Grenon – Tax Court of Canada finds that the purported establishment of “alter ego” MFTs through which an RRSP invested in operating businesses was a GAAR abuse

In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis that 171 individuals (the “Investors”) - immediate and extended family members, friends, employees, business associates and others - each subscribed $750 for units of each Income Fund. The taxpayer’s RRSP invested a total of $315 million for units of the Income Funds, which then invested directly or indirectly in underlying LPs carrying on businesses or making loans to other group entities.

Smith J found that there had been a failure to satisfy the requirement in Reg. 4801(a)(i)(A) that there had been a “lawful distribution” of the units to the Investors in accordance with the offering memorandum exemption from a prospectus-filing requirement, given that a substantial number of the Investors were adults who did not pay for their own units, or minors. As the Income Fund units thus did not qualify as MFT units, the RRSP was subject to tax under s. 146(10.1) and penalty tax (under former s. 207.1(1)) on the basis of not holding qualified investments.

In the alternative, Smith J considered whether GAAR should apply even if the units in the Income Funds were qualified investments. After finding that there was a tax benefit and avoidance transactions (being the establishment of the Income Funds through which the RRSP could invest in the businesses), Smith J also found that there was an abuse under s. 245(4), stating:

[T]he object, spirit and purpose of subsection 146(4) is to prevent an annuitant from making tax deductible contributions … and then using those funds for business purposes and thus take advantage of the tax-exempt status of the plan. …

[T]he acquisition by the RRSP Trust of 99% of the units of the Income Funds defeated the object, spirit and purpose of the provision and was contrary to the Parliament intention that a mutual fund trust was to be widely held. It was certainly not within the contemplation of Parliament that a mutual fund trust that was a qualified investment for RRSP purposes would effectively become one investor’s alter ego. …

[T]he Appellant sought to abuse the RRSP regime and the provisions of the Act by establishing the Income Funds … .

After finding that the Minister’s assessment of the taxpayer himself respecting the RRSP income pursuant to s. 56(2) was unsupported by the wording of that provision, Smith J went on to indicate that he would have upheld the reassessments of the taxpayer in those amounts on the basis of the GAAR, but for this resulting “in a duplication of the tax which the Minister has also sought to impose on the RRSP Trust pursuant to subsection 146(10.1)” – which could not “be considered ‘reasonable in the circumstances’ as contemplated in subsection 245(5).” Accordingly, only the assessments of the RRSP under s. 146(10.1) and not of the taxpayer under s. 56(2), were sustained.

Neal Armstrong. Summaries of Grenon v. The Queen, 2021 TCC 30 under Reg. 4801(a)(i)(A), s. 245(4), s. 204 2(1) and General Concepts - Window Dressing.