Grenon v. The Queen

Grenon v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-04-27
Neutral citation
2021 TCC 30
File numbers
2014-3401(IT)G, 2014-4440(IT)G
Judges and Taxing Officers
Guy R. Smith
Subjects
Income Tax Act
Decision Content
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:
Cy M. Fien
Brandon Barnes Trickett
Ari M. Hanson
Aron W. Grusko
Counsel for the Respondent:
Ifeanyi Nwachukwu
Tanis Halpape
Christopher Kitchen
Jeremy Tiger
AMENDED JUDGMENT
[This Amended Judgment is issued in substitution of the Judgment dated April 9, 2021 to correct and add counsel’s names.]
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 27th day of April 2021.
“Guy R. Smith”
Smith J.
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:
John J. Tobin
Linda Plumpton
James Gotowiec
Cy M. Fien
Brandon Barnes Trickett
Ari M. Hanson
Aron W. Grusko
Counsel for the Respondent:
Ifeanyi Nwachukwu
Tanis Halpape
Christopher Kitchen
Jeremy Tiger
AMENDED JUDGMENT
[This Amended Judgment is issued in substitution of the Judgment dated April 9, 2021 to correct and add counsel’s names.]
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 27th day of April 2021.
“Guy R. Smith”
Smith J
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 (“GAAR”) 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 GAAR 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:20210601
Docket: 2014-3401(IT)G
BETWEEN:
JAMES T. GRENON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2014-4440(IT)G
THE RRSP OF JAMES T. GRENON (552-53721)
BY ITS TRUSTEE CIBC TRUST CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
FURTHER AMENDED 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 (“GAAR”).
[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”).
a) The Appellant
[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.
b) The Income 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.
c) The acquisition of units by the RRSP Trust
[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
Sub. Date
# of Units
Value of Units
Amount ($)
June. 2003
1,575,000
7.50
11,812,500
Jan. 2005
3,400,000
9.06
30,804,000
Dec. 2007
1,390,500
8.99
12,500,595
Total
55,117,095
2003-2 Income Fund
Sub Date
# of Units
Value of Units
Amount ($)
Sept. 2003
540,000
7.50
4,050,000
Sept. 2006
225,800
15.50
3,499,900
July 2007
60,000
14.94
896,400
May 2008
147,700
15.08
2,227,316
July 2010
41,666
18.00
749,988
Total
11,423,604
2003-3 Income Fund
Sub Date
# of Units
Value of Units
Amount ($)
Sept. 2003
540,000
7.50
4,050,000
Total
4,050,000
2003-4 Income Fund
Sub Date
# of Units
Value of Units
Amount ($)
Nov. 2005
3,821,850
40.00
152,874,000
May 2006
4,000,000
5.53
22,120,000
Total
174,994,000
2006-5 Income Fund
Sub Date
# of Units
Value of Units
Amount ($)
March 2008
320,000
7.50
2,400,000
July 2008
213,333
7.50
1,599,998
Total
3,999,998
2006-8 Income Fund
Sub Date
# of Units
Value of Units
Amount ($)
August 2008
5,333,333
7.50
39,999,998
August 2009
3,176,620
7.87
24,999,999
Total
64,999,997
[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 $69 million, respectively:
Total number and value of units acquired by the RRSP Trust [6]
Subscription
Year
2003 Income Funds
2006 Income Funds
Number of
Units
Amount ($)
Number of
Units
Amount ($)
2003
2,655,000
19,912,500
0
0
2004
0
0
0
0
2005
7,221,850
183,678,012
0
0
2006
4,225,800
25,619,900
0
0
2007
1,450,500
13,396,995
0
0
2008
147,700
2,227,316
5,866,666
43,999,996
2009
0
0
3,176,620
24,999,999
Total
15,742,516
$245,584,711
9,043,286.00
$68,999,995
[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.
d) The income distributions made by the Income Funds
[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.
e) Tom 2003-1 Income Fund
[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.
f) Tom 2003-2 Income Fund
[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.
g) Tom 2003-3 Income Fund
[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.
h) Tom 2003-4 Income Fund
[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.
i) Tom 2006-5 Income Fund
[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.
j) Tom 2006-8 Income Fund
[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.
k) The Fact witnesses
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