The Supreme Court of Canada denied leave to appeal a landmark federal court ruling over the question of what qualifies as a mutual fund trust.
Last July, the Federal Court of Appeal handed down a decision that took more than two years to reach — the case was argued back in May 2023 — on appeal from the Tax Court of Canada over the formation of a series of mutual fund trusts by James Grenon to hold more than $300 million in assets from various ventures, which he, in turn, aimed to hold in an RRSP.
According to the court’s decision, in 2013, the then-minister of national revenue issued assessments to the RRSP assessing tax on the income it earned from the purported mutual funds, which accepted that the trust units were able to be held within an RRSP as “qualified investments” but relied on the general anti-avoidance rule to impose tax consequences. However, the minister later concluded that the units were not qualified investments.
The Grenon RRSP appealed those assessments to the Tax Court of Canada, which allowed the appeal in part, finding that the assessment was partly incorrect and ordering the minister to adjust the assessment, but it rejected the rest of the appeal.
In that ruling, the tax court also found that the trust units were not qualified investments — a decision that the Grenon RRSP appealed to the federal court, arguing that the tax court “should have allowed all its appeals and vacated the assessments.”
However, the federal court upheld the conclusion that the units were not qualified investments and that the income generated from those units was taxable.
In reaching that decision, the court found that trusts didn’t meet the requirements under securities law, as they didn’t engage in a lawful distribution that’s required to rely on an exemption from prospectus requirements (the offering memorandum exemption). Among other things, it found that the funds didn’t meet the minimum condition of being distributed to at least 160 investors, as some of the funds’ purported investors included children.
“While Grenon RRSP also contends there is no express prohibition on minors subscribing for units, like the Tax Court, I have difficulty accepting that provincial securities regulators envisaged minors, some as young as two years old, subscribing for units based on the [offering memorandum exemption],” the court said.
The federal court also upheld the conclusion that a fund’s distribution “must strictly comply with provincial securities laws.”
As a result, it sided with the tax court in finding that the funds didn’t complete a lawful distribution and didn’t count as qualified investments.