Words and Phrases - "distribution"
Thye RRSP of James T. Grenon (552-53721) by its Trustee CIBC Trust Corporation v. Canada, 2025 FCA 129
The appellant subscribed $310 million for units of various income funds, which were intended to qualify as mutual fund trusts on the basis that each had received subscription proceeds totaling $128,250 from 171 investors, with each such investor subscribing for 100 units at $7.50 per unit. Whether they so qualified turned on whether they each satisfied the distribution condition in ITR 4801(a)(i)(A)—that there had been a lawful distribution of units of the trust to the public in circumstances in which a prospectus or similar document was not required to be filed—and that the 150-minimum beneficiary condition in ITR 4801(b) was satisfied.
(Monaghan JA stated that she was "far from convinced" (para. 169) as to whether the parties were correct in their mutual view that an offering memorandum was not a similar distribution document to a prospectus, so that the distribution condition in ITR 4801(a)(ii)—that a class of units of the trust is qualified for distribution to the public—was not relevant. However, nothing turned on this since, in light of the definition in ITR 4803(2)(a) of "qualify for distribution to the public," this alternate distribution test, like ITR 4801(a)(i)(A), required that there have been a lawful distribution of units to the public.)
Regarding the 150-minimum beneficiary condition, Monaghan JA found that such beneficiaries need not have acquired their units in a lawful distribution to the public. She stated (at para. 133) that “the minimum beneficiary condition might also be satisfied through a unitholder transferring units to others” and (at para. 145) that she was satisfied that, in the context of the ITA, "’hold’ is intended to mean ‘own’, unless the context in which it is used indicates otherwise” – which was not the case regarding Regulation 4801. Furthermore, the ITA's use of "hold" and "acquire" suggested they have different meanings (para. 147). Thus, the test of 150 beneficiaries holding units did not require that such units have been acquired from any particular persons.
Regarding the distribution condition in ITR 4801(a)(ii), Monaghan JA found (at para. 214) that the Tax Court did not err in interpreting a distribution as meaning “distribution in the collective sense,” i.e., an issuance to all those subscribing in a particular offering. Furthermore, the reference to a "lawful" distribution referred to compliance “with the exemption relied on under relevant provincial securities laws” (para. 218). Here, the exemption from a prospectus-filing requirement that had been relied on was the offering memorandum exemption (OME) coupled with a condition stipulated in the offering memorandum (OM) that a minimum of 160 investors subscribe.
She indicated (at para. 221) that, although she accepted that “not every deviation from the prospectus requirement or prospectus exemptions, or from the terms of the prospectus or OM, will necessarily lead to the conclusion that the distribution is unlawful, even if it might attract liability or enforcement action,” the appellant agreed that such 160-investors-minimum specified in the OM "was an essential term" (para. 229). The Tax Court had made a non-reversible finding that 39 of the subscribers in each fund were minors. Agreeing with the Tax Court that this thus established that such minimum had not been lawfully met, she stated (at para. 247) that, like the Tax Court, she had "difficulty accepting that provincial securities regulators envisaged minors, some as young as two years old, subscribing for units based on the OME." She also stated (at para. 250) that "it was open to the Tax Court to find that the income funds did not take any steps to waive the condition regarding legal capacity and age of majority."
Moreover, she found no reasonable error in the Tax Court's “finding regarding adults signing subscriptions and paying for units for other adults and minors” (para. 262), contrary to the representations of the investors that each investor was purchasing "as principal." This further supported the Tax Court's conclusion (at para. 288) that the income funds had not “complied with an essential term in their OMs: that they issue units to a minimum of 160 investors in compliance with the OME.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.1 - Subsection 207.1(1) | since FMV of non-qualified investments was required to be included in the annuitant’s income (even though such inclusion was not reported or assessed) it was excluded from Pt. XI.1 tax | 360 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(3.1) | assessment of group RRSP return focused on Pt. XI.1 tax reporting did not start the Pt. I normal reassessment period running | 279 |
| Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Act - Section 27 - Subsection 27(1.3) | FCA raised the correctness of (and reversed) a TCC finding that was not challenged by the parties | 420 |
| Tax Topics - Income Tax Act - Section 146 - Subsection 146(10.1) | RRSP must recognize losses on non-qualified investments but such losses, if capital losses, cannot be deducted from property income from such investments | 153 |
| Tax Topics - Statutory Interpretation - Consistency | presumption that same word has same meaning, and different words have different meanings throughout the ITA | 233 |
| Tax Topics - Statutory Interpretation - Ordinary Meaning | meaning of “distribution” informed by provincial securities law | 161 |
| Tax Topics - Statutory Interpretation - French and English Version | 2-step approach to reconciling 2 versions | 298 |
10 October 2003 Roundtable, 2003-0035665 F - TRANSFER D'UNE POLICE D'ASSURANCE-VIE
A corporation transfers a policy on the life of an arm’s length shareholder for consideration equal to the policy’s fair market value, which exceeds its cash surrender value. In finding that s. 148(7) would not apply, CCRA stated:
The transfer by a corporation of a life insurance policy to a shareholder or employee who deals at arm's length with the transferor for proceeds equal to the fair market value of the policy is not a "distribution" for purposes of subsection 148(7).
Grenon v. The Queen, 2021 TCC 30, aff'd in part 2025 FCA 129
In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he and/or two business colleagues had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis of 171 individuals (the “Investors”) - being immediate and extended family members, friends, employees of businesses run by him, business associates and others - each subscribing $750 for units. This distribution of units to such individuals was intended to be exempted from the requirement to qualify the distribution through filing a prospectus, by relying on an offering memorandum exemption.
The taxpayer’s RRSP then invested a large sum (e.g., over $150 million for one of the Income Funds) in subscribing for additional units. The Income Funds invested in the underlying businesses (sometime through a multi-tier “flow-through” structure under which the Income Fund held a sub trust, which held a master limited partnership, which held individual LPs that carried on the various businesses.)
Given that there were over 150 unitholders in each Income Fund holding a qualifying block of units, whether the units of the Income Funds qualified (under Reg. 4900(1)(d)) as units of mutual fund trusts turned principally on whether there had been a “lawful distribution in a province to the public of units of the trust and a prospectus … was not, under the laws of the province, required to be filed in respect of the distribution” (Reg. 4801(a)(i)(A)). In concluding that this requirement had not been satisfied because the distribution of the units had not been lawful, Smith J found that the RRSP had not displaced the Minister’s assumptions that many (over 30) of the Investors were minors and that many of the adult subscribers did not sign their own subscription documents (e.g., acknowledgements of risk) and did not pay for their own units. In this regard, Smith J found (at para. 266) that the subscribing “minors were not legally competent to sign the Risk Acknowledgement form” required to be given by them and that “the Alberta and BC securities commission intended that this document would only be signed by adult subscribers who had legal capacity,” that the minors’ subscriptions “were … unlawful” (para. 291) and (regarding over 25 of the subscriptions by adult Investors) the Minister’s unrebutted “assumption that these adults did not pay for their own units was sufficient to indicate that they had not purchased the units as principal for their own account” (para. 313). Furthermore, although it may have been possible to rely on other exemptions to establish a lawful distribution, this did not matter because in the reporting of the distribution to the Commissions, reliance had been placed only on the offering memorandum (OM) exemption (paras. 269-271).
After rejecting the taxpayer’s submission that there had been 171 distributions to the initial investors, so that the “lawful distribution” requirement would have been satisfied if as few as one of those distributions had been lawful, and instead finding that there had been only one distribution to that group, which was not lawful, as described above, Smith J stated obiter (at para. 207) that if, for example, there had been a lawful distribution to 50 investors relying on the “Friends, Family and Business Associates Exemption” and there had been a simultaneous second distribution to at least 100 investors, relying on the OM exemption, the first distribution might be sufficient to satisfy the lawful distribution requirement.
Furthermore, the OM had stated that the offerings were to a minimum of 160 investors. In this regard, Smith J stated (at paras. 208, 348):
[I]n this instance ... “a lawful distribution …under the laws of the province” required a distribution to no fewer than 160 investors. Anything less than that would not be “a lawful distribution” since it would be contrary to the precise terms of the OM. …
The Income Funds did not qualify as a “mutual fund trust” because they failed to satisfy the prescribed condition that there be “a lawful distribution …to the public of units” under the laws of the provinces of Alberta and BC to not fewer than 160 investors as required by the OM. Even if the Court considers for a moment that “a lawful distribution” should be interpreted to refer to a distribution to “no fewer than 150 beneficiaries of the trust”, as set out in paragraph (b) of Regulation 4801, the Income Funds have not met that bright-line test.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | purported establishment of “alter ego” MFTs through which an RRSP could invest in operating businesses was an abuse engaging GAAR | 605 |
| Tax Topics - Income Tax Act - Section 204.2 - Subsection 204.2(1.1) | alleged distribution from non-qualified investment was not an over-contribution | 277 |
| Tax Topics - General Concepts - Window Dressing | window-dressing is a deception about intention | 312 |
| Tax Topics - Income Tax Act - Section 207.1 - Subsection 207.1(1) | non-qualified investments not “included” in annuitant’s income because it was never assessed | 346 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) | CRA’s assessing listed taxable RRSPs in a T3GR global return was not of the taxpayer’s (also listed) RRSP /inappropriate reliance in legal opinion on certificate of fact was carelessness | 441 |
| Tax Topics - Income Tax Act - Section 207.2 - Subsection 207.2(3) | CRA’s assessment of Pt. XI.1 shown on the T3GR for all RRSPs of one type did not start the normal reassessment period for the taxpayer’s RRSP since no tax shown for it | 370 |
| Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(d.2) | distribution was not lawful because the issuer had not complied with the OM exemption, which was the exemption that it had chosen to rely on | 290 |
Canada v. Repsol Energy Canada Ltd., 2017 FCA 193
The taxpayers were the partners of a limited partnership which constructed a terminal and jetty in St. John to which liquid natural gas would be delivered by tanker (at the jetty), "regasified,", and then delivered to a pipeline for shipment to the U.S. resellers.
The eligibility of the related costs for investment tax credits and classification as a Class 43 asset turned principally on whether it came within the exclusion from Class 1(n) (respecting manufacturing and distributing equipment and plant acquired primarily for the production or distribution of gas) contained in (ii) thereof for “property acquired for the purpose of processing natural gas, before the delivery of such gas to a distributions system.” The Crown’s primary position was that the terminal was not so excluded because it was part of a distribution system, and secondarily took the position that the terminal’s operation was not “processing.”
In rejecting the Crown’s position, Woods JA stated (at para 40) that she agreed with C. Miller J below that the Class 1(n)(ii) exclusion “only makes sense if distribution starts at a pipeline,” and further noted (at para 48):
Northern & Central … stands for the proposition that the term “distribution” can encompass not only short-distance pipelines, in accordance with industry usage, but also long-distance transmission lines. It did not state a broader principle. …
Woods J also rejected a Crown submission that the distribution process started with the tanker, in part because, unlike Northern & Central, the purpose of the processing here was “to make the gas more marketable” rather to merely “provide storage in the course of transmission.”
In also rejecting the Crown’s position on “processing,” she stated (at paras 54 and 56):
… It is clear that the product has been changed when it is transformed from a liquid to a gaseous state. …
Furthermore ...change ... takes place during the facility’s blending operations, and ... in chemical composition… [and] the operations …transform the product from being non-marketable in the North American market, to being marketable… .
Finally, in rejecting a Crown submission that, as a jetty was specifically mentioned in Class 3(h), the Jetty should be so classified, she stated (at paras. 64-65):
…Class 3 only applies to property “not included in any other class.” … If the Jetty falls within Class 43, that is the end of the matter. …
The judge-made integration principle provides that processing includes all activities that are necessary and integral to the processing operation.
19 December 2013 External T.I. 2013-0503481E5 - Distribution of property by a trust
After referring to 2013-0488061E5 (below) and 2013-0488381E5, CRA stated:
[A] transfer of property by a trustee in settlement of a debt cannot also be a distribution for purposes of subsection 107(2)…; it is one or the other. A distribution is the fulfilment of a fiduciary duty owed to the beneficiary in respect of the trust property. Thus, for the portion of a transfer of value that settles a debt owing by the trust, the preamble to subsection 107(2) of the Act is not met, and by extension, paragraph 107(2)(a) will not apply.
Repsol Canada Ltd. v. The Queen, 2015 TCC 21, aff'd 2017 FCA 193
The taxpayers were related companies, and the general partner and a 75% limited partner of a partnership which constructed a terminal and jetty in St. John to which liquid natural gas would be delivered by tanker (at the jetty), "regasified," tested and processed to meet quality standards such as flammability and low O2 content, and then delivered to a pipeline for shipment to the U.S. resellers.
The eligibility of the related costs for investment tax credits turned on whether the assets qualified as a Class 43 property rather than (as maintained by the Minister) as Class 1(n) (i.e. for the distribution of natural gas) and 3(h) (i.e. a jetty not captured by any other class).
As a preliminary matter, C Miller J found that terminal and jetty were one asset on the basis that the Jetty could "be considered ancillary and necessary, and part of the integral totality of the operation occurring at the Terminal" (para. 88), including that the jetty operators monitored the safety of the overall operation. Furthermore, the terminal was not engaged in distribution, but rather processing before distribution. There was "processing" because there was a change to the goods (including a change in chemical composition) and there was an increase in the goods' marketability (i.e., the natural gas entering into the pipeline was worth more than the LNG arriving at the jetty). He also stated that, even in the "broadest sense," "distribution" of natural gas does not commence before the gas enters a transmission pipeline (para. 120).
(Class 47, which explicitly includes liquid natural gas plants and thus excludes those plants from Class 43, was introduced in 2007; consequently this appeal concerned the approximately one third of capital costs arising before that introduction.)
Stursberg v. The Queen, 93 DTC 5271, [1993] 2 CTC 76 (FCA)
The other partners of the partnership consented to a reduction in the taxpayer's partnership interest from 40% to 15%, and to an increase in the partnership interest of a corporation ("WBG") of which he had voting control from 10% to 35%. WBG deposited the sum of $162,500 (representing 25% of the fair market value of the partnership assets) to the partnership, the taxpayer at the same time received a cheque for $162,500 from the partnership, and an amount of $269,812 representing 25/40ths of the taxpayer's 40% share of the partnership losses was transferred in the books of the partnership from the taxpayer to WBG.
Hugessen J.A. found that the payment of $162,500 to the taxpayer did not represent a distribution of capital to the taxpayer for purposes of s. 53(2)(c)(v) "because there [was] no change whatever in the corpus of the partnership capital or in the relative interests therein of any of the other partners" (p. 5275). Instead there was a partial disposition of the taxpayer's partnership interest to WBG, thereby giving rise to a capital gain.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | partial disposition of partnership interest to a related corporation, even though proceeds run through the partnership | 114 |