Cassan v. The Queen

Cassan v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-09-08
Neutral citation
2017 TCC 174
File numbers
2013-3488(IT)G, 2013-355(IT)G, 2014-384(IT)G, 2014-802(IT)G, 2014-803(IT)G, 2014-804(IT)G, 2014-806(IT)G
Judges and Taxing Officers
John R. Owen
Decision Content
Dockets: 2013-355(IT)G
2013-3488(IT)G
BETWEEN:
LYNN CASSAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Kenneth Gordon (2014-384(IT)G), Stephen Chu (2014-802(IT)G),
Katherine Lee Sang (2014-803(IT)G), Howard Platnick (2014-804(IT)G),
and Dana Tilatti (2014-806(IT)G) on February 8 to 12, 2016,
February 15 to 19, 2016, February 22 to 25, 2016 and
June 29 and 30, 2016, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Mary Paterson,
Pooja Mihailovich and Adam Hirsh
Counsel for the Respondent:
Daniel Bourgeois, Andrew Miller,
and Josh Kumar
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeals from the reassessments made under the Income Tax Act (“ITA”) for the 2009, 2010 and 2011 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. The eligible amount of the gift made by the Appellant to TGTFC (as defined in the Reasons for Judgment) in 2009 is nil.
2. The interest paid or payable by the Appellant in the Appellant’s 2009, 2010 and 2011 taxation years on the Unit Loan (as defined in the Reasons for Judgment) is deductible under paragraph 20(1)(c) of the Income Tax Act (the “ITA”) in computing the income of the Appellant for those taxation years.
3. The Fees (as defined in the Reasons for Judgment) incurred by the Appellant in the Appellant’s 2009, 2010 and 2011 taxation years are deductible in computing the income of the Appellant for those taxation years in accordance with the applicable provisions of the ITA.
4. The 2009 LP (as defined in the Reasons for Judgment) is not deemed by subsection 12(9) of the ITA to accrue as interest any amount in respect of the Linked Notes (as defined in the Reasons for Judgment) for its 2009, 2010 and 2011 taxation years.
Signed at Ottawa, Canada, this 8th day of September 2017.
“J.R. Owen”
Owen J.
Docket: 2014-384(IT)G
BETWEEN:
KENNETH GORDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Lynn Cassan (2013-355(IT)G and 2013-3488(IT)G),
Stephen Chu (2014-802(IT)G), Katherine Lee Sang (2014-803(IT)G),
Howard Platnick (2014-804(IT)G) and Dana Tilatti (2014-806(IT)G) on February 8 to 12, 2016, February 15 to 19, 2016,
February 22 to 25, 2016 and June 29 and 30, 2016, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Mary Paterson,
Pooja Mihailovich and Adam Hirsh
Counsel for the Respondent:
Daniel Bourgeois, Andrew Miller,
and Josh Kumar
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income Tax Act for the 2009 and 2010 taxation years is allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. The eligible amount of the gift made by the Appellant to TGTFC (as defined in the Reasons for Judgment) in 2009 is nil.
2. The interest paid or payable by the Appellant in the Appellant’s 2009 and 2010 taxation years on the Unit Loan (as defined in the Reasons for Judgment) is deductible under paragraph 20(1)(c) of the Income Tax Act (the “ITA”) in computing the income of the Appellant for those taxation years.
3. The Fees (as defined in the Reasons for Judgment) incurred by the Appellant in the Appellant’s 2009 and 2010 taxation years are deductible in computing the income of the Appellant for those taxation years in accordance with the applicable provisions of the ITA.
4. The 2009 LP (as defined in the Reasons for Judgment) is not deemed by subsection 12(9) of the ITA to accrue as interest any amount in respect of the Linked Notes (as defined in the Reasons for Judgment) for its 2009 and 2010 taxation years.
Signed at Ottawa, Canada, this 8th day of September 2017.
“J.R. Owen”
Owen J.
Docket: 2014-802(IT)G
BETWEEN:
STEPHEN CHU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of Lynn Cassan
(2013-355(IT)G and 2013-3488(IT)G), Kenneth Gordon (2014-384(IT)G),
Katherine Lee Sang (2014-803(IT)G), Howard Platnick (2014-804(IT)G) and Dana Tilatti (2014-806(IT)G) on February 8 to 12, 2016,
February 15 to 19, 2016, February 22 to 25, 2016 and June 29 and 30, 2016,
at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Mary Paterson,
Pooja Mihailovich and Adam Hirsh
Counsel for the Respondent:
Daniel Bourgeois, Andrew Miller,
and Josh Kumar
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income Tax Act for the 2009 and 2010 taxation years is allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. The eligible amount of the gift made by the Appellant to TGTFC (as defined in the Reasons for Judgment) in 2009 is nil.
2. The interest paid or payable by the Appellant in the Appellant’s 2009 and 2010 taxation years on the Unit Loan (as defined in the Reasons for Judgment) is deductible under paragraph 20(1)(c) of the Income Tax Act (the “ITA”) in computing the income of the Appellant for those taxation years.
3. The Fees (as defined in the Reasons for Judgment) incurred by the Appellant in the Appellant’s 2009 and 2010 taxation years are deductible in computing the income of the Appellant for those taxation years in accordance with the applicable provisions of the ITA.
4. The 2009 LP (as defined in the Reasons for Judgment) is not deemed by subsection 12(9) of the ITA to accrue as interest any amount in respect of the Linked Notes (as defined in the Reasons for Judgment) for its 2009 and 2010 taxation years.
Signed at Ottawa, Canada, this 8th day of September 2017.
“J.R. Owen”
Owen J.
Docket: 2014-803(IT)G
BETWEEN:
KATHERINE LEE SANG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of Lynn Cassan
(2013-355(IT)G and 2013-3488(IT)G), Kenneth Gordon (2014-384(IT)G),
Stephen Chu (2014-802(IT)G), Howard Platnick (2014-804(IT)G) and
Dana Tilatti (2014-806(IT)G) on February 8 to 12, 2016,
February 15 to 19, 2016, February 22 to 25, 2016 and June 29 and 30, 2016,
at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Mary Paterson,
Pooja Mihailovich and Adam Hirsh
Counsel for the Respondent:
Daniel Bourgeois, Andrew Miller,
and Josh Kumar
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income Tax Act for the 2009 and 2010 taxation years is allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. The eligible amount of the gift made by the Appellant to TGTFC (as defined in the Reasons for Judgment) in 2009 is nil.
2. The interest paid or payable by the Appellant in the Appellant’s 2009 and 2010 taxation years on the Unit Loan (as defined in the Reasons for Judgment) is deductible under paragraph 20(1)(c) of the Income Tax Act (the “ITA”) in computing the income of the Appellant for those taxation years.
3. The Fees (as defined in the Reasons for Judgment) incurred by the Appellant in the Appellant’s 2009 and 2010 taxation years are deductible in computing the income of the Appellant for those taxation years in accordance with the applicable provisions of the ITA.
4. The 2009 LP (as defined in the Reasons for Judgment) is not deemed by subsection 12(9) of the ITA to accrue as interest any amount in respect of the Linked Notes (as defined in the Reasons for Judgment) for its 2009 and 2010 taxation years.
Signed at Ottawa, Canada, this 8th day of September 2017.
“J.R. Owen”
Owen J.
Docket: 2014-804(IT)G
BETWEEN:
HOWARD PLATNICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of Lynn Cassan
(2013-355(IT)G and 2013-3488(IT)G), Kenneth Gordon (2014-384(IT)G),
Stephen Chu (2014-802(IT)G), Katherine Lee Sang (2014-803(IT)G) and
Dana Tilatti (2014-806(IT)G) on February 8 to 12, 2016,
February 15 to 19, 2016, February 22 to 25, 2016 and June 29 and 30, 2016,
at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Mary Paterson,
Pooja Mihailovich and Adam Hirsh
Counsel for the Respondent:
Daniel Bourgeois, Andrew Miller,
and Josh Kumar
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income Tax Act for the 2009 and 2010 taxation years is allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. The eligible amount of the gift made by the Appellant to TGTFC (as defined in the Reasons for Judgment) in 2009 is nil.
2. The interest paid or payable by the Appellant in the Appellant’s 2009 and 2010 taxation years on the Unit Loan (as defined in the Reasons for Judgment) is deductible under paragraph 20(1)(c) of the Income Tax Act (the “ITA”) in computing the income of the Appellant for those taxation years.
3. The Fees (as defined in the Reasons for Judgment) incurred by the Appellant in the Appellant’s 2009 and 2010 taxation years are deductible in computing the income of the Appellant for those taxation years in accordance with the applicable provisions of the ITA.
4. The 2009 LP (as defined in the Reasons for Judgment) is not deemed by subsection 12(9) of the ITA to accrue as interest any amount in respect of the Linked Notes (as defined in the Reasons for Judgment) for its 2009 and 2010 taxation years.
Signed at Ottawa, Canada, this 8th day of September 2017.
“J.R. Owen”
Owen J.
Docket: 2014-806(IT)G
BETWEEN:
DANA TILATTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of Lynn Cassan
(2013-355(IT)G and 2013-3488(IT)G), Kenneth Gordon (2014-384(IT)G),
Stephen Chu (2014-802(IT)G), Katherine Lee Sang (2014-803(IT)G) and
Howard Platnick (2014-804(IT)G) on February 8 to 12, 2016,
February 15 to 19, 2016, February 22 to 25, 2016 and June 29 and 30, 2016,
at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellants:
Al Meghji, Mary Paterson,
Pooja Mihailovich and Adam Hirsh
Counsel for the Respondent:
Daniel Bourgeois, Andrew Miller,
and Josh Kumar
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income Tax Act for the 2009 and 2010 taxation years is allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
1. The eligible amount of the gift made by the Appellant to TGTFC (as defined in the Reasons for Judgment) in 2009 is nil.
2. The interest paid or payable by the Appellant in the Appellant’s 2009 and 2010 taxation years on the Unit Loan (as defined in the Reasons for Judgment) is deductible under paragraph 20(1)(c) of the Income Tax Act (the “ITA”) in computing the income of the Appellant for those taxation years.
3. The Fees (as defined in the Reasons for Judgment) incurred by the Appellant in the Appellant’s 2009 and 2010 taxation years are deductible in computing the income of the Appellant for those taxation years in accordance with the applicable provisions of the ITA.
4. The 2009 LP (as defined in the Reasons for Judgment) is not deemed by subsection 12(9) of the ITA to accrue as interest any amount in respect of the Linked Notes (as defined in the Reasons for Judgment) for its 2009 and 2010 taxation years.
Signed at Ottawa, Canada, this 8th day of September 2017.
“J.R. Owen”
Owen J.
Citation: 2017 TCC 174
Date: 20170908
Dockets: 2013-355(IT)G
2013-3488(IT)G
BETWEEN:
LYNN CASSAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2014-384(IT)G,
AND BETWEEN:
KENNETH GORDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2014-802(IT)G,
AND BETWEEN:
STEPHEN CHU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2014-803(IT)G,
AND BETWEEN:
KATHERINE LEE SANG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2014-804(IT)G
AND BETWEEN:
HOWARD PLATNICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2014-806(IT)G
AND BETWEEN:
DANA TILATTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Owen J.
I. Introduction [1] These are appeals by Lynn Cassan, Kenneth Gordon, Dana Tilatti, Howard Platnick, Steven Chu and Katherine Lee Sang (collectively, the “Appellants”) of reassessments fixing the income tax consequences of their participation in a structure called the EquiGenesis 2009-II Preferred Investment Limited Partnership and Donation Program (the “Program”) that was created and marketed by EquiGenesis Corporation (“EquiGenesis”) in 2009. The appeals were heard on common evidence.
[2] The basic components of the Program vis-à-vis the Appellants are an investment, substantially funded by a loan, in limited partnership units of a limited partnership and a transfer of money to a charitable foundation, also substantially funded by a loan. EquiGenesis promoted the Program on the basis that a participant in the Program would be entitled to a non-refundable charitable donation tax credit for the 2009 taxation year and to deductions from income for interest and fees payable over 19 years.
[3] The Minister of National Revenue (the “Minister”) reassessed the 2009 and 2010 taxation years of the Appellants[1] to deny the non-refundable charitable donation tax credit claimed in respect of the Program for the 2009 taxation year and to deny the deductions from income claimed in respect of the Program for the 2009 and 2010 taxation years. The Minister also included in income each Appellant’s proportionate share of income the Minister says was deemed by subsection 12(9) of the Income Tax Act (Canada) (the “ITA”)[2] and paragraph 7000(2)(d) of the Income Tax Regulations (the “ITR”) to be realized by the limited partnership.
II. The Evidence [4] The parties filed a statement of agreed facts (partial), a copy of which is attached as Appendix A to these reasons. The structure of the Program is shown graphically in Appendix B to these reasons.
[5] Six fact witnesses and three expert witnesses testified for the Appellants:
1. Kenneth Gordon, the sole shareholder of EquiGenesis, a participant in the Program and one of the Appellants;
2. Dana Tilatti, a participant in the Program and one of the Appellants;
3. Howard Platnick, a participant in the Program and one of the Appellants;
4. Steven Chu, a participant in the Program and one of the Appellants;
5. Katherine Lee Sang, a participant in the Program and one of the Appellants;
6. Lynn Cassan, a participant in the Program and one of the Appellants;
7. Howard Rosen, a principal of FTI Consulting Inc. (“FTI”), who was qualified as an expert in business valuation and corporate finance;
8. Jerrold Marriott, the president of Eastmount Financial Consulting Limited (“Eastmount”), who was qualified as an expert in credit rating and structured finance capital markets; and
9. Andrew Scott Davidson, the managing Director of Duff & Phelps (“D & P”), who was qualified as an expert in business and security interests.
[6] Three fact witnesses and one expert witness testified for the Respondent:
1. Mary Zhang, a private banker working with TD Wealth private clients;
2. Louis Tilatti, the spouse of Dana Tilatti and a participant in similar programs offered by EquiGenesis in 2005, 2010 and 2012;
3. Christine Spettigue, an auditor with the Canada Revenue Agency (the “CRA”) involved in the audit of the Program; and
4. Howard Edward Johnson, a corporate finance advisor with Campbell Valuation Partners Limited (“CVPL”), who was qualified as an expert in the valuation of debt instruments, in the valuation of equity securities and in corporate finance.
A. The Fact Witnesses (1) Kenneth Gordon [7] Mr. Kenneth Gordon testified first for the Appellants. He is the president, sole owner, sole shareholder, sole director and senior officer of EquiGenesis.[3] Mr. Gordon is a lawyer and a member of the Law Society of Upper Canada. Mr. Gordon is also one of the 59 taxpayers who participated in the Program (I will refer to these 59 taxpayers collectively as the “Participants” and individually as a “Participant”).
[8] Mr. Gordon described the role of EquiGenesis and himself in connection with the Program as follows:
Q. . . . What is EquiGenesis’s role in connection with the ‘09 program?
A. EquiGenesis played a variety of rules [sic]. It was the creator, the structurer, the distributor, and it was the manager. So we played all those functions and we –– we did so and we have a compliment [sic] of people in our office who are specifically trained to be able to properly implement and manage these programs throughout their entire life.
Q. Let’s talk about you in particular, what has your role been day-to-day in these programs?
A. My role has been to specifically oversee everything that happens related to from beginning to end of these programs. So I am intimately involved in the structuring, in the reviewing and drafting of documents and overseeing drafting of documents by counsel, in the preparation of marketing materials, in overseeing the marketing process with clients and potential clients and their advisors and I am extremely involved on a day-to-day basis in the ongoing management of these programs, some of which extend like the one today, the ‘09 program, for up to 20 years.[4]
[9] Mr. Gordon described the history of the Program and the structure and operation of the Program. The basic structure used in the Program was first employed in 2003 and then again in 2004, 2005 and 2006. According to Mr. Gordon, no program was offered in 2007 or 2008 because the 2005 and 2006 programs were under audit by the CRA and it was not considered prudent to offer new programs until these audits were completed.[5]
[10] In early 2009, the taxpayers participating in the 2005 and 2006 programs, including Mr. Gordon, were advised in writing by the CRA that the audit of those programs had been terminated and that no reassessments were to be issued.[6]
[11] After meeting with the auditor to obtain an understanding of the reasoning behind the decision not to reassess, Mr. Gordon decided to proceed with the creation of the Program on the basis that it should follow the structure of the 2005 and 2006 programs as closely as possible.[7] Mr. Gordon stated that EquiGenesis offered further programs in 2010, 2011 and 2012 on the same basis.[8]
[12] In cross-examination, Mr. Gordon testified that the term of the program for 2010 had been shortened to 10 years and that an additional option on maturity had been added.[9] The additional option involves an exchange of the limited partnership units issued to participants in the 2010 program for mutual fund trust units and a donation of the latter to a charity.[10] Mr. Gordon stated that this option could not be added to the Program because of conditions laid down in paragraph 38(a.3) of the ITA.[11]
[13] Each Participant in the Program was required to purchase a minimum of ten limited partnership units (the “LP Units”) in the EquiGenesis 2009-II Preferred Investment Limited Partnership (the “2009 LP”) for $36,140 per LP unit. Of the total purchase price of $36,140 per LP Unit, $32,000 was funded by a loan (a “Unit Loan”) from aIncome 2009 Finance Trust (“FT”) and the balance of $4,140 was funded by the Participant from the Participant’s own resources.
[14] FT acquired the funding for the initial advances of the Unit Loans from a credit facility provided by third-party lenders.[12] In cross-examination, Mr. Gordon stated that at the time each of the Unit Loans was advanced he was not aware of either the identity of the third-party lenders or the details of the loans made by them to FT.[13]
[15] To obtain a Unit Loan, a Participant was required to complete a unit loan application and assignment form (a “ULAA Form”).[14] The ULAA Form was prepared by FT’s counsel in consultation with EquiGenesis’ counsel.[15] The form required the Participants to disclose within ranges specified on the form the Participants’ gross personal annual income, their gross household annual income, their assets and their liabilities.[16]
[16] In cross-examination, Mr. Gordon stated that he was not required to provide any document to support his income or net worth as disclosed on his ULAA Form.[17] Mr. Gordon also stated that he did not disclose liabilities associated with his participation in previous programs on the basis that these liabilities would not have any impact on the net worth he disclosed on the form and on the basis of his belief that FT was focussing on the borrower’s ability to meet the cash flow requirements with regard to the loan.[18]
[17] Article 2.02 of the ULAA Form provided for additional advances to the Participant that would be added to the principal amount of that Participant’s Unit Loan. Mr. Gordon explained the purpose of this provision as follows:
The purpose of that section is to provide the opportunity for the lender at its sole discretion to make annual additional advances which would be added to the principal of the outstanding loan and would be used to pay interest from the prior year.
. . .
The intention was that interest -- there was a mechanism in place at the sole discretion of the lender that would allow it the opportunity to, if appropriate, to make additional advances to fund the interest from the prior year, and this would happen every year before the end of February to satisfy the Income Tax Act requirement that interest was paid within 60 days of year end.[19]
[18] Articles 2.03 and 2.06 of the ULAA Form stated that the principal amount of the Unit Loan bore interest at 7.85% per annum and that the Unit Loan matured on February 15, 2019. Articles 2.04 and 2.05 of the ULAA Form described the loan arrangement fee and the loan maintenance fee respectively. Article 2.07 of the ULAA Form stated that the Unit Loan would be evidenced by a promissory note, and Mr. Gordon testified that each Participant executed a promissory note.[20] The form of promissory note used stated that the Unit Loan matured on February 15, 2019.[21]
[19] Mr. Gordon explained the February 15, 2019 maturity date of the Unit Loans as follows:
Q. You said that the loan matures at February 15th, 2019, earlier in your evidence?
A. Yes.
Q. We see that at article 2.06 on page 26 [of the ULAA Form]?
A. Correct.
Q. What happens at maturity?
A. At maturity the loan becomes fully payable, both all principal and accrued interest to that date, and must be paid in full.
Q. It’s a 20-year program so why is it designed so that the loan matures halfway through?
A. Although the program was intended to potentially reach 20 years it’s essential from a tax perspective that the debt mature in a period within the first 10 years so there had to be bona fides terms of re-payment [sic] within 10 years, and that was what drove the requirement to have the debt paid in full by that date.[22]
[20] Mr. Gordon testified that the Participants were advised that the Unit Loan had to be repaid on maturity and that they were not given any written or verbal assurance that the loan would be renewed or extended.[23] He pointed to statements to this effect made in Article 5 of the ULAA Form and in the confidential offering memorandum for the Program (the “COM”).[24]
[21] With respect to EquiGenesis’ role on the maturity of the Unit Loan, Mr. Gordon stated:
Q. What did EquiGenesis tell participants about EquiGenesis’s role in potentially refinancing the loans?
A. We told them that there was the potential at 10 years prior, just prior to the date the loan matured, that we would, to the extent possible, investigate options, but no options had been, have been investigated yet and no options have been considered at the time.[25]
[22] In cross-examination, Mr. Gordon stated that if a sufficient number of Participants wanted to refinance the Unit Loan, EquiGenesis would do what it could on a best efforts basis to assist in finding a replacement lender.[26] Mr. Gordon also stated that on maturity the loans for the 2003, 2004, 2005 and 2006 programs had been replaced with new loans from special-purpose entities and that over 90% of the participants in the 2003 program had refinanced.[27]
[23] Under the terms of the Unit Loan, the 7.85% annual interest had to be paid by the Participant no later than February 28 of the year following the year in which the interest accrued. For example, the interest that accrued on a Unit Loan during 2011 had to be paid by February 28, 2012. If the interest was not paid by a Participant by a certain deadline, the Participant was deemed to have requested an additional cash advance from FT equal to the amount of that interest, subject to the discretion of FT to refuse the additional advance.
[24] Mr. Gordon explained the intention behind the additional advances and the means employed to make the advances as follows:
Q. Mr. Gordon, can you explain for the Court how these additional advances work?
A. The additional advances are intended to facilitate the participants’ obligation to fund interest every year within 60 days of year end so as to avoid violating the Limited Recourse Debt Rules and creates [sic] a mechanism that provides the ability of the lender to -- on an annual basis -- determine whether or not the client or the participant or I should say the borrower is creditworthy enough or at least not in default of any of its obligations and therefore entitled to receive an advance.
To the extent that the lender has approved the participants for the advance, then, every year prior to February 28th, the lender will make two advances. One advance in an aggregate amount in respect of the participants who borrowed in respect of the partnership loan and that advance is made on an aggregate basis from the lender to the general partner of the partnership, which is authorized under the loan documentation as an agent to receive those funds on behalf of each of the participants.
The amount the GP will receive is an aggregate amount equal to the combined amount of interest owing on each of the borrowers pursuant to their partnership loans for the prior fiscal period. The lender will advance that amount to the general partner. The general partner will receive that amount and re-pay [sic] it back to the lender on behalf of each of the borrowers who have borrowed under the loan agreements.
The lender will receive that amount, account for it as a payment on account of the prior 12 months’ interest during the prior fiscal period and then will immediately increase the loan amount, the principal of the borrower’s loan amount to account for that additional advance. That is how the interest is paid annually within 60 days of year end for each of the borrowers who purchased limited partnership units.[28]
[25] Mr. Gordon stated that while a request to FT for an advance was made automatically if a Participant did not pay the prior year’s accrued interest by the deadline, the advance itself was not automatic but was at the discretion of FT.[29] Mr. Gordon provided a detailed explanation of the steps taken to effect each year’s advances, including the role played by TD Canada Trust, which was described as follows:
Q. Tell us about the bank and the bank’s role in this process?
A. The bank played a significant role in this process in that the funds and the transaction for this closing all took place in the early years at the branch of the TD Canada Trust here in Toronto. All of the parties involved in the transaction have bank accounts at the same branch of the TD Canada Trust.
What would happen is the representatives of Finance Trust would initially deposit the advance amount in cash from Finance Trust into their account at the TD Bank. Then the TD Bank would walk those funds through the appropriate transaction paying them from the lender, Finance Trust, to either EquiGenesis or the GP as the case may be and then paying those funds back to the lender and documenting the entire process on a manual basis, the deposits, the transfers, the receipts, and so on.
The process is fully documented as the cash originating from Finance Trust flows through each of the relevant parties and eventually back to Finance Trust.[30]
[26] In more recent years, the bank has employed electronic processing managed by FT, which eliminates the need for the parties to attend at the bank branch to effect the annual advances.[31]
[27] Each Participant pledged to FT his or her LP Units as security for the Unit Loan and this security interest was perfected by delivery of the LP Unit certificates to FT. In addition, the 2009 LP and its general partner, the EquiGenesis 2009–II Preferred Investment GP Corp. (the “GP”), entered into a priority agreement with FT that gave FT priority over the 2009 LP and GP with respect to any claim over the LP Units.[32]
[28] Each Participant was required to pay to FT a one-time loan arrangement fee of $125 per LP Unit purchased by the Participant (the “LA Fee”). Commencing on February 1, 2011, each Participant was required to pay to FT an annual loan maintenance fee of $30 per LP Unit purchased (the “LM Fee”) and to pay to the GP an annual administration fee of $95 per LP Unit purchased (the “Admin Fee”). Of this $95, $25 was an agent service fee paid to the individuals who sold the Program to taxpayers and $70 was retained by the GP for the ongoing administration of the Program.[33] I will refer to the LA Fee, the LM Fee and the Admin Fee collectively as the “Fees”.
[29] For each LP Unit issued to the Participants, the 2009 LP used $1,565 to cover issue costs for the LP Units and invested $34,575 in debt instruments (the “Linked Notes”)[34] issued by Leeward Alternative Financial Asset 2009 Corporation (“Leeward”), a corporation formed under the laws of the British Virgin Islands (“BVI”).
[30] On the maturity of the Linked Notes on December 31, 2028, Leeward is required to pay the 2009 LP the principal amount of the Linked Notes (i.e., $34,575 per LP Unit issued to Participants) and a return on the principal amount determined at that time as the greater of two amounts. Each such amount is calculated by reference to a notional portfolio of assets, which I will refer to as “Portfolio A” and “Portfolio B”. As security for its obligations under the Linked Notes, Leeward granted the 2009 LP a security interest over all of its assets pursuant to the terms of a general security agreement.
[31] For each LP Unit issued, Leeward lent $32,000 of the amount received from 2009 LP for the Linked Notes to aIncome 2009 Deposit Trust (“DT”) and DT immediately lent the same amount to FT. Each of these loans bears interest at 7.85% per annum and matures on December 31, 2028. DT granted Leeward a security interest over all its assets and FT granted DT a security interest over all its assets.
[32] Although Mr. Gordon stated that he did not have knowledge of FT’s activities, he agreed that since FT was a special-purpose entity created to participate in the Program it was logical to assume that FT used the proceeds of the loan from DT to repay the third-party lenders.
[33] In cross-examination, Mr. Gordon stated that the funds advanced by FT passed sequentially through each party’s bank account at TD.[35] Rather than each Participant having a bank account, the General Partner received the funds advanced by FT in its capacity as agent for the Participants.[36]
[34] For each LP Unit issued, Leeward invested $2,575 in Class D notes (the “Man Notes”) issued by AHL Investment Strategies SPC, a Cayman Islands corporation managed by Man Investments Limited (“Man”). The return on the Man Notes was dependent on the return realized on an underlying pool of assets managed by Man.
[35] A Participant who agreed to acquire LP Units was given the opportunity to borrow from FT a second amount equal to $10,000 per LP Unit purchased by the Participant (the “TGTFC Loan”) on the condition that the amount of the TGTFC Loan be transferred by the Participant to The Giving Tree Foundation of Canada (“TGTFC”). Of the 59 Participants in the Program 58 chose to take advantage of this aspect of the Program (I will refer to these 58 Participants collectively as the “TGTFC Participants” and individually as a “TGTFC Participant” and I will refer to this aspect of the Program as the “TGTFC Program”).
[36] The TGTFC Loan matured on February 15, 2019 and bore interest at 7.85% per annum. Each TGTFC Participant was required to pay to FT in respect of this loan a one-time loan arrangement fee of $35 per LP Unit purchased by that Participant. FT acquired the funding for the initial advance of the TGTFC Loans from the credit facility provided by the third-party lenders.
[37] Of the total interest on the TGTFC Loan of 7.85% per annum, each TGTFC Participant was required to pay 3.75% per annum in cash from his or her own resources no later than February 28 of the following year. The balance of 4.1% per annum was also payable no later than February 28 of the following year. However, if the 4.1% was not paid by a TGTFC Participant by a certain deadline, that participant was deemed to have requested an additional cash advance from FT equal to the amount of that interest, subject to the discretion of FT to refuse the additional advance.
[38] Mr. Gordon stated that the only substantive difference between the Unit Loan and the TGTFC Loan was the requirement that a TGTFC Participant pay a portion of the interest accruing on the TGTFC Loan from his or her own resources and not from an advance by FT.
[39] In cross-examination, Mr. Gordon was asked about his understanding of the credit review conducted by FT prior to advancing Unit Loans or TGTFC Loans. He stated that his understanding at the time of the closings in 2009 was that FT conducted credit checks and PPSA searches of all Participants.[37] However, after his first examination for discovery he was advised by a representative of FT that FT did not perform credit checks of the Participants with respect to the first two of the four closings for the purchase of LP Units. Instead, credit checks were being performed by FT by the end of October 2009, which was after the first two closings, for which PPSA (Personal Property Security Act) searches were done in the absence of credit checks.[38] He was also advised by FT that it had not performed credit checks prior to making additional advances to Participants in 2010 and 2011.[39] Mr. Gordon stated that he had no personal knowledge of FT performing credit checks[40] and was not able to provide documentary evidence of credit checks performed by FT.[41]
[40] Each TGTFC Participant transferred the amount of his or her TGTFC Loan and a further $200 per LP Unit purchased by the TGTFC Participant (for a total of $10,200 per LP Unit purchased by the TGTFC Participant) to TGTFC under the terms of a pledge executed by the TGTFC Participant and TGTFC (I will refer to the total amount transferred to TGTFC by the TGTFC Participants as the “Transferred Property”). TGTFC issued each TGTFC Participant a charitable donation receipt in an amount equal to the face value of the amount transferred by that Participant to TGTFC.
[41] The pledge required TGTFC to invest 98.04% of the face amount transferred to it by a TGTFC Participant in debt obligations (the “TGTFC Notes”) issued by Leeward. This equated to an investment in TGTFC Notes of $10,000 per LP Unit purchased by the TGTFC Participant.
[42] As well, the pledge required TGTFC to hold the TGTFC Notes until maturity on December 31, 2028. In cross-examination, Mr. Gordon stated that the agreement of TGTFC to lend Leeward 98.04% of the Transferred Property was essential to the structure. He also stated that by participating in the Program TGTFC recognized that it was a closed structure:
The charity always had an option to take funds that it received as a donee and invest the way they wanted to. By participating in this structure they recognized it was a closed structure. It was a structured finance vehicle and as such it was intended to match the elements of two earlier versions previously done. So in respect of that element, to the extent that the charity received donations through this structure, they agreed to invest them as laid out in the original memorandum of understanding.[42]
[43] Leeward issued TGTFC two TGTFC Notes, on December 15, 2009 and December 30, 2009 respectively.[43] The TGTFC Notes each bore interest at the rate of 4.75 % per annum. Leeward was required to pay TGTFC an amount equal to 1.75% of the TGTFC Notes in December 2010 and an amount equal to 3.75% of the TGTFC Notes on December 31 of each subsequent year until maturity.[44] The balance of the interest payable on the TGTFC Notes accrued and was payable by Leeward to TGTFC on maturity. In cross-examination, Mr. Gordon confirmed that the amount of Leeward’s liability to TGTFC for every $102,000 transferred to TGTFC by a TGTFC Participant (that is, per 10 LP Units purchased by a TGTFC Participant) would be $134,402 (or $13,440.20 per LP Unit).[45]
[44] Mr. Gordon explained how the 3.75% per annum (or $375 per $10,000 of TGTFC Loan) was paid to TGTFC, as follows:
Q. What happens to the $375 in respect of the donation loan interest?
A. Two separate things happen in respect of that money. First, I will walk you through the legal flow of those funds as anticipated by the diagram. Then I will secondarily tell you exactly how those funds flow from a practical perspective.
The $375 of the $500 is intended to flow from the donor directly to Finance Trust. Finance Trust will receive that money and account for it to reduce the interest owing on an annual basis on the donation loan. Finance Trust then immediately, at the same time, has a matching obligation to pay that $375 to Deposit Trust on account of the loan agreement entered into between Finance Trust and Deposit Trust.
Similarly, Deposit Trust has a matching obligation to pay $375 to Leeward on account of the loan agreement entered into between Deposit Trust and Leeward. Then immediately Leeward has a matching obligation to pay the same $375 through to The Giving Tree on account of its commitment by issuing the charity investment note which requires a 3.75 percent annual payment. The 3.75 percent on a $10,000 original investment is exactly 3.75 percent.
It means that notionally the $375 flows through each of these parties. What actually happens is, after the funds are collected and they are aggregated in EquiGenesis’s trust account, each of the relevant parties –– being the lender –– sorry, Finance Trust, Deposit Trust, and Leeward sign what we refer to as an omnibus direction.[46]
[45] To secure its obligations under the TGTFC Notes, Leeward granted TGTFC a security interest over all of its assets, which had priority over any other security interest granted by Leeward, with the result that the TGTFC Notes ranked ahead of the Linked Notes.[47] Mr. Gordon explained the importance of the security provided to TGTFC as follows:
A. . . . We felt it was essential when this structure was put together that there be very specific security arrangements in place that would put the charity in first position and would put the partnership in second position to be c