Docket: 2014-3401(IT)G

BETWEEN:

JAMES T. GRENON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of The RRSP Trust of James T. Grenon (552-53721) by its Trustee CIBC Trust Corporation – 2014-4440(IT)G

Appeal heard on February 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 2019 and September 9, 10, 11, 12 13, 2019, at Winnipeg, Manitoba.

Before: The Honourable Justice Guy R. Smith

Appearances:

Counsel for the Appellant James T. Grenon:	Cy M. Fien Brandon Barnes Ari M. Hanson
Counsel for the Respondent:	Ifeanyi Nwachukwu Tanis Halpape Christopher Kitchen Jeremy Tiger

JUDGMENT

In accordance with the attached Reasons for Judgment, the appeal from Notices of Reassessment made by the Minister of National Revenue on February 28, 2013 in respect of the 2008 and 2009 taxation years, pursuant to subsection 56(2) of the Income Tax Act AND the appeal from the Notices of Assessment made on March 1, 2013 in respect of the 2004 to 2011 taxation years, pursuant to subsection 204.1(2.1) of the Income Tax Act, are hereby allowed.

The parties will have 60 days from the date of hereof to provide written submissions regarding costs. Such submissions shall not exceed 15 pages for each party.

Signed at Ottawa, Canada, this 9th day of April 2021.

“Guy R. Smith”

Docket: 2014-4440(IT)G

BETWEEN:

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

BY ITS TRUSTEE CIBC TRUST CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of
James T. Grenon – 2014-3401(IT)G

Appeal heard on February 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 2019 and September 9, 10, 11, 12 13, 2019, at Winnipeg, Manitoba.

Before: The Honourable Justice Guy R. Smith

Appearances:

Counsel for the Appellant CIBC Trust	John J. Tobin Linda Plumpton James Gotowiec
Counsel for the Respondent:	Ifeanyi Nwachukwu Tanis Halpape Christopher Kitchen Jeremy Tiger

JUDGMENT

In accordance with the attached Reasons for Judgement, the appeal from Notices of Assessment made by the Minister of National Revenue on March 6, 2013 in respect of the 2004 to 2009 taxation years, pursuant to subsection 146(10.1) of the Income Tax Act is allowed and the appeal is referred the back to the Minister for reconsideration and reassessment on that basis that the income of the RRSP Trust received from the Income Funds (described herein as the Distribution Transactions) during the 2005 taxation year, shall be reduced by $136,654,427;

The appeal from Notices of Reassessment dated March 6, 2013 in respect of the 2004 to 2009 taxation years, pursuant to subsection 207.1(1) of the Income Tax Act, is hereby dismissed.

The parties will have 60 days from the date of hereof to provide written submissions regarding costs. Such submissions shall not exceed 15 pages for each party.

Signed at Ottawa, Canada, this 9th day of April 2021.

“Guy R. Smith”

Table of Contents

I. OVERVIEW 1

II. BACKGROUND FACTS 3

a) The Appellant 3

b) The Income Funds 5

c) The acquisition of units by the RRSP Trust 8

d) The income distributions made by the Income Funds 11

e) Tom 2003-1 Income Fund 12

f) Tom 2003-2 Income Fund 13

g) Tom 2003-3 Income Fund 14

h) Tom 2003-4 Income Fund 15

i) Tom 2006-5 Income Fund 15

j) Tom 2006-8 Income Fund 16

k) The Fact witnesses 16

III. THE ASSESSMENTS 20

a) Grenon Appeal - Part 1 Reassessments 20

b) Grenon Appeal - Part X.1 Assessments 20

c) RRSP Trust Appeal - Part 1 Assessments 21

d) RRSP Trust Appeal - Part XI.1 Reassessments 21

IV. THE ISSUES 21

a) Grenon Appeal - Part 1 Reassessments and Part X.I Assessments 21

b) RRSP Trust Appeal - Part 1 Assessments and Part XI.1 Reassessments 22

V. PRELIMINARY ISSUES 22

a) Admissibility of the Affidavit of Helen Little 23

b) Admissibility of certain Read-ins 26

VI. RELEVANT STATUTORY PROVISIONS 27

a) The RRSP legislative framework 27

b) Mutual Fund Trusts 39

c) Indirect Payments 45

d) General Anti-Avoidance Rule (“GARR”) 45

VII. ANALYSIS 49

A. Whether the Income Funds were “Qualified Investments”? 49

a) Overview – “a lawful distribution…to the public” 49

b) Summary of the Alleged Deficiencies 57

c) The burden of proof in tax appeals 59

d) General principles of statutory interpretation 62

e) The meaning of “distribution” in subparagraph 4801(a)(i)A 63

f) The meaning of “lawful” in subparagraph 4801(a)(i)A 68

g) Failure to disclose the position held 74

h) The subscription and acquisition of units by minors 76

i) The subscription of units by adults for other adults 86

j) The requirement that units be purchased “as principal” 88

k) The requirements of Regulation 4900(1)(d.2) 94

l) Conclusion 95

B. The Sham Doctrine 96

C. Window Dressing 104

D. The Application of Subsection 56(2) 109

E. The Excess Contributions 117

F. Statute-Barred Years 121

a) The Grenon Appeal 121

b) The RRSP Appeal 125

G. The application of GARR 138

a) Was there a tax benefit? 140

b) Was there an avoidance transaction? 142

c) If so, was the avoidance transaction ‘abusive’? 145

d) Determination of tax consequences 154

e) Analysis and Conclusion 156

VIII. CONCLUSION 159

Appendix A – The Read-ins 162

 

Citation:2021 TCC 30

Date:20210409

Docket: 2014-3401(IT)G

BETWEEN:

JAMES T. GRENON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Docket: 2014-4440(IT)G

REASONS FOR JUDGMENT

Smith J.

I. OVERVIEW

[1] James T. Grenon (the “Appellant”) was the annuitant of a Registered Retirement Savings Plan (the “RRSP Trust”) in which he had accumulated substantial assets. CIBC Trust Corporation (“CIBC Trust”) acted as trustee.

[2] The Appellant established and promoted several income funds (the “Income Funds”) each of which raised a relatively modest amount of capital relying on the exempt distribution rules of the provinces of Alberta and British Columbia. The investors in each fund were essentially the same but the Appellant also participated, acquiring units personally and through investment vehicles he owned or controlled.

[3] Following the closing of the exempt distributions, the Appellant (acting alone or in concert with two other individuals and their respective RRSPs) then arranged for the RRSP Trust to acquire in excess of 99% of the units of the Income Funds.

[4] The Income Funds then invested in flow-through investment vehicles that served as conduits for the acquisition of business ventures or investments controlled directly or indirectly by the Appellant, the profits of which flowed back to the Income Funds and were distributed to unitholders, including the RRSP Trust.

[5] It is not disputed that the Appellant intended from the beginning to structure the Income Funds as qualified investments for RRSP purposes and one of the key issues in this appeal is whether they met the definition of a “mutual fund trust”.

[6] The Minister of National Revenue (the “Minister”) has taken the position that the steps undertaken to establish the Income Funds were not legally effective such that they were not a “qualified investment” for RRSP purposes or alternatively, that they were a sham or mere window dressing intended to allow the Appellant to manipulate the RRSP regime by using the funds in the RRSP Trust to acquire and actively manage businesses or investments, the profits of which flowed back to the RRSP Trust where they continued to accrue on a tax-exempt basis. The Minister has also relied on the general anti-avoidance rule (“GARR”).

[7] The appeals herein were heard on common evidence with the appeals in Magren Holdings Ltd. v. Her Majesty the Queen, 2017-486(IT)G; 2176 Investments Ltd. v. Her Majesty the Queen, 2017-605(IT)G; and Magren Holdings Ltd. v. Her Majesty the Queen, 2017-606(IT)G (the “Corporate Appeals”). Reasons for Judgment in respect of the Corporate Appeals will be issued separately.

[8] The “Appellant” will refer to Mr. Grenon in his personal capacity and as the annuitant of the RRSP Trust and the “Appellants” will refer to both Mr. Grenon and the CIBC Trust. Unless otherwise indicated, the 2004 to 2011 taxation years will be referred to as the relevant period (the “Relevant Period”).

[9] Unless otherwise indicated, all references to legislative provisions in these Reasons for Judgment are references to the legislative provisions of the Income Tax Act [1] , (the “Act”) including Regulations promulgated under the Act, that relate to the assessments or reassessments and the taxation years in question.

II. BACKGROUND FACTS

[10] The Appellant testified on his own behalf but also called four fact witnesses, all of whom had acquired units in the Income Funds. Two other witnesses testified on behalf of the CIBC. Their respective testimony will be reviewed below.

[11] Alan B. Martyszenko testified as an expert witness but his testimony relates primarily to the Corporate Appeals and will not be reviewed herein.

[12] The Minister did not call any witnesses but relied on the affidavit of Helen Little, an auditor with the Canada Revenue Agency (“CRA”).

[13] The Appellant completed a law degree at University of Manitoba in 1980 and practiced law in Alberta for a short period of time before pursuing an interest in corporate finance and investments. He resided in Alberta during the Relevant Period but became a non-resident when he emigrated to New Zealand in 2012.

[14] Early in his career, the Appellant became involved with a company known as Tom Capital Associates Inc. (“Tom Capital”) that focused on general corporate finance including loans and distressed lending. During the Relevant Period, it was controlled by Grencorp Management Inc. (“GMI”), wholly-owned by the Appellant.

[15] The Appellant also owned or controlled numerous other companies or entities that were used in the Income Funds structure including 100% of the shares of 1042946 Alberta Inc. (“1042 Inc.”) and 1019109 Alberta Inc. (“1019 Inc.”) that acted as general partners as well as participating interests in Colborne Capital Corporation (“CCC”) and Landcraft Development Corporation (“Landcraft”).

[16] The Appellant was also involved in the early stages of the Alberta oil and gas industry and as a result of these activities, gained significant personal wealth.

[17] By 2003, the Appellant had accumulated substantial assets in the RRSP Trust including approximately $39 million in cash and cash equivalents and a 58% interest in Foremost Industries Income Fund (“FMO”), a publicly traded mutual fund trust created in 2001, of which he was a trustee.

[18] By March 2004, the units of FMO were valued at $46 million and the total value of the RRSP Trust at that point in time was approximately $90 million.

[19] It was apparent that the Appellant was a sophisticated individual whose knowledge of income tax law surpassed that of ordinary taxpayers. He readily admitted that he frequently consulted the Act and generally followed developments in income tax law. He described this as one of his hobbies.

[20] With respect to the RRSP Trust, the Appellant explained that he was not interested in passive investments or in a diversified portfolio of publicly traded companies. He wanted to be as actively involved as possible in the management of the investments acquired. He understood the financial consequences of withdrawing funds from an RRSP which he described as financial “suicide”.

[21] With respect to the structure of his investments or businesses, the Appellant explained that he preferred a flow-through structure using business trusts or limited partnerships that he viewed as more efficient from an income tax point of view.

[22] With respect to the Income Funds, the Appellant’s objective was to broaden his RRSP investment horizon and to provide flexibility in the management of his investments in a way that was not normally possible within an RRSP.

[23] He was also not especially interested in raising large amounts of capital from a wide array of investors. As will be seen below, he only sought to raise as much capital from as many investors as was needed to meet or exceed the minimum requirements of a “mutual fund trust” as defined by the Act.

[24] Since he had already accumulated substantial assets in the RRSP Trust, what he needed was an appropriate vehicle to invest those funds. He was of the view that the Income Fund structure was “best aligned with his investment objectives.”

[25] With respect to at least two Income Funds, the Appellant collaborated with two other business associates, namely Bruce MacLennan (“MacLennan”) and Angus Sutherland (“Sutherland”). Both individuals acquired units of two Income Funds, accepting a transfer from the Grenon RRSP in exchange for cash from their respective RRSP’s (the “MacLennan RRSP” and “Sutherland RRSP”) and assumed various roles in the Income Fund structure. They acted as trustee of some funds or as directors of various companies that acted as general partners. As will be seen in greater detail below, the MacLennan RRSP and Sutherland RRSP each held a 49% interest in two Income Funds.

[26] Although the Appellant was the promoter of all the Income Funds, the Minister has described all three individuals as insiders (the “Insiders”) in connection with the Income Fund structure. According to the Minister’s assumptions [2] “the structures were crafted so that Insiders could obtain a number of tax related benefits from these non-arm’s length structures” including the following (the Minister refers to the Income Funds as the “Promoted Funds”):

- The reduction and postponement of taxes payable by Grenon and various businesses owned by Grenon, through the payment of interest and management fees to related entities;

- The deferral of tax on the distribution of income to the various RRSP Trusts held by the Insiders, including the Grenon RRSP Trust, income that would otherwise be distributed as dividends, or otherwise, subject to tax;

- The avoidance of Part 1 and Part X1.1 tax on non-qualifying investments held by the Insiders’ RRSP Trusts, including the Grenon RRSP Trust;

-The avoidance of Part X.1 tax on excess amounts contributed to the Grenon RRSP Trust in respect of the amounts that the Grenon RRSP Trust received from the Promoted Funds.

[27] The Income Funds that are relevant to these appeals were established in 2003 and 2006. The 2003 series of Income Funds (described as Tom 2003-1, Tom 2003-2, Tom 2003-3, Tom 2003-4) were established in Alberta by separate deeds of trust dated March 14, 2003. The 2006 series of Income Funds (known as Tom 2006-5 and Tom 2006-8) were similarly established on June 30, 2006.

[28] Each Income Fund undertook a first distribution of units to 171 Investors (the “First Distribution”) relying on a prospectus exemption pursuant to the securities legislation of the provinces of Alberta and British Columbia (“BC”) known as the “Offering Memorandum Exemption” (“OME”).

[29] The units in the 2003 series of Income Funds were distributed pursuant to the OME requirements described in Part 4 of Multilateral Instrument 45-103 Capital Raising Exemptions. [3] The units in the 2006 Income Funds were issued pursuant to the OME requirements described in Part 2 of National Instrument 45-106 Prospectus and Registration Exemptions [4] . The OME requirements of Multilateral Instrument 45-103 and National Instrument 45-106 (the “Instruments”) are substantially the same and where there are differences, they are not material in these appeals.

[30] An Offering Memorandum (“OM”) was prepared for each Income Fund indicating that a minimum of 100 units (a “block of units”) valued at $7.50 per unit for a total of $750 would be issued to each investor, subject to a minimum of 160 investors (the “Investors”). All units had the same rights. The investment process involved delivery of the OM to prospective investors who were then required to sign the risk acknowledgment (the “Risk Acknowledgment”) and subscription agreement (the “Subscription Agreement”) forms.

[31] Each Income Fund allegedly issued units to 171 Investors thus raising approximately $128,250, subject to nominal legal and accounting fees. As explained by the Appellant, the minimum subscription amount and minimum number of Investors, was established by him with the intention that it meet or exceed the minimum requirements of a “mutual fund trust”, as defined by the Act.

[32] The Appellant participated as an Investor in the First Distribution acquiring a block of units for himself but additional units were acquired by entities owned or controlled by him including Grencorp, Tom Capital, Tom Capital Consulting Corp and Tom Consulting Limited Partnership. All were included as part of the Investors.

[33] As will be seen in greater detail below, the units were promoted and distributed to the Appellant’s immediate and extended family members, friends, employees, business associates and others with whom he was not as closely connected. In any event, it is not disputed that Investors who acquired units in the 2003 and 2006 series of Income Funds were essentially the same persons. Additionally, I find that all Investors were residents of Alberta or BC.

[34] The OM indicated that it was a “blind pool offering” or “junior capital pool” and that the business would be identified by trustees at a later date. It indicated that investors would be “restricted from selling their units for an indefinite period to time” but that the Appellant would provide liquidity to those who might wish to redeem their units at cost (though this never occurred). It also indicated that the Appellant would “invest at least $1,000,000 in the Fund” and that he or other trustees would acquire at least 66.66% of the units, thus allowing them “to substantially control the Fund”.

[35] Each OM contained a certificate indicating: “This Offering Memorandum does not contain a misrepresentation”. It was signed by the Appellant as trustee and promoter and included the following statement:

No securities regulatory authority has assessed the merits of the Units or reviewed this offering memorandum. Any representation to the contrary is an offence. This is a risky investment (…)

[36] Finally, the OM contained an explanation of the “Tax Status of the Fund” indicating that, subject to certain conditions, it would be a “unit trust” and a “mutual fund trust” and thus a “qualified investment for Exempt Plans”. It added that if the fund ceased to qualify as a “mutual fund trust”, investors who acquired units in an exempt plan would have to pay a 1% tax on the fair market value of the units and report any income or gains personally.

[37] Upon completion of the First Distribution, the Appellant selected and arranged for the appointment of the trustees of the Income Funds, including Bruce MacLennan and Deborah Nickerson, as well as various legal counsel.

[38] As will be seen in greater detail below, the income fund structure generally included a series of trusts described as fund venture trusts (“FVT’s”) wholly-owned by the Income Funds. The FVT’s in turn held 99.99% of the units of a master limited partnership (“MLP”) that established a series of limited partnerships, as required, to acquire various investments or businesses. A corporation generally wholly-owned or controlled by the Appellant or other Insiders acted as general partner and held a 0.01% interest. The 2006 series of Income Funds did not use an FVT and investments were held directly.

[39] Following completion of the First Distribution (including the filing of a report with the Alberta and BC securities commission), the Appellant undertook a second distribution of units in favour of his RRSP Trust which resulted in a substantial dilution of the initial Investors’ aggregate holdings.

[40] The table below provides a detailed breakdown of the subscriptions made by the RRSP Trust in the 2003 and 2006 series of Income Funds, setting out the date of the subscription, the number of units acquired, the value of the units and the subscription amount, collectively referred to as the second distribution (the “Second Distribution”): [5]

Subscriptions made by the RRSP Trust in the Income Funds

2003-1 Income Fund

2003-2 Income Fund

2003-3 Income Fund

2003-4 Income Fund

2006-5 Income Fund

2006-8 Income Fund

[41] The total amounts are further summarized in the table below. The RRSP Trust acquired units of the 2003 Income Funds and the 2006 Income Funds, valued at approximately $245 million and $69 million, respectively:

Total number and value of units acquired by the RRSP Trust [6]

[7]

[42] As a prerequisite to the acquisition of units in the Income Funds (the “Acquisition Transactions”), CIBC Trust required delivery of certain documents including copies of the OM, the subscription documents and a legal opinion from a reputable law firm to confirm that the Income Funds were qualified investments. The process and documentation required was more fully explained by Kerri Calhoun and Sabrina Tam, employees of the CIBC, whose testimony is summarized below.

[43] A total of twelve legal opinions were issued, one for each Acquisition Transaction (collectively, the “Legal Opinions”). The Legal Opinions were set out on the law firm’s letterhead and addressed to CIBC Trust. They contained four paragraphs including the following:

For the purposes of this opinion, we have relied upon the facts represented to us by James T. Grenon in the form of the Trustee’s Certificate attached hereto and other matters as we have considered necessary or appropriate for the purpose of this opinion.

[44] Four of the Legal Opinions were distinct in that they included a caveat that the facts represented in the Trustee’s Certificate (the “Certificates”) had not been “independently verified” and that if the facts differed “from those presented (…) this opinion may not be valid.” All of the Legal Opinions concluded that the Income Funds were “qualified investments under the Act for the RRSP maintained for the benefit of James T. Grenon.”

[45] The Certificates signed by the Appellant contained an acknowledgment that the Legal Opinions would be based in part on the factual information set out in the certificate wherein the Appellant represented that he knew those facts to be true and correct and specifically that:

In respect of the Fund, an offering memorandum has been filed with the Alberta Securities Commission and the British Columbia Securities Commission and there has been a lawful distribution in Alberta and British Columbia to the public of Units of the Fund in accordance with the offering memorandum.

[46] When the RRSP Trust acquired units of the Income Funds that were already engaged in business or investment activities, valuation reports prepared by accounting firm Grant Thornton (the “Grant Thornton valuations”) were included with the Legal Opinions. These valuation reports were intended to support the issuance of units at prices exceeding the initial subscription price of $7.50 per unit.

[47] As will be seen in greater detail below, the Income Funds were required to file a report with the securities commission within 10 days from the completion of the distribution of units. Reports were filed in connection with the First Distribution but no evidence was adduced to demonstrate that reports were filed in connection with the Second Distributions.

[48] The profits from the various investments or businesses were flowed-up through the various entities, including the FVT’s, to the Income Funds and were then distributed to unitholders, including the RRSP Trust. Trustee resolutions to support the distribution of profits were prepared and reported in the T3 Returns.

[49] According to the Minister, a total of $186,489,148 was distributed to the RRSP Trust (the “Distribution Transactions”). The table below represents a summary of all distributions made from the Income Funds to the RRSP Trust during the Relevant Period (the “Distribution Transactions”):

Total distributions made by the Income Funds to the RRSP Trust

	2003-1	2003-2	2003-3	2003-4	2006-8	Total
2004		4,192,015	1,924,362			6,116,377
2005	6,372,526	3,493,797	4,773,945	136,654,427		151,294,695
2006	4,176,831	861,930	3,232,052	2,636,201		10,907,014
2007	2,513,091	2,194,196	2,838,325	2,554,003		10,099,615
2008	1,381,913	2,050,920				3,432,833*
2009		1,516,445			3,122,169	4,638,614
Total	14,444,361	14,309,303	12,768,594	141,844,631	3,122,169	186,489,148

[8]

[50] As will be seen in greater detail below, there is some dispute as to the actual distributions made in 2005 by the 2003-4 Income Fund. The Appellant argues that the distributions made in that year resulted from the issuance of new units to the RRSP Trust in exchange for the transfer of the FMO units to the 2003-4 Income Fund and that this did not have the effect of increasing the value of the RRSP Trust. The Appellant also argues that the Minister failed to account for a loss of $129,876,648 realized by the RRSP Trust on the disposition of those units in 2008.

[51] In any event, the Appellant has acknowledged that the RRSP Trust earned approximately $58 million from the Income Funds during the Relevant Period.

[52] The Appellant as trustee, approved the filing of the respective T3 Trust Income Tax and Information Returns on an annual basis indicating that each fund was a “mutual fund trust”. Similarly, CIBC as trustee filed a T3GR Return in which it was required to list all “taxable” RRSP’s (meaning RRSPs that held non-qualified investments) with the applicable tax withheld and remitted to the Minister. The RRSP Trust was grouped with others in a specimen plan but was not listed as a taxable RRSP holding non-qualified investments. The annual filing of the T3GR Returns was explained by the CIBC employees and will be addressed below.

[53] In June 2003 (shortly after the closing of the First Distribution), the RRSP Trust initially subscribed for 1,575,000 units of the Tom 2003-1 Income Fund at $7.50 per unit for total proceeds of $11,812,500. Additional subscriptions were made at later dates, as detailed above.

[54] As with all Income Funds, a corporation acted as trustee of the FVT to ensure a form of creditor protection, as explained by the Appellant. In this instance, 1019 Inc., a corporation wholly owned by the Appellant, acted as general partner.

[55] This fund held 100% of the units of the Tom 2003-1 FVT that owned 99.99% of the units of the Tom 2003-1 Master Limited Partnership. (“MLP-1”). 1042 Inc., another corporation wholly owned by the Appellant, acted as general partner. Beginning in 2005, MLP-1 acquired a 99.99% in both the Raywal Limited Partnership and the Tom 2003-1 Limited Partnership-1 that held 100% of the units or shares in 1213321 Alberta Ltd., Raywal Kitchens Inc. and 2037629 Ontario Inc.

[56] In 2006, the Tom 2003-1 Income Fund acquired a 99.99% interest in Can-Am Kitchens Limited Partnership and a 75% participating interest in Landcraft Limited Partnership with Landraft as the general partner. Prior to these transactions, 75% of the shares in Landcraft were owned by the Appellant. The Appellant also owned or controlled several of the companies that acted as general partners.

[57] The Tom 2003-1 Income Fund also entered into several loan transactions. On August 1, 2003, it entered into a loan agreement for $10 million with CCC, owned in part by Grencorp, the Appellant’s management company. Security for the loan in the form of a general security agreement securing the assets and undertakings of CCC, was signed by the Appellant on behalf of the borrower.

[58] As noted in the table above, the 2003-1 Income Fund distributed a total of $14,444,361 to the RRSP Trust during the Relevant Period.

[59] In September 2003, the RRSP Trust initially subscribed for 540,000 units of the Tom 2003-2 Income Fund at $7.50 per unit for total proceeds of $4,050,000. The MacLennan RRSP owned 49% of the units in this fund. MacLennan owned 100% of the shares in Century Services Inc. (“Century Services”) that was involved in the business of distressed lending.

[60] The Tom 2003-2 Income Fund held 100% of the units in a FVT whose primary investment was a 99.99% interest in the Century Services Limited Partnership (“CSLP”) established on November 15, 2003. Century Services held the remaining interest and acted as general partner.

[61] In December 2003, CSLP purchased the assets and liabilities of Century Services Partnership for $12.6 million. The only assets of that partnership were the shares of Century Services. In 2005, Century Services paid management fees of $5,692,000 to CSLP. The net income of CSLP was paid to the 2003-2 FVT and then to the Tom 2003-2 Income Fund.

[62] As noted above, this fund distributed a total of $14,309,303 to the RRSP Trust during the Relevant Period, excluding the amounts distributed to the MacLennan RRSP.

[63] In September 2003, the RRSP Trust subscribed for 540,000 units of the 2003-3 Income Fund at $7.50 per unit for total proceeds of $4,050,000. The RRSP Trust and Sutherland RRSP each owned 49% of the units and the remaining units were held by the Investors. This fund owned 100% of the units in the Tom 2003-3 FVT which owned 99.99% of the units in MLP-3 formed in January 2004. The general partner was 661314 B.C. Ltd. (“661 Ltd.”), a company controlled by Sutherland.

[64] Sutherland had a controlling interest in Silvercreek Development Corporation and was involved in the development, subdivision and sale of commercial and residential properties in Alberta and British Columbia.

[65] MLP-3 owned 99.99% of the units in Silvercreek Abbortsford Limited Partnership (“SALP”), formed in February 2004. Several other limited partnerships were later created but in all instances 661 Ltd. was the general partner.

[66] Properties were identified for development and a corporation owned by Sutherland would acquire the property. SALP or other limited partnerships in which MLP-3 owned 99.99% of the units, acted as limited partners while 661 acted as general partner. These properties were developed and sold to third parties. The net income was paid by the limited partnerships to MLP-3 and then to the 2003-3 FVT, followed by distributions to the 2003-3 Income Fund.

[67] As appears from the table above, the Tom 2003-3 Income Fund distributed a total of $12,768,594 to the RRSP Trust during the Relevant Period, excluding amounts paid to the Sutherland RRSP.

[68] The Tom 2003-4 Income Fund was not directly involved in any business and its income was generated from loans made to related parties including other Income Funds. It was referred to by the Appellant as the “fund of funds”.

[69] As noted above, the Tom 2003-4 Income Fund acquired the units of FMO, a publicly traded mutual fund trust, held by the RRSP Trust. As long as the units of FMO were actually held by the RRSP Trust, the Minister has acknowledged that they were a qualified investment for RRSP purposes.

[70] This transaction took place on November 14, 2005, and involved, inter alia, a transfer by the RRSP Trust of its 58% interest in FMO to the 2003-4 Income fund, in exchange for units. As part of that transaction, the RRSP Trust submitted a subscription for 3,821,850 units valued at $40 per unit for a total $152,874,012.

[71] In May 2006, the RRSP Trust submitted a further subscription for 4 million units valued at $5.53 per unit for net proceeds of $22,120,000. No explanation was provided to the Court as to why the value of the units had decreased in value between November 2005 and May 2006.

[72] As noted in paragraph k) of the Reply to the Fresh as Further Amended Reply, the transaction involving the transfer of the FMO units is more particularly described in the Corporate Appeals.

[73] The Tom 2006-5 Income Fund was settled in 2006.

[74] In March 2008, the RRSP Trust subscribed for 320,000 units at $7.50 per units for net proceeds of $2,400,000 and in July 2008, it subscribed for an additional 213,333 units at $7.50 per unit for net proceeds of $1,599,998.

[75] As a result of these subscriptions, the RRSP Trust controlled more than 99% of the outstanding units but no distributions were made during the Relevant Period. The proposed acquisition was never completed and all units were eventually redeemed at cost.

[76] The 2006-8 Income Fund was also settled in 2006.

[77] In March 2008, the RRSP Trust subscribed for 5,333,333 units at $7.50 per unit for net proceeds of $39,999,998 and in August 2009, it subscribed for a further 3,176,620 units at $7.87 per unit for net proceeds of $24,999,999.

[78] On August 12, 2008, the Tom 2006-8 Income Fund entered into a loan transaction with the Appellant extending a loan of $18,000,000 at 9%per annum. The loan proceeds were used for investment purposes and the Appellant acknowledged in oral testimony that he claimed the interest charges as a deduction on his personal tax return. Several other loans were made to related corporations.

[79] As noted in the table above, the 2006-8 Income Fund made distributions of $3,122,169 to the RRSP Trust during the Relevant Period.

Geoffrey Merritt

[80] The Appellant called Geoffrey Merritt, a chemical engineer with extensive experience in the oil and gas industry. He invested in both the 2003 and 2006 series of Income Funds with his spouse and 2 children, aged 15 and 18 in 2003.

[81] Mr. Merritt was made aware of the funds through the Appellant’s brother and since he knew that the Appellant would be investing his own money, he did not feel the need to conduct any further due diligence. He confirmed signing the subscription documents on behalf of his spouse and children and receiving income distributions and T3’s over the years. He stated that his children held investments in other securities from a young age but no corroborating evidence was adduced.

Mary Yee

[82] Mary Yee was employed as a legal assistant with Tom Capital for 14 years and provided administrative assistance for the Income Funds, including up-dates to unitholders, distributions, tax slips and notices of annual meetings.

[83] She testified that all the investors in the Income Funds were residents of Alberta or BC and that while minors had subscribed for units, none had ever refuted the subscription or refused or returned a distribution cheque, even upon reaching the age of majority. She and her spouse had subscribed for units in the 2006 series of Income Funds based on the success of the 2003 series.

Deborah Nickerson

[84] Deborah Nickerson joined the accounting team of Tom Capital in 2005 and eventually assumed a leadership role. She also provided accounting services for both Tom Capital and the Income Funds and served as trustee for several funds. She provided those services through a numbered company.

[85] Ms. Nickernon also provided advice as to the appropriate interest rate and security to be provided for loans from the Income Funds to related parties such as the Appellant. She felt that the terms were commercially reasonable but acknowledged that she had no formal training or credentials in this area. She also indicated that the Income Funds were regularly reviewed by external accountants, that clarifications were provided where needed and that if any issues arose, they were always resolved.

[86] In connection with the Income Funds, she too confirmed that all Investors were residents of either Alberta or BC and that units had been issued to minors. In fact, she testified that she had signed the Subscription Agreement and Risk Acknowledgment forms for her two children, aged 10 And 13 at the time of the subscriptions in 2003. She also indicated that the subscription funds for her children were intended as loans to be reimbursed once the units were redeemed. She acknowledged that she had no documentation to support this.

Bruce MacLennan

[87] Bruce MacLennan was the president of Century Services whose core business was appraising real estate or other assets for institutional and private lenders. It was also involved in distressed lending which is how he came into contact with the Appellant and Tom Capital.

[88] Mr. MacLennan served as trustee of the 2003 series of Income Funds. He testified that he signed the subscription and risk acknowledgement forms for his two children (both aged 5 in 2003) who acquired units in the 2003 series of Income Funds. Both children signed their own documents for the 2006 series of Income Funds but he witnessed their signature. During cross-examination, he acknowledged that he had actually paid the subscription price for his spouse and two children and, on re-examination, indicated that the amounts paid on their behalf were intended as gifts. All distribution cheques were deposited in their respective bank accounts.

Kerri Calhoun

[89] Kerri Calhoun joined CIBC Trust Corporation in 1988 and at the time of her testimony was Executive Director. She explained that only trust companies could act as trustees of an RRSP and as a result, CIBC, being a Canadian chartered bank, had appointed CIBC Trust as trustee for all its RRSP’s. That said, CIBC Wood Gundy, and later CIBC Capital Markets Inc., were appointed as agents to manage the day-to-day administration and ensure that assets were qualified investments.

[90] Ms. Calhoun also explained that in a self-directed plan, the annuitant made all investment decisions and the role of CIBC Wood Gundy, as agent for CIBC Trust, was to ensure that investments were qualified investments under the Act.

[91] Other investments, described as non-public offerings or private placements, required additional documentation including the OM, Subscription Agreement as well as a legal opinion from a reputable law firm confirming that the investment was a qualified investment. The team tasked with the review of the documents would have been familiar with the requirements of the Act and Regulations.

[92] From CIBC’s perspective, they relied on the legal opinions provided as to the status of the investment though it understood that the law firm itself would be relying on the statements made in a trustee certificate. If the investment was an initial offering, the value of the securities was determined with reference to the OM but for a secondary or subsequent offering, a valuation report prepared by a reputable accounting firm might be required. On cross-examination, she indicated that there was no obligation to obtain a comprehensive valuation report. They were only required to make reasonable efforts to obtain a fair market value of the proposed investment. She also indicated that for self-directed plans, in accordance with the contractual documentation required to open such a plan, it was ultimately up to the annuitant to ensure that the acquired assets were qualified investments.

[93] With respect to the CIBC Trust’s filing obligations with the CRA, Ms. Calhoun indicated that CIBC would submit an application and declaration of trust. If the documentation was approved, CRA would assign a specimen plan number that could reference hundred of thousand of RRSP plans. On an annual basis, CIBC would then submit a T3GR – Group Income Tax and Information Return for RRSP, RRIF, RESP, or RDSP Trusts, being the prescribed form that included the fair market value of all RRSP’s listed under that specimen plan.

[94] The T3GR included a listing of all RRSPs within the specimen plan that held non-qualified investments, described as taxable RRSP’s, in which case taxes were deducted from the RRSP and paid to the CRA. In this instance, the RRSP Trust was not listed on any of the T3GR forms filed during the Relevant Period because, according to Ms. Calhoun, it did not hold any non-qualified investments.

[95] With respect to the documentation submitted by the Appellant or his agents, she was not aware and could not comment as to whether minors had acquired units in the Income Funds or who had actually paid the subscription amounts. Such enquiries were not made given the reliance on legal opinions.

[96] On cross-examination, she acknowledged her understanding that the T3GR was both an income tax return and information return but that if an RRSP trust had taxable income, a T3 Trust and Information Return was required to be filed.

[97] She indicated that a T3 Return was not filed for RRSPs that held only qualified investments as CRA did not require it to do so. She acknowledged that a T3 return had not been filed with the CRA in connection with the RRSP Trust.

Sabrina Tam

[98] Sabrina Tam was a director of business risk effectiveness at CIBC World Markets Inc. She commenced her employment with CIBC in 1999 as a compliance officer moving on in 2005 to the business risk and sales supervision group (“BBRS Group”) tasked with reviewing and approving private-placement transactions.

[99] The BBRS Group reviewed all private placement documentation. If concerns arose, they consulted with the CIBC compliance or legal departments. She confirmed that the required documents included a subscription agreement to confirm both the value and number of securities being purchased as well as a risk acknowledgement and legal opinion from a reputable law firm confirming that the investment was a qualified investment for RRSP purposes. On cross-examination, she stated that they would typically rely on the legal opinion provided and would not parse the representations or certificates contained in the OM.

III. THE ASSESSMENTS

[100] The Minister has issued a number of assessments or reassessments (the “Reassessments”) as described below but has acknowledged that the Part 1 assessments in both appeals seek to tax the same amounts for the 2008 and 2009 taxation years and that she can only be successful in one or the other:

[101] The Appellant appeals from Notices of Reassessment made by the Minister on February 28, 2013, on the basis that the payments of $3,432,833 and $4,638,614 made by the Income Funds to the RRSP Trust during the 2008 and 2009 taxation years, respectively, (the “Grenon Part 1 Reassessments”), should be assessed as indirect payments taxable in the hands of the Appellant on the basis of subsection 56(2) [9] or in the alternative on the basis of sham, window dressing or GARR. The 2009 taxation year gave rise to a nil assessment, such that it is not under appeal, but the Appellant claimed a non-capital loss for that year, the amount of which is not in dispute, which he carried back to the 2006 taxation year. The Minister reduced the non-capital loss by $4,638,614, thus resulting in a consequential increase of the Appellant’s taxable income for the 2006 taxation year.

[102] The Appellant also appeals from Notices of Assessment (T1-OVP) made by the Minister on March 1, 2013 (late filing penalties were later deleted by Notice of Reassessment dated August 13, 2014) in respect of the 2004 to 2011 taxation years (the “Grenon Part X.1 Assessments”) on the basis that payments made by the Income Funds to the RRSP Trust (described herein as the Distribution Transactions) should be re-characterized as excess contributions to the RRSP Trust and subject to a tax of 1 % calculated monthly pursuant to subsection 204.1(2.1), or in the alternative, on the basis of sham, window dressing or GARR.

[103] The RRSP Trust appeals from Notices of Assessment made by the Minister on March 6, 2013, served on CIBC as trustee, in respect of the 2004 to 2009 taxation years (the “RRSP Trust Part 1 Assessments”) assessing taxes and late filing penalties on the payments made by the Income Funds to the RRSP Trust (described herein as the Distribution Transactions), pursuant to subsection 146(10.1) or in the alternative, on the basis of sham, window dressing or GARR.

[104] The RRSP Trust also appeals from Notices of Reassessment made by the Minister on March 6, 2013, served on CIBC as trustee, in respect of the 2004 to 2009 taxation years (the “RRSP Trust Part XI.1 Reassessments”), assessing a tax of 1% on the fair market value of the units of the Income Funds acquired by the RRSP Trust, pursuant to subsection 207.1(1) or, in the alternative, on the basis of sham, window dressing or GARR. Late filing penalties were also assessed.

IV. THE ISSUES

[105] The issues in this appeal may be described as follows:

i. Whether the Income Funds were a “qualified investment” for RRSP purposes, as that term is defined in subsection 146(1) of the Act and Regulation 4900(1) and, more particularly, whether the Income Funds were properly constituted as a “mutual fund trust” as defined in subsection 132(6) and met the prescribed conditions set out in Regulation 4801, or alternatively qualified as a unit trust as described in Regulation 4900(1)(d.2);

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

iii. Whether the Minister was entitled to include the Income Fund payments made in respect of the 2008 and 2009 taxation years to the Appellant’s personal income on the basis that they were “indirect payments” relying on subsection 56(2) or, in the alternative, whether the Minister was entitled to do so relying on sham, window dressing or GARR, as a basis for the application of subsection 56(2);

iv. Whether the Minister was entitled to re-characterize the payments made by the Income Funds to the RRSP Trust, described herein as the Distribution Transactions, as “excess contributions” to the RRSP Trust, relying on sham or window dressing or alternatively on GARR, and if so, whether the Appellant was entitled to a credit of $152,874,000 (or at least $136,654,427, being the lesser amount used by the Minister), being the value of the units issued to the RRSP Trust in exchange for the FMO units and/or to a further credit of $129,876,648 as a result of a loss suffered by the RRSP Trust from the disposition in 2008 of the units held in the 2003-4 Income Fund;

v. Whether the Part 1 and Part X.1 Reassessments are statute-barred and in particular, whether the Appellant was required to file a separate T1-OVP Return to report and pay tax on the excess contributions;

i. Whether the Minister was entitled to assess the RRSP Trust on the basis that the Income Fund payments, described herein as the Distribution Transactions, were income derived from non-qualified investments, taxable pursuant to subsection 146(10.1) of the Act or alternatively, on the basis of sham, window dressing or GARR and if so, whether the Appellant was entitled to a credit of $129,876,648 resulting from a loss suffered by the RRSP Trust from the disposition in 2008 of the units held in the 2003-4 Income Fund;

ii. Whether the Minister was entitled to assess the RRSP Trust for a tax equal to 1% calculated monthly on the fair market value of the units in the Income Funds at the time they were acquired, pursuant to subsection 207.1(1) of Part XI.1 of the Act or alternatively, on the basis of sham, window dressing or GARR;

iii. Whether the Part 1 and Part XI.1 assessments are statute-barred on the basis that CIBC filed the T3GR form within 90 days from the end of each applicable year, as required by subsection 207.2(1) and was assessed accordingly;

V. PRELIMINARY ISSUES

[106] The Court reserved on two issues at the conclusion of the hearing and what follows is the final disposition forming part of these Reasons for Judgment.

[107] As noted above, the Respondent did not call any witnesses but on the final day of the hearing, tendered the affidavit of Helen Little (the “Affidavit”), an auditor with the CRA, relying on the following provision of the Act:

244(9) Proof of Documents – An affidavit of an officer of the Canada Revenue Agency, sworn before a commissioner or other person authorized to take affidavits, setting out that the officer has charge of the appropriate records and that a document annexed to the affidavit is a document or true copy of a document, or a print-out of an electronic document, made by or on behalf of the Minister or a person exercising a power of the Minister or by or on behalf of a taxpayer, is evidence of the nature and contents of the document.

[108] Appended to the Affidavit, was a computer screen shot of the name and birthdate of all minors who had acquired units in the Income Funds. The Appellant was aware of its contents since it had been in the possession of counsel for several months prior to the actual hearing of the appeals.

[109] Helen Little’s name had been included in the Respondent’s list of potential witnesses with a short summary of her proposed testimony but she was not called to testify. When the Affidavit was tendered as evidence as the Respondent closed its case, the Appellant requested a sealing order given the confidential nature of the information pertaining to minors. The Court issued the Order, restricting access to Court officials, the parties to these proceedings and their authorized agents.

[110] The Appellant also reserved the right to make further written submissions as to the admissibility or weight of the Affidavit. There were no further objections.

[111] Aside from the sealing Order, no further ruling was made at that time and the intention of the Court, though not clearly expressed as appears from the transcript of the hearing, was to mark the Affidavit for identification purposes and to reserve on its admissibility, subject to written submissions to be delivered at a later date.

[112] The Appellant indicates in written submission that Helen Little was to be cross-examined at the hearing. It is argued that although she was present in court for most of the hearing, she was not present when the Respondent closed its case and this has deprived him of the fundamental right of cross-examination.

[113] There is little doubt that the facts that the Affidavit seeks to establish are relevant to the Minister’s position i.e. whether minors acquired units of the Income Funds. It had been established that “the presumption is that relevant evidence is admissible and that all those called to testify with respect to relevant evidence are compellable”: Globe and mail v. Canada (AG), (2010) 2 SCR 592, (para 56).

[114] Thus, although Hellen Little was “compellable”, the Appellant did not indicate to the Court that he wished to cross-examine her nor request an adjournment to secure her presence. Given that 5-6 days remained in the scheduled time allotted for the hearing of the appeals, there was still ample time to do so.

[115] As excerpted above, subsection 244(9) indicates that an “affidavit of an officer of the Canada Revenue Agency (…) setting out that the officer has charge of the appropriate records and that a document annexed” is a true copy of “a print-out of an electronic document (…) is evidence of the nature and contents of the document”. Similarly, subsection 25(1) of the Canada Evidence Act, RSC, 1985, c C-5 provides that “[w]here an enactment provides that a document is evidence of a fact (…) that document is admissible in evidence and the fact is deemed to be established in the absence of any evidence to the contrary”.

[116] The Minister submits that the Appellant failed to introduce “any evidence to the contrary” by way of documentary or viva voce evidence as to the age of unit-holders in the Income Fund. As will be reviewed in greater detail below, the Appellant confirmed in oral testimony that subscription documents signed by minors or their guardian, had been accepted and units issued accordingly. This was also confirmed by several fact witnesses, as noted above.

[117] As noted by the Court at the hearing, the fact that minors had signed subscription documents was relatively uncontroversial. In fact, CIBC Trust has since indicated in written submissions (para. 44) that “[b]etween 35 and 40 unitholders were under the age of 18 years old when they subscribed”.

[118] In James Scott et al. vs. HMTQ, 2017 TCC 224 (“James Scott”) (paras 36-64), Sommerfeldt J. conducted a review of the applicable law on the admissibility of an affidavit under subsection 244(9). In that instance, the appellant had objected to the filing of an affidavit without prior notice arguing that it “constituted prejudicial ‘last-minute trial-by-ambush type tactics” and that the affidavit “should not be admitted into evidence”.

[119] Justice Sommerfeldt reserved on its admissibility and later reviewed subsection 89(1) of the Tax Court of Canada Rules (General Procedure) SOR/90-688a (the “Rules”) which provides as follows:

89 (1) Unless the Court otherwise directs, except with the consent in writing of the other party or where discovery of documents has been waived by the other party, no document shall be used in evidence by a party unless

(a) reference to it appears in the pleadings, or in a list or an affidavit filed and served by a party to the proceeding,

(b) it has been produced by one of the parties, or some person being examined on behalf of one of the parties, at the examination for discovery, or

(c) it has been produced by a witness who is not, in the opinion of the Court, under the control of the party.

(2) Unless the Court otherwise directs, subsection (1) does not apply to a document that is used solely as a foundation for or as part of a question in cross-examination or re-examination.

[120] Justice Sommerfeldt noted (para 47) that “the opening words of subsection 89(1) (…) provide the Court with a discretion to allow a document into evidence even if the requirements of that provision have not been met” and that:

(47) “(…) The Court must exercise its discretion judicially, according to the rules of reason and justice, and not arbitrarily. In determining whether to admit a previously undisclosed document, there must be a balancing of the competing interest of justice and the overriding importance of having all of the relevant information before the Court to enable it to arrive at a proper and just disposition of the particular appeal (…).”

[121] In this instance, as noted above, the Appellant reserved the right to make written submissions as to the admissibility of the Affidavit but did not indicate that he wished to conduct cross-examinations nor request an adjournment for that purpose.

[122] The contents of the Affidavit are relevant to these proceedings and are relatively uncontroversial (as noted above) since the Minister had made an assumption that minors had acquired units in the Income Funds. The Appellant has not seriously disputed the Minister’s position on this issue but has not outright admitted the actual number of minors (except as noted above by the CIBC Trust) indicating in response to a request to admit that there was no reason to conclude that the listed minors were not minors, arguing in any event that the issue was not relevant since minors could acquire units in the Income Funds.

[123] In the end, I find that the information appended to the Affidavit was readily available or would have been readily available to the Appellant had he taken the time to obtain it in order to contradict the Minister’s assumption. He chose not to do so despite having the evidentiary burden of rebutting the assumption.

[124] I conclude that the Court should exercise its discretion pursuant to subsection 89(1) of the Rules and that rejecting the Affidavit at this time, would be procedurally unfair to the Minister. Having considered the written and oral submissions of the respective parties and having considered the requirements of subsection 89(1) of the Rules, the Court hereby rules that the Affidavit of Helen Little is admissible.

[125] It establishes the birthdates of the minor Investors in the 2003 and 2006 series of Income fund. The relevance of this information will be discussed below.

[126] Parties are permitted to read into evidence examination for discovery materials pursuant to the operation of section 100 of the Rules and Tax Court of Canada Practice Note 8, titled “Use of Discovery/Undertakings”, July 19, 2001 (“Practice Note 8”) which governs the use of examinations for discovery and undertakings as evidence at trial. An adverse party may request that other parts of the evidence be introduced to qualify or provide some context concerning the proposed read-ins.

[127] Before the scheduled date for the hearing of theses appeals, the parties had exchanged their list of read-ins from examination for discovery. The Appellant gave notice of his proposed read-ins on February 1, 2019 and the Minister did not request any contextual read-ins in respect of those read-ins.

[128] The Minister served a notice of proposed read-ins on February 6, 2019, exactly four days before the hearing was scheduled to commence. They consisted of approximately 850 pages of discovery transcript, representing a substantial majority of the discovery. The Appellants reviewed the Minister’s proposed read-ins within the two days contemplated by Practice Note 8 and served their notice of proposed contextual read-ins on February 7th and 8th, 2019.

[129] On the last day of trial, the Minister tendered on the Appellant and the Court her list of read-ins from examinations for discovery but the list was a significantly abridged selection of the read-ins which the Minister had identified in her pre-trial notice, constituting about one-third of that original list. The Appellants requested time to perform a new contextual review of the Minister’s actual read-ins as the previously identified contextual read-ins were rendered moot by the significant reduction in the Minister’s read-ins. The Minister challenged the appellants’ request for time to complete a contextual review of the read-ins.

[130] The Court ordered that the parties provide written submissions on the matter and the parties did so later in March of 2019. The Minister challenged certain of the Appellant’s requests to read-in additional portions of the discovery evidence in order to qualify or explain the Minister’s read-ins pursuant to subsection 100(3) of the Rules. The Minister challenged these requests on the basis that section 100 and Practice Note 8 did not allow additional read-ins at or following trial.

[131] Only four contextual read-ins are at issue. For reasons set out in the attached Appendix A, I find that the contextual read-ins #8, #10 and #18 are admissible and that contextual read-ins #16 is also admissible but subject to certain limits.

VI. RELEVANT STATUTORY PROVISIONS

[132] The basic legislative framework for RRSP’s is set out in Division G, entitled “Deferred & Special Income Arrangements” and is governed by section 146 and various other provisions of the Act in addition to certain regulations under the Income Tax Regulations, CRC, c 945 (the “Regulations”).

Definitions 146(1) In this section, annuitant means (a) until such time after maturity of the plan as an individual’s spouse or common-law partner becomes entitled, as a consequence of the individual’s death, to receive benefits to be paid out of or under the plan, the individual referred to in paragraph (a) or (b) of the definition retirement savings plan in this subsection for whom, under a retirement savings plan, a retirement income is to be provided, and (b) thereafter, the spouse or common-law partner referred to in paragraph (a); (rentier) benefit includes any amount received out of or under a retirement savings plan other than (a) the portion thereof received by a person other than the annuitant that can reasonably be regarded as part of the amount included in computing the income of an annuitant by virtue of subsections 146(8.8) and 146(8.9), (b) an amount received by the person with whom the annuitant has the contract or arrangement described in the definition retirement savings plan in this subsection as a premium under the plan, (c) an amount, or part thereof, received in respect of the income of the trust under the plan for a taxation year for which the trust was not exempt from tax by virtue of paragraph 146(4)(c), and (c.1) a tax-paid amount described in paragraph (b) of the definition tax-paid amount in this subsection that relates to interest or another amount included in computing income otherwise than because of this section and without restricting the generality of the foregoing includes any amount paid to an annuitant under the plan (d) in accordance with the terms of the plan, (e) resulting from an amendment to or modification of the plan, or (f) resulting from the termination of the plan; (prestation) (…) issuer means the person referred to in the definition retirement savings plan in this subsection with whom an annuitant has a contract or arrangement that is a retirement savings plan; (émetteur) (…) non-qualified investment, in relation to a trust governed by a registered retirement savings plan, means property acquired by the trust after 1971 that is not a qualified investment for the trust; (placement non admissible) (…) qualified investment for a trust governed by a registered retirement savings plan means (a) an investment that would be described in any of paragraphs (a), (b), (d) and (f) to (h) of the definition qualified investment in section 204 if the references in that definition to a trust were read as references to the trust governed by the registered retirement savings plan, (b) a bond, debenture, note or similar obligation (i) issued by a corporation the shares of which are listed on a prescribed stock exchange in Canada, or (ii) issued by an authorized foreign bank and payable at a branch in Canada of the bank, (c) an annuity described in the definition retirement income in respect of the annuitant under the plan, if purchased from a licensed annuities provider, (…) (d) such other investments as may be prescribed by regulations of the Governor in Council made on the recommendation of the Minister of Finance; (placement admissible) (…) No tax while trust governed by plan 146(4) Except as provided in subsection 146(10.1), no tax is payable under this Part by a trust on the taxable income of the trust for a taxation year if, throughout the period in the year during which the trust was in existence, the trust was governed by a registered retirement savings plan, except that (a) if the trust has borrowed money (other than money used in carrying on a business) in the year or has, after June 18, 1971, borrowed money (other than money used in carrying on a business) that it has not repaid before the commencement of the year, tax is payable under this Part by the trust on its taxable income for the year; (b) in any case not described in paragraph 146(4)(a), if the trust has carried on any business or businesses in the year, tax is payable under this Part by the trust on the amount, if any, by which (i) the amount that its taxable income for the year would be if it had no incomes or losses from sources other than from that business or those businesses, as the case may be, exceeds (ii) such portion of the amount determined under subparagraph 146(4)(b)(i) in respect of the trust for the year as can reasonably be considered to be income from, or from the disposition of, qualified investments for the trust; and (c) if the last annuitant under the plan has died, tax is payable under this Part by the trust on its taxable income for each year after the year following the year in which the last annuitant died. (…) Disposition of non-qualified investment 146(6) Where in a taxation year a trust governed by a registered retirement savings plan disposes of a property that, when acquired, was a non-qualified investment, there may be deducted, in computing the income for the taxation year of the taxpayer who is the annuitant under the plan, an amount equal to the lesser of (a) the amount that, by virtue of subsection 146(10), was included in computing the income of that taxpayer in respect of the acquisition of that property, and (b) the proceeds of disposition of the property. (…) Benefits taxable 146(8) There shall be included in computing a taxpayer’s income for a taxation year the total of all amounts received by the taxpayer in the year as benefits out of or under registered retirement savings plans, other than excluded withdrawals (as defined in subsection 146.01(1) or 146.02(1)) of the taxpayer and amounts that are included under paragraph (12)(b) in computing the taxpayer’s income. (…) Where acquisition of non-qualified investment by trust 146(10) Where at any time in a taxation year a trust governed by a registered retirement savings plan (a) acquires a non-qualified investment, or (b) uses or permits to be used any property of the trust as security for a loan, the fair market value of (c) the non-qualified investment at the time it was acquired by the trust, or (d) the property used as security at the time it commenced to be so used, as the case may be, shall be included in computing the income for the year of the taxpayer who is the annuitant under the plan at that time.

Définitions 146(1) Les définitions qui suivent s’appliquent au présent article. déductions inutilisées au titre des REER a) Jusqu’au moment, après l’échéance du régime, où son conjoint acquiert le droit, par suite du décès du rentier, de recevoir des prestations qui doivent être versées sur ce régime ou en vertu de ce régime, le particulier visé aux alinéas a) ou b) de la définition de régime d’épargne-retraite au présent paragraphe pour lequel est prévu, en vertu d’un régime d’épargne-retraite, un revenu de retraite; b) après ce moment, son conjoint. (annuitant) prestation est comprise dans une prestation toute somme reçue dans le cadre d’un régime d’épargne-retraite, à l’exception a) de la fraction de cette somme reçue par une personne autre que le rentier et qu’il est raisonnable de considérer comme faisant partie de la somme incluse dans le calcul du revenu d’un rentier en vertu des paragraphes (8.8) et (8.9); b) d’une somme reçue à titre de prime en vertu du régime par la personne avec laquelle le rentier a conclu le contrat ou l’arrangement visé à la définition de régime d’épargne-retraite au présent paragraphe; c) d’une somme, ou d’une partie de cette somme, reçue relativement au revenu de la fiducie en vertu du régime, pour une année d’imposition, à l’égard de laquelle la fiducie n’était pas exonérée d’impôt en vertu de l’alinéa (4)c); c.1) d’un montant libéré d’impôt, visé à l’alinéa b) de la définition de cette expression au présent paragraphe, qui se rapporte à des intérêts ou à un montant inclus dans le calcul du revenu autrement que par l’effet du présent article. Sans préjudice de la portée générale de ce qui précède, le terme vise toute somme versée à un rentier en vertu du régime : d) soit conformément aux conditions du régime; e) soit à la suite d’une modification du régime; f) soit à la suite de l’expiration du régime. (benefit) (…) émetteur la personne visée à la définition de régime d’épargne-retraite au présent paragraphe et avec laquelle un rentier a conclu un contrat ou un arrangement qui constitue un régime d’épargne-retraite. (issuer) (…) placement non admissible dans le cas d’une fiducie régie par un régime enregistré d’épargne-retraite, s’entend des biens acquis par la fiducie après 1971 et qui ne constituent pas un placement admissible pour cette fiducie. (non-qualified investment) (…) placement admissible« placement admissible » Dans le cas d’une fiducie régie par un régime enregistré d’épargne-retraite a) placement qui serait visé aux alinéas a), b), d) et f) à h) de la définition de placement admissible à l’article 204 si la mention « fiducie » y était remplacée par la mention de la fiducie régie par le régime enregistré d’épargne-retraite; b) obligation, billet ou titre semblable qui, selon le cas : (i) est émis par une société dont les actions sont inscrites à la cote d’une bourse de valeurs au Canada visée par règlement, (ii) est émis par une banque étrangère autorisée et payable à sa succursale au Canada; c) rente visée à la définition de revenu de retraite relativement au rentier en vertu du régime, si elle a été achetée d’un fournisseur de rentes autorisé; d) tout autre placement qui peut être prévu par règlement pris par le gouverneur en conseil, sur recommandation du ministre des Finances. (qualified investment) (…) Exonération d’impôt d’une fiducie régie par le régime 146(4) Sous réserve du paragraphe (10.1), aucun impôt n’est payable en vertu de la présente partie par une fiducie sur son revenu imposable pour une année d’imposition si, tout au long de la période de l’année où la fiducie existait, elle était régie par un régime enregistré d’épargne-retraite; toutefois : a) si la fiducie a emprunté de l’argent (autre que de l’argent utilisé pour l’exploitation d’une entreprise) au cours de l’année ou a emprunté, après le 18 juin 1971, de l’argent (autre que de l’argent utilisé pour l’exploitation d’une entreprise) qu’elle n’a pas remboursé avant le début de l’année, un impôt est payable par la fiducie, en vertu de la présente partie, sur son revenu imposable pour l’année; b) dans tout cas non visé à l’alinéa a), si la fiducie a exploité une ou plusieurs entreprises au cours de l’année, un impôt est payable par elle en vertu de la présente partie sur l’excédent éventuel du montant visé au sous-alinéa (i) sur le montant visé au sous-alinéa (ii): (i) le montant qui constituerait le revenu imposable de la fiducie pour l’année si elle n’avait pas tiré de revenu, ni subi de pertes de sources autres que l’entreprise ou les entreprises en question, (ii) la partie du montant déterminé selon le sous-alinéa (i) à l’égard de la fiducie pour l’année, qu’il est raisonnable de considérer comme un revenu provenant soit de placements admissibles pour elle, soit de la disposition de tels placements; c) si le dernier rentier en vertu du régime est décédé, un impôt est payable par la fiducie en vertu de la présente partie sur son revenu imposable pour chaque année postérieure à l’année suivant l’année du décès de ce rentier. (…) Disposition d’un placement non admissible 146(6) Lorsque, au cours d’une année d’imposition, une fiducie régie par un régime enregistré d’épargne-retraite dispose d’un bien qui, au moment où il a été acquis, était un placement non admissible, il est permis de déduire, dans le calcul du revenu du contribuable qui est le rentier du régime, pour l’année d’imposition, une somme égale au moins élevé des montants suivants : a) le montant qui était, en vertu du paragraphe (10), inclus dans le calcul du revenu de ce contribuable à l’égard de l’acquisition de ce bien; b) le produit de disposition du bien. (…) Prestations imposables 146(8) Est inclus dans le calcul du revenu d’un contribuable pour une année d’imposition le total des montants qu’il a reçus au cours de l’année à titre de prestations dans le cadre de régimes enregistrés d’épargne-retraite, à l’exception des retraits exclus au sens des paragraphes 146.01(1) ou 146.02(1), et des montants qui sont inclus, en application de l’alinéa (12)b), dans le calcul de son revenu. (…) Acquisition d’un placement non admissible par une fiducie 146(10) Lorsque, à un moment donné d’une année d’imposition, une fiducie régie par un régime enregistré d’épargne-retraite : a) acquiert un placement non admissible; b) utilise à titre de garantie d’un prêt un bien quelconque de la fiducie ou en permet l’utilisation, la juste valeur marchande : c) du placement non admissible au moment de son acquisition par la fiducie; d) du bien utilisé à titre de garantie, au moment où il a commencé à être ainsi utilisé, selon le cas, doit être incluse dans le calcul du revenu, pour l’année, du contribuable qui est le rentier en vertu du régime à ce moment.

[133] Subsection 146(10) was amended in 2011 (Keeping Canada’s Economy and Jobs Growing Act, SC 2011, c. 24 at s.65) to introduce the concept of a “controlling individual” for Registered Retirement Savings Plans in section 207.04 of Part XI.01 of the Act and impose a tax of 50% on the fair market value of non-qualified investments held by the controlling individual in the calendar year. Those amendments only apply to non-qualified investments acquired after March 22, 2011 such that they are not at issue in this appeal.

[134] In any event, the Appellant, being “the taxpayer” who is the annuitant under the plan, was not assessed by the Minister pursuant to subsection 146(10) and the Minister assessed the RRSP Trust pursuant to subsection 146(10.1) which provides as follows:

Where tax payable 146(10.1) Where in a taxation year a trust governed by a registered retirement savings plan holds a property that is a non-qualified investment, (a) tax is payable under this Part by the trust on the amount that its taxable income for the year would be if it had no incomes or losses from sources other than non-qualified investments and no capital gains or losses other than from dispositions of non-qualified investments; and (b) for the purposes of paragraph 146(10.1)(a), (i) income includes dividends described in section 83, and (ii) paragraphs 38(a) and 38(b) shall be read without reference to the fractions set out in those paragraphs (…)

Impôt payable 146(10.1) Lorsqu’une fiducie régie par un régime enregistré d’épargne-retraite détient, au cours d’une année d’imposition, un bien qui est un placement non admissible : a) la fiducie doit payer un impôt en vertu de la présente partie sur le montant qui serait son revenu imposable pour l’année si les sources de ses revenus et pertes n’étaient que des placements non admissibles et si ses gains en capital et pertes en capital ne résultaient que de la disposition de tels placements; b) pour l’application de l’alinéa a): (i) sont compris dans le revenu les dividendes visés à l’article 83, (ii) aux alinéas 38a) et b) il n’est pas tenu compte des fractions qui y figurent.

PART X.I - Tax in Respect of Over-contributions to Deferred Income Plans

Tax payable by individuals 204.1 (1) (…) Tax payable by individuals -- contributions after 1990 204(2.1) Where, at the end of any month after December, 1990, an individual has a cumulative excess amount in respect of registered retirement savings plans, the individual shall, in respect of that month, pay a tax under this Part equal to 1% of that cumulative excess amount. (…) Waiver of tax 204.1(4) Where an individual would, but for this subsection, be required to pay a tax under subsection 204.1(1) or 204.1(2.1) in respect of a month and the individual establishes to the satisfaction of the Minister that (a) the excess amount or cumulative excess amount on which the tax is based arose as a consequence of reasonable error, and (b) reasonable steps are being taken to eliminate the excess, the Minister may waive the tax. (…) Cumulative excess amount in respect of RRSPs 204.2(1.1) The cumulative excess amount of an individual in respect of registered retirement savings plans at any time in a taxation year is the amount, if any, by which (a) the amount of the individual’s undeducted RRSP premiums at that time exceeds (b) the amount determined by the formula A + B + R + C + D + E where A is the individual’s unused RRSP deduction room at the end of the preceding taxation year, B is the amount, if any, by which (i) the lesser of the RRSP dollar limit for the year and 18% of the individual’s earned income (as defined in subsection 146(1)) for the preceding taxation year exceeds the total of all amounts each of which is (ii) the individual’s pension adjustment for the preceding taxation year in respect of an employer, or (iii) a prescribed amount in respect of the individual for the year, C is, where the individual attained 18 years of age in a preceding taxation year, $2,000, and in any other case, nil, D is the group RRSP amount in respect of the individual at that time, E is, where the individual attained 18 years of age before 1995, the individual’s transitional amount at that time, and in any other case, nil, and R is the individual’s total pension adjustment reversal for the year. Return and payment of tax 204.3 (1) Within 90 days after the end of each year after 1975, a taxpayer to whom this Part applies shall (a) file with the Minister a return for the year under this Part in prescribed form and containing prescribed information, without notice or demand therefor; (b) estimate in the return the amount of tax, if any, payable by the taxpayer under this Part in respect of each month in the year; and (c) pay to the Receiver General the amount of tax, if any, payable by the taxpayer under this Part in respect of each month in the year. Provisions applicable to Part 204.3(2) Subsections 150(2) and 150(3), sections 152 and 158, subsections 161(1) and 161(11), sections 162 to 167 and Division J of Part I are applicable to this Part with such modifications as the circumstances require.

Impôt payable par les particuliers 204.1(1) (…) Impôt payable par les particuliers — cotisations postérieures à 1990 204(2.1) Le particulier qui, à la fin d’un mois donné postérieur au mois de décembre 1990, a un excédent cumulatif au titre de régimes enregistrés d’épargne-retraite doit, pour ce mois, payer un impôt selon la présente partie égal à 1 % de cet excédent. (…) Renonciation 204.1(4) Le ministre peut renoncer à l’impôt dont un particulier serait, compte non tenu du présent paragraphe, redevable pour un mois selon le paragraphe (1) ou (2.1), si celui-ci établit à la satisfaction du ministre que l’excédent ou l’excédent cumulatif qui est frappé de l’impôt fait suite à une erreur acceptable et que les mesures indiquées pour éliminer l’excédent ont été prises. (…) Excédent cumulatif au titre des REER 204.2(1.1) L’excédent cumulatif d’un particulier au titre des régimes enregistrés d’épargne-retraite à un moment donné d’une année d’imposition correspond à l’excédent éventuel du montant visé à l’alinéa a) sur le montant visé à l’alinéa b): a) les primes non déduites, à ce moment, qu’il a versées à des régimes enregistrés d’épargne-retraite; b) le résultat du calcul suivant : A + B + R + C + D + E où : A représente les déductions inutilisées au titre des REER du particulier à la fin de l’année d’imposition précédente, B l’excédent éventuel du moins élevé du plafond REER pour l’année et de 18 % du revenu gagné du particulier, au sens du paragraphe 146(1), pour l’année d’imposition précédente sur le total des montants représentant chacun : (i) le facteur d’équivalence du particulier pour l’année d’imposition précédente quant à un employeur, (ii) le montant prescrit quant au particulier pour l’année, C si le particulier a atteint 18 ans au cours d’une année d’imposition antérieure, 2 000 $; sinon, zéro, D le montant relatif à un REER collectif quant au particulier à ce moment, E si le particulier a atteint 18 ans avant 1995, le montant de transition qui lui est applicable à ce moment; sinon, zéro; R le facteur d’équivalence rectifié total du particulier pour l’année. Déclaration et paiement de l’impôt 204.3 (1) Les contribuables visés par la présente partie doivent, dans les 90 jours qui suivent la fin de chaque année postérieure à 1975: a) produire auprès du ministre, sans avis ni mise en demeure, une déclaration pour l’année en vertu de la présente partie, selon le formulaire prescrit et contenant les renseignements prescrits; b) estimer, dans cette déclaration, l’impôt dont ils sont redevables en vertu de la présente partie pour chaque mois de l’année; c) verser cet impôt au receveur général. Dispositions applicables 204.3(2) Les paragraphes 150(2) et (3), les articles 152 et 158, les paragraphes 161(1) et (11), les articles 162 à 167 et la section J de la partie I s’appliquent à la présente partie, avec les adaptations nécessaires.

PART XI.I – Tax in Respect of Deferred Income Plans and Other Tax Exempt Persons

Tax payable by trust under registered retirement savings plan 207.1(1) Where, at the end of any month, a trust governed by a registered retirement savings plan holds property that is neither a qualified investment (within the meaning assigned by subsection 146(1)) nor a life insurance policy in respect of which, but for subsection 146(11), subsection 146(10) would have applied as a consequence of its acquisition, the trust shall, in respect of that month, pay a tax under this Part equal to 1% of the fair market value of the property at the time it was acquired by the trust of all such property held by it at the end of the month, other than (a) property, the fair market value of which was included, by virtue of subsection 146(10), in computing the income, for any year, of an annuitant (within the meaning assigned by subsection 146(1)) under the plan; and (b) property acquired by the trust before August 25, 1972. (…) Return and payment of tax 207.2 (1) Within 90 days after the end of each year, a taxpayer to whom this Part applies shall (a) file with the Minister a return for the year under this Part in prescribed form and containing prescribed information, without notice or demand therefor; (b) estimate in the return the amount of tax, if any, payable by it under this Part in respect of each month in the year; and (c) pay to the Receiver General the amount of tax, if any, payable by it under this Part in respect of each month in the year. Liability of trustee 207.2(2) Where the trustee of a trust that is liable to pay tax under this Part does not remit to the Receiver General the amount of the tax within the time specified in subsection 207.2(1), the trustee is personally liable to pay on behalf of the trust the full amount of the tax and is entitled to recover from the trust any amount paid by the trustee as tax under this section. Provisions applicable to Part (3) Subsections 150(2) and 150(3), sections 152 and 158, subsections 161(1) and 161(11), sections 162 to 167 and Division J of Part I are applicable to this Part with such modifications as the circumstances require. (…)

Impôt payable par les fiducies régies par des régimes enregistrés d’épargne-retraite 207.1(1) La fiducie régie par un régime enregistré d’épargne-retraite et qui, à la fin d’un mois donné, détient des biens qui ne sont ni un placement admissible (au sens du paragraphe 146(1)) ni une police d’assurance-vie à l’égard de laquelle, sans le paragraphe 146(11), le paragraphe 146(10) aurait été applicable à la suite de son acquisition doit payer, pour ce mois, en vertu de la présente partie, un impôt égal à 1 % de la juste valeur marchande des biens au moment où ils ont été acquis par la fiducie, de tous ces biens qu’elle détient à la fin du mois, autres que : a) les biens dont la juste valeur marchande a été incluse, en vertu du paragraphe 146(10), dans le calcul du revenu, pour une année donnée, d’un rentier (au sens du paragraphe 146(1)) en vertu du régime; b) les biens acquis par la fiducie avant le 25 août 1972. (…) Déclaration et paiement de l’impôt 207.2 (1) Le contribuable assujetti à la présente partie doit, dans les 90 jours qui suivent la fin de chaque année : a) produire auprès du ministre, sans avis ni mise en demeure, une déclaration pour l’année en vertu de la présente partie, selon le formulaire prescrit et contenant les renseignements prescrits; b) estimer dans cette déclaration l’impôt dont il est redevable en vertu de la présente partie pour chaque mois de l’année; c) verser cet impôt au receveur général. Responsabilité du fiduciaire 207.2(2) Le fiduciaire d’une fiducie qui est assujettie à l’impôt en application de la présente partie qui ne remet pas au receveur général le montant de l’impôt, dans le délai imparti, est personnellement tenu de verser, au nom de la fiducie, le montant total de l’impôt et a le droit de recouvrer de la fiducie toute somme ainsi versée. Dispositions applicables (3) Les paragraphes 150(2) et (3), les articles 152 et 158, les paragraphes 161(1) et (11), les articles 162 à 167 et la section J de la partie I s’appliquent à la présente partie, avec les adaptations nécessaires. (…)

132(1) (…) Meaning of mutual fund trust 132(6) Subject to subsection 132(7), for the purposes of this section, a trust is a mutual fund trust at any time if at that time (a) it was a unit trust resident in Canada, (b) its only undertaking was (i) the investing of its funds in property (other than real property or an interest in real property), (ii) the acquiring, holding, maintaining, improving, leasing or managing of any real property (or interest in real property) that is capital property of the trust, or (iii) any combination of the activities described in subparagraphs 132(6)(b)(i) and 132(6)(b)(ii), and (c) it complied with prescribed conditions.

132(1) (…) Sens de fiducie de fonds commun de placement 132(6) Sous réserve du paragraphe 132(7) et pour l’application du présent article, une fiducie est une fiducie de fonds commun de placement à un moment donné si, à ce moment, les conditions suivantes sont remplies : a) elle est une fiducie d’investissement à participation unitaire résidant au Canada; b) sa seule activité consiste : (i) soit à investir ses fonds dans des biens, sauf des biens immeubles ou des droits dans de tels biens, (ii) soit à acquérir, à détenir, à entretenir, à améliorer, à louer ou à gérer des biens immeubles qui font partie de ses immobilisations ou des droits dans de tels biens, (iii) soit à exercer plusieurs des activités visées aux sous-alinéas (i) et (ii); c) elle satisfaisait aux conditions prescrites portant sur le nombre de ses détenteurs d’unités, la répartition et le commerce de ses unités.

[135] Paragraph 132(6)(c) was amended for 2000 and later years by Technical Tax Amendments Act, S.C. 2013, c.34, subsection 278(1) to delete (from the end) the phrase “relating to the number of its unit holders, dispersal of ownership of its units and public trading of its units.”

Election to be mutual fund 132(6.1) Where a trust becomes a mutual fund trust at any particular time before the 91st day after the end of its first taxation year, and the trust so elects in its return of income for that year, the trust is deemed to have been a mutual fund trust from the beginning of that year until the particular time. Retention of status as mutual fund trust (6.2) A trust is deemed to be a mutual fund trust throughout a calendar year where (a) at any time in the year, the trust would, if this section were read without reference to this subsection, have ceased to be a mutual fund trust (i) because the condition described in paragraph 108(2)(a) ceased to be satisfied, (ii) because of the application of paragraph (6)(c), or (iii) because the trust ceased to exist; (b) the trust was a mutual fund trust at the beginning of the year; and (c) the trust would, throughout the portion of the year throughout which it was in existence, have been a mutual fund trust if (i) in the case where the condition described in paragraph 108(2)(a) was satisfied at any time in the year, that condition were satisfied throughout the year, (ii) subsection (6) were read without reference to paragraph (c) of that subsection, and (iii) this section were read without reference to this subsection. (…)

Choix de devenir une fiducie de fonds commun de placement 132(6.1) La fiducie qui devient une fiducie de fonds commun de placement à un moment avant le quatre-vingt-onzième jour suivant la fin de sa première année d’imposition est réputée avoir été une telle fiducie depuis le début de cette année jusqu’à ce moment si elle en fait le choix dans sa déclaration de revenu pour cette année. Note marginale :Fiducie qui demeure une fiducie de fonds commun de placement (6.2) Une fiducie est réputée être une fiducie de fonds commun de placement tout au long d’une année civile si, à la fois : a) elle aurait cessé d’être une telle fiducie à un moment de l’année si le présent article s’appliquait compte non tenu du présent paragraphe du fait que, selon le cas : (i) la condition énoncée à l’alinéa 108(2)a) n’est plus remplie, (ii) l’alinéa (6)c) s’applique, (iii) la fiducie a cessé d’exister; b) elle était une telle fiducie au début de l’année; c) elle aurait été une telle fiducie tout au long de la partie de l’année où elle a existé si, à la fois : (i) la condition énoncée à l’alinéa 108(2)a) étant remplie à un moment de l’année, elle était remplie tout au long de l’année, (ii) le paragraphe (6) s’appliquait compte non tenu de son alinéa c), (iii) le présent article s’appliquait compte non tenu du présent paragraphe. (…)

Income Tax Regulations Regulation 4801(as it read in 2004) 4801 For the purposes of paragraph 132(6)(c) of the Act, the following conditions are hereby prescribed in respect of a trust: (a) either (i) a class of the units of the trust shall be qualified for distribution to the public, or (ii) there has been a lawful distribution in a province to the public of units of the trust and a prospectus, registration statement or similar document was not required under the laws of the province to be filed in respect of the distribution; and (b) in respect of any one class of units described in paragraph (a), there shall be no fewer than 150 beneficiaries of the trust, each of whom holds (i) not less than one block of units of the class, and (ii) units of the class having an aggregate fair market value of not less than $500. Regulation 4801, as amended in 2012 on a retroactive basis to 2000 4801 In applying at any time paragraph 132(6)(c) of the Act, the following are prescribed conditions in respect of a trust: (a) either (i) the following conditions are met: (A) there has been at or before that time a lawful distribution in a province to the public of units of the trust and a prospectus, registration statement or similar document was not, under the laws of the province, required to be filed in respect of the distribution, and (B) the trust (I) was created after 1999 and on or before that time, or (II) satisfies, at that time, the conditions prescribed in section 4801.001, or (ii) a class of the units of the trust is, at that time, qualified for distribution to the public; and (b) in respect of a class of the trust’s units that meets at that time the conditions described in paragraph (a), there are at that time no fewer than 150 beneficiaries of the trust, each of whom holds (i) not less than one block of units of the class, and (ii) units of the class having an aggregate fair market value of not less than $500.

Règlement de l’impôt sur le revenu 4801 (2004) 4801 Aux fins de l’alinéa 132(6)c) de la Loi, les conditions suivantes sont prescrites à l’égard d’une fiducie : a) selon le cas : (i) une catégorie d’unités de la fiducie peut faire l’objet d’un appel public à l’épargne, (ii) des unités de la fiducie ont fait l’objet d’un appel public légal à l’épargne dans une province, et un prospectus, une déclaration d’enregistrement ou un document semblable relatif à cet appel n’avait pas à être produit selon la législation provinciale; b) à l’égard de l’une quelconque catégorie d’unités visée à l’alinéa a), il ne doit pas y avoir moins de 150 bénéficiaires de la fiducie, dont chacun détient (i) pas moins d’une tranche d’unités de la catégorie, et (ii) des unités de la catégorie ayant une juste valeur marchande totale non inférieure à 500 $. Règlement 4801, amendée en 2012 sur une base rétroactive à 2000 4801 Pour l’application, à un moment donné, de l’alinéa 132(6)c) de la Loi, les conditions auxquelles une fiducie doit satisfaire sont les suivantes : a) selon le cas : (i) les conditions ci-après sont réunies : (A) des unités de la fiducie ont, au plus tard à ce moment, fait l’objet d’un appel public légal à l’épargne dans une province, et un prospectus, une déclaration d’enregistrement ou un document semblable relatif à cet appel n’avait pas à être produit selon la législation provinciale, (B) la fiducie : (I) soit a été établie après 1999 et au plus tard à ce moment, (II) soit remplit, à ce moment, les conditions énoncées à l’article 4801.001, (ii) une catégorie d’unités de la fiducie peut, à ce moment, faire l’objet d’un appel public à l’épargne; b) à l’égard d’une catégorie d’unités de la fiducie qui remplit à ce moment les conditions énoncées à l’alinéa a), la fiducie compte, à ce moment, au moins 150 bénéficiaires qui détiennent chacun : (i) pas moins d’une tranche d’unités de la catégorie, et (ii) des unités de la catégorie ayant une juste valeur marchande totale non inférieure à 500 $.

[136] The words “at any time” and “at that time” were added to Regulation 4801 by an amendment made in 2013 [10] applicable for the 2000 and later taxation years.

Regulation 4900 4900 (1) For the purposes of paragraph (d) of the definition qualified investment in subsection 146(1) of the Act, paragraph (e) of the definition qualified investment in subsection 146.1(1) of the Act, paragraph (c) of the definition qualified investment in subsection 146.3(1) of the Act, paragraph (h) of the definition qualified investment in section 204 of the Act, paragraph (d) of the definition qualified investment in subsection 205(1) of the Act and paragraph (c) of the definition qualified investment in subsection 207.01(1) of the Act, each of the following investments is prescribed as a qualified investment for a plan trust at a particular time if at that time it is (a) an interest in a trust or a share of the capital stock of a corporation that was a registered investment for the plan trust during the calendar year in which the particular time occurs or the immediately preceding year; (b) a share of the capital stock of a public corporation other than a mortgage investment corporation; (c) a share of the capital stock of a mortgage investment corporation that does not hold as part of its property at any time during the calendar year in which the particular time occurs any indebtedness, whether by way of mortgage or otherwise, of a person who is a connected person under the governing plan of the plan trust; (c.1) a bond, debenture, note or similar obligation of a public corporation other than a mortgage investment corporation; (d) a unit of a mutual fund trust; (d.1) [Repealed, 2007, c. 29, s. 32] (d.2) a unit of a trust if (i) the trust would be a mutual fund trust if Part XLVIII were read without reference to paragraph 4801(a), and (ii) there has been a lawful distribution in a province to the public of units of the trust and a prospectus, registration statement or similar document was not required under the laws of the province to be filed in respect of the distribution; (…)

Règlement 4900 4900 (1) Pour l’application de l’alinéa d) de la définition de placement admissible au paragraphe 146(1) de la Loi, de l’alinéa e) de la définition de placement admissible au paragraphe 146.1(1) de la Loi, de l’alinéa c) de la définition de placement admissible au paragraphe 146.3(1) de la Loi et de l’alinéa i) de la définition de placement admissible à l’article 204 de la Loi, chacun des placements suivants constitue, sous réserve du paragraphe (2), un placement admissible pour une fiducie de régime à une date donnée si, à cette date, il s’agit : a) d’un intérêt dans une fiducie ou d’une action du capital-actions d’une société qui constitue un placement enregistré pour la fiducie de régime au cours de l’année civile pendant laquelle tombe la date donnée ou de l’année immédiatement antérieure; b) d’une action du capital-actions d’une société publique, sauf une société de placement hypothécaire; c) d’une action du capital-actions d’une société de placement hypothécaire qui, à aucun moment de l’année civile qui comprend la date donnée, ne détient parmi ses biens une dette — sous forme d’hypothèque ou toute autre forme — d’une personne qui est un rentier, un bénéficiaire, un employeur ou un souscripteur en vertu du régime d’encadrement de la fiducie de régime, ou de toute autre personne qui a un lien de dépendance avec cette personne; c.1) de quelque obligation, billet ou titre semblable d’une société publique, sauf une société de placement hypothécaire; d) d’une unité d’une fiducie de fonds communs de placement; d.1) d’une obligation, d’un billet ou d’un titre semblable émis par une fiducie de fonds commun de placement dont les unités sont inscrites à la cote d’une bourse de valeurs visée à l’article 3200; d.2) d’une unité d’une fiducie, dans le cas où, à la fois : (i) la fiducie serait une fiducie de fonds commun de placement si la partie XLVIII s’appliquait compte non tenu de l’alinéa 4801a), (ii) des unités de la fiducie ont fait l’objet d’un appel public légal à l’épargne dans une province, et un prospectus, une déclaration d’enregistrement ou un document semblable relatif à cet appel n’avait pas à être produit selon la législation provinciale; (…)

Other Sources of Income Amounts to be included in income for year 56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year, (…) Indirect payments 56(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 65.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to the taxpayer.

Autres sources de revenu Sommes à inclure dans le revenu de l’année 56 (1) Sans préjudice de la portée générale de l’article 3, sont à inclure dans le calcul du revenu d’un contribuable pour une année d’imposition : (…) Paiements indirects 56(2) Tout paiement ou transfert de biens fait, suivant les instructions ou avec l’accord d’un contribuable, à toute autre personne au profit du contribuable ou à titre d’avantage que le contribuable désirait voir accorder à l’autre personne — sauf la cession d’une partie d’une pension de retraite conformément à l’article 65.1 du Régime de pensions du Canada ou à une disposition comparable d’un régime provincial de pensions au sens de l’article 3 de cette loi ou d’un régime provincial de pensions visé par règlement — doit être inclus dans le calcul du revenu du contribuable dans la mesure où il le serait si ce paiement ou transfert avait été fait au contribuable.

PART XVI

Tax Avoidance Definitions 245(1) In this section, tax benefit means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty; (avantage fiscal) tax consequences / attribut fiscal tax consequences to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount; (attribut fiscal) transaction / opération transaction includes an arrangement or event. (opération) General anti-avoidance provision 245(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction. Avoidance transaction 245(3) An avoidance transaction means any transaction (a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or (b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. Application of subsection (2) 245(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction (a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of (i) this Act, (ii) the Income Tax Regulations, (iii) the Income Tax Application Rules, (iv) a tax treaty, or (v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or (b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole. Determination of tax consequences 245(5) Without restricting the generality of subsection (2), and notwithstanding any other enactment, (a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part, (b) any such deduction, exemption or exclusion, any income, loss or other amount or part thereof may be allocated to any person, (c) the nature of any payment or other amount may be recharacterized, and (d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored, in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.

Évitement fiscal Définitions 245(1) Les définitions qui suivent s’appliquent au présent article. attribut fiscal S’agissant des attributs fiscaux d’une personne, revenu, revenu imposable ou revenu imposable gagné au Canada de cette personne, impôt ou autre montant payable par cette personne, ou montant qui lui est remboursable, en application de la présente loi, ainsi que tout montant à prendre en compte pour calculer, en application de la présente loi, le revenu, le revenu imposable, le revenu imposable gagné au Canada de cette personne ou l’impôt ou l’autre montant payable par cette personne ou le montant qui lui est remboursable. (tax consequences) avantage fiscal Réduction, évitement ou report d’impôt ou d’un autre montant exigible en application de la présente loi ou augmentation d’un remboursement d’impôt ou d’un autre montant visé par la présente loi. Y sont assimilés la réduction, l’évitement ou le report d’impôt ou d’un autre montant qui serait exigible en application de la présente loi en l’absence d’un traité fiscal ainsi que l’augmentation d’un remboursement d’impôt ou d’un autre montant visé par la présente loi qui découle d’un traité fiscal. (tax benefit) opération Sont assimilés à une opération une convention, un mécanisme ou un événement. (transaction) Disposition générale anti-évitement 245(2) En cas d’opération d’évitement, les attributs fiscaux d’une personne doivent être déterminés de façon raisonnable dans les circonstances de façon à supprimer un avantage fiscal qui, sans le présent article, découlerait, directement ou indirectement, de cette opération ou d’une série d’opérations dont cette opération fait partie. Opération d’évitement 245(3) L’opération d’évitement s’entend : a) soit de l’opération dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s’il est raisonnable de considérer que l’opération est principalement effectuée pour des objets véritables — l’obtention de l’avantage fiscal n’étant pas considérée comme un objet véritable; b) soit de l’opération qui fait partie d’une série d’opérations dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s’il est raisonnable de considérer que l’opération est principalement effectuée pour des objets véritables — l’obtention de l’avantage fiscal n’étant pas considérée comme un objet véritable. Application du par. (2) (4) Le paragraphe (2) ne s’applique qu’à l’opération dont il est raisonnable de considérer, selon le cas : a) qu’elle entraînerait, directement ou indirectement, s’il n’était pas tenu compte du présent article, un abus dans l’application des dispositions d’un ou de plusieurs des textes suivants : (i) la présente loi, (ii) le Règlement de l’impôt sur le revenu, (iii) les Règles concernant l’application de l’impôt sur le revenu, (iv) un traité fiscal, (v) tout autre texte législatif qui est utile soit pour le calcul d’un impôt ou de toute autre somme exigible ou remboursable sous le régime de la présente loi, soit pour la détermination de toute somme à prendre en compte dans ce calcul; b) qu’elle entraînerait, directement ou indirectement, un abus dans l’application de ces dispositions compte non tenu du présent article lues dans leur ensemble. Attributs fiscaux à déterminer 245(5) Sans préjudice de la portée générale du paragraphe (2) et malgré tout autre texte législatif, dans le cadre de la détermination des attributs fiscaux d’une personne de façon raisonnable dans les circonstances de façon à supprimer l’avantage fiscal qui, sans le présent article, découlerait, directement ou indirectement, d’une opération d’évitement : a) toute déduction, exemption ou exclusion dans le calcul de tout ou partie du revenu, du revenu imposable, du revenu imposable gagné au Canada ou de l’impôt payable peut être en totalité ou en partie admise ou refusée; b) tout ou partie de cette déduction, exemption ou exclusion ainsi que tout ou partie d’un revenu, d’une perte ou d’un autre montant peuvent être attribués à une personne; c) la nature d’un paiement ou d’un autre montant peut être qualifiée autrement; d) les effets fiscaux qui découleraient par ailleurs de l’application des autres dispositions de la présente loi peuvent ne pas être pris en compte.

VII. ANALYSIS

[137] Qualified investments are defined in paragraphs 146(1)(a) to (d) of the Act and paragraphs (a) to (w) of Regulation 4900(1) which includes at paragraph (d) a “mutual fund trust”. Subsection 248(1) provides that a “mutual fund trust” has the meaning assigned by subsection 132(6).

[138] It is not disputed in this appeal that the Income Funds met the requirements of paragraphs 132(6)(a) and (b) in that they were “a unit trust resident in Canada” whose only undertaking was “the investing of its funds in property” or “the acquiring, holding (…) of real property”.

[139] At issue is whether the Income Funds satisfied the requirements of paragraph 132(6)(c) being the prescribed conditions described in Regulation 4801 that require that either “there has been (…) a lawful distribution in a province to the public of units of the trust and a prospectus (…) was not, under the laws of the province, required to be filed in respect of the distribution” or “a class of the units of the trust is (…) qualified for distribution to the public”.

[140] The second requirement as set out in paragraph 4801(b) of the Regulation is that, in respect of each Income Fund, there has been “no fewer that 150 beneficiaries of the trust, each of whom” hold “not less that one block of units (…) having an aggregate fair market value of not less than $500.” The latter issue will be discussed in the next section entitled “Summary of Alleged Deficiencies.”

[141] It is not disputed in this proceeding that the distribution of securities in Canada is subject to provincial legislation, in this instance the Alberta Securities Act (“ASA”) and the British Columbia Securities Act (“BCSA”) [11] and to agreements known as national instruments or multilateral instruments adopted by the provinces and territories. It is also not disputed that the Appellant did not file a prospectus or similar document and that he relied on the OME, as described above. However, the requirements of subparagraphs 4801(a)(i) and (ii) of the Regulation both refer to a distribution “to the public” and as a result it is necessary to review some general concepts related to the distribution of securities.

[142] It is not disputed that a distribution refers to the process by which securities are issued to prospective investors or subscribers and that securities can only be distributed “to the public” in accordance with applicable securities legislation. This is known as the “closed system” for the distribution of securities that prevails today in most if not all provinces or territories.

[143] It has been suggested that the expression “to the public” is anachronistic in the modern world of securities distribution [12] and that historically, the notion was used to determine whether a prospectus or other disclosure document was required for a distribution to an investor who was not closely connected to the issuer and thus deemed to be in need of protection from unscrupulous or fraudulent behaviour. These investors were viewed as not having the benefit of the “common bonds or interest or association with the issuer of the security or its directors (…) or promoter” and would “have a ‘need to know’ all relevant matters before making an informed investment decision”. Attempts to distinguish between closely connected investors and broader constituents of “the public” gave rise to litigation and “a minefield of interpretive difficulties”. [13]

[144] Since the “advent of the closed system in 1979”, [14] it is recognized that the triggering event for the registration and prospectus requirements is “a distribution to the public” [15] . The historical distinction between a distribution “to the public” or “to the non-public” was eliminated as recommended by the Merger Report. [16]

[145] It is noted that both the ASA and BCSA continue to distinguish between members of the public and individuals who have “a special relationship with the issuer” and are, for example, an “insider, affiliate or associate” [17] for disclosure, compliance or insider-trading purposes.

[146] None of those provisions are relevant in this instance but they are mentioned to emphasize that the distinction between individuals who fall within those categories and members “of the public” are still relevant for administrative, enforcement or compliance proceedings instituted by the securities commissions.

[147] Subject to the exceptions described below, securities can only be distributed if a disclosure document described as a prospectus has been filed with the provincial securities commission. [18] Such securities are said to be “qualified for distribution to the public” and become freely tradeable in the jurisdiction where they are qualified and typically trade on the public exchanges. The issuer becomes a reporting issuer and is required to provide continuous disclosure to its investors.

[148] However, securities can also be distributed pursuant to one of several capital raising exemptions set out in the provincial legislation or instruments, including the OME requiring delivery of a simplified disclosure document known as an OM, as was used in this instance.

[149] In Gupta (P.L.) v. Minister of National Revenue [1992] 1 C.T.C. 2535 (“Gupta”) the Tax Court of Canada considered the difference between a “prospectus” and an “offering memorandum” and indicated as follows:

56. Neither the Income Tax Act nor the Quebec Securities Act define the words “prospectus” and “offering memorandum” or “registration statements”. However, one can find these definitions in the following reference works:

The Dictionary of Canadian Law

“PROSPECTUS. n. Any prospectus, notice, circular or advertisement of any kind whatsoever, whether of the kind hereinbefore enumerated or not, whether in writing or otherwise offering to the public for purchase or subscription any shares or debentures of any company.”

“OFFERING MEMORANDUM. A document that: (i) sets forth information concerning the business and affairs of an issuer; and (ii) has been prepared primarily for prospective purchasers to assist those purchasers to make an investment decision with respect to securities being sold pursuant to a trade that is made in reliance on an exemption.”

[My emphasis]

[150] Other exemptions include the “Private Issuer Exemption”, the “Family and Friends and Business Associates’ Exemption” or the “Accredited Investor Exemption”, none of which are at issue in this proceeding. The requirements of these exemptions may vary from one province to another but securities issued pursuant thereto are generally subject to re-sale restrictions. They are not “freely-tradeable” since they have not been qualified for distribution to the public.

[151] As explained by the Appellant, he knew that the filing of a prospectus was an expensive and onerous undertaking and he chose to rely on the OME.

[152] As indicated above, the units in the 2003 Income Funds were distributed pursuant to the OME described in Part 4 of Multilateral Instrument 45-103 and the units in the 2006 Promoted Funds were distributed in reliance on National Instrument 45-106 (the “Instruments”). The OME described in Multilateral Instrument 45-103 provides as follows:

Part 4 - Offering memorandum exemption

4.1

(1) In British Columbia… the dealer registration requirement does not apply to a person or company with respect to a trade by an issuer in a security of its own issue if the purchaser purchases the security as principal and, at the same time or before the purchaser signs the agreement to purchase the security, the issuer

a. delivers an offering memorandum to the purchaser in compliance with sections 4.2 to 4.4, and

b. obtains a signed risk acknowledgement from the purchaser in compliance with section 4.5(1).

(2) In British Columbia… the prospectus requirement does not apply to a distribution of a security in the circumstances referred to in subsection (1).

(3) In Alberta… the dealer registration requirement does not apply to a person or company with respect to a trade by an issuer in a security of its own issue if

a. the purchaser purchases the security as principal,

b. at the same time or before the purchaser signs the agreement to purchase the security, the issuer

i. delivers an offering memorandum to the purchaser in compliance with sections 4.2 to 4.4, and

ii. obtains a signed risk acknowledgement form from the purchaser in compliance with section 4.5(1),

(…)

(4) In Alberta…the prospectus requirement does not apply to a distribution of a security in the circumstances referred to in subsection (3).

4.2 Required form of offering memorandum

An offering memorandum delivered under section 4.1 must be in the required form.

(…)

4.4 Certificate

(1) An offering memorandum delivered under section 4.1 must contain a certificate that states the following:

“This offering memorandum does not contain a misrepresentation.”

(…)

4.5 Risk Acknowledgement

(1) A risk acknowledgement under section 4.1 must be in the required form.

(…)

4.7 Filing of offering memorandum

The issuer must file a copy of an offering memorandum delivered under section 4.1 and any update of a previously filed offering memorandum with the securities regulatory authority on or before the 10th day after each distribution under the offering memorandum or update of the offering memorandum.

(…)

7.1 Reporting Requirements

Subject to subsection (2), if an issuer distributes a security of its own issue under an exemption in section 3.1(2), 4.1(2), 4.1(4) or 5.1(2), the issuer must file a report in the local jurisdiction in which the distribution takes place on or before the 10^th day after the distribution.

[My emphasis]

[153] The “Confidential Offering Memorandum” prepared for the 2003 and 2006 Income Funds described the subscription process as follows:

5.2 Subscription Procedure

This Offering is made to, and subscriptions for Units will only be accepted from persons resident in the Provinces of Alberta and British Columbia. The Offering is being made in reliance upon Multilateral Instrument 45-103 – Capital Raising Exemptions (“MI 45-103”). See items 11 and 12

A prospective Investor may acquire Units if the following is received by the Fund and accepted by the Trustees:

• a. One manually signed and duly completed subscription agreement substantially in the form of the Subscription Agreement attached as Schedule “A” hereto;

• b. One manually signed and duly completed Risk Acknowledgement (Form 45-103F) substantially in the form of the Risk Acknowledgement attached as Schedule “B” hereto; and

• c. Payment of the subscription price to be made by cheque or other payment method acceptable to the Trustees.

[My emphasis]

[154] To summarize, “the prospectus requirement does not apply to a distribution of a security”, where the issuer relies on the OME and prospective investors have i) received a copy of the OM ii) returned a manually signed and duly completed risk acknowledgement and ‘agreement to purchase the security’ and iv) provided payment of the subscription amount.

[155] Sections 4.1(1) and (3) of the Instrument simply refer to “the agreement to purchase the security” (there is no prescribed form) but section 5.2 of the OM, noted above, explains the subscription procedure and refers to “the form of Subscription Agreement attached as Schedule “A” hereto” to which was appended Exhibit “A” being the “Terms and Conditions for the Subscription of Units” (the “Terms and Conditions” or collectively, the “Subscription Agreement”). It contained amongst other matters, the following provision:

5. Representation, Warranties and Covenants of the Investor.

The Investor hereby represents and warrants to and covenants and agrees with the Trustees that:

• a. Legal Capacity: If the investor is a corporation, the investor is a duly incorporated and subsisting corporation (…) If the Investor is an individual, he or she has attained the age of majority and has the legal capacity and competence to execute this Subscription Agreement, and to take all Actions required pursuant hereto;

• b. No Prospectus: No prospectus has been filed (…) with any securities regulator authorities of the Provinces of Canada (…);

• c. Offering Memorandum: the Investors has received from the Trustees the Offering memorandum (…);

• d. Prospectus Exemption: (i) The Investor is a residentof British Columbia and Alberta and is purchasing Units as principal for its own account, not for the benefit of any other person (…) ii) it has received a copy of the Offering Memorandum (…);

• e. Resale Restrictions: The Investor (…) is aware of the applicable restrictions on the resale of Units (…);

• f. Status of Investor: The Investor has such knowledge, skill and experience in business, financial and investment matters so that the Investor is capable of evaluating the merits and risks of an investment in the Units. To the extent necessary, the Investor has retained, at his or her own expense, and relied upon, appropriate professional advice regarding the investment, tax and legal rights and consequences of this subscription and owning the Units;

(…)

6. Reliance upon Representations, Warranties and Covenants.

The Investor acknowledges that the foregoing representations and warranties are made by it with the intent that they may be relied upon by the Trustees and their counsel in determining the eligibility of the Investors to purchase the Units (…) The Fund, the Trustees (…) shall be entitled to rely on the representations and warranties of the Investor contained hereto (…)

7. Survival of Representations, Warranties and Covenants.

All representations, warranties and covenants set out I this Agreement (…) will survive the Closing.

8. Amendment.

Neither this Subscription Agreement nor any provisions hereof will be modified, changed, discharged or terminated except by an instrument in writing, signed by the party against whom, any waiver, change, discharge or termination is sought.

[My emphasis]

[156] In compliance with section 4.4 of the Instrument, each OM prepared in connection with the Income Funds included a certificate which stated “This Offering Memorandum does not contain a misrepresentation” (the “Certificate”).

[157] The Certificate was required to be true when it was signed and when the OM was delivered to prospective purchasers. Additionally, each OM contained the following statement:

No securities regulatory authority has assessed the merits of the Units or reviewed this offering memorandum. Any representation to the contrary is an offence. This is a risky investment…

[158] The Companion Policy to National Instrument 45-106 [19] provides additional guidance on the need for prospective investors to be fully informed and on the requirement placed on the issuer in relation to the Certificates:

Date of certificate and required signatories

The issuer must ensure that the information provided to the purchaser is current and does not contain a misrepresentation. For example, if a material change occurs in the business of the issuer after delivery of an offering memorandum to a potential purchaser, the issuer must give the potential purchaser an update to the offering memorandum before the issuer accepts the agreement to purchase the securities. The update to the offering memorandum may take the form of an amendment describing the material change, a new offering memorandum containing up-to-date disclosure or a material change report, whichever the issuer decides will most effectively inform purchasers.

[My emphasis]

[159] Section 4.7 provides that the OM delivered to prospective investors had to be filed with the securities commission within 10 days of the distribution which corresponded to the timing for the filing of the Report pursuant to section 7.1.

[160] It is not disputed that the Appellant filed a copy of the OM with the filing fee and Form 45-103F4 for Alberta and Form 45-902F for BC, each being a “Report of Exempt Distribution” (the “Reports”) in connection with the First Distribution. As noted above, no evidence was adduced to suggest that a Report was filed in connection with the Second Distribution(s) of units.

[161] The cover letters addressed to the respective securities commissions and the Reports were signed by “James T. Grenon – Trustee”. By so doing, he certified their accuracy, and included the required schedules that listed the name and address of the Investors, the “position” held by them with the issuer, if any, and the exemption relied upon. Both versions of the Reports to the provinces included a statement that it was “[a]n offence to make a misrepresentation”.

[162] The Minister argues that the Income Funds were not properly constituted and that there were multiple deficiencies that resulted in an unlawful distribution as well as misrepresentations in that i) the Reports failed to disclose the “position” held by any of the Investors, notably the Appellant himself; ii) contrary to the Terms and Conditions for Subscription of Units attached to the Subscription Agreement, as noted above, the Appellant accepted Risk Acknowledgment and subscription forms from minors, signed by minors themselves or by guardians or other adults for minors; iii) numerous subscription forms were signed by adults for other adults, and finally iv) all Investors were required to purchase “as principal” but in numerous instances, subscription funds were paid for by third parties.

[163] In particular, the Minister argues that the acceptance by the Trustees of numerous subscriptions was unlawful, as detailed below, and that the filing of the Reports by the Appellant constituted a misrepresentation. Central to the position of the Respondent is that, as a result of the number of deficiencies, the distribution did not meet the requirements of paragraph 4801(b) of the Regulation that there be “no fewer than 150 beneficiaries” in each Income Fund. As reviewed above, the OM actually required that there be a minimum of 160 investors.

[164] The Minister takes the position that for 65 of the 171 Investors in the 2003 series of Income Funds, units were issued contrary to the OM in that:

• - 39 subscribers were minors at the time of subscription; and

• - 65 subscribers (including 39 minors and 26 adults) did not pay the subscription amount themselves.

[165] Of the 39 minors, two signed the Risk Acknowledgement and Subscription Agreement forms themselves while 32 such documents were signed by a guardian. In the remaining five cases, an individual other than a guardian, executed the documents ‘in trust’ for the minor. Of the 65 subscribers who did not purchase their own units, the subscription amounts were paid by third parties.

[166] The Minister takes the position that 74 of the 171 Investors in the 2006 series of Income Funds were issued contrary to the OM in that:

• - 31 subscribers were minors at the time of subscription; and

• - 74 subscribers (including 31 minors at least 40 adults) did not pay the subscription amount themselves.

[167] Of the 31 minors, 10 signed the Risk Acknowledgement and Subscription Agreement forms themselves while 21 were signed by a guardian. Of the 18 adult subscribers who did not sign their own Risk Acknowledgment and Subscription forms, it appears these were signed by other adults. For 74 of the subscribers, the subscription amounts were paid by third parties.

[168] As a result of these alleged deficiencies, the Minister takes the position that all the Income Funds was were not validly constituted as a “mutual fund trust” and thus were not “qualified investments” for RRSP purposes.

[169] The following inquiry will consider the objective reality and effectiveness of the steps undertaken by the Appellant to constitute the Income Funds in order to then assess the effectiveness of those arrangements for purposes of the Act.

[170] The Appellant has taken the position that he “does not admit” the numbers cited above suggesting that the Minister has the burden of convincing the Court.

[171] A review of the Appellant’s written submissions indicates that there is an admission that units were purchased by minors directly or by their guardian and that some adults signed subscription documents for other adults and paid for their units. I find that these admissions are binding on the Appellant and that he has made no effort to provide any further detail or specificity. He has maintained that the issue was unimportant and irrelevant. In particular, the Appellant has relied on the position that all units of the Income Funds had been paid for and issued and that none of the Investors has in any way repudiated the subscription.

[172] The Appellant admitted in oral testimony that he knew that subscriptions were being accepted for minors and that some adults were signing for other adults and paying for their units. Indeed several of the fact witnesses admitted as much. The Appellant has stated that he was not at all concerned with this.

[173] A review of the Minister’s assumptions indicates that it was assumed i) that many of the Investors were minors ii) who did not sign their own subscription documents and iii) did not pay for their own units and iv) many of the adult subscribers did not sign their own subscription documents and v) did not pay for their own units and vi) in certain instances, adult subscribers purchased units for multiple investors both minors and adults [20] . I find that these assumptions were sufficiently clear and precise for purposes of the pleadings and that, following the production of documents by the Appellant, including all subscription documents and subscription cheques, the Minister was able to particularize those basic assumptions.

[174] The number of subscriptions challenged by the Minister, as outlined above, are set out in Schedules A and B attached to the Written Submissions of the Crown (Volume 1 of 3) and were presented to the Court during closing submissions as an “aide-mémoire” that sought to reflect the information provided. I find that the Appellant cannot sit on his laurels and argue that he does not admit the numbers.

[175] If the Appellant wished to contradict the tabulation of information that had been prepared based on documents provided by him, it was incumbent on him to call witnesses or adduce some form of evidence to establish on a balance of probabilities that the Minister was mistaken. He has not done so.

[176] As the Appellant must know, in tax appeals the burden of proof rests on the taxpayer. The basic principles regarding the burden of proof were summarized by the Federal Court of Appeal in House v Canada, 2011 FCA 234:

[30] In determining the issue before us, it is important to keep in mind the Supreme Court of Canada’s decision in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman), where Madam Justice L’Heureux-Dubé enunciated, at paragraphs 92 to 95 of her Reasons, the principles which govern the burden of proof in taxation cases:

1. The burden of proof in taxation cases is that of the balance of probabilities.

2. With regard to the assumptions on which the Minister relies for his assessment, the taxpayer has the initial onus to “demolish” the assumptions.

3. The taxpayer will have met his initial onus when he or she makes a prima facie case.

4. Once the taxpayer has established a prima facie case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima facie case by proving, on a balance of probabilities, his assumptions (...).

5. If the Minister fails to adduce satisfactory evidence, the taxpayer will succeed.

[177] It is understood that the “assumptions” referred to in the above citation concern assumptions of fact only and do not include assumptions of law or assumptions of mixed fact and law: Canada v Anchor Pointe Energy Ltd., 2003 FCA 294. Moreover, the assertions made in paragraphs 4 and 5 above have been the subject of some controversy and in the more recent decision of the Federal Court of Appeal in Sarmadi v The Queen, 2017 FCA 131 (“Sarmadi”), Justice Webb indicated that:

[61] In my view, a taxpayer should have the burden to prove, on a balance of probabilities, any facts that are alleged by that taxpayer in their notice of appeal and that are denied by the Crown. In most cases this should end the discussion of the onus of proof since the assumptions of fact made by the Minister in reassessing the taxpayer would generally be inconsistent with the facts pled by the taxpayer with respect to the material facts on which the reassessment was issued.

[62] If there are facts that were assumed by the Minister in reassessing a taxpayer and that are not inconsistent with the facts as pled by that taxpayer, it would also seem logical to require the taxpayer to prove, on a balance of probabilities, that these facts assumed by the Minister (and which are in dispute and are not exclusively or peculiarly within the Minister’s knowledge) are not correct. Requiring a taxpayer to disprove the facts assumed by the Minister in reassessing that taxpayer simply puts the onus on the person who knows (or ought to know) the facts. It also puts the onus on the person who indirectly asserted certain facts in filing their tax return that would be inconsistent with the facts assumed by the Minister in reassessing such taxpayer.

[63] Once all of the evidence is presented, the Tax Court judge should then (and only then) determine whether the taxpayer has satisfied this burden. If the taxpayer has, on the balance of probabilities, disproven the particular facts assumed by the Minister, based on all of the evidence, there is no burden to shift to the Minister to disprove what the Tax Court judge has determined that the taxpayer has proven. Either the taxpayer has disproven the assumed facts or he, she or it has not.

[My emphasis]

[178] In this instance, I find that the Appellant has failed to satisfy his burden in that he has not established on a prima facie basis that the units in the Income Funds were issued other than as indicated in the Minister’s assumptions.

[179] The Appellant has utterly failed to adduce any evidence that might demolish the assumptions made by the Minister as further particularized above. I find that he has not addressed the facts with candour, fairness and honesty. On the contrary, he has made glib admissions “that there were minors”, that “adults did sign for other adults” and that “third parties paid the subscription amounts for other subscribers” but he has otherwise declined to address the assumptions with any degree of specificity. Vague admissions of fact do not suffice to shift the burden to the Minister. As indicated by Justice Webb in Sarmadi, supra, “either the taxpayer has disproven the assumed facts or (…) not”. In this instance, I find that he has not.

[180] I thus conclude that the number of subscriptions challenged by the Minister, as set out above, have been established to the satisfaction of the Court.

[181] What remains to be discussed are the legal consequences.

[182] Since Regulation 4801 has not been judicially considered to date, it is appropriate to review the basic rules of statutory interpretation as set out by the Supreme Court of Canada that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, and the intention of Parliament (…) according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole”: Canada Trustco Mortgage Co. v. Canada [2005] 2 S.C.R. 601 (“Canada Trustco”).The Supreme Court has added that “where the words are precise and unequivocal, the ordinary meaning of words play a dominant role in the interpretative process” (para. 10)

[183] In the later decision of Placer Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715 (“Placer Dome”), the Supreme Court referenced tax legislation specifically and noted that “because of the degree of precision and detail characteristic of many tax provisions, a greater emphasis has often been placed on textual interpretation where taxation statutes are concerned” (para 21) and that “where such provision admits of no ambiguity in its meaning or in its application to the facts, it must be simply applied”. Reference to the purpose of the provision “cannot be used to create an unexpressed language” (Para 23).

[184] The Appellant argues that terms used in provincial securities legislation should inform the interpretation of similar terms in the Act, and relies on two earlier decisions of the Supreme Court of Canada, notably Backman v. The Queen, 2001 SCC 10 (“Backman”) where is was held that a partnership was defined by reference to provincial or territorial definitions and Will-Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915 (“Will-Kare Paving”) where the Supreme Court emphasized that “a ‘plain meaning’ interpretation (…) would assume that the Act operates in a vacuum, oblivious to the legal characterization of the broader commercial relationships it effects”, noting that the Act “is not a commercial code in addition to a taxation statute” (para 31).

[185] The Appellant argues that each Income Fund completed a valid and lawful distribution of units to 171 Investors but that in order to satisfy the requirements of sub-paragraph 4801(a)(i)A, all that was required was a valid and lawful distribution to “at least one” Investor.

[186] The Appellant argues that the Regulation requires only that “some units of the class have been lawfully distributed” but that “not all units of the class must have been issued in accordance with such requirements” as long as “at least one” of the 150 beneficiaries “has received their securities through a lawful distribution (…) the requirement for a lawful distribution is met”, and further that “taken as a whole, Regulation 4801 does not require all of the 150 beneficiaries to have received their securities through a lawful distribution in a province” as some “might be friends and family of the promoter” who remain as security holders.

[187] The Appellant maintains that a “distribution” is an industry term that refers to a singular trade in securities. He relies on the definition of that term in the ASA as “a trade in securities of an issuer that have not been previously issued” [21] and in the BCSA as “a trade in a security of an issuer”. [22]

[188] The Appellant relies on the decision of Will-Kare Paving, supra, and argues that any other interpretation of the word “distribution” would create uncertainty in that the acquisition of units by one investor and the validity of that issuance would depend on the acquisition of units by all other investors, many of whom are not known to each other, leading to undesirable results from a practical and policy perspective.

[189] Although this issue is primarily one of statutory interpretation, I note that the Appellant’s testimony on the subject was inconsistent and contradictory. When asked during cross-examinations which exemption he had relied on, he expressed some uncertainty explaining that he might have relied on more than one before finally concluding that it was the OME and that he had understood that it required only one lawful trade. But in earlier testimony, he had indicated that the OM was drafted to exceed the minimum requirements of Regulation 4801, and in particular that the number of investors had been increased to 160. There was no mention of a single trade to one investor. He understood that units had to be issued to at least 160 investors to satisfy the terms of the OM.

[190] In any event, the Minister maintains that a “mutual fund trust” will be a qualified investment for RRSP purposes only if there has been i) a lawful distribution of securities ii) to at least 150 investors. If these requirements are not met, the Income Fund might continue to exist as an ordinary trust but not as a “mutual fund trust”, as defined in the Act.

[191] As indicated by the Minister, the word “distribution” is defined in the Oxford English Dictionary, 2019 Oxford University Press (“Oxford Dictionary”) as “the action of dividing and dealing out or restoring or bestowing in portions among a number of recipients; apportionment, allotment”. Also subsection 33(2) of the Interpretation Act, RSC 1985, c I-21, provides that “words in the singular include the plural, and words in the plural include the singular”.

Analysis

[192] From a textual analysis point of view, I agree with the Minister that the ordinary meaning of the word “distribution” incorporates the plural form of the term and that the use of the expression “a lawful distribution (…) to the public” suggests that Parliament intended that it would refer to more than one isolated trade.

[193] The plain meaning of the word “public” suggests a collective concept and the Oxford Dictionary defines it as “ordinary people in general; the community”.

[194] While the definitions set out in the provincial securities legislation, as noted above, refer generally to “a” trade in securities of an issuer, I find that had Parliament intended to refer to an isolated trade to one investor, it would have said so using precise language. As noted by the Minister, in other provisions of the Act, Parliament has spoken clearly, for example, by using the expression “to any member of the public” [23] . As argued by the Respondent, this is consistent with the notion that “giving the same words the same meaning throughout a statute is a basic principle of statutory interpretation”: R. v. Zeolkowski, (1989) 1 SCR 1378 (S.C.C.).

[195] If the notion of “a lawful distribution” referred to only one singular trade, the use of the expression “to the public” would be superfluous and, as noted by the Minister, this would run counter to the presumption against tautology in the sense that Parliament seeks to avoid superfluous words: Quebec (Attorney-General) v. Carrières Ste. Thérese Ltée., (1985) 1 S.C.R. 831 (at 838) (S.C.C.).

[196] The parties agree that the prescribed conditions for a “mutual fund trust” are set out in paragraphs (a) and (b) of Regulation 4801, as noted above, but the Appellant argues that paragraph (a) only requires one valid trade as long as there are at least 150 investors at the time the trust claims to be a “mutual fund trust”.

[197] On this issue, I agree with the Minister that the use of the conjunctive “and” (and not the disjunctive “or”) indicates that the conditions of both paragraphs must be met. From a contextual point of view, it is apparent that Parliament intended to link the requirement in paragraph (a) that there be “a lawful distribution…to the public” with the requirement in paragraph (b) of the Regulation that there be a widely-held distribution to no fewer than 150 investors.

[198] I agree with the Minister that this inter-connection supports the interpretation of “a lawful distribution” as being to more than one investor. Moreover, the phrase “in respect of a class of the trust’s units that meets at that time, the conditions prescribed in paragraph (a)” that appears at the beginning of paragraph 4801(b), provides further context. It requires that “at the time” the lawful distribution is completed, there are no fewer than 150 investors. Moreover, the introductory words to Regulation 4801 indicate that “[i]n applying at any time paragraphs 136(c) of the Act, the following are the prescribed conditions (…).” The word “conditions” is expressed in the plural and not the singular.

[199] As a result I conclude that paragraphs (a) and (b) of Regulation 4801 must be read harmoniously as a whole, or “holistically”, as argued by the Minister, and that this is consistent with the notion that the purpose of the provision is to establish the precise requirements for a “mutual fund trust” that may provide valuable tax advantages to annuitants as a “qualified investment” for RRSP purposes.

[200] Subsection 132(6.1) provides that “where a trust becomes a mutual fund trust at any particular time” it may so elect “in its return of income for that year”. This is consistent with the wording of subsection 132(6) which provides that “a trust is a mutual fund trust if, at that time” it satisfies the conditions set out therein including the requirements of Regulation 4801. This suggests that a trust would only become a “mutual fund trust” when it so elects having satisfied “at that time” the requirements of both paragraphs (a) and (b) of Regulation 4801.

[201] It may be, as argued by the Appellant, that a distribution to one single investor is “a trade in a security of an issuer” that satisfies the definition contained in provincial legislation, as noted above. But it is not clear how this advances the Appellant’s position in establishing that the Income Funds were a “mutual fund trust”. If paragraph (a) of the Regulation refers to only one lawful trade to one investor, then the Court would have to wonder how or pursuant to what other lawful distribution the remaining units in the trust were issued to other Investors. I agree with the Minister that it would be absurd to condone the possibility that there might be 149 unlawful distributions as long as there was at least one lawful distribution.

[202] The Appellant suggests that sub-paragraphs (a)(i) and (a)(ii) of Regulation 4801, do not provide that “all” units must be distributed in the same distribution or pursuant to “a lawful distribution” and do not exclude the possibility of there being only “one” lawful distribution, as long as there were no fewer than 150 investors “at that time”.

[203] I find that this interpretation is incompatible with and ignores the closed-system for the distribution of securities that prevails in Canada, as reviewed above.

[204] All securities, without exception, must be legally or lawfully distributed and that involves filing a prospectus or relying on a prospectus exemption, as required “under the laws of the province”.

[205] The uncontroverted evidence is that the Appellant undertook only “one” distribution of units in connection with each Income Fund relying on the OME and it was an essential term of the OM that units be issued to at least 160 investors.

[206] There was no evidence of a prior distribution of units by prospectus or pursuant to any other exemption. The evidence on this issue was unequivocal.

[207] Although it is not necessary for the Court to opine in the abstract, I will add that it would be possible (subject to the finer points of securities legislation) to issue securities relying on a prospectus or a combination of different exemptions carried out at different points in time (and possibly in different provinces), given the use of the words “there has been at or before that time” in sub-paragraph 4801(a)(i). For example, a trust might issue units having a value of at least $500 to 50 investors relying on the “Friends, Family and Business Associates Exemption” and, at a later date (or simultaneously), if it intended to qualify as a “mutual fund trust”, undertake a second distribution of units having a value of at least $500 to at least 100 investors, relying on the OME. For the purposes of Regulation 4801, as long as a class of units had been distributed “lawfully” to the initial 50 investors, there would be a lawful distribution to the public under the laws of the province. Once the second distribution was completed, there would be “at that time”, no fewer than 150 investors. Having completed two lawful distributions and having reached the “bright-line test” of 150 investors, the trust would qualify as a “mutual fund trust” in accordance with the requirements of Regulation 4801.

[208] To conclude on this issue, given the undisputed terms of the OM and the Appellant’s admission that he had raised the bar to exceed the minimum requirements of the provision, the Court finds in this instance that, “a lawful distribution…under the laws of the province” required a distribution to no fewer than 160 investors. Anything less than that would not be “a lawful distribution” since it would be contrary to the precise terms of the OM. I find that this interpretation of the word “distribution” in Regulation 4801 is consistent with the text of the provision and provides a result that achieves the statutory objectives and gives effect to the entire statutory scheme.

[209] As noted above, the Minister has argued that as a result of a number of deficiencies, the distribution of units in the Income Funds was not “lawful” in that it was contrary to securities legislation including the OME and the terms of the OM.

[210] The Oxford Dictionary defines “unlawful” as “contrary to or prohibited by law; not conforming to, permitted by, or recognized by law; illegal; unjust, wrongful.”

[211] Before reviewing the alleged deficiencies in greater detail, I turn to the position of the parties as to the meaning of the word “lawful”.

[212] The Minister argues that under the closed-system for the distribution of securities, an issuer is prohibited from distributing securities unless a prospectus has been filed and approved in advance of the distribution or alternatively, the issuer has met the requirements of an exemption as set out in the national or multilateral instruments, as reviewed above. The Minister argues that these requirements are mandatory and have force of law and must be strictly complied with. A distribution that does not strictly comply will be characterized as illegal and thus unlawful.

[213] The Minister cites a number of decisions of the Alberta Securities Commission including Re Homerun International Inc., 2014 ABASC 59 (“Homerun”); Re Cloutier, 2014 ABASC 170 (“Cloutier”) and Bartel Re, 2008 ABASC 141 (“Bartel”). All of these decisions involved enforcement proceedings against issuers or individuals who were prosecuted for having engaged in illegal trades or the distribution of securities where there was no exemption from the prospectus requirements. They had also made prohibited representations to investors. In all instances, the focus was on the conduct of the issuer or individuals involved.

[214] In Homerun, the Commission referred to the exempt-distribution rules as the “Prescribed Capital-Raising Exemptions” explaining that they were enacted to “facilitate capital-raising on terms that preserve investor protection” (para. 82) and added that the “onus of demonstrating the availability, and adherence to all the conditions and requirements, of the Registration Exemption (…) rests with the [person] claiming the benefit of the exemption” (para. 83).

[215] Similarly, in Bartel, the Commission noted that “distributions that fall squarely within the exemption requirements will not be illegal” but that “the onus rests on [the promoter] to prove the facts necessary to demonstrate that one or more of those exemptions was available” (para 109). It later noted that “the use of exemptions must be complied with strictly” and that “those who use exemptions are expected to know what the rules are and how they work” adding that “[o]ne is responsible for the trades one conducts” (para. 127).

[216] The Minister also relies on the decisions of R. v. Del Bianco, 2008 ABPC 248, confirmed on appeal in Del Bianco v. Alberta Securities Commission, 2004 ABCA 344 (“Del Bianco”), R. v. Boyle, 2001 ABPC 152 (“Boyle”) and Ironside v. Smith, 1998 ABCA 366 (“Ironside”). In the latter decision, the court conducted a detailed review of what it described as “the highly regulated world of securities law” (paras. 18-30) noting that it seeks to balance the twin-goals of “investor protection and efficient raising of capital” (para. 19) by regulating issuers and individuals involved in the distribution of securities by providing “civil and criminal sanctions (…) to discourage fraudulent behaviour” (para. 21) and “broad definitions to capture most distributions before excluding various trades by exemption” (para. 22).

[217] In both Boyle and Del Bianco, individuals were accused of contravening the provisions of the securities legislation by engaging in the illegal trade of securities and failing to comply with various orders of the Alberta Securities Commission, including that they cease trading in securities and resign as officers and directors of any issuers. In Boyle, the Provincial Court of Alberta stated that:

[18] (…) In a closed system, all “trades” of “securities,” both of which are broadly defined, must be undertaken in full compliance with the regulatory regime. If an issuer of securities wishes to operate “outside” of the full system, it must take affirmative steps to be exempt from various statutory requirements.

[My emphasis]

[218] The Minister argues that all of these decisions support the broad proposition that under the closed-system of distribution of securities, all distributions must be undertaken in strict compliance with the securities legislation. Moreover, while acknowledging that the Companion Policy 45-106CP Prospectus Exemption, is not binding legislation, the Minister points to section 1.9(1) that provides as follows:

It is the seller that is relying on the prospectus exemption and it is the seller that is responsible to ensure that the terms of the exemption are met. If the seller has any reservations about whether the purchaser qualifies under the exemption, the seller should not sell securities to the purchaser in reliance on that exemption.

[219] The Appellant argues that the alleged deficiencies are of no consequence since the word “lawful” refers to something that is prohibited by law as a consequence of which it is utterly void. The Appellant argues that the distribution of units was in keeping with the requirements of the Instruments and that even if it was contrary to the Instruments or to the OM, as the Minister has alleged, it would not render them automatically unlawful since they would only be voidable.

[220] The Appellant relies inter alia on the decision of the Federal Court of Appeal in Still v. M.N.R., [1998] 1 FC 549 (“Still”) involving an American citizen who was lawfully admitted to Canada to join her spouse. Pending consideration of her application for permanent resident status, she accepted gainful employment without a work permit, contrary to the provisions of the immigration legislation. She was laid-off after several months and sought unemployment benefits. Despite a finding that she was of good faith and had paid insurance premiums, her application for unemployment benefits was denied and the trial judge who up-held the Minister’s determination that her failure to obtain a work permit resulted in an illegal contract of service that did not constitute “insurable employment”.

[221] On appeal, the Federal Court of Appeal reviewed the common law doctrine of illegality noting that the “classical model” provides that “a contract which is either expressly or impliedly prohibited by statue is normally considered void ab initio”. Before concluding that the applicant was entitled to unemployment benefits, the Court noted that “the classical model has long since lost its persuasive force and is no longer being applied consistently” and that:

“(… ) where a contract is expressly or impliedly prohibited by statute, a court may refuse to grant relief to a party when, in all of the circumstances of the case, including regard to the objects and purposes of the statutory prohibition, it would be contrary to public policy, reflected in the relief claimed, to do so.

[222] I note that Still has been cited in several decisions of this Court involving claims for unemployment benefits, notably Garland v. M.N.R., 2005 TCC 176 (“Garland”) (para. 8) and Haule v. M.N. R., (Docket 98-511-UI) (“Haule”). These decisions involved individuals who had been denied unemployment benefits as a result of the alleged illegality of their employment contract. The paragraph from Still that is most of often quoted is that of Robertson J.A.:

(…) As the doctrine of illegality is not a creature of statute, but of judicial creation, it is incumbent on the present judiciary to ensure that its premises accord with contemporary values (…)

[My emphasis]

[223] In Haule, Lamarre J. (as she then was), noted that “as the doctrine of illegality rests on the understanding that it would be contrary to public policy to allow a person to maintain an action on a contract prohibited by statute, then it is only appropriate to identify those policy considerations which outweigh the applicant’s prima facie right to unemployment benefits” (para. 49).

[224] The Appellant also relies on the Supreme Court of Canada’s approach to the doctrine of illegality in Continental Bank of Canada v The Queen (1998), 98 DTC 6505 (SCC) (“Continental”). In that instance, the Court reviewed the application of the doctrine explaining that it includes both “common law illegality” and “statutory illegality” (para 67) and provides that “a contract prohibited by statute or for an illegal purpose, will be declared void even if it conforms to all other requirements of a valid transaction” (para. 64).

[225] Writing for the majority, McLachlin J. (as she then was) indicated that a finding that “a contract is void or unenforceable for public policy reasons under the doctrine of illegality does not render either the contract itself or the subject of the contract unlawful” (para. 116) and further that, even if the Court concluded (on the facts of that decision) that the bank’s participation in the “partnership should be void or unenforceable for public policy reasons under the doctrine of illegality” that would “not necessarily mean that its participation was illegal or unlawful in the traditional sense of either term” (emphasis in the original text, para 117). She concluded that “public policy requires that breaches of the Bank Act should not lead to the invalidation of contracts and other transactions” (emphasis in the original text, para 118) explaining further that the legislation in question specifically provided that “[n]o act of a bank…is invalid by reason only that the act or transfer is contrary to this Act” [24] . In the end, McLachlin J. concluded that “the doctrine of illegality should have no application in the case at bar” (para 119).

[226] The Appellant also relies on the decision of Sidmay Ltd. v. Wehttam Investments Ltd., [1967] 1 OR 508 (ONCA) (“Sidmay”) affirmed on appeal [1968] S.C.R. 828, involving a mortgagor who sought to invalidate a mortgage (“the impugned mortgage”) on the basis of illegality since the lender was not registered under the Loan and Trust Corporations Act [25] . The trial judge declared the mortgage “void and unenforceable”, a finding that was rejected by the Ontario Court of Appeal. Laskin J.A. quoted the following phrase with approval: “If refusal to enforce or to rescind an illegal bargain would produce a harmful effect on the parties for whose protection the law making the bargain illegal exists, enforcement or rescission, whichever is appropriate, is allowed” (para 74).

[227] The Appellant argues that Still, Continental and Sidmay all support the broad proposition that even if certain subscriptions for units in the Income Funds were accepted mistakenly or contrary to the provisions of the securities legislation, the Instruments or the OM, they would only be rendered voidable and not unlawful. The Appellant argues that a finding that the issuance of units to some investors was “unlawful” could also harm innocent third parties who were unaware of the potential illegality of the transaction.

Analysis

[228] It is apparent from the decisions cited by the Minister that securities legislation has evolved over time as a highly-regulated area of law intended to facilitate capital-raising efforts while also ensuring investor protection.

[229] In particular, securities legislation provides discreet capital-raising exemptions as an alternative to the more onerous process of filing a prospectus but holds that exemptions must be strictly complied with and “must be undertaken in full compliance with the regulatory regime”. Only “distributions that fall squarely within the exemption requirements will not be illegal” (Bartel), suggesting that all others will be considered illegal.

[230] I now turn of the decision of Still on the issue of statutory illegality. It is not entirely clear how this applies to the facts in this instance since the issue of the enforceability of the subscriptions as between the various unitholders and the Income Funds, and whether they are voidable or utterly void, is not before the Court. The only issue is whether the distribution was “lawful” for the purposes of Regulation 4801. In the decisions of Still, Godard and Haule, the applicants had all been engaged in gainful employment and the critical issue was their entitlement to statutory benefits. In this instance, the Minister does not seek to deprive any of the Investors of their entitlement to pro rata distributions from the Income Funds much less to any statutory benefits.

[231] Similarly, the decision of Sidmay involved a dispute as to the enforceability of a mortgage that was alleged to be void on the basis of illegality. But Laskin J.A. rejected that notion finding that “the prohibition of the statute affects the mortgagee alone” (para 61) (My emphasis) and that the mortgage was enforceable. As noted above, the Minister does not seek a declaration that the impugned subscriptions are void or voidable, but only whether units were issued as part of “a lawful distribution” to determine whether the Income Funds satisfy the requirements of Regulation 4801.

[232] It is relevant to note that in Continental, McLachlin J. concluded that “the doctrine of illegality had no application in the case at bar” (para 119) suggesting that her comments on the issue were largely obiter dicta. However, even if the Court considers the application of the doctrine, it bears repeating that it rests on the understanding that public policy considerations dictate that an impugned contract that is said to be prohibited by statute, should not be disregarded outright. As noted in Haule, in such circumstances, it is only appropriate for the court to identify those policy considerations which would outweigh a finding of illegality.

[233] In this instance, the Court must determine the validity of the assessments wherein the Minister takes the position that the Appellant did not complete “a lawful distribution...under the laws of the province” such that the Income Funds were not a “qualified investment” for RRSP purposes. If the Court concludes that the issuance of units to certain Investors was contrary to the requirements of the OME and OM, then the Income Funds would continue to exist as ordinary trusts (assuming they still exist today). With the exception of the Appellant (and possibly Sutherland and MacLennan who acquired units with their respective RRSP’s) the remaining unitholders would not be affected by a decision of this Court.

[234] The issue before the Court is the meaning of the word “lawful”. To make that determination, the Court must consider whether the Income Funds have been legally, validly or properly constituted and were compliant with securities legislation. Did they meet the definition of a “mutual fund trust” in Regulation 4801 and in particular was there “a lawful distribution (…) in accordance with the laws of the province” or stated otherwise, were the Income Funds “qualified investments” for RRSP purposes.

[235] To provide further context on the analytical framework, it bears repeating that in the realm of tax law, form matters a great deal. That the Appellant intended, in good faith or otherwise, to issue units to at least 160 investors per Income Fund does not suffice. In the seminal decision of The Queen v. Friedberg, 92 D.T.C. 6031 (FCA) (“Friedberg”) at 6032, Linden J.A. stated the following:

In tax law, form matters. (…) If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. (…) While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.

[My emphasis]

[236] I conclude that a distribution will be “lawful” and meet the requirements of paragraph (a) of Regulation 4801, where the distribution of securities is made “under the laws of the province” and either i) the distribution of securities is pursuant to one of several exempt-distribution rules (where a prospectus is not required) and the securities are distributed in accordance with that exemption, or ii) the securities have been qualified for distribution to the public by the filing of a prospectus and the securities are distributed in accordance with that document.

[237] In this instance, despite the Appellant’s assertion that he “may have relied on more than one exemption”, it cannot seriously be disputed that he relied exclusively on the OME. The Reports filed with the securities commissions in connection with the First Distribution, confirm that all listed Investors, without exception, including the Appellant and his related entities, relied on that exemption. At issue is whether the distribution complied with or met the technical requirements of the securities legislation, including the OME and OM.

[238] As noted above, the Reports included a schedule listing the name and address of Investors, the exemption relied upon, and the “role” assumed by each of them.

[239] The Minister argues that the Appellant did not indicate the “position” held by any of the Investors, including the Appellant himself nor Bruce Maclennan for the 2003 series of funds or Deborah Nickerson for the 2006 series of funds. The Minster argues that this was a misrepresentation.

[240] The ASA provides a broad definition of the word “misrepresentation” [26] as being “an untrue statement of a material fact” or “an omission of a material fact that is required to be stated” or, finally, “an omission to state a material fact that is necessary to be stated in order for a statement not to be misleading”. The BCSA contains a similar definition.

[241] The schedule in question listed a certain “Jim Grenon” as an Investor but described his position as “none”. The Appellant explained in oral testimony that his staff knew him by that name and that they prepared the form accordingly, suggesting it was in the nature of a clerical error. The failure to identify his role was also characterized as a clerical error. The Appellant indicated that in any event he had signed the cover page addressed to the securities commission and the Reports in his capacity as trustee and that his role as promoter was described in the OM.

[242] I note that the Appellant’s suggestion of a clerical error is uncorroborated. The cover page was signed by the Appellant below the type-written words “James T. Grenon - Trustee”. If the said “Jim Grenon” was one and the same as the Appellant, the Court must wonder why his role was not specified and why this error was repeated in at least six Reports that also failed to identify the other trustees.

[243] Moreover, the Court notes that the Appellant’s employees were sufficiently diligent and attentive to detail to list numerous entities related to the Appellant in the 2003 Reports and at least 14 other Investors sharing the same address and telephone number as Tom Capital Consulting, including Grencorp, Tom Capital, Tom Consulting Limited Partnership and at least 5 Alberta numbered companies, two of which were noted above as being wholly owned by the Appellant.

[244] To suggest that these was mere clerical errors stretches credulity and, at the very least, raises serious concerns as to how the distribution process was managed.

[245] That said, while I find that the Appellant’s testimony on this issue was not credible, I am unable to conclude that the failure to describe his “role” or that of the other trustees in the schedules to the Reports was a “misrepresentation” or “an omission of a material fact that is required to be stated”. In the end, the Reports at least identified the Appellant as the trustee and promoter of the Income Funds.

[246] For reasons set out above, the Court has concluded that 39 Investors in the 2003 series of Income Funds and 31 Investors in the 2006 series of Income Funds, were minors. In oral testimony, the Appellant indicated that he was not at all concerned with this because of his view that “little Johnny can own shares”.

[247] Although there is some disagreement as to the actual age of the minors involved, the Affidavit of Helen Little provides birthdates and in response to requests to admit, the Appellant indicated that he had no reason to dispute that the listed minors were not minors. They were all under the age of majority.

[248] In all instances, the subscriptions were accepted and units were issued to the minors “as named” and over the years, pro-rata distributions were made accordingly. The Appellant’s testimony on this has been corroborated by the fact witnesses.

[249] The Appellant maintains that under common law, minors [27] can acquire property including securities and enter into contracts with third parties. The common law simply holds that contracts with minors are prime facie voidable (with the exception of contracts for “necessaries”) and may be rescinded by the minor upon reaching the age of majority. These common law notions have been incorporated into statute. For example, the applicable BC legislation provides that a contract with a minor is unenforceable unless “affirmed by the infant on his or her reaching the age of majority” or “if not repudiated by the infant within one year after his or her reaching the age of majority” [28] . At common law, “all instruments and acts of an infant are voidable only” but not void ab initio: Rex v. Rash, (1923) 53 O.L.R. 245 (ONCA) (para 49).

[250] The Appellant also relies on an article entitled “The Present Law of Infants’ Contracts” [29] in support of the proposition that “[a]ny contract made by an infant for the purchase or other acquisition of shares is voidable at the option of the infant, but is valid unless and until so repudiated.” I note that this article predates the introduction of the closed-system in 1979, as described above. It also does not specifically address the issuance of securities pursuant to an OM.

[251] The Appellant also maintains that guardians can enter into legally binding contracts on behalf of minors and thus could lawfully sign the subscription documents on their behalf. In Alberta, the Domestic Relations Act, RSA 2000, c D-14 (section 50(1) (replaced effective 2013, by the Family Law Act, SA 2003, c F-4.5), provides that parents are the joint guardians of a child. There is similar legislation in BC: Family Law Act, SBC 2011, c 25, section 39.

[252] The Appellant’s position on this issue is best encapsulated by the following phrase: “[g]uardianship is a specific legal construct designed, and inculcated in statute, to address the relatively unique relationship of children and parents (…) The guardian acts, as a child, such that, in a commercial context, any party seeking to deal with the child’s property can, by contracting through the guardian, obtain an enforceable agreement” [30] .

[253] The Minister does not appear to disagree with the general proposition of law that minors can acquire property and that guardians may sign contracts on behalf of a minor. She relies on the case law referenced above, which holds that under the closed-system for the distribution of securities, a distribution of securities is unlawful unless the requirements of the exemption are strictly complied with.

[254] In particular, the Minister has focused on section 5 of the Terms and Conditions being the “Representations, Warranties and Covenants of the Investor”, as noted above, and concluded that it was contrary to the OME and OM for minors to acquire units. Similarly, the Minister has argued that the Risk Acknowledgement is a prescribed form that does not allow for the signature of guardians in the pre-printed signature block. And finally, the Minister has argued that when the Appellant filed the Reports with the securities commission, listing the name and address of all the Investors, having knowledge of the subscriptions by minors, that this was a “misrepresentation” leading to the conclusion that the distribution was contrary to the OME as well as the OM and thus not “a lawful distribution”.

[255] I find that there are compelling reasons to agree with the Minister’s submissions.

[256] As a preliminary observation, I note that the Appellant’s bald assertion that minors can own shares is mistaken or at least too simplistic. Within the realm of private corporations where securities are typically issued pursuant to the “Private Issuer Exemption” or “Family, Friends and Business Associates Exemption”, it may be that shares are routinely issued to minors without further consideration. As noted by the Appellant, the Act itself contains provisions seeking to reattribute dividend income to adults [31] or to impose the so-called ‘kiddie’ tax [32] . But outside the narrow confines of those exemptions, I note that even securities that have been “qualified for distribution to the public” (ie. by the filing of a prospectus with the applicable securities commission) and trade on an exchange, cannot simply be acquired by minors except with the use of a custodial or “in trust” account managed by an adult. No evidence has been lead on this issue, but I take judicial notice of the fact that investment dealers in Canada will not open investment accounts for minors because they are not competent to give instructions. Given the inherent risks of owning securities, it is of little comfort for investment dealers to know that securities acquired for minors are only “voidable” until the age of majority.

[257] In this instance, we are dealing with the OME and securities that have “not” been qualified for distribution to the public and the governing law, as set out in the Instruments, provides that the OM and Risk Acknowledgment “must be in required form”, as noted in sections 4.2 and 4.5 above. The Court must take this to mean that the “forms” could not be modified unless otherwise provided for.

[258] It is not disputed that the OM was in required form and that it included various Schedules, including a “Form of Subscription Agreement”. The attached Terms and Conditions included the representation that prospective investors had attained the age of majority and had legal capacity and competence.

[259] More importantly, section 5(k) included a representation as to the “Status of Investor” indicating that the investor had such “knowledge, skill and experience in business and investment matters” as was necessary and was “capable of evaluating the merits and risks of an investment in the Units” and “to the extent necessary” had retained “appropriate professional advice regarding the investment, tax and legal merits and consequences of this subscription”.

[260] It is true, as argued by the Appellant, that the Subscription Agreement itself was not a prescribed form. However, since it was attached to the OM (and listed in the table of contents) that was delivered to Investors and later filed with the securities commission, I find that it was indivisible from the statutory form. Offering Memorandum Form 45-103F1, entitled “Instructions for Completing”, Offering Memorandum for non-qualifying issuers, provides as follows:

5.2 - It is an offence to make a misrepresentation in the offering memorandum. This applies both to information that is required by the form and to additional information that is provided.

[My emphasis]

[261] I find that both the “Form of Subscription Agreement” and “Terms and Conditions for Subscription of Units” were indivisible or part and parcel of the OM. They were not simply extraneous documents that could be ignored by the Appellant if he deemed it convenient or expedient to do so.

[262] The Court accepts that the applicable securities legislation does not expressly prohibit the sale of securities to minors. This leads the Appellant to the conclusion that it was therefore not “unlawful” to do so. However, the Court cannot agree and must conclude that in “the highly-regulated world of securities law” (Ironside), where issuers are required to strictly comply with capital raising exemptions (Bartel, Homerun, Del Bianco, Doyle), it follows that they must also strictly comply with the OME and OM.

[263] A review of the OM with the attachments as noted above, and the prescribed Risk Acknowledgment form, leads me to conclude that subscription documents could only be signed by individuals or persons who had legal capacity to do so and were able to represent that they had the requisite “knowledge, skill and experience” and were “capable of evaluating the merits and risk” of the investment and seeking “appropriate professional advice” if deemed appropriate. Minors by definition are not legally competent to fulfill those requirements. In this context, it does not matter that at common law, a contract signed by a minor is only voidable.

[264] As a result, I reject the suggestion that the Appellant as trustee “had the discretion to make non-material changes to the form” [33] or that the requirement as to the age of majority or as to the status of the investor, as noted above, was a mere contractual term that could be waived by the Appellant when he knew “that the subscriber’s representations are not accurate or fulfilled” [34] . The Appellant relies on Kempling v. Hearthstone Manor Corp., 1996 ABCA 254 and Saskatchewan River Bungalow ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490, to support the broad proposition that “a party to a contract may waive a stipulation or a condition in a contract to its benefit”. However, none of these decisions involved the issuance of securities to minors.

[265] The OM could have stated that a particular representation was inserted for the benefit of the issuer and could be waived at any time before closing. But in this instance, there are no words to that effect. It does not assist the Appellant that section 6 of the Terms and Conditions indicates that “the Trustees and their counsel” would rely on the representation to determine “the eligibility of the Investor to purchase Units”. Having determined that subscribers were minors, the Appellant should have rejected them or taken affirmative steps to correct the situation, possibly by amending the documentation. No such steps were taken.

[266] Similarly, it is clear that minors were not legally competent to sign the Risk Acknowledgement form and the Court must conclude, given the wording and law applicable to minors, that the Alberta and BC securities commission intended that this document would only be signed by adult subscribers who had legal capacity.

[267] I note parenthetically that this form is not required for the “Private Issuer Exemption” which is limited to 50 investors who are closely-connected or deemed to be closely-connected to the issuer [35] or by the “Family, Friends and Business Associates Exemption” which is also only available to individuals closely-connected or deemed to be closely-connected with the issuer. For the latter two exemptions, a disclosure document is also not required and thus we can conclude that the legislatures of Alberta and BC have sought to relax the rules for a limited and fairly well-defined category of investors who were not deemed to be in need of protection, thus ensuring that the objectives of facilitating capital-raising and investor protection, were being met.

[268] The same cannot be said for the OME because securities are distributed to a much broader category of investors that can best be described as “the public” in the traditional sense even though some investors may be closely-connected to the promoter, such as family, friends and business associates, for example.

[269] Since the Appellant chose to rely on the OME (as confirmed in the Reports), the underlying premise is that prospective investors were deemed not to be closely connected with the issuer (whether they were or not, is not relevant) and as such were deemed to be in need of protection. This is apparent given the requirement for a relatively detailed disclosure document (the OM) and Risk Acknowledgment, all in prescribed form. This suggests that the exemption relied upon in this instance was structured to ensure that the objective of investor protection was given priority given the deemed absence of a close connection with the issuer. As such, all Investors, without exception (even those closely connected to the Appellant), were required to adhere to the requirements of the OME and OM.

[270] At this point, I will mention that during the course of the hearing, the Appellant entered Exhibits A-2 and A-3 purporting to provide a list of investors who were not well-known or closely-connected to him. I find that this list is of no consequence for reasons set out above. Since he chose to rely on the OME, all prospective investors without exception, including those who were well-known or closely connected to him, were required to sign the subscription documents.

[271] The Appellant could not rely on other capital-raising exemptions on a casual or ad hoc basis. That is apparent from the decisions cited above. He relied on the OME as outlined in the Reports. It does not assist him in this proceeding to suggest that “he may have been relying on other exemptions”. While it may be possible to rely on multiple exemptions, it is not possible to do so on an ex post facto basis. As noted in Boyle, supra, the Appellant would have been required to “take affirmative steps to be exempt from various statutory requirements” (para 18). He did not do so.

[272] On the issue of the subscription documents signed by individuals purporting to act as guardians for minors and those signed by unrelated adults for minors, I find that a similar analysis applies. Given the highly-regulated nature of the securities industry and the closed-system for the distribution of securities, the Appellant could not simply waive the requirement that individual investors be of the age of majority by having the subscription forms signed by guardians or other adults for minors who were not their children. This was not permissible. It was contrary to the Terms and Conditions and thus unlawful.

[273] The fact that guardians may bind minors under ordinary contract law, as reviewed above, does not assist the Appellant in this instance. This is so because the case-law has established that the capital-raising exemptions must be strictly construed and applied and the attachments to the OM clearly required that investors have “attained the age of majority” and “the legal capacity and competence” to execute the subscription documents. If it was appropriate for documents to be signed by guardians or other third parties, the Terms and Conditions would have addressed this possibility.

[274] If the Court were to accept that subscription documents could be signed by guardians or other adults for minors, it would be necessary to read-in words that do not appear in the language of these quasi-statutory forms. That is not permissible.

[275] In the end, I find that this interpretation is consistent with the cautionary words of the section 1.9(4) of the Companion Policy titled “Responsibility for compliance and verifying purchaser status”, indicating what reasonable steps should be taken too ensure compliance with the exemption and that if an issuer had “any reservations about whether the purchaser” qualified under the exemption, “the seller should not sell securities to the purchaser in reliance on that exemption”.

[276] As noted above, the Instrument states that the OM and Risk Acknowledgment were to be in “prescribed form”. This must be interpreted to mean that they could not be modified in any way, notably to accommodate the signature of a guardian or other adult, unless this was permissible under another provision.

[277] To reinforce this notion, section 8 of the Terms and Conditions states that “neither the Subscription Agreement nor any provision hereof” could be “modified, changed, discharged or terminated except by an instrument in writing”. (My emphasis). Although this suggests that it might have been possible to amend the Terms and Conditions, there was no evidence before the Court that such an instrument had been prepared.

[278] It is noted that the Appellant could have prepared and delivered a modified OM. He did not do so. He could have made an application to the securities commission seeking “an exemption from the Instrument, in whole or in part” [36] . There is no evidence to suggest that a dispensation was sought or obtained.

[279] With respect to the issue of a “misrepresentation”, that concept is defined, as noted above, to include “an omission of a material fact that is required to be stated”. I find that this relates primarily to the contents of the OM, including the business objectives of the issuer, the use of subscription proceeds or the contractual rights of unit holders, for example. This is apparent from a reading of the Certificate, as noted above, stating that the OM remained true and that the “offering memorandum does not contain of misrepresentation”.

[280] However, the obligation to avoid a “misrepresentation” also extended to the Reports since the prescribed form contained a similar caution in bold capitalized letters. Given the conclusions I have reached as to the obligation of an issuer in the closed-system of distribution of securities, the need to ensure investor protection, the express prohibition against issuing securities to minors in the OM, I find that the Appellant made a misrepresentation when he reported to the securities commission attaching a list of Investors that included minors.

[281] The Appellant has argued that a finding that some subscriptions were unlawful and not others would mean that all subscriptions were somehow interconnected which was not desirable from a public policy point of view. I would reject this analysis outright since the funds can continue to exist as ordinary trusts with a reduced number of beneficiaries, if necessary. The number of investors required in this instance was a function of the OM prepared by the Appellant and his attempt to establish a “mutual fund trust” for RRSP purposes. If the trust was only successful in issuing units to a lesser number of investors, it could have amended the OM to indicate that a revised minimum number of investors was required.

[282] The Appellant cannot, in the context of these proceedings, rely on his own inadvertence or mistaken interpretation as to the requirements of the Instruments, the OME or OM. Even if he mistakenly believed that units had been issued in full compliance with the securities legislation, this would still not result in a “lawful distribution” for the purposes of the Act or Regulation 4801. Nor can he rely on the assertion that there were no complaints or enforcement proceedings or that units were issued to minors and other investors who received pro-rata distributions over the years. Such considerations are simply not relevant to these proceedings.

[283] I indicated above that the doctrine of illegality had no application to this analysis because the only issue before the Court was the validity of the assessments under the Act and compliance with Regulation 4801. That said, if I consider for a moment the application of the doctrine of illegality, I need only turn to the words of the Federal Court of Appeal as laid out in Still, (a decision relied upon by the Appellant) indicating that where “a contract is expressly or impliedly prohibited by statute” a court may consider all the circumstances “including the objects and purposes of the statutory prohibition” and ask if “it would be contrary to public policy” to grant relief. A similar comment was made in Haule, supra.

[284] In this instance, as established by the case law, the closed-system for the issuance of securities mandates strict compliance with the exemptions as described in the Instruments. By extension, the OME requires strict compliance with the OM, including the attached Terms and Conditions. The object and purpose of those provisions is investor protection.

[285] In Gupta, supra, the court concluded that there had been “a lawful distribution” where the taxpayer had not filed a prospectus but had obtained a dispensation from the provincial securities commission. The court noted that:

71. The Quebec Securities Commission in exempting the appellant from filing a prospectus pursuant to section 263 of the Quebec Securities Act determines a certain number of conditions (…) to protect the purchasers. Indeed the protection of purchasers of securities is the main basis of the legislation concerning securities.

[My emphasis]

[286] This was later confirmed by the Supreme Court of Canada in Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132, where it held that the statutory and public policy goals of the statutory scheme governing the issuance of securities included investor protection, capital market efficiency and public confidence in capital markets.

[287] In the context of an exempt offering of securities relying on the OME, where investors are deemed not to be connected with the issuer or promoter, I find that investor protection is the broad public policy objective. As a result, I have no difficulty in concluding that the issuance of units to minors directly or by their guardians or other adults, was contrary to that public policy objective.

[288] In the words of Robertson J.A., since “the doctrine of illegality is not a creation of statute but of judicial creation, it is incumbent on the present judiciary to ensure that its premises accord with contemporary values”. (Still, supra). I find that those “contemporary values” are implicitly described in the Instruments, the OME and the OM, and that there is no justifiable reason for this Court in the context of a tax appeal, to turn a blind eye and provide relief to the Appellant or to make a finding that the subscriptions in favour of minors were lawful for the purposes of the Act.

[289] Given the various decisions reviewed above, I have little doubt that the Alberta and BC Securities Commission, would have come to a similar conclusion had there been a complaint that might have triggered enforcement or compliance proceedings.

[290] It is important to appreciate that contrary to the distribution of securities pursuant to a prospectus that is filed, reviewed and approved by a securities commission, all exempt distributions rules, including the OME, only require the “filing” of a prescribed report “in the jurisdiction where the distribution takes place no later that 10 days after the distribution” [37] . These reports are filed to ensure a minimum level of regulatory oversight but are not reviewed unless there is a complaint or other reason to make enquiries. [38] .

[291] On the basis of the foregoing, I have no difficultly in concluding that all subscriptions in favour of minors, whether the documents were signed by the minors themselves, by their guardians or other unrelated adults, were illegal as that term has been used in Bartel, Homerun, Del Bianco or Doyle, supra, as being contrary to the securities legislation and the Instruments. They were thus unlawful.

[292] As a result, all of the subscriptions in favour of minors should be disregarded for the purpose of this analysis and compliance with Regulation 4801.

[293] The Minister argues that at least 20 adults acquired units in the 2006 Income Funds without signing the Subscription Agreement and Risk Acknowledgment forms.

[294] The Appellant does not dispute that there were “adults who signed for other adults” [39] but argues that this is totally irrelevant since the units were issued in favour of the “named subscriber”, regardless of who signed.

[295] Also, the named subscribers received investor packages intended for the annual meetings as well as pro-rata distributions and annual T3 slips in normal course. The Appellant argues that all subscriptions were paid for and that there was no evidence that any of the adults had repudiated their subscriptions.

[296] While acknowledging that the OME as set out in the Instruments and OM required that the “purchaser purchase the security as principal” and that the subscriber sign a Subscription Agreement and Risk Acknowledgement form, the Appellant argues that the Instruments do “not preclude one person subscribing on behalf of an identified principal” and that “[t]his requirement is intended to prevent an agent, such as a financial institution, purchasing from one or many undisclosed principals, such as a financial institution’s clients” [40] .

[297] Moreover, while acknowledging that the OM and Risk Acknowledgement are prescribed forms, the Appellant argues that the Subscription Agreement itself is not, suggesting it does not necessarily need to be signed by the named subscribers.

[298] The Appellant argues that even if securities have “mistakenly” been issued to a named subscriber, that “does not detract from a lawful distribution to another unitholder” and “if that were so, large offerings could be nullified by one non-compliant subscription” [41] .

[299] The Minister does not agree with any of these submissions and again, as with the subscriptions in favour of minors, I find that there are compelling reasons to conclude that the issuance of units on the basis of subscriptions made by adults for other adults were contrary to the securities legislation and the Instruments and thus were unlawful.

[300] From an evidentiary point of view, the Court was not provided with any context as to why adults were signing for other adults. There may have been acceptable reasons but the record is silent as to the relationship between those who signed the subscription documents and the so-called “named subscribers”. The circumstances under which they received units in the Income Funds remains somewhat of a mystery but the Appellant asks that they be accepted as a “fait-accompli” that should not be challenged by the Minister or this Court.

[301] I note moreover that although the Appellant has admitted that there were “adults who signed for other adults”, as noted above, he has been careful to avoid any admission as to the number of adults who did not subscribe for their own units, despite his knowledge that this was a matter of some controversy and despite the fact that the Minister had made an assumption on the issue. The Appellant has failed to adduce any evidence on the matter and his oral testimony was vague at best. As a result of this the Court must again draw a negative inference.

[302] A review of the requirements of the OME as described in the Instruments indicates in clear and unequivocal terms, that prospective investors must have received a copy of the OM. There was no evidence of this. They also must have signed the subscription documents personally to which were attached the Terms and Conditions described above, including notably the “Status of Investor”.

[303] Moreover the Risk Acknowledgment begins with the words “I acknowledge that this is a risky investment – I am investing entirely at my own risk”. The form ends with the acknowledgement that “this is a risky investment and I could lose all the money I invest” followed by a space for the “Purchaser” to print his name and appose his signature. The second page of the form includes a reminder that the purchaser will be receiving an OM and that it should be read carefully “because it has important information about the issuer and its securities”. There is little doubt that prospective subscribers were required to sign this document personally. It could not be delegated to a third party.

[304] The Appellant’s testimony on this issue was wholly inadequate. He had little to offer by way of explanation except to say that he relied on his staff and that all units were paid for. The Appellant should have known that the distribution of securities is a highly regulated activity. The steps that needed to be followed were not trivial or inconsequential. Unless the Appellant had sought a dispensation from the securities commission, they were all mandatory. He did not seek a dispensation.

[305] To address the more technical arguments raised by the Appellant, I would say that the Instruments do in fact “preclude” adults from signing for other adults. The OME is predicated on the notion that investors have received a detailed disclosure document that was to be carefully evaluated to ensure the investor was sufficiently informed as to the potential risks involved before signing the subscription. This was not a trivial exercise. It was mandated by the Instruments.

[306] The argument that the named subscribers had not “repudiated” the units received should also be rejected. The notion of a repudiation in contract law relates to a contracting party’s obligation to perform the terms of a contract. If the terms are not performed, the contract is said to have been repudiated. This legal principle has no application to these facts. The “named subscribers” who were adults received units from other adults who intended to provide them with a benefit. The Court must wonder for what reason or for what purpose? There must have been an understanding or quid pro quo as between the signatories of the subscription documents and the recipients, but no evidence whatsoever was adduced to explain the situation.

[307] In the end, the Appellant has not advanced any credible theory of law that would satisfy this Court that an adult can sign subscription documents on behalf of another adult.

[308] As explained above, it is not necessary for this Court to conclude if the subscriptions signed by adults for other adults are void ab initio or merely voidable. Those issues are not relevant to these proceedings.

[309] Since an issuer is required to strictly comply with the requirements of the exemption relied upon, and since the Appellant has failed to do so in connection with the subscriptions submitted by adults for other adults, the Court must conclude that they were unlawful under the laws of the applicable provinces and that they should be disregarded for the purpose of this analysis.

[310] As noted above, according to paragraphs 4.1(2) and (3) of the Instruments describing the OME, the purchaser was required to “purchase the security as principal”. Although the Minister has acknowledged that the subscription price was to be paid “by cheque or other payment method acceptable to the Trustees” [42] the parties disagree as to the meaning of this expression.

[311] It is not disputed that numerous adults acquired units and where a cheque was drawn for spouses from a joint bank account, the Minister has conceded that this was an acceptable payment for both spouses. The Minister has also not challenged subscriptions made by various legal entities connected to the subscriber.

[312] Since the Court has already concluded that the subscriptions in favour of minors were unlawful, it is not relevant who paid the subscription amount as they should have been rejected in any event. That said, the Appellant has failed to adduce any evidence to contradict the Minister’s assumption that the minors did not pay for their units. I must therefor conclude that none of the minors paid for their units.

[313] At issue then are units in the 2003 Income Funds issued to 27 adults and those in the 2006 Income Fund issued to 43 adults. As noted above, the Minister has particularized the assumption based on the results of the discovery process including requests to admit and production of documents. I find that the assumption that these adults did not pay for their own units was sufficient to indicate that they had not purchased the units as principal for their own account. It was not necessary for the Minister to adduce evidence of an undisclosed principal or resulting trust or other arrangement. The evidentiary onus was on the Appellant to demonstrate that the subject adults had in fact acquired the units as principal.

[314] As noted above, the Appellant has argued in written reply submission that “they have never admitted that the unitholders did not pay for their own units” and “have always maintained that all units were paid for”.

[315] For reasons set out above on issue of the burden of proof in tax appeals, I accept the Minister’s position that these adults did not pay for their own units and find that it was incumbent on the Appellant to adduce some evidence to prove that they did in fact pay for their own units. Copies of cheques or bank drafts or other proof of payment, possibly evidence of a loan arrangement, should have been provided to the Court in order to allow it to reach its own conclusions. Instead, the Appellant has chosen to rely on the bald assertion that “all units were paid for”.

[316] As noted above, the Minister’s assumptions stipulated that many investors “of the age of majority, did not purchase units with their own money” and that “one unitholder purchased units (…) with his/her own money for multiple Outsiders, both Minors and persons of the age of majority.” [43]

[317] At least three of the Appellant’s fact witnesses testified on this issue. Bruce Maclennan admitted that he had paid for the units of his two children but had difficulty explaining the nature of the payment, finally agreeing that it was a gift. Geoff Merrit admitted that he had advanced the money as a gift for his child. Deborah Nickerson was the only witness who indicated that the funds advanced for her two children were intended as loans to be repaid when the units were redeemed. She admitted having no documentation to support this.

[318] In the end, despite the disagreement as to the actual numbers, I draw a negative inference from the Appellant’s vague responses to these issues and his failure to adduce any evidence to clarify the matter for the Court or to meet his evidentiary burden in connection with the Minister’s assumptions.

[319] I now turn to the position of the parties on this issue.

[320] The Appellant argues that there is no requirement that “a subscriber use his or her own money” or that they draw a cheque from their own bank account, and that “the purchase of securities in Alberta and British Columbia is much like the purchase of anything else: a third party can physically give money to the seller (in this case, the issuer) to fund that buyer’s obligation to pay” [44] .

[321] The Minister takes the position that the expression “to purchase as principal” has been interpreted to mean “to purchase in one’s own right and not on behalf of a third party” [45] . In the Alberta Securities Commission decision of Little (re), 2000 LNABASC (“Little Re”) it was interpreted to mean “a person acting in a transaction entirely for his or her own account and not on behalf of any other person” (p.13) and in Cartaway Resources Corp (Re), 2000 LNBSSC 391 (para 246) (“Cartaway”) the BC Securities Commission indicated that it was “to be used in connection with sales to persons who are legitimately making the full investment themselves” (para 246). [My emphasis].

[322] In Cartaway, a promoter was prosecuted for having actively solicited, encouraged and advised individuals to subscribe for and purchase securities through a private placement by pooling their money with other investors so that separate investments could appear as one combined investment. This was done so that investors could rely on the “sophisticated purchaser” exemption (now known as the “accredited investor” exemption) and following the subscription, the main investor would hold the units on behalf of the other investors. The Alberta Securities Commission highlighted the need for investors to purchase as principal and not on behalf of others since the exemption was “designed for investors who have, by virtue of their net worth, sufficient sophistication to be able to ensure that they obtain adequate information and, if necessary, appropriate advice before deciding that they are prepared to accept the risks associated with the investment”.

[323] The Minister argues that the Instruments include a limited category of persons or entities that are “deemed to purchase as principal” for purposes of the “accredited investor” exemption, including financial entities registered to carry on the business of “trading as a trustee or agent on behalf of a fully managed account” or a person or company licensed “to act a portfolio manager or equivalent designation, authorised to act as agent for a fully managed account”. The Minister argues that there are no such exemptions for the OME which means that each investor was required “to purchase as principal” meaning to purchase for one’s own account and not for the benefit of other persons.

[324] The Minister argues that the securities legislation provides “a complete regulatory code” for the closed-system for the distribution of securities and that since the legislatures have already provided a narrow range of individuals or persons who “are deemed to act as principal”, it is not the role of the court to take an expansive interpretation of matters that have already been addressed.

[325] The Minister concludes by indicating that the statutory provisions and Instruments are clear and that the OME does not allow for any person other that the investor to purchase units as principal and that the limited exceptions, noted above, “do not allow guardians, trustee, agents, ‘attorneys of fact’ to purchase as principal” [46] .

Analysis

[326] I agree with the Minister’s submissions on this issue. Subscriptions that have been paid for by third parties should be rejected for the purpose of this analysis.

[327] This is consistent with the notion that the closed-system for the distribution of securities has evolved over time to protect the integrity of the system, to avoid fraudulent or unscrupulous behavior and to ensure that securities are acquired by investors who not only fit within the narrow category of investors targeted by the capital-raising exemption, but also that subscription funds are advanced from an investor’s own personal resources, though this could include borrowed money.

[328] The decision of Cartaway supports the notion that investors are expected to advance their own funds and not rely on third parties to pay for their subscriptions.

[329] In this instance, how can the Court conclude that subscribers who did not pay for their own units were in fact “acting in a transaction entirely for [their] own account and not on behalf of any other person” (Little Re, supra) or were “legitimately making the full investment themselves” (Cartaway, supra)? The Instruments address some of these concerns, for example, by explicitly prohibiting the distribution of securities to a person or company that had no pre-existing purpose (also known as a “syndicate”) and is created solely for the purchase of securities under an exemption [47] .

[330] In the end, the issue once again relates to the evidentiary burden. The Appellant cannot hide behind the bald assertion that “all the units have been paid for”. This does not assist the Court in determining whether these adults have purchased as principal. If they have not paid for subscriptions themselves, then the logical inference is that the units were not acquired by them as principal. Third parties do not routinely advance money on a gratuitous basis. There are usually strings attached. What were they? The question remains unanswered.

[331] A person may be a “purchaser for valuable consideration” without advancing money if there is a corresponding “release of a right or the compromise of a claim”, as was observed in Re Laventure, 1985 CarswellAlta 336 (ABQB), but there would need to be some evidence of such a compromise or other arrangement.

[332] The Court has absolutely no explanation or information as to why third parties were advancing funds on behalf of other adults (who were not their spouses) including the so-called named-subscribers. As with the previous issue, the Appellant’s explanation was wholly inadequate. If there was a quid pro quo or some other rational explanation, it was not shared with the Court. If funds were advanced by an arm’s length individual as a loan or if a bank draft was delivered instead of a personal cheque, it would have been a simple matter to provide evidence of the arrangement. No such evidence was forthcoming.

[333] The Court cannot simply accept the unsupported theory of law that third parties can advance subscription funds and that as long as the units are issued to a named individual, they have been purchased as principal. The issue is not whether units have been “purchased” but whether they have been “purchased as principal”.

[334] The Court must again draw a negative inference from the Appellant’s failure to adduce any evidence to contradict the Minister’s assumption that numerous subscriptions were paid for by third parties.

[335] As with the previous analysis, it is not necessary to determine if the issuance of these units was voidable or void ab initio. That is a matter that remains to be determined as between the issuer and the individuals who received the units.

[336] It is sufficient for the purpose of this analysis to conclude that the issuance of units to individuals whose subscriptions were paid for by third parties, was contrary to the requirement that “the purchaser purchase the security as principal”. Since it was contrary to the Instrument, it was illegal and thus unlawful.

[337] As a result of the foregoing, the Court must conclude that all units issued to minors or to adults, whose subscriptions were paid by third parties (excluding payments from joint bank accounts) should be disregarded for the purpose of this analysis.

[338] The Appellant argues in the alternative that if the Court concludes that the Income Funds did not issue units to at least 150 beneficiaries and as a result did not meet the requirements of Regulation 4801, they are still “qualified investments” because they meet the definition of a “unit of a trust” described as follows:

4900 (1)

(d.2) a unit of a trust if

(i) the trust would be a mutual fund trust if Part XLVIII were read without reference to paragraph 4801(a), and

(ii) there has been a lawful distribution in a province to the public of units of the trust and a prospectus, registration statement or similar document was not required under the laws of the province to be filed in respect of the distribution;

[339] The Appellant argues that “a unit of a trust” involves a trust that would be a “mutual fund trust” if the requirements of Regulation 4801(a) were disregarded. It is argued that since the requirement for at least 150 investors in Regulation 4801(b) “is dependant for its vitality on 4801(a) by virtue of a cross-reference to the class of units described in Regulation 4801(a), then 4801(b) is inoperative, and therefor the 150 unitholders test no longer applies”. The Appellant argues finally that even if the Income funds have not issued units to at least 150 investors, there was nonetheless a lawful distribution to a number of investors.

[340] This argument was not raised in the pleadings. It should be dismissed outright on that basis alone but I will nonetheless make a few observations.

[341] Regulation 4900)1)(d.2) was added by P.C. 2001-1106 for property acquired after 1983. According to the Technical Notes, it was intended to allow a widely-held trust to make a lawful distribution in a province of its units to qualify as a mutual fund trust without filing a prospectus or similar document where such a document was not required to be filed. This amendment was intended to ensure that the requirements under the Act for a distribution were no more onerous than those imposed under provincial securities requirements.

[342] Subparagraph (1)(d.2)(i) of Regulation 4900 refers to a trust that would be a mutual fund trust if the definition was considered “without reference to paragraph 4801(a)” - but it does not exclude the application of paragraph 4801(b) and hence it is not possible to simply conclude that paragraph 4801(b) is rendered “inoperative” because 4801(b) is necessarily linked to 4801(a). Had Parliament intended to exclude the application of 4801(b), it would have said so explicitly. Since it did not do so, units would still have to be issued to at least 150 investors.

[343] Secondly, this provision allows a widely-held unit trust that makes a lawful distribution in a province of its units to qualify as a mutual fund trust for the purpose of the qualifying investment determination, without filing a prospectus or similar document where it was not required to be filed. As noted above, the distribution of securities is regulated at a provincial level and in Alberta and BC an issuer must either file a prospectus or rely on one of the capital raising exemptions described above. As a result, it cannot be said that “such a document was not required to be filed” in Alberta or BC.

[344] Finally, the provision refers to a lawful distribution. The Appellant argues that there was such a lawful distribution of units to many investors who paid for their units including the Appellant himself. This argument has already been disposed of since the Court has concluded that the issuance of units to those investors was inextricably tied to the OME and the OM and since the Income Funds had not issued units to at least 160 investors, the Court was unable to conclude that there had been “a lawful distribution” pursuant to subparagraph 4801(i)A. For the same reason, there was not a lawful distribution pursuant subparagraph (1)(d.2)(ii) of Regulation 4900. [48] It has been noted that this provision has very little practical application today since it was introduced as a retroactive relieving measure in 2001 for units of certain mutual funds sold by private placement between 1993 and 1999.

[345] As a result, the Court must reject this argument in its entirety.

[346] In the end, it is difficult for the Court to disagree with the Respondent’s suggestion that the Appellant has demonstrated a wanton and reckless disregard for the requirements of the securities legislation, the OME and the OM.

[347] Without going that far, I would at least conclude that the Appellant was careless, cavalier and possibly indifferent. In particular, he misconstrued, misunderstood and failed to appreciate the importance of the requirements of the securities legislation, the OME and the OM and, more importantly, the important legal steps required to ensure that the Income Fund qualified as a mutual fund trust.

[348] As a result of the foregoing analysis, the Court must conclude that the steps undertaken by the Appellant to constitute the Income Funds were not legally effective. The Income Funds did not qualify as a “mutual fund trust” because they failed to satisfy the prescribed condition that there be “a lawful distribution …to the public of units” under the laws of the provinces of Alberta and BC to not fewer than 160 investors as required by the OM. Even if the Court considers for a moment that “a lawful distribution” should be interpreted to refer to a distribution to “no fewer than 150 beneficiaries of the trust”, as set out in paragraph (b) of Regulation 4801, the Income Funds have not met that bright-line test.

[349] Since the Court has concluded that the Income Funds did not meet the prescribed conditions set out in Regulation 4801, as required by paragraph 132(6)(c), it follows that they were not a “mutual fund trust” and as a result they were not qualified investments for RRSP purposes.

[350] I have already concluded that the Income Funds were not validly constituted, that the steps undertaken by the Appellant were legally ineffective to establish a “mutual fund trust” and consequently that they were not a “qualified investment”. In the event that I have erred in so finding, I will review whether the Income Funds, including the Acquisition Transactions and Distribution Transactions, were a sham.

[351] Since the existence of a sham and window dressing (to be addressed separately below) was not assumed in assessing the Appellant or the RRSP Trust, it is understood that the Minister has the onus of satisfying the Court on a balance of probabilities that the Income Funds involved a sham or window dressing. This is consistent with the decisions of Canada v. Anchor Pointe Energy Ltd, 2007 FCA 188, Swirsky v. The Queen, 2013 TCC 73 (para 53.) and Morrison v The Queen, 2018 TCC 220 (para 106).

Position of the Respondent

[352] The Respondent argues that the Appellant knew at all times that the Income Funds had not been properly constituted as a “mutual fund trust” since he had not completed a lawful distribution to the public in accordance with the laws of the provinces and that he made a number of misrepresentations.

[353] The Respondent alleges that the initial Certificate attached to the OM contained a misrepresentation in that it suggested that all units would be distributed pursuant to applicable securities legislation, the OME and the OM, when in fact many units (as described above) were distributed contrary to the terms of those documents. It is also alleged that the Appellant submitted at least six Reports to the securities commissions in connection with the Income Funds and that they contained misrepresentations as to the completion of the distribution and as to the list of unit holders and the securities exemption relied upon, when in fact the Appellant knew that the distribution had not been validly completed and that many units had been issued contrary to the OME and OM, as noted above.

[354] The Respondent alleges further that the Appellant then completed a total of twelve Trustee’s Certificates attesting to the existence and validity of the Income Funds as mutual fund trusts. In the preamble to the Certificates, the Appellant specifically acknowledged that the Legal Opinions would be based in part on the factual information set out in the Certificates that were attached to and formed the basis of the Legal Opinions relied upon by CIBC prior to releasing funds for the completion of the Acquisition Transactions. These Opinions confirmed that the Income Funds were mutual fund trusts and thus qualified investments and expressly stated that they had “relied on the facts represented to us by James T. Grenon”.

[355] The Respondent alleges further that the Appellant as trustee of the Income Funds then submitted T3 Trust Income Tax and Information Returns for the 2004 to 2009 taxation years in connection with the Distribution Transactions, indicating that all Income Funds were a “mutual fund trust” when in fact he knew that this was incorrect.

[356] Similarly, it is argued that on the basis of the Appellants ongoing misrepresentations, CIBC filed T3GR returns that included the RRSP Trust as part of its specimen plan but did not list it as a taxable plan even though it held non-qualified investments.

[357] In the end, the Respondent argues that the Appellant was at all times on both sides of all transactions. As the promoter of the Income Funds, he established the basic mutual fund structure and controlled the distribution of units to the same 171 investors. As the annuitant of the RRSP Trust (a self-directed RRSP), he directed and controlled the acquisition of units in the various Income Funds, described above as the Acquisition Transactions. As the individual who appointed or controlled the appointment of trustees of the Income Funds, he was directly involved in the preparation of the Trustee Resolutions by which profits were distributed to the various unitholders including the RRSP Trust. He essentially controlled all aspects of the businesses or investments.

[358] I now turn to the position of the Appellant.

[359] The Appellant argues that there are no transactions “involving Mr. Grenon or any other party which meets the definition of a sham”, that there was no “intention to deceive the Minister” and that “no part of the [Income Fund] structure or (…) investments (…) was secretive or mis-documented or mis-described”. [49] The Appellant argues that “the transaction documents described exactly” what he “intended to carry out” and that there was “no alternative reality to the transactions” [50] . The Appellant adds that the RRSP Trust was simply “a self-directed RRSP that made investments” in the Income Funds that “were created and documented accurately and completely (…) and there was a total absence of deceit”. It is argued that the Appellant “intended that the [Income Funds] be created and that the CIBC RRSP invest in the [Income Funds] and that (…) there was no misrepresentation as to the legal relationship among the parties.” [51] . He argues that the evidence “established that the unitholders were real beneficiaries (…) who earned a return on their investment.” [52]

[360] The Appellant admits that the Income Funds were established for tax purposes but argues that proper tax planning “depends for its effectiveness on real steps being taken in respect of actual entities” [53] . In this respect, the Appellant relies on Lee v The Queen, 2018 TCC 230 (“Lee”), where Owen J. stated that “[c]reating legal (or equitable) relationships to give effect to a tax plan is not the perpetration of a sham.” (para 69)

[361] The Appellant argues that even if the RRSP Trust acquired a high percentage of the units in the Income Funds, that would not equate to a sham and that the definition of a “mutual fund trust” does not restrict the “percentage of units that any one unitholder may own”. [54]

[362] The Appellant relies on a number of decisions including Stubart Investments Ltd v. The Queen, [1984] 1 S.C.R. 536 (“Stubart”) where the Supreme Court of Canada reviewed the distinction between the “incomplete transaction test and the sham test”. In that instance, the Court found that “the appearance created by the documentation” was “precisely the reality” and that the “obligations created by the documents were legal obligations (…) fully enforceable at law”. It concluded that there was “a total absence of the element of deceit, which is the heart and core of a sham” (p. 573).

[363] The Appellant also relies on Cameco Corporation v The Queen, 2018 TCC 195 (“Cameco”) (confirmed on appeal to the Federal Court of Appeal in Canada v. Cameco Corporation, 2020 FCA 112) where Owen J. found that there was no evidence that the written terms and conditions of the contracts did not reflect the true intention of parties and that “the arrangements created by the contracts were not a façade”. He noted moreover that “a tax motivation does not transform the arrangements (…) into a sham” (paras 602-605).

The meaning of sham according to the case law

[364] The meaning of a sham was addressed in great detail by Owen J. in Cameco, supra (confirmed by the Federal Court of Appeal, as noted above) where he cited the decision of Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518 (“Snook”), in which Diplock L.J. stated (p. 528) that a sham refers to:

“(…) acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.”

[365] Owen J. noted that this description of sham was adopted by the Supreme Court of Canada in M.N.R. v. Cameron, [1974] S.C.R. 1062 (p. 1068) (“Cameron”) and later, in Stubart, supra where Estey J. stated (p. 545) that:

“(…) A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, a simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality (…)”

[366] As further noted by Owen J., in the later decision of Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298 (“Continental Bank”), the Supreme Court of Canada interpreted Estey J.’s comments in Stubart to mean that the “sham doctrine will not be applied unless there is an element of deceit in the way a transaction was either constructed or conducted” (para 20) and that “the determination of whether a sham exists precedes and is distinct from the correct legal characterization of a transaction”. If the transaction is a sham, the true nature of the transaction must be determined from extrinsic evidence (i.e. evidence other than the document(s) papering the transaction). If the transaction is not a sham, the correct legal characterization of the transaction can be determined with reference to the document(s) papering the transaction” (para 21).

[367] As restated by Owen J. in Lee, supra (para 68):

(…) A sham involves an element of deceit—the parties must intend to give to third parties the appearance of creating between them legal rights and obligations different from the legal rights and obligations, if any, that the parties actually intend to create. An allegation of sham is an allegation that the parties to the alleged sham have been deceitful because they know that the actual legal rights and obligations created by them, if any, differ from the legal rights and obligations presented to the outside world.

[368] In the earlier decision of 2530-1284 Québec Inc. v The Queen, 2007 TCC 286 (also known as “Faraggi”), Rip A.C.J. (as he then was) stated that “[f]or a sham to exist, the taxpayers must have acted in such a way as to deceive the tax authority as to their real legal relationships” such as where the “taxpayer creates an appearance that does not conform to the reality of the situation” (para 86). On appeal to the Federal Court of Appeal (