Canada: Is A Promissory Note A Security? The Ontario Superior Court Has The Answer

The Ontario Superior Court recently provided guidance on whether certain secured promissory notes fell within the definition of a "security" under the Securities Act (Ontario) (the Act). The Act defines "security" broadly to include, among other things, "a bond, debenture, note or other evidence of indebtedness". In Ontario Securities Commission v. Tiffin, 2018 ONSC 3047, the Ontario Superior Court held, among other things, that promissory notes issued by Daniel Emerson Tiffin (Tiffin) and his company, Tiffin Financial Corporation (TFC) to clients were securities under the Act.

The Allegations

Tiffin, a financial advisor, was subject to a cease-trade order issued by the Ontario Securities Commission (OSC) in relation to a foreign exchange investment scheme (the Order). The Order prohibited Tiffin and TFC from trading in securities or relying upon any exemption under Ontario securities laws. After the Order was issued, Tiffin solicited funds from clients on behalf of TFC and TFC issued $700,000 in secured promissory notes to a handful of those clients. Tiffin disclosed the OSC investigation and the Order to his clients. Tiffin's clients viewed the transaction as a loan and not an investment.

The OSC charged Tiffin and TFC with trading in securities without registration, distributing securities without filing a prospectus and breaching the Order.

Trial Decision

At trial, Tiffin and TFC argued that the promissory notes issued to clients were not securities subject to the Act but rather, "simple loan agreements". 

Despite acknowledging the OSC's view that the broad definition of a security in the Act provides a "catch and exclude" regime and intentionally captures a variety of transactions with specific statutory exemptions to correct the overreach, the trial judge held that a broad interpretation "casts too wide a net" and was inconsistent with the purpose of the Act. The trial judge found that, on its face, the impugned promissory notes appeared to be securities within the Act's definition but acquitted Tiffin and TFC on the basis that adopting a liberal interpretation would be contrary to the approach taken by courts in Canada and the United States. In doing so, the trial judge applied an American "family resemblance" test that involved assessing the promissory notes against four judicially crafted factors that had been developed in the US to determine whether or not an instrument is a security.

The Appeal

The Ontario Superior Court found the trial judge had erred in applying American extra-statutory judicial criteria to exclude the impugned promissory notes when they otherwise met the definition of a "security" in the Act. The Superior Court also disagreed with the trial judge's opinion that the statutory definition of security under the Act "casts too wide a net" and is inconsistent with the purpose of the Act, noting that this breadth is deliberate and consistent with the remedial purpose of the Act. Notably, Tiffin and TFC did not bring a constitutional challenge of the definition of "security" for overbreadth. Further, the Superior Court found that there are fundamental differences between the Ontario securities regulatory regime and the comparable regime in the United States, rendering the "family resemblance" test inappropriate in this context.

The Superior Court relied on the trial judge's findings that the loan arrangement between Tiffin, TFC and their clients was a "note or other evidence of indebtedness" under the Act, thereby falling within the Act's definition of a security. The Ontario Superior Court overturned the decision and concluded that the promissory notes were "securities" within the meaning of the Act.

Accordingly, Tiffin and TFC were found to have traded in securities without registration, distributed securities without filing a prospectus and breached the Order. Tiffin was sentenced to imprisonment for 6 months, probation for 24 months and ordered to make full restitution to his clients for the amount of the promissory notes (2018 ONSC 5419).


  1. Given the harsh penal sentence imposed on Tiffin, it is important to seek the appropriate legal advice on whether there are exemptions in the Act or securities legislation that permit a borrower to issue a note or similar instrument to evidence a loan or debt obligation.
  2. The definition of a security under the Act is intentionally broad. To rely on an exemption, one must point to express statutory or regulatory exemption(s). Failing this, a Court or the OSC will be reluctant to apply US jurisprudence or policy arguments to exclude an instrument that presumptively falls within the Act's definition of a security.
  3. The understanding and intention of the parties will likely not play a major role in the analysis of whether an instrument is a security. In this case, the promissory notes were understood by the clients to be loans to Mr. Tiffin through his business which were secured against assets of the business and carried no expectation of gain or loss based on the fortune of the business. The Superior Court noted that "[t]here is nothing in the [Act] to exempt promissory notes on the basis of what the parties "understood". As a general proposition, it is unlikely that most of the investing public has any understanding what kind of lending transactions fall within the ambit of the Act and which do not."

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