canadian partnership losses through s. 96 of the Act,
the taxpayer must satisfy the definition of partnership that exists under
the relevant provincial or territorial law. . . .
 The Supreme Court also addressed the distinction between motive and
intention where the applicable private law looks at the intention of the
A determination of whether there exists a “view to profit” requires
an inquiry into the intentions of the parties entering into an alleged
partnership. At the outset, it is important to distinguish between
motivation and intention. Motivation is that which stimulates a person to act,
while intention is a person’s objective or purpose in acting. This Court has
repeatedly held that a tax motivation does not derogate from the validity of
transactions for tax purposes: Shell Canada Ltd. v. Canada,  3
S.C.R. 622; Canada v. Antosko,  2 S.C.R. 312; Stubart
Investments Ltd. v. The Queen,  1 S.C.R. 536, at p. 540. Similarly, a
tax motivation will not derogate from the validity of a partnership where the
essential ingredients of a partnership are otherwise present: Continental
Bank, supra, at paras. 50-52. The question at this stage is whether
the taxpayer can establish an intention to make a profit, whether or not he was
motivated by tax considerations. . . .
. . .
. . . to ascertain the existence of a partnership the courts must
inquire into whether the objective, documentary evidence and the surrounding
facts, including what the parties actually did, are consistent with a
subjective intention to carry on business in common with a view to profit.
 The Supreme Court of Canada sets out four important principles in
these statements. First, legal terms that are not defined in the ITA are to be
given their meaning under private law unless a textual, contextual and
purposive interpretation indicates otherwise. This principle is
adopted by the Federal Court of Appeal in The Queen v. Friedberg,
 1 C.T.C. 1, 135 N.R. 61, 92 DTC 6031, relying on that court’s
earlier decision in The Queen v. McBurney  2 C.T.C. 214, 62
N.R. 104, 85 DTC 5433 (“McBurney”). In Friedberg,
the Court stated (DTC 6032):
The Income Tax Act does not define the word “gift”, so
that the general principles of law with regard to gifts are utilized by the Courts
in these cases. As Mr. Justice Stone explained in The Queen v.
McBurney, 85 D.T.C. 5433, at p. 5435 [ 2 C.T.C. 214, at p. 218]:
The word gift is not defined in the statute. I can find nothing in
the context to suggest that it is used in a technical rather than its ordinary
Thus, a gift is a voluntary transfer of property owned by a donor to
a donee, in return for which no benefit or
consideration flows to the donor (see Heald J. in The Queen v. Zandstra,
 2 F.C. 254, at p. 261 [ C.T.C. 503, at p. 509, 74 D.T.C. 6416, at
p. 6420]). The tax advantage which is received from gifts is not normally
considered a “benefit” within this definition, for to do so would render the
charitable donations deductions unavailable to many donors.
 Second, the origin of the legal meaning will depend on the private
legal concept involved. In this case, as in Backman, the law of gift is
a matter within provincial jurisdiction as it involves property and civil
This principle is not explicitly addressed in Friedberg but has been
addressed in other tax cases.
 Third, the fact that a taxpayer is motivated by tax considerations
does not in and of itself vitiate the result under the applicable private law. This
recognizes the wider principle that tax law is accessory to private law and
that, absent a provision of the ITA to the contrary, the tax law is to be
applied to the result under private law. In Will-Kare, Justice Iacobucci
states this principle as follows:
To apply a
“plain meaning” interpretation of the concept of a sale in the case at bar
would assume that the Act operates in a vacuum, oblivious to the legal
characterization of the broader commercial relationships it affects. It is not
a commercial code in addition to a taxation statute. Previous jurisprudence of
this Court has assumed that reference must be given to the broader commercial
law to give meaning to words that, outside of the Act, are well-defined. See Continental
Bank Leasing Corp. v. Canada,  2 S.C.R. 298. See also P. W. Hogg,
J. E. Magee and T. Cook, Principles of Canadian Income Tax Law
(3rd ed. 1999), at p. 2, where the authors note:
The Income Tax Act relies implicitly
on the general law, especially the law of contract and property. . . . Whether
a person is an employee, independent contractor, partner, agent, beneficiary of
a trust or shareholder of a corporation will usually have an effect on tax
liability and will turn on concepts contained in the general law, usually
 This principle is not commented on in Friedberg but is
addressed by the Federal Court of Appeal in Côté v. R., 2000 CarswellNat 3211,  F.C.J. No. 1805 (QL), 2000 DTC 6615
(Fr.)(“Côte”), where the Court affirmed the analysis of the Tax Court judge:
. . . Relying on the decision of this Court in The Queen v. Friedberg,
92 DTC 6031, [the trial Judge] held that even though obtaining a tax advantage
was the principal motivation of the respondents in this case, that did not
nullify the donors’ intent to give. He also was of the view that obtaining a
receipt from the charitable organization could not be viewed as consideration
that would eliminate the gratuitous and liberal nature of the transaction. . .
In my view, the judge directed himself properly as to the legal
principles that apply to this case. . . .
 The final principle is that, where subjective intention is an issue
under the private law, that intention is to be determined with reference to the
objective, documentary evidence and the surrounding facts, including what the
parties actually did.
The Private Law relating to Gifts
 The Appellants and TGTFC are located in Ontario and the transfer of
property to TGTFC took place in Ontario, so it is necessary to consider the
legal meaning of gift as it is understood in the common law provinces. The
Ontario Court of Appeal addressed the meaning of the word “gift” in McNamee v. McNamee, 2011 ONCA 533 (“McNamee”):
 Although the term “gift” is not defined in the Family
Law Act, a gift, generally speaking, is a voluntary transfer of property to
another without consideration: Black’s Law Dictionary, 7th ed. (St.
Paul, Minnesota: West Group, 1999), at p. 696; Birce v. Birce (2001), 56
O.R. (3d) 226 (C.A.), at para. 17. A transfer of property by contractual
agreement involves a mutual exchange of obligations (“consideration”), but a
transfer by way of gift involves a gratuitous, unilateral transaction: Mary
Jane Mossman and William Flanagan, Property Law, Cases and Commentary,
2nd ed. (Toronto: Emond Montgomery, 2004), at p. 439. As McLachlin J. observed
in Peter v. Beblow  1 S.C.R. 980, at p. 991-92, “the central
element of a gift [is the] intentional giving to another without expectation of
 The essential ingredients of a legally valid gift are not in dispute. There must be (1) an
intention to make a gift on the part of the donor, without consideration or
expectation of remuneration, (2) an acceptance of the gift by the donee, and
(3) a sufficient act of delivery or transfer of the property to complete the
transaction: Cochrane v. Moore, (1890), 25 Q.B.D. 57 (C.A.), at p.
72-73; Mossman and Flanagan, supra, at p. 441, Bruce Ziff, Principles
of Property Law, 5th ed. (Toronto: Carswell, 2010), at p. 157.
 Some authorities have sought to refine or qualify these
elements in various ways, but they remain the substance of a valid gift. Here,
the trial judge found two qualifications to be significant. First, he
concluded, correctly, that the donor must divest himself or herself of all
power and control over the property and transfer such control to the donee.
Secondly, he concluded – incorrectly, in our view – that the intention of the
donor must be inspired by affection, respect, charity or like impulses and not
by commercial purposes.
 Accordingly, for a transfer of property to be a gift, there must be
(1) an intention to make a gift on the part of the donor, without consideration
or expectation of remuneration, (2) an acceptance of the gift by the donee, and
(3) a sufficient act of delivery or transfer of the property to complete the
 The first requirement for a gift embodies the essential objective
and subjective character of the transfer. The objective requirement is that the
transfer of property must be gratuitous. The subjective requirement is that the
transferor must intend the transfer of property to be gratuitous. Professor
Hyland describes the common law requirement that the transfer be gratuitous as
In the common law, as Blackstone noted, gifts are always gratuitous.
As an Indian commentator has written, “A gift is essentially a gratuitous transfer.”
At least on one level, gratuitousness in the common law is easy to define. It
involves a transaction without a valid legal consideration. “In fact, if there
be a consideration the transaction is no longer a gift, but a contract.” This
is the unanimous view of the statutes, the case law, and the commentators.
 The Court in McNamee focussed on, among other things, whether
consideration or remuneration flowed from the transferees to the transferor in
exchange for the transfer of property. In the circumstances of that case, the
Court concluded that the transferor did not receive consideration or
remuneration for the transfer of shares to his children.
 In Maréchaux, Kossow and Berg
(collectively, the “Trilogy”), the Federal Court
of Appeal considered whether the consideration (benefit) had to emanate from
the transferee. In Kossow, the Court adopted the general approach taken
in its decision in Maréchaux:
In Maréchaux, this Court dealt
with a leveraged charitable donation program that was strikingly similar to the
program considered in this case, particularly in so far as a substantial part
of the purported gift was funded by an interest-free loan provided by the
promoters (who were not the donees) on terms that were part of a series of interconnected
contractual arrangements. The Federal Court of Appeal adopted the well-known
definition of a gift as set out in The Queen v. Friedberg, 92 D.T.C.
6031 (F.C.A.) (Friedberg) for the purposes of section 118.1 of the Income
Tax Act as
[…] a gift is a voluntary transfer
of property owned by a donor to a donee, in return for which no benefit or
consideration flows to the donor (at 6032).
In my view, Maréchaux stands for two propositions, as
(a) a long-term interest-free loan is a significant financial benefit
to the recipient; and
(b) a benefit received in return for making a gift will vitiate the
gift, whether the benefit comes from the donee or another person.
 In Kossow, the taxpayer argued that, for a gratuitous
transfer of property to be precluded from being a gift, McNamee required
any benefit in issue to flow from the donee rather than a third party. The
Court rejected the taxpayer’s argument, as follows:
I agree with the judge that McNamee did not purport to change
the generally accepted definition of gift as set out in Friedberg. In McNamee,
the Ontario Court of Appeal considered the arrangement between a father and a
son and determined whether shares given by the father to a son in an estate
freeze situation were as a result of any consideration being given to the
father (the donor) from the son (the donee). The Ontario Court of Appeal in McNamee
did not consider either a leveraged donation program or a situation where,
through a series of interconnected transactions, a donor receives a significant
benefit from a party other than the donee as part of an interconnected series
of transactions that includes the purported gift.
The result is that there is no conflict between the Federal Court of
Appeal in Maréchaux and the Ontario Court of Appeal in McNamee,
and there is no basis upon which this Court should depart from Maréchaux.
 Accordingly, pursuant to the decision in Kossow, a transfer
of property is not gratuitous if a benefit flows to the transferee as part of
an interconnected series of transactions that includes the transfer of
property. In my view, the transactions must be interconnected in a legal
sense consistent with the Federal Court of Appeal’s observation at paragraph 24
of Kossow that the transactions in Maréchaux were interconnected
Requirement for Donative Intent
 The Respondent correctly states that for a transfer of property to
be a gift, the transferor must have the requisite donative intent. However, in
my view, when the Respondent refers to a requirement for “detached and disinterested generosity”, the Respondent
is misconstruing the role of donative intent and is incorrectly conflating
donative intent and motive.
 In order for there to be a gift, the transferor must objectively
make a gratuitous transfer and must subjectively intend to make a gratuitous
 Maréchaux and Kossow hold that a
transfer of property is not gratuitous if a benefit flows to the transferee as
part of an interconnected series of transactions that includes the transfer of
property. If the transferor did not make a gratuitous transfer of property then,
under the common law, there can be no gift and it is generally not necessary to
consider whether the transferor had donative intent.
 The dual requirement of a gratuitous transfer of property and of donative
intent addresses the fact that a gratuitous transfer may occur in circumstances
where the transferor did not intend to permanently enrich the transferee. In Hu
v. Li, 2016 BCSC 2131, Justice Macintosh observed:
When one person gratuitously transfers property to another adult
person, there is a general presumption that the recipient holds the property in
trust for the other. That is because equity presumes bargains, not gifts. The
transferor can use this ‘resulting trust’ to recover his or her property,
unless the transferee can show that a gift was intended.
 Accordingly, the requirement for donative intent seeks to ensure
that a gratuitous transfer was indeed intended by the transferor such that the
transferor cannot call for the return of the transferred property.
role of donative intent in the common law of gift is exemplified by cases such
as Pecore v. Pecore, 2007 SCC 17,  1 S.C.R. 795 (“Pecore”), Peter v. Beblow,  1 S.C.R. 980 (“Beblow”), Thorsteinson Estate v.
Olson, 2016 SKCA 134, St. Onge Estate v. Breau, 2009 NBCA 36, Spooner v. Webb (1951), 3 WWR (NS) 490 (Sask.
C.A.) and Kinsella v. Pask (1913), 12 D.L.R 522 (O.S.C. Appellate
 In Pecore, the Supreme Court of Canada addressed the question
of whether a gratuitous transfer of funds from a parent to a child was a gift. Justice
Rothstein stated at paragraph 5:
While the focus in any dispute over a
gratuitous transfer is the actual intention of the transferor at the time of
the transfer, intention is often difficult to ascertain, especially where the
transferor is deceased. . . .
 Justice Rothstein goes on to review the presumptions of law
that help guide the court in the resolution of the dispute. That analysis
establishes that, if there is a gratuitous transfer of property to an unrelated
person or an adult child and a dispute arises as to whether a gift was intended,
the onus is on the transferee to rebut the presumption of resulting trust on a
balance of probabilities. If, on the other hand, there is a gratuitous transfer of property
from a parent to minor child or from one spouse to the other, the onus is on
the transferor to rebut the presumption of advancement on a balance of
probabilities. With respect to the evidence of intent in the latter case,
Justice Rothstein states:
56 The traditional rule is that evidence adduced to show
the intention of the transferor at the time of the transfer “ought to be contemporaneous,
or nearly so”, to the transaction: see Clemens v. Clemens Estate, 
S.C.R. 286, at p. 294, citing Jeans v. Cooke (1857), 24 Beav. 513, 53
E.R. 456. Whether evidence subsequent to a transfer is admissible has often
been a question of whether it complies with the Viscount Simonds’ rule in Shephard
v. Cartwright,  A.C. 431 (H.L.), at p. 445, citing Snell’s
Principles of Equity (24th ed. 1954), at p. 153:
and declarations of the parties before or at the time of the purchase, [or of
the transfer] or so immediately after it as to constitute a part of the transaction,
are admissible in evidence either for or against the party who did the act or
made the declaration . . . . But subsequent declarations are admissible as
evidence only against the party who made them . . . .
The reason that subsequent acts and declarations have been viewed
with mistrust by courts is because a transferor could have changed his or her
mind subsequent to the transfer and because donors are not allowed to retract
gifts. . . .
57 Some courts, however, have departed from the restrictive
— and somewhat abstruse — rule in Shephard v. Cartwright. In Neazor
v. Hoyle (1962), 32 D.L.R. (2d) 131 (Alta. S.C., App. Div.), for example, a
brother transferred land to his sister eight years before he died and the trial
judge considered the conduct of the parties during the years after the transfer
to see whether they treated the land as belonging beneficially to the brother
or the sister.
58 The rule has also lost much of its force in England. In Lavelle v. Lavelle,  EWCA Civ 223 (BAILII), at para.
19, Lord Phillips, M.R., had this to say about Shephard
v. Cartwright and certain other authorities relied on by the appellant in
seems to me that it is not satisfactory to apply rigid rules of law to the
evidence that is admissible to rebut the presumption of advancement. Plainly, self-serving statements or conduct of a transferor, who
may long after the transaction be regretting earlier generosity, carry little
or no weight. [Emphasis added.]
59 Similarly, I am of the view that the evidence of
intention that arises subsequent to a transfer should not automatically be
excluded if it does not comply with the Shephard v. Cartwright rule.
Such evidence, however, must be relevant to the intention of the transferor at
the time of the transfer: Taylor v. Wallbridge (1879), 2 S.C.R. 616. The
trial judge must assess the reliability of this evidence and determine what
weight it should be given, guarding against evidence that is self-serving or
that tends to reflect a change in intention.
 It is apparent from these comments that the concern with evidence of
donative intent from the transferor is that the transferor may decide after the
fact that a gift was not intended. This focus is explained by the simple fact
that if there is a gratuitous transfer and the transferor is not challenging
the existence of donative intent then there is no dispute as between the
transferor and transferee over the nature of the transfer.
 In Beblow, the Supreme Court of Canada addressed whether a
claim for unjust enrichment was established by Catherine Peter, who had gratuitously
provided domestic services to her spouse. Justice McLachlin (as she then was)
for the majority identified the three requirements for such a claim as follows
(at page 987):
. . . An action for unjust enrichment arises when three elements
are satisfied: (1) an enrichment; (2) a corresponding deprivation; and (3) the
absence of a juristic reason for the enrichment.
 The first two elements of unjust enrichment are the hallmarks of any
gratuitous transfer from one person to another. Consequently, it was necessary
for Justice McLachlin to consider whether there was a juristic reason for the
gratuitous transfer. One possible juristic reason was that the transfer was a
gift. On this issue, Justice McLachlin stated (at pages 991-92):
This Court has held that a common law spouse generally owes no duty
at common law, in equity or by statute to perform work or services for her
partner. As Dickson C.J., speaking for the Court put it in Sorochan v.
Sorochan, supra, at p. 46, the common law wife “was under no
obligation, contractual or otherwise, to perform the work and services in the
home or on the land”. So there is no general duty presumed by the law on a
common law spouse to perform work and services for her partner.
Nor, in the case at bar was there any obligation arising from the
circumstances of the parties. The trial judge held that the appellant “was
under no obligation to perform the work and assist in the home without some
reasonable expectation of receiving something in return other than the drunken
physical abuse which she received at the hands of the Respondent.” This puts an
end to the argument that the services in question were performed pursuant to
obligation. It also puts an end to the argument that the appellant’s services
to her partner were a “gift” from her to him. The central element of a gift at
law—intentional giving to another without expectation of remuneration—is
simply not present.
 Justice McLachlin found that Catherine Peter had established an
absence of donative intent, which meant that the gratuitous transfer of
services was not a gift from her to her spouse.
 In Garland v. Consumers’ Gas Co., 2004 SCC 25,  1
S.C.R. 629, Justice Iacobucci addresses the concern that, if the absence of a
juristic reason requirement for a claim of unjust enrichment is open-ended, the
transferor is faced with the impossible task of proving a negative. He
addresses this by providing discrete categories of juristic reasons: a
contract, a disposition of law, a donative intent and other valid common law,
equitable or statutory obligations.
In so doing, he confirms that in Beblow the transferor established that
the gratuitous transfer in issue was not accompanied by the intention to make a
gratuitous transfer and therefore was not a gift.
Role of Donative Intent in a Tax Appeal
 The Appellants assert that there was a gratuitous transfer of
property to TGTFC and that the gratuitous transfer was intended to be a gift.
One might assume, on the basis of the foregoing cases, that if there was a
gratuitous transfer of property from the Appellants to TGTFC the question of
whether the Appellants had the requisite donative intent does not arise, as
neither the Appellants nor TGTFC is challenging the nature of the transfer as a
 However, as this is an income tax case, the Minister can and does
challenge the nature of the transfer from the Appellants to TGTFC by making
assumptions of fact that the transfers were not gratuitous and that the Appellants
lacked donative intent. This means that the Appellants must demolish the
assumptions made by the Minister by presenting a prima facie case to the
contrary. According to the Federal Court of Appeal in House v. The Queen,
2011 FCA 234 (at paragraph 30):
. . .
4. Once the taxpayer has established a prima facie
case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima
facie case by proving, on a balance of probabilities, his assumptions . . .
5. If the Minister fails to adduce satisfactory evidence, the
taxpayer will succeed.
 With respect to donative intent, the Respondent seeks to require the
Appellants to present a prima facie case to the effect that the
Appellants made the transfers by way of benefaction and out of “detached and disinterested generosity”, which the Respondent
refers to in her argument as “liberal intent” or
animus donandi. In effect, the Respondent is requiring the Appellants to establish
a prima facie case regarding their motives for transferring property to
 In support of this position, the Respondent cites the comments of
the Federal Court of Appeal in Berg:
The Crown is entitled to succeed for a further reason. In my view,
it was not open to the judge on this record to conclude that, at the time of
the transfer of the timeshare units to Cheder Chabad, Mr. Berg had the
requisite donative intent for the purposes of section 118.1 of the Act. In my
view, Mr. Berg did not intend to impoverish himself by transferring the
timeshare units to Cheder Chabad. On the contrary, he intended to enrich
himself by making use of falsely inflated charitable gift receipts to profit
from inflated tax credit claims. He consummated the “deal” solely with that
objective, and he acted from beginning to end in a manner intended to achieve
 In my view, the Court is not addressing Mr. Berg’s motive for
transferring property but is simply observing that Mr. Berg lacked the
intention to transfer property gratuitously because he consummated the “deal”
in order to acquire falsely inflated tax receipts that he could use to his
financial advantage. The lack of donative intent found by the Court follows
from the fact that the transfer itself was not gratuitous but rather was for
value because of the economic benefit that flowed to Mr. Berg.
 A review of the development of the concept of donative intent or animus donandi supports the view that donative
intent does not require a particular motive for the gratuitous transfer of
 Under classical Roman law, “donation was a
disposition for the benefit of somebody else, for which this other party was
not expected to give any recompense”.
A donation could take many forms but, regardless of the form, a particular
transfer was a donation only if the transfer was “intended
to confer a gratuitous benefit on the donee—if, as several texts put it, the
donor acted animo donandi.”
 For a period of time, the law did move away from this classical
definition. In the 6th century, Emperor Justinian codified a requirement for an
However, according to Professor Zimmermann this requirement had been
removed from the legal concept of gift by the 19th century (page 502):
. . . The
great writers of the 19th century had stripped it [donative intent] of any
unrealistic implication of magnanimity and unselfishness. The donor, as Savigny
had put it, may hope to gain, by way of his donation, some goodwill and
affection which will in the long run bring him much greater advantages; he may
make his gift out of mere vanity, in order to make others admire his wealth and
generosity. In all these cases the transaction is a gift because the donor
genuinely intends the other person’s enrichment, albeit only in order to achieve
certain ulterior purposes.
view of donative intent was clearly reflected in American law and in the law of other common
law countries by the early 20th century. In Collector of
Imposts (Vict.) v. Peers,  H.C.A. 5; (1921), 29 C.L.R. 115 (“Peers”), Australia’s highest court explicitly
stated that benevolence is not a requirement for a gift:
The phrase “the gift must be an act of benevolence or something akin
to it” is not very precise, but if it means more than this−that the donor
must not receive consideration from the donee−we cannot accept it. There
may be a good gift although no feeling of benevolence exists between donor and
donee, a gift is no less a gift because by its means the donor intends to
compass the moral or physical destruction of the donee.
its recent decision in McNamee, the Ontario Court of Appeal addresses
donative intent and in so doing expressly rejects the notion that donative
intent refers to the motive of the transferor:
this analysis erroneously conflates intention with underlying motivation or
purpose. They are not the same concepts and to treat them as such constitutes
error in law. That Mr. McNamee Sr.’s primary purpose or motivation in
transferring the shares was to underpin the estate freeze does not mean he did
not intend to gift the shares in order to give effect to that purpose. Had the
trial judge focussed on Mr. McNamee Sr.’s intention in relation to the
transfer of the shares itself, rather than on his ultimate purpose or
motivation in putting the estate freeze in place, he would have realized – on
the evidence here – that Mr. McNamee Sr. did intend to gift the shares:
the documentation to that effect (the Declaration of Gift) is clear; the fact
that he did not sell the shares to the boys because they had no money – as
noted by the trial judge above – reinforces the notion that the transfer was by
way of gift; and there was no “consideration” in law, as we have earlier
explained. The intention respecting the transfer of shares was to do so
gratuitously. The transfer was part of the corporate structure putting the
estate freeze in place. And the estate freeze was the ultimate motivation or
given effect to these distinctions, the trial judge would have recognized that
Mr. McNamee Sr. had the requisite intention as donor to transfer the shares
by way of gift.
analysis, the trial judge relied upon a Superior Court decision, Traversy v.
Glover (2006), 30 R.F.L. (6th) 372 which, in turn, at para. 39, cited the
following statement as part of the definition of “gift” from Black’s Law Dictionary,
5th ed. (St. Paul, Minnesota: West Group, 1979):
In tax law, a payment is
a gift if it is made without conditions, from detached and disinterested
generosity, out of affection, respect, charity or like impulses, and not from
the constraining force of any moral or legal duty or from the incentive of
anticipated benefits of an economic nature.
We are not
able to find this reference in later editions of Black’s. In any event,
we are not persuaded that “inspired by affection, respect, charity, or like
impulses” is the only type of donor intention that may found a valid gift –
“the spirit of, say, cufflinks under the Christmas tree”, as the trial judge
put it. Here, the intention to transfer the shares had a perfectly legitimate
legal objective, namely, to underpin the corporate restructuring in the form of
an estate freeze. To the extent that Traversy and the trial judge here
are suggesting that for a gift to be valid the donor’s intention may only be
motivated by altruism, we respectfully disagree. A transfer of property by way
of gift may equally be motivated by commercial purposes provided the transfer
is gratuitous, i.e., as McLachlin J. (as she then was) put it in Peter v.
Beblow, supra, provided it involves “[the] intentional giving to
another without expectation of remuneration.” 
 In Leary v. Federal Commissioner of Taxation (1980), 32 A.L.R.
221 (“Leary”), cited by the Federal Court
of Appeal in McBurney, the Federal Court of Australia does state that a gift
“ordinarily ‘proceeds from a “detached
and disinterested generosity” . . .’”, citing Commissioner v.
Duberstein, (1960), 363 U.S. 278 which in turn cites Commissioner v. LoBue (1956), 351 US 243
(cited in Duberstein) and Robertson v. United States (1952), 343
 In the cases cited in Leary, the
United States Supreme Court was interpreting a section of the Internal
Revenue Code (the “IRC”) that broadly
defined gross income subject to taxation.
The section expressly excepted “[t]he value of property
acquired by gift, bequest, devise, or inheritance”. In Duberstein, the Court introduces its analysis of whether
the item received is a gift within the meaning of section 22 of the IRC as
The course of decision here makes it plain that the
statute does not use the term “gift” in the common-law sense, but in a more colloquial sense. This Court has
indicated that a voluntarily executed transfer of his property by one to
another, without any consideration or compensation therefor, though a common-law
gift, is not necessarily a “gift” within the meaning of the statute. . . .
. . .
The Government says that this “intention” of the
transferor cannot mean what the cases on the common-law concept of gift call “donative
intent.” With that we are in agreement, for our decisions fully support
this. . . .
 The United States Supreme Court in Duberstein
clearly states that the US tax cases have departed from the common-law meaning
of gift in favour of a colloquial meaning because the statutory context
required that approach. This is contrary to the approach required by section
118.1 as stated in Friedberg. In
addition, the Court in Duberstein does not reproduce the full context of
the statements in LoBue and Robertson. For example, the Court in LoBue
does not state that detached and disinterested generosity is a condition for a
gift under section 22(b)(3) of the IRC but simply
observes that there is no evidence of the “detached and disinterested generosity which might evidence a ‘gift’ in the statutory sense”. This says nothing more than that evidence of an altruistic motive
may support donative intent as that term is understood for the purposes of section
22(b)(3) of the IRC.
 Given the statutory context and actual content of the comments of
the United States Supreme Court in Duberstein, LoBue and Robertson,
the reference to “detached and disinterested generosity”
in Leary is not in my view indicative of the meaning of donative intent
for the purposes of section 118.1 of the ITA. Donative intent does not require
the transferor to have a particular motive for making the transfer. Rather,
donative intent simply requires that the transferor intended to transfer the
 Furthermore, in Backman, the Supreme Court of Canada holds
that a tax motive does not alter the result under the private law and in Côté the Federal Court of Appeal holds
that the motive of obtaining the benefit of the tax credit provided by section
118.1 does not disqualify a transfer of property from being a gift.
although they relate to the requirement that the transfer of property be
gratuitous and not to the requirement for donative intent per se, Friedberg,
Côté and other cases hold that the receipt of a
tax credit because of a transfer of property to a qualified donee does not
disqualify that transfer from being a gift.
Similarly, the receipt of a charitable donation tax receipt in respect of a
transfer of property does not in and of itself constitute a benefit to the
transferor even if the amount of the receipt is inflated.
(4) Are the Transfers of Property From the Appellants to TGTFC Gifts Under
the Common Law?
the Transfers of Property to TGTFC Gratuitous?
evidence establishes that each of the Appellants transferred to TGTFC the face amount
of $10,200 per LP Unit. The transfers were funded as to $10,000 per LP Unit by
the TGTFC Loans and as to $200 by the Appellants’ own cash. The Appellants did
not receive anything directly from TGTFC in exchange for the transfers. TGTFC
was required to use all but $200 of the amount transferred per LP Unit to
acquire the TGTFC Notes. The Respondent submits that the latter requirement
diminished the value of the property transferred to TGTFC because the interest
rate on the TGTFC Notes is below the market rate.
evidence also establishes, either directly or by reasonable inference, that the
Appellants transferred $10,200 to TGTFC only because they participated in the
Program by purchasing a minimum of 10 LP Units in the 2009 LP
and only because 98.04% of the amount transferred to TGTFC was funded by the
In addition, I conclude from the totality of the evidence of the Appellants
that the primary motive for the transfers of property to TGTFC was the receipt
of the tax credit under section 118.1.
Maréchaux and Kossow, the Federal Court of
Appeal held that in a structured arrangement such as the Program, where
the transfer of property to the qualified donee is contractually tied to other
arrangements, a benefit that flows to the transferor as a consequence of those
other arrangements disqualifies the transfer of property from being a gift even
if the person providing the benefit is not the qualified donee. The benefit must of course be an economic benefit such that it can
be said that the transferor did not transfer the property gratuitously but
rather in expectation of the benefit.
 The Respondent submits that the pledge of the Appellants to make a
payment to TGTFC and the payment itself were each part of a series of
interconnected transactions preconceived to form a structured finance arrangement
that was designed to provide the Participants with, among other things,
cash-flow benefits of “5 to 1 income tax deductions and
credits to cash invested”.
I take this to mean that the cash-flow benefits provided to the Appellants by
the tax credit under section 118.1 and the interest deduction under paragraph
20(1)(c), as well as other smaller deductions from income, disqualify the
transfers as gifts.
 For the reasons already stated, the tax credit provided by section
118.1 cannot be a benefit that disqualifies a transfer of property to a
qualified donee from being a gift.
 The interest deduction under paragraph 20(1)(c) results from the
Appellants borrowing money to invest in the 2009 LP. In Kossow,
the Federal Court of Appeal observed that the interest-free loan in issue in Maréchaux
was provided “on terms that were part of a series of
interconnected contractual arrangements” and the Court viewed the loan
to the taxpayer in Kossow in the same light. The loans in issue in those
cases were advanced for the sole purpose of funding the transfers of property
to the qualified donees and could be used for no other purpose.
 Here, the legal arrangements provide that the principal amount of
the Unit Loan is to be used to invest in the 2009 LP and the principal amount
of the TGTFC Loan is to be used to fund the transfer of property to TGTFC. While
it is true that the Appellants were required to participate in the 2009 LP
Program in order to participate in the TGTFC Program, the Appellants were not
required to participate in the TGTFC Program because of participation in the
2009 LP Program. In fact, one Participant chose not to participate in the TGTFC
 In my view, the investments in the 2009 LP and the loans used to
fund those investments are sufficiently separate from the transfers of property
to TGTFC to make it possible to conclude that any benefit from the former was
not a benefit received in respect of the transfers of property to TGTFC. The
close connection between the loans and the transfers of property that existed
in Maréchaux and Kossow simply does not exist between the
investments in the 2009 LP and the Unit Loans used to fund those investments.
 The Respondent also submitted that the transactions taken as a whole
were circular and that benefits flowed to the Appellants because their money
was, in economic terms, returned to them through the circular structure. In my
view, that argument ignores the legal effect of the separate transactions,
contrary to Shell Canada Limited v. Canada,  3 S.C.R. 622 and
Singleton v. Canada, 2001 SCC 61,  2 S.C.R. 1046. Consistent with
those cases, the results in Maréchaux and Kossow derived from the
Federal Court of Appeal’s view of the contractual arrangements and not from an
economic substance over legal form analysis.
 This leaves only the possibility that the Appellants received a benefit
because of the TGTFC Loans. Under the terms of those loans, the Appellants were
required to pay 7.85% per annum, of which 3.75% was funded by the Appellants
from their own resources and the balance was funded by further advances from
 The expert witnesses are divided on whether the TGTFC Loans resulted
in benefits to the Appellants.
 Mr. Johnson states that the TGTFC Loans are not commercially
reasonable debt instruments and that the interest rate on those loans should be
between 10% and 14%. On the other hand, Mr. Rosen and Mr. Davidson
state that the interest rate on the TGTFC Loans is within the range of
commercial reasonability. In fact, after comparing various possible benchmarks,
Mr. Davidson concludes that the 7.85% interest rate is slightly higher
than the benchmarks.
 I have considered the expert evidence and I am inclined to agree
with Mr. Johnson that the TGTFC Loans are not commercially reasonable debt
instruments. I find it especially difficult to believe that an arm’s length
commercial lender in the same circumstances would lend such significant amounts,
which accumulate over 9 years to become even larger amounts, at a rate that is
only roughly 1% above the rate on a 10-year residential mortgage.
 While I understand the Appellants’ position that the Appellants are
high net worth individuals with substantial incomes and that the risk
associated with the TGTFC Loans (and the Unit Loans) must be judged in that light,
I would at least expect extremely thorough vetting of each Appellant by FT in
order to establish the creditworthiness of the Appellants. Further, since the
amount owed to FT increases significantly each year, I would expect FT to
require at least annual updates of the financial position of the Participants.
 Instead, the evidence of Mr. Gordon is that FT did not perform
credit checks at all for the first two closings and did not perform credit
checks at the time of the additional advances in 2010 and 2011. Moreover, Mr. Gordon’s evidence that FT performed credit
checks for the closings after October 31, 2009 is hearsay as
Mr. Gordon conceded that he had no personal knowledge of the issue and was
not able to provide documentary proof of credit checks. I
have no evidence at all from FT regarding the loans as no one with direct
knowledge of FT and its activities testified.
 In addition, the credit application forms provided FT with ranges of
income and assets instead of hard numbers and the Appellants, including
Mr. Gordon, took a liberal view of what should and should not be disclosed
as liabilities. In my view, a lender in these circumstances would require
detailed information to support the creditworthiness of the Appellants, and not
ranges, and would require full disclosure of all liabilities, not just those
liabilities the borrower chooses to disclose. The explanation by some of the
Appellants that EquiGenesis knew their financial situation vis-à-vis other
programs is inconsistent with the position of the Appellants that FT is an independent,
arm’s length lender acting in a commercially reasonable manner.
 The Appellants did pledge their LP Units as security for their TGTFC
Loans and Unit Loans and the TGTFC Loans did take priority over the Unit Loans.
However, the evidence is that there was no market for the LP Units and
therefore it would be difficult for FT to realize on the LP Units in the event
of a default. In any event, since any payment arising from the LP Units was
(save for the unknown value of the Man Notes in 9 years) ultimately dependent
on the repayment of the Program Loans, the LP Units did not provide security
for the Program Loans that could reasonably be considered a proxy for a
mortgage on a home.
 In the circumstances, I conclude that a commercially reasonable
interest rate on the TGTFC Loans would be no less than the bottom end of
Mr. Johnson’s range, which is 10%. On the
basis of this rate, Mr. Johnson calculated a benefit per LP Unit of $1,475
for the 9-year term of the TGTFC Loans.
 Accordingly, the transfer of property by the Appellants to TGTFC was
not gratuitous and that transfer cannot be considered a gift under the common
law. In reaching this conclusion, I am cognizant of the Federal Court of
Appeal’s observations in French regarding the open question surrounding “split gifts”. In my view, the Court is simply
observing that there may be circumstances where a transferor transfers property
to a qualified donee in a manner that in fact involves two transfers: one for
consideration and one made gratuitously.
the Appellants have the Requisite Donative Intent?
 In light of my conclusion that the transfer of property by the
Appellants to TGTFC was not gratuitous, it is not necessary for me to consider
whether the Appellants had donative intent (i.e., the intent to transfer the
property to TGTFC gratuitously). As
the discussion above illustrates, donative intent is generally only relevant
where there has been a gratuitous transfer but the transferor’s intention to
make a gratuitous transfer is called into question.
the Transfers of Property Gifts for the Purposes of the ITA Because of
 The amendments to the ITA addressing gifts included in Bill C-48
were not in issue in the Trilogy. These amendments were assented to on
June 26, 2013 and apply, with limited exceptions, in respect of gifts
and monetary contributions made after December 20, 2002.
 The Respondent acknowledges that, following the enactment of
subsections 248(30) to (41) of the ITA, it is no longer the case that the
receipt of a benefit in respect of a transfer of property to a qualified donee
automatically precludes the existence of a gift under section 118.1 of the ITA.
248(30) to (32) state:
existence of an amount of an advantage in respect of a transfer of property
does not in and by itself disqualify the transfer from being a gift to a
qualified donee if
amount of the advantage does not exceed 80% of the fair market value of the
transferred property; or
transferor of the property establishes to the satisfaction of the Minister that
the transfer was made with the intention to make a gift.
eligible amount of a gift or monetary contribution is the amount by which the
fair market value of the property that is the subject of the gift or monetary
contribution exceeds the amount of the advantage, if any, in respect of the
gift or monetary contribution.
amount of the advantage in respect of a gift or monetary contribution by a
taxpayer is the total of
total of all amounts, other than an amount referred to in paragraph (b), each
of which is the value, at the time the gift or monetary contribution is made,
of any property, service, compensation, use or other benefit that the taxpayer,
or a person or partnership who does not deal at arm’s length with the taxpayer,
has received, obtained or enjoyed, or is entitled, either immediately or in the
future and either absolutely or contingently, to receive, obtain, or enjoy
is consideration for the gift or monetary contribution,
is in gratitude for the gift or monetary contribution, or
is in any other way related to the gift or monetary contribution, and
(b) the limited-recourse debt, determined under subsection
143.2(6.1), in respect of the gift or monetary contribution at the time the
gift or monetary contribution is made.
paragraph 248(30)(a), the existence of an amount of an advantage in respect of
a transfer of property to a qualified donee does not disqualify the transfer as
a gift, provided the amount of the advantage does
not exceed 80% of the fair market value of the transferred property. If the
amount of the advantage is greater than the 80% limit then the transferor must
establish to the satisfaction of the Minister that the transfer was made with
the intention to make a gift.
248(31) provides that the amount of a gift or monetary contribution is the fair
market value of the property that is the subject of the gift or monetary
contribution less the amount of the advantage. Subsection 248(32) determines
the amount of the advantage in respect of a gift or monetary contribution by a
appears that the phrase “monetary
contribution” refers to contributions under the Canada
Since these appeals do not involve monetary contributions, I will limit my
analysis to gifts.
is a degree of circularity in subsections 248(30) and (32). Specifically, to
determine whether a transfer of property is “saved” by subsection 248(30), it is necessary to
determine the amount of the advantage in respect of the transfer of property.
However, subsection 248(32) determines the amount of an advantage in respect of
a gift but not in respect of a transfer of property.
strictly textual interpretation would suggest that a transfer of property that
is not a gift because of an associated benefit to the transferor will never
have an amount of an advantage for the purposes of subsection 248(30) and will
always be saved by that subsection. On the other hand, a transfer of property
that is a gift can have an amount or advantage in respect of the transfer but
never needs to be saved because it is already a gift. That is an absurd result
and is therefore assumed not to have been intended by Parliament.
context of the provisions strongly suggests that subsections 248(30) to (41)
are intended to work together and to function as a cohesive whole. The manifest
purpose of these provisions is to limit the tax credit under subsection 118.1
or the deduction under section 110.1 for transfers of property to qualified
donees where the economic cost of the transfer to the transferor is directly or
reduced. However, where an amount of an advantage in respect of a transfer of
property is also responsible for the transfer not being a gift under the
applicable private law,
the transfer will remain a gift provided the offset is 80% or less of the fair
market value of the transferred property or the Minister is convinced that the
transferor intended to make a gift.
these considerations into account, a sensible interpretation of subsections
248(30) and (32) is that one must assume that a transfer of property is a gift
under private law for the purpose of determining the amount of the advantage in
respect of that gift under subsection 248(32). The amount of the advantage in
turn determines whether the 80% threshold in paragraph 248(30)(a) is or is not
the 80% threshold is exceeded and the requirement in paragraph 248(30)(b) is
not satisfied, the exception provided by subsection 248(30) does not apply to
the transfer of property and only the private law will determine the character
of the transfer. If the 80% threshold is not exceeded or the requirement in
paragraph 248(30)(b) is satisfied, then a transfer of property that is not a
gift under private law because of the existence of an amount of an advantage in
respect of the transfer will be considered a gift for the purposes of the ITA.
either case, if there is a gift for the purposes of the ITA, subsection 248(31)
and the other applicable rules will then determine the eligible amount of the
this interpretation, one sees that the TGTFC Loans are related to the transfers
of property by the Appellants to TGTFC because the loans were applied for by
the Appellants and were advanced to the Appellants solely for the purpose of
funding those transfers. Consequently, under paragraph 248(32)(a), the amount
of the advantage in respect of the transfers of property by the Appellants to
TGTFC would include the value of any benefit resulting from those loans
determined at the time of the transfers of property. In addition, if the TGTFC
Loans of the Appellants are “limited-recourse
debt” under subsection 143.2(6.1), the principal amount of those
loans would be included in the amount of the advantage in respect of the
transfers of property to TGTFC.
It is not entirely clear which advantages are to be considered when
applying the 80% threshold in paragraph 248(30)(a) to a particular transfer of
property. Subsection 248(32) describes “the amount of
the advantage” broadly and some of the items described (such as “limited-recourse debt” determined under subsection
143.2(6.1)) may not be considered to disqualify the transfer of property as a
gift under the private law.
There are two possible interpretations of subsection 248(30). Under the
first interpretation, only those advantages that disqualify the transfer of
property as a gift under the private law are considered in determining whether
the 80% threshold in paragraph 248(30)(a) is exceeded. Under the second
interpretation, the total of the items described in subsection 248(32) is
included in determining whether the 80% threshold in paragraph 248(30)(a) is
exceeded even if some of the items described in subsection 248(32) did not
disqualify the transfer of property as a gift under the private law.
In my view, the text of subsection 248(30) supports the first
interpretation. Subsection 248(30) provides an exception to the private law in
circumstances where the “existence of an amount
of an advantage” would otherwise disqualify a transfer of property as a
gift. The exception applies if the amount of the advantage described in the
opening words does not exceed 80% of the fair market value of the transferred
property. The reference to “the advantage” in paragraph 248(30)(a) is a reference to
the advantage described in the introductory words of the subsection – that is,
the advantage that disqualified the gift under the private law – not to the
broader term in subsection 248(32).
This interpretation is supported by the technical notes which state:
For the transfer of property to qualify as a gift, it is
necessary that the transfer be voluntary and with the intention to make a gift.
At common law, where the transferor of the property has received any form of
consideration or benefit, it is generally presumed that such an intention is
not present. New subsection 248(30) of the Act, which applies in respect of
transfers of property after December 20, 2002 to qualified donees (such as
registered charities), allows the opportunity to rebut this presumption. New
paragraph 248(30)(a) provides that the existence of an amount of an advantage
to the transferor will not necessarily disqualify the transfer from being a
gift if the amount of the advantage does not exceed 80% of the fair market
value of the transferred property.
The first interpretation of subsection 248(30) maintains the purpose of
the provision - to allow as gifts transfers of property otherwise disqualified
under the common law - without adversely impacting the determination of the
eligible amount of such gifts under subsection 248(31).
amount of the advantage that is responsible for the disqualification of the
Appellants’ transfers of property to TGTFC as gifts under private law is the
benefit received under the TGTFC Loans. That benefit is estimated by Mr. Johnson
to be $1,475 per LP Unit. This amount is to be compared to the fair market
value of the transferred property, which is in dispute and requires
consideration of the expert evidence.
 Mr. Johnson
opines that the TGTFC Notes have a fair market value in the range of $2,889 to
$5,249 per LP Unit.
Since the other experts opine that the TGTFC Notes have a higher value and the 80%
test is not failed at Mr. Johnson’s value, I conclude that the benefit
associated with the TGTFC Loans to the Appellants does not exceed the 80%
threshold in paragraph 248(30)(a) of the ITA. Accordingly, the transfers of
property by the Appellants to TGTFC are gifts for the purposes of the ITA
because they are saved by subsection 248(30).
Respondent submits that, even if the transfers of property by the Appellants to
TGTFC are gifts because of paragraph 248(30)(a) of the ITA, the eligible amount
of the gifts is nil.
Respondent submits that the Program Loans are “limited-recourse debt” as determined under subsection
143.2(6.1) at the time the gifts were made. Subsections 143.2(6.1), (7), (8)
and (12) state:
Limited-recourse debt in respect of a gift or monetary contribution — The
limited-recourse debt in respect of a gift or monetary contribution of a
taxpayer, at the time the gift or monetary contribution is made, is the total
limited-recourse amount at that time, of the taxpayer and of all other
taxpayers not dealing at arm’s length with the taxpayer, that can reasonably be considered to relate to the gift or
limited-recourse amount at that time, determined under this section when this
section is applied to each other taxpayer who deals at arm’s length with and
holds, directly or indirectly, an interest in the taxpayer, that can reasonably
be considered to relate to the gift or monetary contribution, and
amount that is the unpaid amount at that time of any other indebtedness, of any
taxpayer referred to in paragraph (a) or (b), that can reasonably be considered
to relate to the gift or monetary contribution if there is a guarantee,
security or similar indemnity or covenant in respect of that or any other
Repayment of indebtedness — For the purpose of this section, the unpaid
principal of an indebtedness is deemed to be a limited-recourse amount unless
fide arrangements, evidenced in writing, were made, at the time the
indebtedness arose, for repayment by the debtor of the indebtedness and all
interest on the indebtedness within a reasonable period not exceeding 10 years;
interest is payable at least annually, at a rate equal to or greater than the
(i) the prescribed rate of interest in effect at the time the
indebtedness arose, and
(ii) the prescribed rate of interest applicable from time to time
during the term of the indebtedness,
and is paid in respect of the indebtedness by the debtor no later
than 60 days after the end of each taxation year of the debtor that ends in the
Limited-recourse amount — For the purpose of this section, the unpaid principal
of an indebtedness is deemed to be a limited-recourse amount of a taxpayer
where the taxpayer is a partnership and recourse against any member of the
partnership in respect of the indebtedness is limited, either immediately or in
the future and either absolutely or contingently.
. . .
Series of loans or repayments — For the purpose of paragraph (7)(a), a debtor
is considered not to have made arrangements to repay an indebtedness within 10
years where the debtor’s arrangement to repay can reasonably be considered to
be part of a series of loans or other indebtedness and repayments that ends
more than 10 years after it begins.
Respondent submits that the Program Loans can reasonably be considered to
relate to the gifts by the Appellants to TGTFC and are deemed to be
limited-recourse amounts because:
were no bona fide arrangements evidenced in writing for repayment by the
debtor of the indebtedness and all interest on the indebtedness within a
reasonable period of time not exceeding 10 years: paragraph 143.2(7)(a) of the
the alternative, the Appellants are deemed not to have made arrangements to
repay the loans within 10 years because the Appellants’ arrangements to repay
are part of a series of loans or other indebtedness and repayments that ends
more than 10 years after it begins: subsection 143.2(12) of the ITA.
the further alternative, the annual interest in respect of the loans was not
paid by each Appellant no later than 60 days after the end of each taxation
first argument is based on the position that the arrangements for the repayment
of the Program Loans were not bona fide arrangements as required by
paragraph 143.2(7)(a) of the ITA. Paragraph 143.2(7)(a) is part of a series of
rules in section 143.2 which place limits on the use of leverage and amounts
that are not “at risk”
to increase tax expenditures or tax credits.
Oxford English Dictionary (2nd ed.) defines bona fide
as meaning “In good faith, with
sincerity; genuinely”. When it is used to qualify a noun, as
here, the definition is “Acting or
done in good faith; sincere, genuine”. Of course, the context of
the phrase “bona fide arrangements” and the purpose
of the provisions in which the phrase is found must also be taken into account
in interpreting the phrase.
straightforward interpretation of the text is that the arrangements to repay
the Program Loans must be entered into in good faith and must be genuine. The
context and purpose of the text suggest to me that Parliament wanted more than
just legally enforceable arrangements when it used the phrase bona fide
to qualify the nature of the arrangements.
my view, the phrase bona fide speaks to the fundamental character of the
arrangements and requires that the arrangements reflect what one would
reasonably expect arm’s length commercial relations to look like in the
circumstances. Simply pointing to pieces of paper as evidence of binding legal
obligations to repay the debt – even if the authenticity of the pieces of paper
is not in issue − is not sufficient to
establish that there are bona fide arrangements for the purposes of
paragraph 143.2(7)(a) of the ITA.
 To determine whether there are bona fide arrangements to
repay the Program Loans, the borrowing arrangements as a whole must be
considered and analyzed. If the borrowing arrangements viewed as a whole are
not bona fide arrangements in the sense in which that phrase is used in
paragraph 143.2(7)(a), then it follows that the arrangements to repay the
principal and interest embedded in those borrowing arrangements are also not bona
 The evidence establishes that the Program Loans were part of
structured arrangements and that the Appellants had to either accept or reject
the arrangements as presented. The Appellants did not negotiate any aspect of
the arrangements but rather, if they decided to participate in the Program,
they simply executed documents provided to them by EquiGenesis. Although some
of the Appellants did review the Program with professional advisers, these
reviews focussed on the tax consequences of the arrangements and not on the
commercial issues and risks normally associated with taking on substantial
amounts of debt.
 There was no bargaining by the Appellants but merely acquiescence to
the terms presented by EquiGenesis. The Appellants did not investigate – and in
many cases were not even aware of the identity of − the entity from which they
were borrowing large amounts of money. The Appellants relied on the
representations of EquiGenesis and, where applicable, past experience with
other programs offered by EquiGenesis, even though the lenders in those
programs were different. One certainly gets the general sense that, for the
most part, the Appellants did not distinguish between EquiGenesis and FT, even
though Mr. Gordon testified that EquiGenesis dealt at arm’s length with FT
and that he had no knowledge of the affairs of FT.
 Although the Appellants each stated that they were on the hook for
the amounts borrowed from FT and could be liable to repay these amounts from
their own resources, some of the Appellants failed to disclose similar
liabilities from earlier EquiGenesis programs on their loan applications. For
example, in cross-examination, Dr. Platnick stated:
I viewed it as a personal loan, but I didn’t –– because there was
the corresponding investment that I knew –– I was hoping would grow over time,
it would cover it off. I didn’t include the investment part in my net worth
statement. I didn’t include the debt showing on the liability side because they
would cancel each other out.
 Similarly, Mrs. Tilatti stated:
The reason why we did not include them here is because the loans
that we have taken out for the EquiGenesis programs in the past were offset by
the investment in the program. So the net impact was a zero as far as we were
concerned and that’s why they’re not listed here.
 Even Mr. Gordon, the architect of the Program structure, stated
that he was not required to provide any documentation to FT to support his net
worth and that he did not disclose liabilities associated with his
participation in other programs. I
take from this that even Mr. Gordon did not see fit to treat the borrowing
arrangements as genuine commercial arrangements requiring full, true and plain
disclosure of the financial wherewithal of the borrower.
 In my view, a borrower’s unilateral determination that a significant
liability need not be disclosed on a loan application coupled with the failure
of FT to insist on full disclosure is strong evidence of an absence of the sort
of good faith and genuineness contemplated by paragraph 143.2(7).
 I have already commented on the shortcomings of the ULAA Forms, the
generalized information provided to FT by those forms, the failure of FT to
require documentation to support the information provided on the forms and the
failure of FT to perform thorough credit checks on all the Participants prior
to closing and at the time of each additional advance. All of these factors
point away from the arrangements regarding the Program Loans being bona fide
arrangements as contemplated by the use of that phrase in paragraph
 I also draw a negative inference regarding the existence of bona
fide arrangements from the fact that no one from FT testified regarding the
borrowing arrangements with the Participants. If the arrangements are indeed bona
fide arrangements then I would have expected to hear testimony from a
representative of FT regarding the details of the arrangements viewed from the
perspective of the lender. After all, a loan is an arrangement between a lender
and a borrower, and yet here one party to that arrangement is silent as to the
details of the arrangement, even though that party is credited with being the
driving force behind the arrangement.
 For the foregoing reasons, I conclude that the arrangements
respecting the Program Loans are not bona fide arrangements in the sense
contemplated by paragraph 143.2(7)(a) of the ITA. Accordingly, the arrangements
to repay the principal and interest owed under the Program Loans are not bona
fide arrangements and the principal amount of each of the Program Loans is
a limited-recourse amount for the purposes of subsection 143.2(6.1).
 The Respondent submits that the Unit Loans and the TGTFC Loans are
each limited-recourse debt in respect of the gifts made by the Appellants to
TGTFC because they can reasonably be considered
to relate to those gifts.
 It is clear that the TGTFC Loans relate to the gifts since the loans
fund roughly 98% of the gifts. I am not convinced, however, that the Unit Loans
can reasonably be considered to relate to the gifts on the facts of this case.
 The Program was marketed as two separate arrangements giving rise to
two separate sources of tax benefits: an investment substantially funded by a
loan and a donation to a qualified donee substantially funded by a loan. A
Participant in the LP Program could elect to also participate in the TGTFC
Program but was not required to participate in it. No portion of the Unit Loan
was used to fund or facilitate the transfer of property by the Appellants to
 It is true that the existence of the LP Program may indirectly support
the TGTFC Program by ostensibly placing more assets in Leeward than would be
the case if only the TGTFC Program existed and by allowing the LP Units to be
given as security for the TGTFC Loans. However, in my view, that remote a
connection is not sufficient for one to conclude that the Unit Loans can
reasonably be considered to relate to the gifts made by the
Appellants to TGTFC.
 I therefore find that the TGTFC Loan is a limited-recourse debt in
respect of the gifts by the Appellants to TGTFC and that the eligible amount of
the gifts by the Appellants to TGTFC is reduced by the original principal
amount of the their respective TGTFC Loans. This means that the eligible amount
of Dr. Platnick’s gift to TGTFC is reduced by $650,000 and the eligible
amount of each of the other Appellants’ gifts to TGTFC is reduced by $100,000.
 Paragraphs 248(32)(a) and (b) are worded
such that an amount described in paragraph 248(32)(b) is not also included in
the amount of an advantage by paragraph 248(32)(a). The amount described in
paragraph 248(32)(b) in this case is the unpaid principal of the TGTFC
Loans at the time the gifts are made. That amount is not the same amount as a
benefit resulting from a below-market interest rate on the principal amount of
the TGTFC Loans.
have already found that the 7.85% rate of interest on the TGTFC Loans resulted
in a benefit to the Appellants of $1,475 per LP Unit under the principles
described in the Trilogy. This benefit also clearly falls within the language
of paragraph 248(32)(a) of the ITA. In my view, it is not double counting to
include in the amount of an advantage the principal amount of the TGTFC Loans
and the benefit resulting from the below-market interest rate on those loans. Each
is described separately in paragraphs 248(32)(b) and (a) respectively.
the amount of the advantage in respect of the gifts made by the Appellants to
TGTFC is greater than the amount of those gifts even assuming the fair market
value of the gifts is equal to the face amount of the gifts. As a result, the
eligible amount of the gift made by each of the Appellants to TGTFC is nil.
I am wrong in my conclusion that the TGTFC Loans are limited-recourse amounts
under subsection 143.2(7) because there are no bona fide arrangements to
repay the loans within 10 years, I also find that the arrangements to repay the
TGTFC Loans are “part of a series of
loans or other indebtedness and repayments that ends more than 10 years after
it begins” and therefore, under subsection 143.2(12) of the ITA,
the Appellants are considered not to have made arrangements to repay the TGTFC
Loans within 10 years.
evidence indicates that the Program was marketed as a 19-year investment in a
limited partnership and an opportunity to donate to a qualified donee, both the
investment and the donation being substantially funded by a loan. In order not
to run afoul of the 10-year limitation in paragraph 143.2(7)(a) of the ITA, the
initial loans used to fund the investment and the donation have terms of less
than ten years.
Appellants testified that no representations were made to them regarding the
refinancing or replacement of the Program Loans on maturity and the Program
documents emphasize that point. Many of the Appellants also pointed to the
inherent risk that the loans would not be refinanced. However, subsection
143.2(12) does not speak to the existence of legal arrangements or obligations
or to certainty regarding future events. Rather, subsection 143.2(12) asks
whether the arrangements to repay “can
reasonably be considered” to be part of a series of loans or
other indebtedness and repayments that ends more than 10 years after it begins.
use of the phrase “can reasonably be
considered” requires an objective assessment, as at the time the
Program Loans were advanced, of all the circumstances in order to determine
what was reasonably contemplated would occur upon the maturity of the Program
Loans. Subsection 143.2(12) is asking whether at the time the Program Loans
were advanced a reasonable person would have contemplated that the loans would
be replaced or refinanced on substantially similar terms save for changes
mandated by the effluxion of time.
seems to me obvious that a reasonable person would contemplate that when the
Program Loans matured they would be replaced or refinanced with other similar
loans and that EquiGenesis would take the lead in ensuring that this occurred. In
fact, I cannot imagine an individual participating in the Program unless that
individual fully expected the Program Loans to be replaced or refinanced in
that manner. The refinancing of the loans associated with earlier similar
programs offered by EquiGenesis certainly suggests that such an expectation
would be reasonable and may even go so far as to suggest that this eventuality
is “baked-in” to the
fact that the Program has a 19-year term.
C. The Receipts Issued
by TGTFC to the Appellants Do Not Meet the Requirements of Paragraph 118.1(2)(a)
of the ITA
118.1(2) of the ITA and subsection 3501(1) of the ITR require that the official
donation receipt contain certain information including:
3501(1)(h) the amount that is
(i) the amount of a cash gift, or
(ii) if the gift is of property other than cash, the amount that is the
fair market value of the property at the time that the gift is made;
(h.1) a description of the advantage, if any, in respect of the gift and
the amount of that advantage;
(h.2) the eligible amount of the gift.
Castro, the Federal Court of Appeal highlighted the importance of
complying with the requirements of subsection 118.1(2) of the ITA:
Even if the Judge determined that a gift was made, there was no official
receipt, in the present case, evidencing the amount that was donated, in
violation of subsection 118.1(2) of the Act. Consequently, the
respondent is denied any tax credit.
In light of my conclusion that the eligible amount of the gifts by the
Appellants to TGTFC is nil, I do not need to consider whether the donation
receipts issued by TGTFC to the Appellants meet the requirements of subsection 118.1(2)
of the ITA. However, it is clear from Castro that, if the receipts
issued by TGTFC to the Appellants do not comply with the requirements in the
ITR, the Appellants are not entitled to any tax credit in respect of the
transfers of property by them to TGTFC.
D. The GAAR Applies to
Deny the Tax Benefit Obtained by the Appellants Under Section 118.1
light of my conclusion that the eligible amount of the gifts by the Appellants
to TGTFC is nil, I do not need to consider whether the GAAR applies so as to
recharacterize the tax consequences that would otherwise arise in respect of
the transfer of property by the Appellants to TGTFC.
E. The 2009 LP Has
Deemed Interest Income Under Subsection 12(9) of the ITA and Section 7000 of
2, 5, 9, 10, 20, 27 and 28 of the Linked Note state:
Principal Amount of this Note as at any date shall be equal to the aggregate
amount of the Subscription Price paid by the Partnership on or prior to such
date in accordance with Section 5 and will be increased on the date hereof and
on each of the dates referenced in Section 5 as a date on which an Advance on
account of the Subscription Price is payable. Any such increase shall be
reflected by an appropriate notation on the grid attached to this Note. The
Issuer authorizes the Partnership to record on the grid attached to this Note
all advances, repayments, prepayments and the unpaid balance of the Principal
Amount from time to time. The Issuer agrees that in the absence of manifest
error the record kept by the Partnership on the grid attached to this Note
shall be conclusive evidence of the matters recorded thereon, and the Principal
Amount outstanding at any time shall be equal to the last entry on the grid in
the column headed “Aggregate Principal Amount”, provided that the failure of
the Partnership to record or correctly record any amount or date shall not
affect the obligation of the Issuer to pay the outstanding Principal Amount and
the Variable Return Amount on the Maturity Date.
Note shall be issued for a subscription price (the “Subscription Price”) equal
to the sum of the following amounts, payable by the Partnership to the Issuer
in instalments as follows (each, an “Advance”):
(a) on Closing, the sum of $6,560,000 representing $32,000
multiplied by the number of Units issued on Closing;
(b) on December 1, 2009, the sum of $205,000, representing
$1,000 multiplied by the number of Units issued on Closing;
(c) on March 31, 2010, the sum of $220,375, representing $1,075
multiplied by the number of Units issued on Closing; and
(d) on March 31, 2011, the sum of $102,500, representing $500
multiplied by the number of Units issued on Closing.
in 2018, the Partnership shall have the right to redeem and demand payment of
this Note in part in accordance with the following provisions of this Section
. . .
Issuer shall pay to the Partnership on the Maturity Date, without any need for
the Partnership to elect or otherwise take any action other than the surrender
of this Note, an amount in Canadian dollars equal to the Principal Amount then
outstanding plus the Variable Return Amount, if any, calculated as provided in
Sections 20 to 23, but subject to Sections 24 to 26 plus the sum of the
Variable Return Carryover Amounts, if any (the “Payment at Maturity”).
“Variable Return Amount” is equal to the product of the Principal Amount of
this Note and the Total Weighted Reference Portfolio Return. The “Total Weighted
Reference Portfolio Return” is that amount, expressed as a percentage which is
equal to the greater of (i) the sum of the Weighted Basket Returns of the
Baskets in Reference Portfolio A, (ii) the return of Reference Portfolio B, and
(iii) zero. The “Weighted Basket Return” of the Baskets in Portfolio A is equal
to the product of: (i) the total return of a Basket through to the date of calculation;
and (ii) such Basket’s weighting from time to time in Reference Portfolio A, as
specified in Section 13.
value (“Note Value”) of this Note will be calculated quarterly as at the last
Business Day in each of March, June, September and December (each a “Valuation
Date”) by the Issuer or such calculation agent as it may from time to time
retain for such purpose. The Issuer will not be responsible for any errors or
omissions made in the calculation of the Note Value if made by it or by such
calculation agent in good faith. The Note Value on any Valuation Date shall be
equal to the aggregate of the Principal Amount outstanding as at the close of
business on the immediately preceding Business Day plus the value of the
Variable Return Amount calculated as if the Valuation Date were the Maturity
Date. The Note Value shall be made available to the Partnership on request no
later than the 10th Business Day following the applicable Valuation Date.
Issuer may suspend the determination of the Note Value in any period during which
the Issuer determines a Market Disruption Event in respect of one or more
Baskets has occurred and is continuing.
Respondent’s submissions on the application of paragraphs 7000(1)(d) and
7000(2)(d) of the ITR to the Linked Notes are as follows:
Parties agree the interest on the Linked Note depended on a contingency that
existed after the end of each taxation years [sic] in which the Linked
Noted [sic] was held. The interest payable on maturity on the Linked
Note is contingent on the performance of the notional investment portfolios (Portfoli[o]
A and Portfolio B). That contingency is, “existing after the year” because the
Variable Return Amount is based on the entire yield of Portfolios A or B over a
period of 20 years. Accordingly, the Linked Notes meet the definition of a PDO
under paragraph 7000(1)(d) of the Regulations.
7000(2)(d) provides that the “maximum amount of interest that could be payable
in respect of” a year must be included in the computation of income for that
year. S. 7000(2)(d) does not require that interest be payable in the year.
Paragraph 12(1)(c) already provides that interest that is receivable in the
year must be included in income. Nor does the provision require that interest
“accrue” in that particular year. Subsection 12(3) already provides that
accruing interest must be included annually in the computation of income. S.
7000(2)(d) merely requires that interest “could” be payable in that year.
7000(2)(d) first requires that the rights and obligations of the parties be
analysed in order to determine whether interest could become payable to the
taxpayer following the occurrence of certain events or circumstances. Once it
is established that the legal relationship does admit of certain payment events
in that year, it must then be determined what is the maximum amount of interest
payable under these scenarios.
explained above, there are two circumstances where EQ09 LP could be entitled to
receive interest prior to maturity:
the occurrence of an Event of Default, EQ09 LP may declare all of the
obligations of Leeward immediately due and payable, and
in 2018, EQ09 LP is provided with an option to redeem and demand payment of the
Linked Notes of the principal amount of the note plus a Redemption Return
the 2009, 2010 and 2011 taxations, the maximum amount of interest which could
be payable to EQ09 LP is the Variable Return Amount that would be payable on
the assumption that an Event of Default, as described in the EQ09 LP GSA, has
that an Event of Default occurred at December 31, 2009, all amounts
under the Linked Notes would become immediately due and payable. As such, the
Partnership would be entitled to receive the principal under the notes plus the
Variable Return Amount as of December 31, 2009. If the default were
to occur on December 31, 2010, the Partnership would be entitled to receive the
principal under the notes plus the Variable Return Amount as of December 31,
2010. Because an Event of Default could occur and would entitle the Partnership
to receive interest, s. 7000(2)(d) requires this hypothetical interest to be
included as deemed interest.
indicated by the Respondent, the Appellants do not dispute that the Linked
Notes are a debt obligation described in paragraph 7000(1)(d) of the ITR. The
Appellants submit, however, that paragraph 7000(2)(d) does not apply because “no amount of interest is or ‘could be
payable’ until the Linked Notes mature or are redeemed.”
Appellants concede that the variable return on the Linked Notes is a “bonus or premium” for the purposes
of subsection 7000(3) of the ITR, which deems a bonus or premium payable under
a debt obligation to be interest for the purposes of section 7000 of the ITR. The
Appellants note, however, that subsection 7000(3) does not deem such interest
to accrue for the purposes of paragraph 7000(2)(d) and does not transform the
variable return on the Linked Notes into a known amount that could be payable.
Appellants submit that section 7000 of the ITR does not create interest income
but merely identifies where such income otherwise exists as a determinable
return under the terms of the debt obligation. The Appellants submit that,
under the Respondent’s approach, gains attributable to appreciation are taxed
on a speculative basis and the taxpayer pays tax on fictitious income.
12(1)(c) and subsections 12(3) and 12(9) of the ITA state:
shall be included in computing the income of a taxpayer for a taxation year as
income from a business or property such of the following amounts as are
. . . (c)
subject to subsections (3) and (4.1), any amount received or receivable by the
taxpayer in the year (depending on the method regularly followed by the taxpayer
in computing the taxpayer’s income) as, on account of, in lieu of payment of or
in satisfaction of, interest to the extent that the interest was not included
in computing the taxpayer’s income for a preceding taxation year;
. . .
Subject to subsection (4.1), in computing the income for a taxation year of a
corporation, partnership, unit trust or any trust of which a corporation or a
partnership is a beneficiary, there shall be included any interest on a debt
obligation (other than interest in respect of an income bond, an income
debenture, a small business bond, a small business development bond, a net
income stabilization account or an indexed debt obligation) that accrues to it
to the end of the year, or becomes receivable or is received by it before the
end of the year, to the extent that the interest was not included in computing
its income for a preceding taxation year.
. . .
the purposes of subsections (3), (4) and (11) and 20(14) and (21), if a
taxpayer acquires an interest in, or for civil law a right in, a prescribed
debt obligation, an amount determined in prescribed manner is deemed to accrue
to the taxpayer as interest on the obligation in each taxation year during
which the taxpayer holds the interest or the right in the obligation.
7000(1) to (5) of the ITR state:
the purpose of subsection 12(9) of the Act, each of the following debt
obligations (other than a debt obligation that is an indexed debt obligation)
in respect of which a taxpayer has at any time acquired an interest is a
prescribed debt obligation:
particular debt obligation in respect of which no interest is stipulated to be
payable in respect of its principal amount;
particular debt obligation in respect of which the proportion of the payments
of principal to which the taxpayer is entitled is not equal to the proportion
of the payments of interest to which he is entitled;
particular debt obligation, other than one described in paragraph (a) or (b),
in respect of which it can be determined, at the time the taxpayer acquired the
interest therein, that the maximum amount of interest payable thereon in a year
ending after that time is less than the maximum amount of interest payable
thereon in a subsequent year; and
particular debt obligation, other than one described in paragraph (a), (b) or
(c), in respect of which the amount of interest to be paid in respect of any
taxation year is, under the terms and conditions of the obligation, dependent
on a contingency existing after the year,
the purposes of this subsection, a debt obligation includes, for greater
certainty, all of the issuer’s obligations to pay principal and interest under
the purposes of subsection 12(9) of the Act, the amount determined in
prescribed manner that is deemed to accrue to a taxpayer as interest on a
prescribed debt obligation in each taxation year during which he holds an
interest in the obligation is,
the case of a prescribed debt obligation described in paragraph (1)(a), the
amount of interest that would be determined in respect thereof if interest
thereon for that year were computed on a compound interest basis using the
maximum of all rates each of which is a rate computed
(i) in respect of each possible circumstance under which an
interest of the taxpayer in the obligation could mature or be surrendered or
(ii) using assumptions concerning the interest rate and compounding
period that will result in a present value, at the date of purchase of the
interest, of all the maximum payments thereunder, equal to the cost thereof to
the case of a prescribed debt obligation described in paragraph (1)(b), the
aggregate of all amounts each of which is the amount of interest that would be
determined in respect of his interest in a payment under the obligation if
interest thereon for that year were computed on a compound interest basis using
the specified cost of his interest therein and the specified interest rate in
respect of his total interest in the obligation, and for the purposes of this
“specified cost” of his interest in a payment under the obligation is its
present value at the date of purchase computed using the specified interest
“specified interest rate” is the maximum of all rates each of which is a rate
respect of each possible circumstance under which an interest of the taxpayer
in the obligation could mature or be surrendered or retracted, and
assumptions concerning the interest rate and compounding period that will
result in a present value, at the date of purchase of the interest, of all the
maximum payments to the taxpayer in respect of his total interest in the
obligation, equal to the cost of that interest to the taxpayer;
the case of a prescribed debt obligation described in paragraph (1)(c), other
than an obligation in respect of which paragraph (c.1) applies, the greater of
the maximum amount of interest thereon in respect of the year, and
maximum amount of interest that would be determined in respect thereof if
interest thereon for that year were computed on a compound interest basis using
the maximum of all rates each of which is a rate computed
respect of each possible circumstance under which an interest of the taxpayer
in the obligation could mature or be surrendered or retracted, and
assumptions concerning the interest rate and compounding period that will
result in a present value, at the date of issue of the obligation, of all the
maximum payments thereunder, equal to its principal amount;
the case of a prescribed debt obligation described in paragraph (1)(c) for
rate of interest stipulated to be payable in respect of each period throughout
which the obligation is outstanding is fixed at the date of issue of the
stipulated rate of interest applicable at each time is not less than each stipulated
rate of interest applicable before that time,
the amount of interest that would be determined in respect
of the year if interest on the obligation for that year were computed on a
compound interest basis using the maximum of all rates each of which is the
compound interest rate that, for a particular assumption with respect to when
the taxpayer’s interest in the obligation will mature or be surrendered or
retracted, results in a present value (at the date the taxpayer acquires the
interest in the obligation) of all payments under the obligation after the
acquisition by the taxpayer of the taxpayer’s interest in the obligation equal
to the principal amount of the obligation at the date of acquisition; and
the case of a prescribed debt obligation described in paragraph (1)(d), the
maximum amount of interest thereon that could be payable thereunder in respect
of that year.
the purpose of this section, any bonus or premium payable under a debt
obligation is considered to be an amount of interest payable under the
the purposes of this section, where
taxpayer has an interest in a debt obligation (in this subsection referred to
as the “first interest”) under which there is a conversion privilege or an
option to extend its term upon maturity, and
the time the obligation was issued (or, if later, at the time the conversion
privilege or option was added or modified), circumstances could reasonably be
foreseen under which the holder of the obligation would, by exercising the
conversion privilege or option, acquire an interest in a debt obligation with a
principal amount less than its fair market value at the time of acquisition,
subsequent interest in any debt obligation acquired by the taxpayer by
exercising the conversion privilege or option shall be considered to be a
continuation of the first interest.
the purposes of making the computations referred to in paragraphs (2)(a), (b),
(c) and (c.1), the compounding period shall not exceed one year and any
interest rate used shall be constant from the time of acquisition or issue, as
the case may be, until the time of maturity, surrender or retraction.
12(1)(c) requires taxpayers to include in income any amount received or
receivable in the year (depending on the method regularly followed by the
taxpayer in computing income) as, on account of or in
lieu of interest. The paragraph applies not only to “interest” but also to amounts
received either in lieu of interest or on account of interest. The paragraph
makes no reference to the source of the payment. The timing of the recognition
of income described in the paragraph is determined by the method regularly
followed by the taxpayer in computing income.
meaning of “interest” was considered by the Federal Court of Appeal in Canada
v. Sherway Centre Ltd.,  3 F.C. 36:
classic definition of interest is found in the 1947 Supreme Court of Canada
case Reference as to the Validity of Section 6 of the Farm Security Act,
1944 of Saskatchewan where Rand J. defined interest broadly to include “the
return or consideration or compensation for the use or retention by one person
of a sum of money, belonging to, in a colloquial sense, or owed to, another”.
This fairly broad definition has since been limited or more narrowly defined.
For instance, in Attorney-General For Ontario v. Barfried Enterprises Ltd.
Judson J., after considering the definition of interest provided by Rand J. in Farm
Security Act and Halsbury’s Laws of England [Vol. 27, 3rd ed., London:
Butterowrths & Co. (Publishers) Ltd., 1959], found that one of the
essential characteristics of interest is that it accrues daily. He held that in
the third edition of Halsbury’s the text states: “‘Interest accrues de die
in diem even if payable only at intervals, and is, therefore, apportionable
in point of time between persons entitled in succession to the principal.’ This
day-to-day accrual of interest seems to me to be an essential characteristic.”
However, as Krishna points out in his text, The Fundamentals of Canadian
Income Tax, Judson J. incorrectly interpreted the Halsbury’s definition:
merely says that where an amount is considered to be ‘interest’, it is deemed
to accrue from day to day. Unfortunately, the statement was read to mean that a
payment cannot be interest unless it accrues from day to day even
if payable only at intervals. This interpretation of Halsbury has caused
a good deal of misunderstanding as to the meaning of interest.
limiting characteristic placed on Rand J.’s definition of interest in Farm
Security Act is found in Re Balaji Apartments Ltd. v. Manufacturers Life
Insurance Co. where the Ontario High Court of Justice held that in order to
be interest, the payment must be a percentage of the principal sum. Based on
these limiting characteristics to the broad definition of interest contemplated
by Rand J. in Farm Security Act, the Tax Court Judge held that the
payments were not interest because they did not accrue day to day and because
they were not based on the principal outstanding at [any time] but on the
operating surplus of the shopping centre. I will deal with each of these
findings in turn.
the issue of whether the payments accrue day to day, in my opinion, the
appropriate interpretation to be given to daily accrual of interest is that
each holder’s entitlement to interest must be able to be ascertained on a daily
basis. I therefore agree with the respondent that the interpretation of the
quotation from Halsbury should not be read as establishing a legal principle
that “compensation for the use of money is not interest unless it is expressed
on a daily basis.” Indeed, I agree with the respondent when he states that “an
amount paid as compensation for the use of money for a stipulated period can be
said to accrue day-to-day.”
 While the
participating interest in this case was only payable once a year, nonetheless,
it was based on a percentage of the operating surplus for the year. It was,
therefore, capable of being allocated on a day-to-day basis and therefore meets
the test for day-to-day accrual.
more difficult issue is the requirement set out in Balaji Apartments
that the interest must be a percentage of the principal sum. Balaji
Apartments dealt with a mortgage which in addition to the mortgage payments
also required the payment of a percentage of gross annual rentals after a bare
figure was reached. The Court held that the payments related to the gross
income were not interest because they were “not a percentage of, or in any way
related to, the principal sum.” . . .
 In my opinion, the Balaji
Apartments case should not be read as limiting the deductibility of
payments that while not directly related to the principal amount, nonetheless,
are clearly related to that amount. Indeed, this case should be limited to
facts similar to those on which it was decided −
where it is clear that payment in question was in addition to the obligation to
pay interest on the loan. . . .
12(3) provides an additional rule regarding the timing of the recognition as
income of interest
on debt obligations.
The subsection applies to corporations, partnerships, unit trusts or any other
trust of which a partnership or a corporation is a beneficiary. The rule
requires such taxpayers to include in income for a taxation year the interest
on debt obligations that accrues to the taxpayer to the end of the taxation
year or becomes receivable or is received by the taxpayer before the end of
that year, to the extent that it has not been included in the income of the
taxpayer for a previous taxation year.
12(9) applies for the purposes of subsections 12(3), (4) and (11)
and subsections 20(14) and (21). Subsection 12(9) provides that, if a taxpayer
acquires an interest
in a prescribed debt obligation, an amount determined in prescribed manner is
deemed to accrue as interest on the obligation in each taxation year that the
interest in the obligation is held.
7000 of the ITR describes four categories of debt obligations that are
prescribed debt obligations and provides for each such category the prescribed
manner for determining the amount deemed to accrue to the taxpayer as interest
on the debt obligation.
to say, to interpret subsection 12(9) and section 7000 of the ITR, I will
consider the text, context and purpose of those provisions.
introduction of subsection 12(9) in the early 1980s
was accompanied by the following technical note:
Subsection 12(9) authorizes special rules to be provided in the Income Tax
Regulations for determining accrued interest income
on prescribed debt obligations. . . . The special rules to be provided in
the Income Tax Regulations . . . will apply for purposes of subsections
12(3), (4), (8) and (11) and 20(14) to determine the interest to be accrued on
prescribed debt obligations.
technical note simply states that subsection 12(9) authorizes special rules for
determining accrued interest income on prescribed debt obligations.
Fortunately, a more expansive statement of the purpose of these rules was set
out in the November 12, 1981 Department of Finance Budget Papers as follows:
present law individuals have the option of reporting interest income for tax
purposes each year as it accrues or when they actually receive the interest
payment. Lower- and middle-income individuals with modest amounts of investment
income would normally report interest as it accrues in order to make use of the
$1,000 annual exemption for such income. However, higher-income individuals who
purchase certain term deposits, guaranteed investment certificates or other
interest-earning assets may defer tax on their interest income. This deferral
amounts to a significant reduction in the effective tax rate on this income.
moreover, several financial institutions have offered new instruments such as
deferred annuities and deposit certificates which allow substantially longer
deferral of tax over 20 or 30 years and can be attractive to higher-bracket
individuals. To prevent such tax deferral, it is proposed that the taxpayer be
required to report accrued investment income on any given instrument every
third year from the date he acquires it. This will have little impact on low-
and middle-income individuals who normally report interest income each year on
an accrual basis so as to claim the $1,000 investment income exemption. Even if
they are not reporting on this basis they may find that the accrued interest
when added to their income will not be taxable as a result of the exemption.
these statements make clear that the purpose of subsection 12(9) and the
accompanying regulations is to ensure the timely recognition as income of the
total return on prescribed debt instruments. Importantly, the technical note
and budget papers say nothing about recognizing as income amounts that cannot
be ascertained for the taxation year to which subsection 12(9) applies.
categories of prescribed debt obligation are described in paragraphs 7000(1)(a)
through (d) of the ITR. The prescribed manner for determining the interest
income deemed to accrue on each such obligation is set out in paragraphs
7000(2)(a) through (d) of the ITR.
7000(1)(a) of the ITR describes debt obligations on which no interest is
stipulated to be payable. Paragraph 7000(2)(a) of the ITR provides that the
amount deemed to accrue to the taxpayer as interest for a taxation year is the
amount of interest that would be determined in respect of the debt obligation
for that year if the interest on the obligation were computed on a compound
interest basis using the maximum of all the interest rates computed in
accordance with subparagraphs 7000(2)(a)(i) and (ii) of the ITR.
7000(2)(a)(i) of the ITR requires interest to be
computed on the debt obligation in respect of each possible circumstance under
which an interest of the taxpayer in the debt obligation could mature or be
surrendered or retracted. The subparagraph describes the sorts of transactions or events that would occur between the
holder of the interest in the debt obligation and the issuer of the debt
obligation (i.e., the maturity of the debt obligation, the surrender of the
debt obligation or the retraction of the debt obligation). Indeed, there is an
underlying assumption that the circumstances in which these transactions or
events may occur can be identified, presumably by reference to the terms and
conditions of the debt obligation. This assumption is highlighted by the fact
that the subparagraph does not describe transactions or events that would
typically not be governed by the terms and conditions of a debt obligation,
such as a sale of the debt obligation.
each of the possible circumstances described in subparagraph 7000(2)(a)(i) of
the ITR, subparagraph 7000(2)(a)(ii) of the ITR requires the computation of an
interest rate and the determination of a compounding period that result in a
present value, at the date of purchase of the interest in the debt obligation,
of all the maximum payments under the obligations equal to the taxpayer’s cost
of the interest in the debt obligation.
a nutshell, paragraph 7000(2)(a) measures the maximum possible return to the
taxpayer on the taxpayer’s interest in the prescribed debt obligation, based on
the terms and conditions of the obligation, and then requires the taxpayer to
accrue that return as interest. The only uncertainty in the quantification of
the income inclusion results from the use of the maximum possible interest rate
determined under subparagraphs 7000(2)(a)(i) and (ii) of the ITR.
7000(1)(b) describes debt obligations that pay to the holder different
proportions of principal than of interest. Paragraph 7000(2)(b) provides that the amount deemed to accrue to the taxpayer
as interest for a taxation year is the total of all amounts each of which
is the interest that would be determined in respect of the taxpayer’s interest
in a payment under the obligation if interest thereon for that year were
computed on a compound basis using the “specified cost” of the interest and the “specified interest rate”.
These terms are defined in subparagraphs 7000(2)(b)(i) and (ii) of the ITR
interest rate” is the maximum interest rate computed in respect
of the taxpayer’s total interest in the debt obligation using essentially the
same methodology as found in subparagraphs 7000(2)(a)(i) and (ii) of the ITR. The
“specified cost” of the
taxpayer’s interest in a payment is the present value of the payment at the
date of purchase of that interest, computed using the specified interest rate.
7000(1)(c) describes debt obligations not otherwise described in paragraphs (a)
or (b) in respect of which it can be determined that the interest payable will
be greater in a future year than in a given previous year.
paragraph 7000(2)(c.1) does not apply, subparagraphs 7000(2)(c)(i) and (ii)
provide that the amount deemed to accrue to the taxpayer as interest for a
taxation year is the greater of the maximum amount of interest on the debt
obligation in respect of the year and the maximum amount of interest that would
be determined if the maximum interest rate were computed using essentially the
same methodology as found in subparagraphs 7000(2)(a)(i) and (ii) of the ITR,
except that the present value is calculated at the date of issue of the
obligation rather than the date of purchase of the interest, and the principal
of the obligation is used rather than the taxpayer’s cost.
7000(2)(c.1) of the ITR applies instead of paragraph 7000(2)(c) of the ITR if
the interest rate on the debt obligation for each period that the obligation is
outstanding is fixed at the date of issue and the interest rate applicable for
each time is not less than the rate applicable for all previous times. The
paragraph uses a somewhat different methodology than paragraphs 7000(2)(a), (b)
and (c) of the ITR to determine the amount deemed to accrue to the taxpayer as
interest for a taxation year, but the computation of the interest rate is still
based on known inputs, including the sum of all payments under the obligation
after its acquisition by the taxpayer, and on assumptions about when the
taxpayer’s interest in the obligation will mature, be surrendered or be
7000(1)(d) of the ITR describes debt instruments in respect of which the amount
of interest to be paid in respect of any taxation year is, under the terms and
conditions of the debt obligation, dependent on a contingency existing after
the end of the year.
text of paragraph 7000(1)(d) of the ITR raises two questions, each of which
must be answered in the affirmative in order for the debt obligation to be one described
in that paragraph:
the taxpayer acquired an interest in a debt obligation that is not described in
paragraphs 7000(1)(a) to (c) of the ITR?
the terms and conditions of that debt obligation, is the amount of interest to
be paid in respect of any taxation year dependent on a contingency existing
after the end of that taxation year?
second question raised by the provision focusses on whether, under the terms
and conditions of the debt obligation, the amount of interest paid in respect
of any taxation year is subject to a contingency that will not arise until
after the end of the year. The text suggests that the mischief being addressed
is the deferral of the recognition as income of interest on the debt obligation
because of the contingency. The text also suggests that the elimination of the
contingency resolves the issue of how much interest is to be paid under the
terms and conditions of the debt obligation in respect of the taxation years of
the taxpayer to which the contingency applies.
Subparagraph 7000(2)(d) of the ITR provides that the amount deemed
to accrue to the taxpayer as interest for a taxation year is the maximum amount
of interest on the prescribed debt obligation that could be payable in respect
of that taxation year. When read together with paragraph 7000(1)(d) of the ITR,
the text of paragraph 7000(2)(d) requires a determination, for each taxation
year to which the contingency applies, of the maximum amount of interest that
could be paid in respect of that year under the terms and conditions of the
debt obligation if the contingency did not exist. The assumption underlying
paragraph 7000(2)(d) is that such an amount is capable of determination, which
is consistent with the approach taken in paragraphs 7000(2)(a) through (c.1) of
approach taken in each of paragraphs 7000(2)(a) through (d) is consistent with
the general proposition that an amount is not recognized as income under the
ITA unless the amount can be ascertained with some reasonable degree of
While a statutory provision enacted by Parliament may of course require the
recognition of an amount that cannot otherwise be determined (i.e., phantom
income), the language to bring about such a result would have to be clear. In
this case, neither the text of subsection 12(9) of the ITA and section 7000 of
the ITR read in context nor the purpose of these provisions as described at the
time of their introduction supports such a result.
Respondent says that I should assume a crystallizing event and then calculate
what the 2009 LP would be entitled to on that event by reference to the
notional value of the Linked Notes at that time. The difficulty I have with
this approach is that the amount so calculated has no correlation to what the
2009 LP may actually be entitled to under the terms of the Linked Notes on an
actual crystallizing event.
Linked Notes do no more than provide the 2009 LP with the possibility of a
return to be determined upon a crystallizing event such as the maturity of the
Linked Notes. Both the existence of the return and the amount of the return on
the Linked Notes are dependent on the occurrence of a crystallizing event. In
the absence of an actual crystallizing event there is simply no way of knowing
the actual amount that the 2009 LP is entitled to be paid under the terms of
the Linked Notes and therefore there is no amount to reallocate to avoid a
deferral of income. This is not an inappropriate result because in fact there
is no deferral of the return on the Linked Notes because until an actual
crystallizing event there is no return to defer. The result simply follows the
uncertainty attached to such debt obligations.
the existence of a crystallizing event does not fix this issue because the
assumed event only establishes a notional entitlement and amount for the
relevant period. This is in stark contrast to paragraphs 7000(2)(a) through
(c.1), which use assumed events such as maturity and retraction to determine
the portion of the actual return on the debt obligation that would be earned by
the taxpayer in the taxation year if that return was apportioned in a manner
that did not defer the recognition of the return as income.
periodic calculation of the notional value of the Linked Notes required by
section 27 of the Linked Notes is not equivalent to the return that may be
earned by the 2009 LP following a crystallizing event. The 2009 LP has no claim
to that value and, in the absence of an actual crystallizing event, the value
of the Linked Note at a particular point in time is not indicative of the
amount that the 2009 LP may be entitled to by way of a return for the period on
the occurrence of an actual crystallizing event in the future.
summary, the Respondent’s approach ignores the fact that an assumed crystallizing
event does not allow for the calculation of a portion of the amount that the
2009 LP is actually entitled to under the Linked Notes and results in the allocation
of phantom income that may never be earned by the 2009 LP. The text, context
and purpose of the provisions provide no basis on which to conclude that
Parliament intended the approach taken in paragraph 7000(2)(d) to depart so
markedly from the approach taken in paragraphs 7000(2)(a) through (c.1) of the
also note that, while this is by no means determinative, the CRA has
consistently applied paragraph 7000(2)(d) on the basis that the return on the
debt obligation must be known in order for a maximum amount to be determined
under that paragraph.
the foregoing reasons, I find that subsection 12(9) of the ITA and section 7000
of the ITR do not require the 2009 LP to accrue an amount as interest on the
F. The Interest
Payable on the Unit Loans Is Not Deductible Under Paragraph 20(1)(c)
Respondent submits that if no interest is deemed by subsection 12(9) of the ITA
and paragraph 7000(2)(d) of the ITR to accrue to the 2009 LP on the Linked
Notes then the deduction from income claimed by the Appellants for interest
payable on the Unit Loans should be denied because the Unit Loans are not
borrowed money used for the purpose of earning income from a business or
property but are borrowed money used for the purpose of realizing capital gains.
The Respondent does not dispute that the other three requirements of
subparagraph 20(1)(c)(i) have been met.
Appellants submit that even if their purpose in using the Unit
Loans to purchase LP Units was to realize a capital gain, the interest is
deductible under subparagraph 20(1)(c)(i) of the ITA. I will address this
 In Stewart v. Canada, 2002 SCC 46,  2 S.C.R. 645 (“Stewart”), the Supreme Court of Canada stated
at paragraph 68:
respect to whether or not an anticipated capital gain should be included in
assessing whether the taxpayer has a reasonable expectation of profit, we
reiterate that the expected profitability of a venture is but one factor to
consider in assessing whether the taxpayer’s activity evidences a sufficient
level of commerciality to be considered either a business or a property source
of income. Having said this, in our view, the motivation of capital gains
accords with the ordinary business person’s understanding of “pursuit of
profit”, and may be taken into account in determining whether the taxpayer’s
activity is commercial in
course the mere acquisition of property in anticipation of an eventual gain
does not provide a source of income for the purposes of s. 9; however, an
anticipated gain may be a factor in assessing the commerciality of the taxpayer’s
overall course of conduct.
9(1) of the ITA states that “a
taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year”. In
Stewart, the Court states that a capital gain is not income from a
source described in section 9 of the ITA, which can only mean that a capital
gain is not income from a business or property.
While this proposition is self-evident and can be further justified by a
detailed review of the relevant provisions of the ITA and the history of the
taxation of capital gains under the ITA, in my view this brief analysis is
sufficient to reject the Appellants’ position that, for the purposes of
paragraph 20(1)(c), a reasonable expectation of income includes a reasonable
expectation of capital gains.
Appellants used the Unit Loans to acquire LP Units. The Program gave the
Appellants three possible ways of realizing on their LP Units: on the maturity
of the Program on December 31, 2028; by requesting the redemption of the LP
Units after the ninth year of the Program;
or by selling the LP Units to a third party approved by the 2009 LP and FT. Mr. Gordon
testified that exit on maturity was the “expected route”.
The other Appellants either explicitly testified that they expected to hold the
LP Units until the maturity of the Program or appeared to assume that that was
what would occur under the Program.
term sheets for the Program described two possible scenarios regarding the LP
Units: Scenario A and Scenario B. Mr. Gordon described these two scenarios
Scenario A was intended to provide an analysis as to the financial
repercussions on maturity if a unit holder held the units to maturity. Scenario
B was designed to indicate the financial repercussions or results for somebody
who was able to sell their units prior to maturity.
In that case, it was assumed that the units themselves were treated
as capital property. As a result, the disposition of the sale of those units to
a third party would trigger a capital gain income inclusion as opposed to a
full income inclusion.
the five other Appellants, those who appeared to have some understanding of the
two scenarios testified that Scenario A yielded income and was the likely
scenario because there was no market or buyer for the LP Units. Two Appellants
testified that they had no understanding of the two scenarios.
Dr. Platnick stated in cross-examination that he hoped for scenario B.
2009 LP’s sole source of income is the Linked Notes. The Linked Notes provide a
return to the 2009 LP, determined on maturity, equal to the
greater of two amounts, each computed by reference to a notional portfolio
(Portfolio A and Portfolio B). Regardless
of the amount Leeward owes to the 2009 LP on the maturity of the Linked Notes,
the amount that will be paid by Leeward to the 2009 LP in satisfaction of the
Linked Notes cannot be greater than the assets of Leeward at the time less the
amount payable by Leeward to TGTFC under the TGTFC Notes. The assets of Leeward
are comprised of the Man Notes and the loans to DT.
 Notwithstanding this practical limitation, the 2009 LP will be
required to include in income under paragraph 12(1)(c) the full amount of the
return on the Linked Notes. If Leeward does not pay the full amount of the
return owing to the 2009 LP on the maturity of the Linked Notes, the 2009 LP is
expected to claim a deduction from income under paragraph 20(1)(p) equal to the
 In Ludco, the Supreme Court of Canada stated:
. . . In the result, the requisite test to determine the purpose for
interest deductibility under s. 20(1)(c)(i) is whether, considering all the
circumstances, the taxpayer had a reasonable expectation of income at the time
the investment was made.
Reasonable expectation accords with the language of purpose in the
section and provides an objective standard, apart from the taxpayer’s
subjective intention, which by itself is relevant but not conclusive. It also
avoids many of the pitfalls of the other tests advanced and furthers the policy
objective of the interest deductibility provision aimed at capital accumulation
and investment, as discussed in the next section of these reasons.
 The Respondent does not dispute that the LP Units are a potential
source of income to the Appellants. Rather, the Respondent submits that the
Appellants did not acquire their LP Units for the purpose of earning the income
that may be allocated to them by the 2009 LP on the maturity of the Linked
Notes but for the purpose of realizing a capital gain on the disposition of the
LP Units. The Respondent provides the following submissions in support of this
490. In light of the evidence and all of the circumstances, there
is no reasonable basis to conclude that EquiGenesis or the participants
expected the linked notes to mature, thus realising income, in particular:
a) Equigenesis is in the
business of promoting tax-assisted investments and its objective is to maximize
the tax benefits for his (sic) clients. Looking at the term sheet, the
single greatest tax benefit described on it is scenario B, which has the
investors realizing a capital gain in year 20.
b) Equigenesis is constantly
trying to enhance the structures to maximise the return of the investors, and
in particular the tax benefits. Amongst the enhancements for the 2010 taxation
year is the new exit strategy, which results in a taxable capital gain of nil
to the participants.
c) The participants chose to
participate in the EQ09 Program primarily for its tax benefits.
d) There is no evidence of any
factors that would prevent EquiGenesis from facilitating the disposition of
units or assets of the Partnership in year 2028, such that the participants
would realize capital gains, instead of partnership income.
e) Investors preferred the
Option B and viewed option A as a worst case scenario.
491. As a result, this Court should conclude that the appellants
did not have a reasonable expectation that they would realize gross income from
their investments in EQ09 LP.
 I am unable to accept the Respondent’s position. The oral and
documentary evidence clearly establishes that there was no market for the LP
Units and that there was no identifiable buyer for the LP Units. The oral and
documentary evidence also clearly establishes that no written representations
were made to the Appellants that their LP Units would be purchased prior to the maturity of the Program. As for oral
representations, I accept the evidence of the Appellants that no oral
representations were made to them regarding the purchase of their LP Units
prior to the maturity of the Program.
 Mr. Gordon did describe four situations in which participants
in earlier programs sold partnership units on their own to relatives or a
friend and two situations in which EquiGenesis was able to find purchasers for
limited partnership units. However, Mr. Gordon’s evidence does not support the conclusion
that there is a market for the LP Units or that there is a buyer for the LP
Units. It only establishes that it may be possible to sell the LP Units.
 The points raised by the Respondent in paragraphs 490 a) through e)
of her submissions do not support the position that the LP Units were acquired
by the Appellants solely for the purpose of realizing a capital gain.
 The points raised in paragraphs a) and b) support only a possible
inference that the Appellants’ purpose in using the Unit Loans to acquire LP
Units was to realize a capital gain. The evidence of the Appellants and the
objective evidence of the elements of the Program found in the documents
implementing the Program rebut any such inference.
 The point raised in paragraph c) is a description of the Appellants’
tax motives. The Appellants’ motives are not the same as the Appellants’
purpose in using the Unit Loans to purchase LP Units.
The point raised in paragraph
d) is a roundabout way of saying that a sale of the LP Units is possible.
However, the fact that a sale of the LP Units is possible says nothing about
whether the Appellants’ purpose in using the Unit Loans
to acquire LP Units was to realize a capital gain or earn income. It simply
establishes that the Appellants could sell their LP Units. This possibility
must be viewed in the context of the oral and documentary evidence that there
was no market for the LP Units and no written or oral representations to the
Appellants that their LP Units would be purchased. In the circumstances, a sale
of the LP Units is merely a possibility and not a purpose of acquiring the LP
 The point raised in paragraph e) is not supported by the evidence. At
best, the Appellants who understood the two scenarios recognized that Scenario
B provided a better tax result and hoped that scenario B would transpire. In
fact, the strongest statement on this point was Dr. Platnick’s concession
in cross-examination that he hoped for scenario B. Given how the ITA
differentiates between capital gains and income, it is certainly not surprising
that the Appellants would prefer to realize a capital gain rather than earn
ordinary income in the same amount. However, evidence of wishful thinking in
hoping for a result that the objective evidence establishes to be unlikely is
not persuasive evidence that the Appellants’ purpose in using the Unit Loans to
purchase LP Units was to realize capital gains and not income.
 I also note that, even though the Respondent did not concede that
the LP Units are a potential source of income to the Appellants, for the
reasons that follow I would draw the conclusion, based on the evidence, that
the LP Units are a potential source of income and that the Appellants’
expectation at the time of the investment of earning gross income from the LP
Units was reasonable.
 The structure of the Program is such that the Appellants’ only
legally enforceable sources of return on the LP Units are the right to redeem
the LP Units after nine years but before the maturity of the Program and the
right to a share of the income of the 2009 LP realized on the maturity of the
Linked Notes on December 31, 2028.
 Mr. Gordon stated in his testimony that redemption of the LP
Units prior to the maturity of the Program would trigger full inclusion in income
for the redeeming Participant. As well, the redeeming Participant would be
responsible for any shortfall between the amount paid to the Participant by the
2009 LP and the balance owing on the Participant’s Unit Loan and TGTFC Loan. The Respondent has not suggested a different result on the
redemption of LP Units prior to the maturity of the Program.
 Similarly, the evidence establishes that the maturity of the Program
is expected to result in income to the Appellants although the quantum of that
income is not known. The potential for income results from the maturity of the
Linked Notes and the allocation by the 2009 LP of any resulting income to the
holders of the LP Units. The term sheets for the Program describe the tax
consequences to Participants of this allocation as scenario A.
 The existence of the legal right to payment by the 2009 LP on the
maturity of the Program is an essential aspect of the Program since it provides
the means by which the Participants can repay their outstanding debts to FT
without using their own resources. For them to do that the amount received from
the 2009 LP on the maturity of the Program must at least be equal to the
principal amount of the loans to the Participants outstanding on December 31,
2028, which amount will be significantly greater than the original
investment in the 2009 LP.
 The Appellants’ legal right to payment by the 2009 LP on the
maturity of the Program is not mere window dressing. This right is
indirectly backed up by the assets of Leeward, which are comprised of the Man
Notes and the accumulating amounts owed to Leeward by
DT less Leeward’s much smaller obligation to TGTFC under the TGTFC Notes. The
assets of DT are the accumulating amounts owed to DT by FT and the assets of FT
are the accumulating amounts owed to FT by the Participants.
 The fact that there is a practical limit to the amount that may be
paid by Leeward to the 2009 LP under the terms of the Linked Notes and that the
2009 LP may claim a deduction from income under paragraph 20(1)(p) does not
detract from the real possibility that the Appellants will earn income from
their LP Units because, even if the practical limit is reached, the 2009 LP
will still have substantial gross income that must be allocated to the holders
of LP Units. Accordingly, this possibility does not turn an objectively
reasonable expectation of gross income into an unreasonable expectation.
 Finally, the fact that the reasonably expected gross income is
expected to be realized on December 31, 2028 is not a consideration raised by
paragraph 20(1)(c) of the ITA. The paragraph dictates the timing of the
deduction of the interest expense and does not require that the deduction be
matched to the income from the business or property. This point is reinforced
by the fact that the matchable expenditure rules in section 18.1 do not apply
to deductions provided for under section 20.
 On the basis of the foregoing, I conclude that the interest payable
by the Appellants on their respective Unit Loans is deductible under
subparagraph 20(1)(c)(i) of the ITA as provided for in that subparagraph. As
well, since the analysis is essentially the same, the Fees incurred by the
Appellants are also deductible in accordance with the applicable provisions of
 The appeals are allowed and the reassessments of the Appellants are
referred back to the Minister for reconsideration and reassessment in
accordance with the foregoing conclusions.
at Ottawa, Canada, this 8th day of September 2017.