Golini v. The Queen

Golini v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-07-19
Neutral citation
2016 TCC 174
File numbers
2013-705(IT)G
Judges and Taxing Officers
Campbell J. Miller
Subjects
Income Tax Act
Decision Content
Docket: 2013-705(IT)G
BETWEEN:
PAUL A. GOLINI JR. REPRESENTING
PAUL C. GOLINI BY POWER OF ATTORNEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 2 to 6, 23, 24 and December 10, 2015, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Nathalie Goyette, Geneviève Léveillé, Laurie Beausoleil
Counsel for the Respondent:
Jenna Clark, Christa Akey,
Alisa Apostle
JUDGMENT
The Appeal is dismissed in accordance with the Reasons for Judgment.
The Parties are to file written submissions on costs within 60 days of this Judgment.
Signed at Ottawa, Canada, this 19th day of July 2016.
“Campbell J. Miller”
C. Miller J.
Citation:2016 TCC 174
Date:20160719
Docket: 2013-705(IT)G
BETWEEN:
PAUL A. GOLINI JR. REPRESENTING
PAUL C. GOLINI BY POWER OF ATTORNEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1] Tax Planning – one side calls it “structured transactions”, while the other side calls it “smoke and mirrors”. Certainly there is a spectrum, and it is for me to determine where the Golini transactions fall on that spectrum.
[2] Mr. Paul C. Golini established a successful development business in conjunction with the Guizzetti family in the 1990’s (a business that ultimately went on to operate under the name of Empire). Mr. Paul C. Golini, his son Paul A. Golini, Mr. A. Guizzetti and his nephews Dan and Andrew Guizzetti, were all integral parts of the business. Mr. A. Guizzetti died in 2001 triggering the family’s realization that estate and shareholder planning was in order, specifically in connection with Paul C. Golini’s transition into retirement.
[3] In the mid-2000’s Empire advisors were consulted to consider retirement plans for Paul C. Golini. Initially a Retirement Compensation Arrangement (“RCA”) was established followed by an estate freeze, followed by what was known as an RCA Optimizer Plan, the steps of which are summarized as follows:
i. Paul C. Golini incorporated a new holding company, 2161845 Ontario Inc. (“Holdco”).
ii. Paul C. Golini exchanged shares of another of his holding companies, 1066167 Ontario Inc. (“Ontario Inc.”) for shares of Holdco; the value of the shares of Ontario Inc. was not less than $6,000,000. An election was made by Paul C. Golini and Holdco under section 85 of the Income Tax Act (the “Act”).
iii. Ontario Inc. borrowed $6,000,000 from DGM Bank, an offshore financial institution (the “bridge loan”).
iv. Ontario Inc. redeemed the shares Holdco acquired from the Appellant directing the bridge loan proceeds to Holdco.
v. Holdco purchased an annuity that would pay it $400,000 annually for 15 years (the “annuity”) by directing the $6,000,000 to St. Joseph’s Assurance Company in Nevis.
vi. Holdco purchased a life insurance policy on Paul C. Golini’s life from DGM Insurance Corporation an insurance company in Barbados by directing that the annuity company pay the $400,000 annual annuity to the insurer as the premium: the policy was to pay a death benefit of $6,000,000, which increased annually (the “Life Insurance”).
vii. St. Joseph’s Assurance and DGM Insurance acquired reinsurance on the annuity and the life insurance by directing $6,000,000 to another Barbadian company, Stellar Insurance.
viii. Stellar Insurance invested $6,000,000 with Trafalgar Holdings, a company in St. Vincent and Grenadines.
ix. Trafalgar loaned $6,000,000 to a Canadian company, Metropac Services Inc. a Canadian company incorporated for these transactions.
x. Metropac provided a $6,000,000 limited recourse loan to Paul Sr., guaranteed by Holdco for a fee of $40,000 a year, secured by Holdco’s Life Insurance.
xi. Ontario Inc. amended its share capital to include an unlimited number of Class D preferred shares with a cumulative dividend preference.
xii. Paul C. Golini acquired 6,000,000 new Class D preferred shares of Ontario Inc. with a paid up capital of $6,000,000 for which he used the $6,000,000 loan from Metropac;
xiii. Ontario Inc. repaid the $6,000,000 bridge loan to DGM Bank.
[4] This is all shown schematically in Appendix A attached to these Reasons. Two of the results of the plan were, first, the ability of Paul Sr. to deduct interest on the Metropac loan from his RCA income and second, the increase in the paid up capital of shares held by Paul C. Golini in Ontario Inc.
[5] The Minister of National Revenue (the “Minister”) has challenged the tax ramifications of the plan on several fronts:
i. The $6,000,000 Metropac loan to Paul C. Golini and/or each of the related transactions in the scheme were a sham such that Paul Sr. overstated his interest expense and carrying charges in respect of the loan and:
a. failed to report a deemed dividend in the amount of $6,000,000; or
b. failed to report a $6,000,000 benefit;
ii. In the alternative, the Minister properly included the amount of $6,358,626 as a taxable benefit in Paul Sr.’s income pursuant to subsections 15(1) or 246(1) of the Act;
iii. In the alternative, the loan and/or the Class D preferred shares were a “tax shelter” as defined in subsection 237.1(1) of the Act;
iv. In the alternative, the carrying charges claimed in respect of the loan were unreasonable in the circumstances; and
v. In the alternative, the tax benefits resulting from the series of transaction should be denied under subsection 245(2) of the Act, the General Anti-Avoidance Rules (“GAAR”).
[6] It is helpful to describe at the outset the cast of characters in this arrangement:
- Paul C. Golini (“Paul Sr.”): the Appellant, currently suffering from Alzheimer’s disease and unable to testify, considered one of the founders of the Empire Community Group.
- Paul A. Golini (“Paul Jr.”): Paul Sr.’s son, who held common shares in Holdco.
- A. Guizzetti: a late contemporary of Paul Sr. and also one of the founders of the Empire Community Group;
- Andrew Guizzetti (“Andrew”): an executive vice-president and thereafter chief financial officer of the Empire Community Group and considered as the trusted financial advisor of Paul Sr.
- Dan Guizzetti: also an executive with the Empire Community Group.
- 1066167 Ontario Inc. (“Ontario Inc.”): the Golini family holding corporation of the interest in the active business of Empire Community Group.
- PGE Contracting Inc.: an operating company, part of the Empire Community Group, held 100% by Ontario Inc.
- 2161845 Ontario Inc. (“Holdco”): an Ontario company incorporated to serve as a holding company of the Golini family’s interest.
- Robert Young: an insurance agent familiar with the nature of the plan and serving as the Golinis’ and Empire Community Group’s advisor with respect to the insurance aspects.
- A. Etcovitch and C. Sharobim: the tax and commercial lawyer respectively with MacMillan Binch Mendelsohn, retained by Ontario Inc. and the Golinis with respect to these transactions.
- Aida Van Wees: a lawyer and owner of New Haven International Co., a business partner and, subsequently, wife of Robert Young and instrumental in the handling of documents and overall implementation of the transactions.
- New Haven International Co. (“New Haven”): a Canadian corporation owned and operated by Ms. Van Wees.
- Relius Global Corporation: a Canadian corporation owned by Robert Young to provide consulting services.
- Chris Potter: a tax accountant with PricewaterhouseCoopers retained by the Golinis and their companies.
- Heenan Blaikie: corporate counsel to the Golinis’ corporations.
- DGM Bank and Trust Inc. (“DGM Bank”): a Barbadian bank providing the bridge loan to Ontario Inc.
- St. Joseph Assurance Company Ltd. (“St. Joseph”): a Nevis corporation providing the annuity to Holdco.
- DGM Insurance Corporation (“DGM Insurance”): a Barbadian insurance company providing the Life Insurance to Holdco.
- Stellar Insurance (“Stellar”): a Barbadian insurance corporation providing the reinsurance of the annuity and Life Insurance.
- Trafalgar Holdings LCC (“Trafalgar”): a St. Vincent and Grenadines corporation in which Stellar invested $6,000,000 that Trafalgar loaned on to Metropac.
- Metropac Services Inc. (“Metropac”): a British Columbia corporation incorporated by Dawn Wattie for purposes of these transactions.
- Dawn Wattie: a lawyer practicing in British Columbia and former friend of Aida Van Wees.
- Liza Harridyal-Sodha of Sodha & Associates (“Liza Law”): a lawyer with the Barbadian law firm acting as escrow agent for the handling of documents in connection with this transaction.
- K.N. Hyde & Associates (“Hyde”): a Barbadian law firm acting as escrow agent for the funds on behalf of DGM Insurance.
- Bruce Magwood: a Canadian chartered accountant working for Stellar and also a shareholder and director of St. Joseph’s Assurance.
- BSD Consulting: company owned by Steven Parker to whom Robert Young directed annual fees from this transaction.
[7] The Appellant’s case was presented through three witnesses, Paul Jr., Andrew and A. Etcovitch. Their explanations were consistent that the RCA Optimizer Plan was part of retirement estate planning, primarily for the transition out of the business by Paul Sr., though given how the RCA Optimizer Plan unfolded this motivation appears to have become less significant.
FACTS [8] The Golini-Guizzetti families worked together since the late 1980’s taking a land development business into home building and community development; indeed, going from a handful of employees to well over 200 by 2008. Upon the death of A. Guizzetti in 2001, it was apparent to Andrew that, while the business was flourishing, little or no attention had been paid to shareholder or retirement planning. It was time to do so for the families and especially for Paul Sr.
[9] Paul Sr. very much relied on Andrew for financial advice. A first move by the families was to switch from a small accounting firm to a major chartered accounting firm. Andrew approached PricewaterhouseCoopers in 2004 and developed a working relationship with a tax partner Mr. C. Potter. The business’ legal advisors were Heenan Blaikie.
[10] The primary focus of the planning at this stage was on making appropriate retirement arrangements for Paul Sr. In this regard, an RCA was recommended and implemented in 2005, through the auspices of a Royal Bank Insurance product. This resulted in the first payment in 2008 of approximately $350,000. No evidence other than that was adduced with respect to the RCA.
[11] A second step in the overall planning was an estate freeze in late 2006. This freeze was to shift growth in the business from Paul Sr. to Paul Jr. and utilize Paul Sr.’s $500,000 capital gain exemption. Accordingly, Ontario Inc.’s articles were amended to authorize common shares, Class B preferred shares and Class C preferred shares. Paul Sr.’s 100 common shares were exchanged for 500,098 Class B preferred shares with a fair market value of $500,098, plus 1 common share, which was changed into 1,000 Class C shares redeemable at $5,598,000 and 100 common shares. Paul Sr. then gifted the 100 common shares to Paul Jr. At this stage the paid up capital of the shares held by Paul Sr. in Ontario Inc. was nominal.
[12] In 2007, Mr. Potter introduced the Golini and Guizzetti families to Robert Young, an insurance agent, self-described as “an insurance sales guy”. Robert Young and Mr. Potter discussed a triple back to back possibility, determining it was too costly to do in Canada, and would be more efficient to go offshore. Robert Young sought a Thorsteinssons’ opinion. PricewaterhouseCoopers was retained to review the opinion and structure the plan on a tax effective basis. Andrew, Dan, and perhaps Paul Jr., were at an initial meeting where Robert Young explained the structured transaction forming the basis for the RCA Optimizer Plan. Robert Young testified he would have presented the plan at a high conceptual level. Paul Jr. understood the benefit to be a new class of cumulative shares that would accommodate a steady flow of income for Paul Sr.’s retirement. He also understood it involved the purchase of insurance and an annuity and an exchange of shares. At trial he suggested that PricewaterhouseCoopers had advised that after the RCA ran out, this would provide income for Paul Sr.: this information did not come out at Paul Jr.’s examination for discovery.
[13] Robert Young was subsequently retained by Empire through the auspices of his business partner, and later wife, Ms. Van Wees’ company New Haven. By a letter of June 27, 2007 from New Haven to Empire, Ms. Van Wees confirmed that New Haven was engaged to:
a) Research and evaluate insurance structures both domestically and internationally;
b) Review and identify available sources of banking, insurance and annuities both domestic and international; and
c) Implement a structure.
Ms. Van Wees testified that New Haven knew nothing of tax planning arrangements but simply looked into the different insurance, annuities and loan facilities available and facilitated introducing the parties, ultimately ensuring everyone worked together. It was Robert Young who said he understood the fundamentals of the transaction.
[14] Andrew described the plan as necessary to replace the RCA which yielded insufficient income. Andrew viewed Robert Young’s proposal as the use of a leveraged insurance product to result in shares with better attributes, primarily a cumulative dividend feature, though admitted no dividends have actually been paid on these new shares to date. Andrew also described the plan as not being a burden on the business. He recalled the only representations with respect to tax ramifications at this stage was in connection with the interest deductibility on the loan Paul Sr. was to obtain from a Canadian lender, which he understood was to shelter the RCA income.
[15] It was clear Paul Jr. was not as intimately familiar with the plan as Andrew, who was viewed as the financial advisor in the business, certainly by Paul Sr. It was Andrew who valued Ontario Inc. at $6,000,000.
[16] Robert Young indicated that he had for several years designed non‑traditional insurance plans, not seen in Canada. He acknowledged he had handled several, what he called, Corporate Equity Optimizer plans. He then suggested the plans were developed from the Canadian triple back to back plans that, according to Robert Young, were common in the Canadian insurance industry at the time. He stated their goal was to reduce taxable income, though also stated “he did not do tax per se”. It was Robert Young who obtained tax opinions from Thorsteinssons, as he suggested the professionals to whom he marketed the plans required such opinions.
[17] Andrew was referred by Robert Young and Mr. Potter to Mr. A. Etcovitch at McMillan Binch Mendelsohn LLP (“MBM”) who had familiarity with these plans. MBM was retained to review and act on behalf of the Golinis and their companies as a tax consultant in advising and documenting the plan on a tax effective basis. As Mr. Etcovitch put it, MBM was to assist in documenting the plan and advising as to tax, which he would look after and the commercial elements, which Mr. Sharobim would look after. He advised that he had previously worked on similar plans with Robert Young, who he referred to as a friend, though could not remember how many plans before and how many after the Golini plan. It was clear he had worked with many of the same offshore participants including Hyde and Liza Law.
[18] Mr. Etcovitch testified there was unlikely a written retainer with MBM. He also testified he provided no written description of the plan to his clients, suggesting it was too costly. He further indicated that he had seen a copy of a 40‑page opinion from the Thorsteinssons law firm which had been provided to New Haven. There was considerable testimony with several witnesses as to whether the Golinis or Guizzettis ever saw the Thorsteinssons’ opinion at the time. Both Robert Young and Mr. Etcovitch suggested they had not, Mr. Etcovitch describing the opinion as an interesting read for tax geeks such as himself, but not relevant to the Golini plan. Interestingly, however, the Thorsteinssons’ opinion was listed on the Golini RCA Optimizer Plan closing agenda, but then at the tab where it was to appear there was a notation “intentionally omitted”. Mr. Etcovitch was adamant it was not to be relied upon by the Golini group, but they should rely on their advisors, MBM and Heenan Blaikie, as opposed to what he called a fictitious transaction. Robert Young testified that Mr. Etcovitch provided facts to him to pass on to Thorsteinssons for purposes of the opinion. Having reviewed the Thorsteinssons’ opinions, there is a striking similarity with some of the Golini plan.
[19] Mr. Etcovitch stated he did not advise Paul Sr. with respect to the paid up capital in the Class D shares in Ontario Inc. upon subscription; according to Mr. Etcovitch there was no need to focus on that as it was an obvious conclusion of law. He did confirm that he discussed the risk of the GAAR but, as stated earlier, nothing was put in writing.
[20] I will now go through the transaction in greater detail though state at the outset that my clear impression from Paul Jr.’s, Andrew’s, Mr. Etcovitch’s, Robert Young’s and Ms. Van Wees’ testimony was that the Golinis and Guizzettis were entirely guided by their professional advisors as to the structure of the plan, and also as to who the participants were, including the lender of the bridge financing, the issuer of the annuity, the issuer of the insurance policy and the Canadian lender of $6,000,000 to Paul Sr. Indeed, Andrew testified he was led to believe that Robert Young had worked with Metropac previously. It was clear many of the players in the overall transaction, DGM, St. Joseph’s, Stellar, Trafalgar and Metropac were chosen by, or set up for this very purpose by Robert Young and Ms. Van Wees through their contacts.
[21] I am also satisfied the families were not aware of the machinations that moved the $6,000,000 proceeds of the bridge loan from Ontario Inc. to St. Joseph’s to DGM Insurance to Stellar to Trafalgar and into (and coincidentally out of) the hands of Metropac. Mr. Etcovitch acknowledged that all he was concerned about from his client’s perspective was that ultimately Metropac had the $6,000,000 to loan to Paul Sr. More on that later when going over the escrow agreement.
[22] There was an extensive record book of closing documents prepared by MBM titled Paul C. Golini RCA Optimizer Transaction. It contained all the documents in connection with the plan except the offshore reinsurance with Stellar, the investment by Stellar in Trafalgar and the loan by Trafalgar to Metropac: these exceptions were part of a separate closing agenda prepared by Ms. Van Wees, relying it appears on the MBM template for the onshore agenda.
Step 1 Incorporation of Holdco and amendment of articles [23] The incorporation of Holdco was handled by Heenan Blaikie. It was incorporated January 29, 2008. Paul Sr. was issued 1 common share. He was the sole director. The articles were amended on February 26, 2008 to create Class B preferred shares to accommodate the rollover by Paul Sr. of his Ontario Inc. shares into Holdco.
Step 2 Amendment of the Ontario Inc. share structure to create Class D preferred shares effective February 26, 2008 [24] This amendment was handled by Heenan Blaikie creating a class of shares with an 8.25% cumulative dividend rate. According to Mr. Etcovitch this was the class that would ultimately provide Paul Sr. with the retirement flow of income.
Step 3 Transfer by Paul Sr. of 401,108 Class B shares and 1000 Class C shares of Ontario Inc. to Holdco for 401,108 Class B shares and 99 common shares of Holdco effective February 26, 2008 [25] The documents implementing this transaction (resolution of the companies, rollover agreement, certificates…) were tabled at closing by Heenan Blaikie. I should note that there was no physical, everyone in the room together, closing as such. All documents were simply circulated amongst the appropriate parties with the request to execute a number of copies leaving them undated. Mr. Etcovitch testified they would be dated when proceeds were in place and everyone knew that the plan would definitely be proceeding. As Mr. Sharobim explained in an email to the St. Joseph’s representative February 27, 2008 forwarding an escrow agreement, direction to pay and notice of assignment, “dates of various documents are to be completed in accordance with the flow of funds”.
[26] The transfer of Ontario Inc. shares was done on a subsection 85(1) of the Act rollover basis. Mr. Etcovitch described this as isolating $6,000,000 worth of shares into Holdco.
Step 4 Loan of $6,000,000 to Ontario Inc. by DGM Bank, described as the bridge loan in the closing record [27] While Heenan Blaikie prepared the corporate authorizing documents for this loan, MBM prepared and provided the loan agreement itself dated February 28, 2008 between DGM Bank and Ontario Inc. It also provided a disbursement direction letter from Ontario Inc. to DGM Bank directing the funds into the MBM trust account. The DGM Bank carried on business in Barbados and was represented by its president, Rob Reid, and vice-president, Keiran Young. The bridge loan of $6,000,000 had an interest rate of 8% and was repayable not later than March 11, 2008. While there was no collateral, the following provision was part of the bridge loan:
5.2 The LENDER hereby represents and warrants to the BORROWER that the escrow agent selected by the LENDER will respect its obligations under the Escrow Agreement (“ESCROW AGREEMENT”) dated February 27, 2008 between K.N. Hyde & Associates, Attorneys-at-Law (“ESCROW AGENT”), 2161845 Ontario Inc., Paul C. Golini, St. Joseph Assurance Company Ltd., Metropac Services Inc., McMillan Binch Mendelsohn LLP and Liza Harridyal Sodha & Associates and in the event the obligations of the ESCROW AGENT under the Escrow Agreement are not fulfilled, the BORROWER shall not be obligated to repay the LOAN to the LENDER.
[28] Mr. Etcovitch confirmed that it was Robert Young who chose this lending institution. The money was deposited in MBM’s trust account February 28, 2008.
[29] Andrew testified this bridge loan was never recorded in Ontario Inc.’s general ledger.
Step 5 Redemption by Ontario Inc. of 401,108 Class B preferred shares and 1000 Class C preferred shares held by Holdco effective February 28, 2008 for $6,000,000 [30] Robert Young testified he had no idea why this element of the Plan was included, but that it came from Mr. Etcovitch.
[31] Heenan Blaikie tabled the resolutions and share certificates necessary for the redemption of the Ontario Inc. shares held by Holdco. MBM prepared an irrevocable letter of instructions from Ontario Inc. to MBM as follows:
RE: SUM OF $6,000,000 HELD IN YOUR TRUST ACCOUNT
You are irrevocably instructed to attribute to the account of 2161845 Ontario Inc. the sum of $6,000,000 held by you in trust for the benefit of the undersigned in payment of the redemption price of 401,108 Class B preferred shares and 1,000 Class C preferred shares of the share capital of the undersigned held by 2161845 Ontario Inc.
[32] Mr. Etcovitch suggested MBM would sign a confirmation that funds were so attributed, though no such confirmation was produced. What was part of the closing agenda, however, was an escrow agreement between Paul Sr., Holdco, St. Joseph’s, Metropac, Liza Law and MBM and Hyde. While getting a bit ahead of myself it helps explain what follows and it is therefore worth reproducing parts of that escrow agreement dated February 27, 2008:
WHEREAS:
A. Holdco wishes to purchase an annuity contract from Annuity Company for a purchase price of $6,000,000 (the “Annuity”);
B. The sum of $6,000,000 shall be ultimately transferred to Metropac;
C. Metropac shall disburse the sum of $6,000,000 to Golini under a limited recourse loan agreement to be entered into between Metropac and Golini (the “Loan”), which Loan shall be guaranteed by Holdco;
D. The parties wish that the sum of $6,000,000 representing the purchase price of the Annuity be transferred by MBM on behalf of Holdco to the Escrow Agent on account of Annuity Company, be ultimately attributed by the Escrow Agent, acting in accordance with the irrevocable instructions of Liza Law on account of Metropac and be disbursed by the Escrow Agent in accordance with the irrevocable instructions of Liza Law to Golini as disbursements of the Loan;
NOW THEREFORE, in consideration of the mutual benefits and obligations contained herein and in the transactions between the parties, the receipt and sufficiency of which is acknowledged by all, the parties agree as follows:
1. The Escrow Agent shall act in accordance with the instructions of the parties provided herein only and of no other party in relation to the matters set out herein.
2. The Escrow Agent shall accept from MBM (acting on behalf of Holdco) the sum of $6,000,000 (to be held on behalf of Annuity Company) as payment to Annuity Company of the purchase price of the Annuity.
3. The Escrow Agent shall accept the irrevocable instructions from Liza Law to ultimately attribute to the benefit of Metropac the sum of $6,000,000 held by the Escrow Agent.
4. The Escrow Agent shall accept the irrevocable instructions from Liza Law to immediately disburse said sum to Golini as disbursement of the Loan.
5. All parties agree that in no event the sum accepted hereunder by the Escrow Agent shall leave its trust account other than to be transferred to MBM, for and on behalf of Golini in accordance with Section 4 above and this sum, notwithstanding any other direction or instruction contrary to those provided herein to be given at any time to the Escrow Agent by any of the parties hereto, should, in case of any conflicting instructions, be immediately returned to MBM in trust for Holdco, in which case the matters contemplated herein shall be deemed to be null, ab initio, provided that this shall be without prejudice to the continued operation of Sections 1, 2, 6 and 11 for the benefit of the Escrow Agent and MBM.
[33] The $6,000,000, indeed, followed exactly the requirements set out in this escrow agreement, leaving MBM’s account briefly going to the Hyde trust account and on the same day that Hyde acknowledged receipt, March 3, 2008, the funds were returned to MBM’s trust account, ultimately to be returned to DGM Bank to repay the bridge loan. It is understandable in these circumstances why DGM Bank required no collateral.
Step 6 Purchase of annuity by Holdco from St. Joseph’s: policy dated February 27, 2008 [34] Andrew could not recall any application for this annuity purchased by Holdco. Holdco authorized the Barbados law firm of Liza Law to file with St. Joseph’s all documents necessary to acquire the annuity for $6,000,000. No such documents were in evidence or were part of the closing agenda. Notwithstanding the policy was dated February 27, 2008, its authorizing resolutions were dated February 28, 2008. As Mr. Etcovitch explained, this sometimes happens.
[35] Hyde confirmed with St. Joseph’s and Liza Law receipt of the $6,000,000 from MBM on March 3, 2008 to be held as payment for the annuity. MBM tabled the documents for closing in connection with the annuity. The annuity policy described its investment fund as follows:
The Investment Fund is a single or group of underlying investments that are not directly purchased by the investment performance of which will be mirrored in the Unit Value for each Policy. St. Joseph Assurance Company Ltd. will select the underlying investments and will ensure that the initial Premium is guaranteed as all are Annuity Benefit payments. If the Investment Fund has performance resulting in a decrease in Unit Value the Annuity Benefit will not be affected. If the Investment Fund has an increase in unit value the Annuity Benefit will be affected. The Investment Fund will be stated in Schedule A, managed by the Investment Advisor.
[36] Mr. Etcovitch indicated he did not investigate the nature of the investment fund as it was important only that the annuity yielded the $400,000 annual payment, to be used to cover the annual insurance premium (to be acquired from DGM Insurance), and that there was a mechanism for excess from an investment fund. In addressing the question of the so-called investment fund, Ms. Van Wees testified she did not know how St. Joseph’s did their business. I would say at this point that I found Ms. Van Wees’ testimony generally evasive and at times disingenuous. This is an example of how she handled several questions. She knew St. Joseph’s paid the $400,000 annuity amount to DGM Insurance for the first insurance premium and that both DGM Insurance and St. Joseph’s reinsured 100% of their policies with Stellar. There was clearly nothing left for any investment fund.
[37] Mr. Magwood was more forthright. He was a Canadian chartered accountant who worked on behalf of Stellar as well as being a shareholder and director of St. Joseph’s, the annuity company registered as a Nevis insurance company in December 2007. He described his role as simply a document processor though he did testify that, with respect to the annuity policy, St. Joseph’s had no discretion as to the use of the $6,000,000: everything was set out in the escrow agreement. He confirmed there was in fact no investment fund. The plan was that the entire transaction would be reinsured, all of the $6,000,000 going to Stellar. As he stated, no one understood there would be any excess from an investment fund.
[38] Holdco directed Liza Law as agent to deliver instructions to St. Joseph’s irrevocably directing it to pay the annual payments of $400,000 to DGM Insurance as payment of the insurance policy premiums in the exact same amount. The insurance policy is the next step.
Step 7 Life insurance policy purchased by Holdco on life of Paul Sr. from DGM Insurance dated February 27, 2008 [39] Robert Young was clear that the annuity and insurance premium had to match. As will be seen later there was also a perfect matching with the Metropac loan. Mr. Keiran Young, a Vice-President with DGM Bank, the lender of the bridge financing, testified that DGM Bank and DGM Insurance were somehow related. He had signing authority for both. He also indicated DGM Insurance held only about 10 policies and that DGM Insurance re-insured as DGM did not intend to assume any risk of their own accord. He could not recall the application for this policy nor the medical in connection with it: neither were produced at trial He was not sure exactly what DGM Insurance was licensed to do. Indeed he could not recall very much, and was unsure what the Golinis were trying to achieve.
[40] Holdco’s resolution authorizing this insurance policy was dated February 28, 2008 notwithstanding the policy was dated February 27, 2008. The policy called for premiums of $400,000 annually for 15 years for initial coverage of $6,400,000, increasing over 15 years to coverage of over $16,000,000. After 15 years the premiums ceased but the insurance coverage escalated thereafter at not only the 8% rate, but as if $400,000 premiums were continuing to be paid.
[41] Liza Law was instructed by Holdco to file the necessary documents to acquire the policy. As mentioned, the premiums were to be covered by the annuity payments. Mr. Etcovitch testified that given the insurance policy was issued, presumably the initial payment was made.
[42] I now diverge from the MBM closing agenda of the RCA Optimizer transaction and turn to the other closing agenda for the offshore transactions that moved the $6,000,000 from St. Joseph’s and DGM Insurance, as required by the escrow agreement, through Stellar and Trafalgar and ultimately to the Canadian company Metropac, to then lend to Paul Sr. I am reminded of Alice in Wonderland that “so many out of the way things had happened lately that Alice had begun to think that very few things indeed were really impossible”.
Step 8: Reinsurance of annuity and life insurance policy by St. Joseph’s and DGM Insurance with Stellar [43] The offshore closing agenda includes the reinsurance treaties for both the reinsurance of the annuity contract between St. Joseph’s and Stellar and the reinsurance of the life insurance policy between DGM and Stellar. Mr. Magwood testified that the forms of these contracts were developed from a template from which he developed the finished form. With respect to the annuity, Mr. Magwood described the reinsurance as a transfer of the entire portfolio to Stellar for a commission shown in the agreement to be $7,500 a year. With respect to the insurance policy the annual premium fee payable to DGM Insurance was $16,000 a year.
[44] Mr. Magwood confirmed the effect of these provisions of reinsurance with Stellar was that the $400,000 annuity payment and $400,000 policy premium (designed to match) were simply dealt with internally by Stellar. Also, he testified that the $5,600,000 and $400,000 respectively from St. Joseph’s and DGM Insurance were, by the escrow arrangements, attributed to Stellar. Article 5 of the Reinsurance Agreement between DGM Insurance and Stellar reads in part as follows:
B. In the event of a Claim under the Policy, the Reinsurer agrees that settlements shall take place at the same time as on the Policy, in order that the Reassured shall not be required to advance funds on behalf of the Reinsurer.
C. The Reinsurer may, at its sole discretion, satisfy any obligation it may have under this Contract to pay an amount to the Reassured in respect of a claim made under the Policy by paying the amount directly to the person making the claim under the Policy on behalf of the Reassured. The Reinsurer shall notify the Reassured of any such payment and any such payment shall relive the Reinsurer of all liability under this Contract in respect of the subject matter thereof.
[45] There were several escrow agreements as part of the offshore closing agenda: one between St. Joseph’s and Liza Law, one between DGM Insurance and Liza Law, one between Stellar and Liza Law and one between Trafalgar, Metropac and Liza Law. Mr. Magwood suggested these were likely prepared by Ms. Van Wees or Hyde. The thrust of these escrow agreements, in combination with the escrow agreement described earlier, was that Hyde would receive funds in trust from MBM and hold those funds ultimately to be returned to MBM to hold for Paul Sr., ultimately to be released to repay the bridge loan. The escrow agreements track the flow of funds from St. Joseph’s and DGM Insurance to Stellar, to Trafalgar, to Metropac and to Paul Sr. via the delivery of acceptances and receipts by Liza Law in terms like the following found in the escrow agreement amongst Trafalgar, Metropac and Liza Law:
1. Liza Law is hereby irrevocably authorized and directed by Long Term Lender to:
i) accept the sum of ________ as a deposit under the Investment Contract from Reinsurance Co. and to issue to Reinsurance Co. a receipt in the sum of ________, to be signed by Liza Law;
ii) accept confirmation from MBM that MBM is holding in trust the following sums and an irrevocable direction from the Client that on the Client receiving the advance contemplated under section 2(v) of this escrow agreement, said sums will be released forthwith as follows:
a) _________ to Liza Law, to be held in trust, on account of prepayment of interest from the Client to MetroPac pursuant to the Golini Loan Agreement and from MetroPac to Long Term Lender on account of interest pursuant to the MetroPac Loan Agreement;
b) _________ to Liza Law on account of Liza Law’s fees and disbursements;
c) _________ to Hyde on account of Hyde’s fees;
d) _________ to MetroPac on account of MetroPac’s counsel fees and disbursements;
e) _________ to MetroPac on account of the administrative fees payable to MetroPac under the MetroPac Loan Agreement;
f) _________ to Banasha Shah Consulting Services Inc. for an actuarial opinion;
g) _________ to Hyde, in trust, on account of consulting fees payable to __________; and
h) _________ to Hyde, in trust, on account of interest payable to DGM Bank & Trust Inc. (“DGM”);
iii) deliver a direction ***(missing word) MBM to pay the sum of __________ on account of interest pursuant to the MetroPac Loan Agreement (the “MetroPac Direction”) to Liza Law, in trust and to issue to MetroPac a receipt from Long Term Lender to be signed by Liza Law;
iv) accept delivery of the following documents from MetroPac:
a) The MetroPac Loan Agreement;
b) MetroPac resolutions approving borrowing ________ from Long Term Lender;
c) Security agreement(s) required pursuant to the MetroPac Loan Agreement, including collateral assignment agreement(s), and registration thereof;
d) Certificate of incumbency of MetroPac;
e) Statutory declaration of MetroPac; and
f) The MetroPac Direction;
v) direct, by fax or electronic transmission, Hyde to advance to MetroPac under the MetroPac Loan Agreement out of the funds Hyde holds in trust for Long Term Lender, the sum of ________;
vi) distribute the sum of _________ in accordance with the instructions received.
[46] Ms. Van Wees testified that everything was handled through Liza Law as there was not a high level of trust from DGM Insurance, St. Joseph’s and Trafalgar so everything had to be signed and in her hands before the transactions went ahead. This type of vague representation by Ms. Van Wees gives me concern with respect to her testimony generally.
[47] Interestingly, the offshore closing agenda indicates the escrow agreements were to be tabled by “D.W.”, which I take to mean Dawn Wattie, the lawyer asked by Ms. Van Wees to set up Metropac and review documents that included Metropac. It is extremely unlikely Ms. Wattie tabled these escrow agreements. She testified that Ms. Van Wees provided all documents for the offshore closing. Wherever there is any discrepancy between the testimony of Ms. Van Wees and Ms. Wattie, I accept completely Ms. Wattie’s evidence.
Step 9 Stellar invests $6,000,000 in Trafalgar pursuant to an agreement dated February 27, 2008 [48] Trafalgar was a St. Vincent and Grenadine company. This contract was labelled a “Term Investment Agreement” for an investment of $6,000,000 at an interest rate of 8% as follows:
2.2 The Lender shall credit 8% interest per annum to the accumulated value of the Deposit for each full year from the effective date such Deposit is paid until this Agreement terminates. Interest at the annual rate of 8% shall also be credited for any partial year that the Deposit is invested. The accumulated value of the Deposit shall equal the amount of the Deposit plus previously credited interest.
[49] Mr. Magwood clarified that in fact all the interest was not capitalized but $80,000 in cash was to be received annually (as will soon be seen, this will track the $80,000 payment Paul Sr. agreed to pay as interest on the loan from Metropac). The $80,000 was used to compensate the participants in the structure (Stellar got $22,500 of which St. Joseph’s got its share, DGM got $12,500 and BSD got $45,000). Mr. Magwood did not know who BSD was but presumed it was Robert Young. Indeed, as explained by Robert Young these were fees he directed to BSD. Robert Young acknowledged the $80,000 was determined based on what the fees would be: that was the starting point. He referred to the amount as the cash cost of the deal.
[50] Although Stellar is investing the $6,000,000 in Trafalgar, Trafalgar is characterized as the “Lender”. There is no indication as to how Trafalgar would invest the funds, but it was clearly part of the plan the $6,000,000 was to go by way of loan from Tra