Case Comment on Grenon (RRSP) v The King, 2025 FCA 129
In its long-awaited decision in Grenon (RRSP),1 the Federal Court of Appeal ("FCA") considered the meaning of the expression "a lawful distribution ... to the public" in Income Tax Regulation 4801(a)(i)(A),2 which forms part of the criteria that generally must be satisfied for a unit trust to qualify as a "mutual fund trust" for the purposes of the Income Tax Act (Canada).3 The FCA held that Regulation 4801(a)(i)(A) refers exclusively to strict and full compliance with applicable securities laws and the fund's offering memorandum, and does not take into account whether a fund has the minimum of 150 subscribers as required in Regulation 4801(b). In light of this decision, registered plan and mutual fund sponsors and promoters should keep foremost in mind that failure to strictly comply with applicable securities laws in a fund distribution—as well with any requirements set out in an offering memorandum—can deprive a trust of "mutual fund trust" status, which can give rise to serious adverse tax consequences.
As one of several additional issues, Grenon (RRSP) also considered whether the issuance of a "trust notice of assessment" in response to a T3GR Return starts the "normal reassessment period" in respect of any Part I taxes owned by any individual RRSP listed on the return.4 The FCA answered this question in the negative, holding that RRSPs must generally file its own general T3 tax return to start the normal reassessment period running.
Regulation 4801(a)(i)(A)
Grenon (RRSP) concerned the RRSP of the Alberta businessman James T. Grenon—who has an extensive history of disputes with the CRA that has produced multiple reported decisions over the past 15 years—including now five from the FCA and one from the Alberta Court of Appeal—as well as at least three applications to the Supreme Court of Canada.5
Between 2004 and 2009, Mr. Grenon's RRSP invested heavily in six small income funds that he had been involved in establishing in reliance of Alberta's and British Columbia's exempt distribution rules.6 The income funds then invested, through other entities, in various active businesses and investments controlled by Mr. Grenon. At issue was whether the six income funds constituted "mutual fund trusts"7, which would, in turn, make them "qualified investments" eligible to held by an RRSP.8 The CRA alleged that the funds failed to qualify as "mutual fund trusts" and thus were not "qualified investments", which gave rise to significantly adverse fiscal consequences for both the RRSP and Mr. Grenon personally.
In the trial decision issued over four years ago, the Tax Court of Canada ("Tax Court") held that the income funds did not qualify as "mutual fund trusts" since they had not made a lawful distribution of their units to the public in accordance with Regulation 4801(a)(i)(A)—in particular because many of their subscribers were minors and/or people not subscribing on their own account, such that the number of actual subscribers fell below the minimum threshold of 150 set out in Regulation 4801(b).
The FCA found that the Tax Court erred in its understanding of Regulation 4801(a)(i)(a), even though it agreed with its ultimate conclusion. Conducting a detailed analysis of Regulation 4801(a)(i)(A), the FCA held that:
- The requirement for a "a lawful distribution ... to the public" in Regulation 4801(a)(i)(A) is separate and distinct from the requirement, in Regulation 4801(b), that a mutual fund trust have at least 150 unit holders, each holding at least one qualifying block of units.9 Consequently, a unit trust can potentially qualify as a mutual fund trust if, for example, it makes a lawful distribution to the public to 100 subscribers, and then secures an additional 50 qualifying unit holders through a second distribution or through some beneficiaries transferring a portion of their units to others.10 In this respect, the FCA reversed the holding of the Tax Court, which had held that a "a lawful distribution ... to the public" under Regulation 4801(a)(i)(A) must itself result in at least 150 qualifying unit holders.
- On the other hand, the word "distribution" refers to the entire process through which units are collectively offered to multiple investors in a single offering. Accordingly, the requirement for "a lawful distribution ... to the public" is not satisfied simply because at least one person happens to lawfully come into possession of units.11
- Whether a "distribution ... to the public" is "lawful" turns on the compliance of the distribution with the relevant provincial regulatory regime—including, in particular, with the rules providing for exemptions from prospectus requirements—and well as compliance with the essential terms of any offering memorandum. While the FCA accepted that "not every deviation from the prospectus requirement or prospectus exemptions, or from the terms of the prospectus or [offering memorandum], will necessarily lead to the conclusion the distribution is unlawful," a distribution must nevertheless "strictly comply with provincial securities laws".12
Applying these principles, the FCA upheld the findings of the Tax Court that the offering memoranda for the funds at issue in Grenon (RRSP) required that at least 160 investors acquire units of each fund, and that the subscriptions purportedly made by minors and by people subscribing on behalf of others could not be included in this count. Excluding these subscribers brought the total number down to well below 160, such that an essential term of each offering memorandum was breached, rendering the distribution of units of each fund unlawful.13 The FCA suggested that the "unlawfulness" might have been corrected had the offering memoranda been amended, but they were not.14
It is perhaps unfortunate that the FCA did not provide further guidance with respect to where the line falls between a "deviation" and "non-compliance". In the absence of such guidance, fund promoters and managers need to strive for perfection and must make every effort to ensure complete compliance with both offering documents and applicable provincial securities laws.
Statute-Barring
CIBC was the trustee of Mr. Grenon's RRSP. In accordance with the CRA's policy and published guidance, CIBC filed a single information return—known as a T3GR—for all of the RRSPs for which it served as trustee in accordance with the same specimen plan. The T3GRs that included Mr. Grenon's RRSP encompassed over between 241,000 and 365,000 plans between 2004 and 2009, of which less than 200 were listed as holding non-qualified investments.15 The CRA issued a "trust notice of assessment" to CIBC assessing Part XI.1 taxes (which were repealed in 2011) on the aggregate non-qualified investments reported on the T3GR.
CIBC also filed T3 income tax returns in respect of each RRSP that held non-qualified investments, and the CRA assessed all taxes owing accordingly. However, CIBC determined that Mr. Grenon's RRSP did not hold any non-qualified investments and thus did not require a T3 return. Consequently, none was filed.
The CRA assessed Mr. Grenon's RRSP for both Part I tax and Part XI.1 tax in respect of its non-qualified investments. The RRSP disputed the assessments on the basis that they were issued over three years following the applicable "trust notice of assessment" and were thus statute-barred.16
The FCA held, on the merits, that the RRSP was not liable for the Part XI.1 at all.17 Consequently, the FCA confined its statute-barring analysis to the Part I assessments. Ultimately, the Court held that the "trust notice of assessment" did not trigger the statute-barring period with respect to Part I tax given that the T3GR did not purport to deal with Part I tax. The FCA also observed that the T3GR form expressly indicated that RRSPs with taxable income were obligated to file a T3 return. The FCA concluded that "Grenon RRSP was obligated to file a return under Part I reporting taxable income. By not doing so, it accepted the risk that the Minister would not issue a Part I assessment to start its normal reassessment period."
Given this decision, RRSP trustees, sponsors and annuitants may want to consider whether it would be prudent to file essentially nil tax returns each year to trigger the start of the "normal assessment period" and thereby obtain the benefit of finality.
Obiter Dicta
Finally, the FCA's lengthy decision included a number of off-hand comments that may well spark further debate or litigation, including:
- The Tax Court's decision included a lengthy analysis of whether, had the six income funds qualified as "mutual fund trusts", the general anti-avoidance rule (the "GAAR")18 would have applied, and if so, what a reasonable remedy would be. The FCA took pains to indicate that it expressed no view as to whether it agreed or disagreed with the Tax Court's GAAR analysis, leaving the precedential value of that analysis uncertain.19
- The FCA wondered whether an offering memorandum that was required to be filed with securities regulators constituted a "similar document" to a prospectus, such that Regulation 4801(a)(ii) (which applies if a class of units is "qualified for distribution to the public") might have been applicable in place of Regulation 4801(a)(i).20
- The FCA evidenced some skepticism over a suggestion from the Tax Court that a distribution made in reliance on the "Friends, Family and Business Associates Exemption" could constitute a "a distribution to the public".21
Given, among other things, the considerable amounts at issue, an application for leave to appeal to the Supreme Court of Canada may well be forthcoming. The FCA decision might not be final word.
Footnotes
1 Grenon (RRSP) v The King, 2025 FCA 129, varying 2021 TCC 30 ("Grenon (RRSP)").
2 Income Tax Regulations, CRC c 945 (the "Regulation").
3 Income Tax Act, RSC 1985, c 1 (5th Supp) (the "ITA").
4 ITA, subsection 152(3.1). As discussed below, the T3GR return is an information return that RRSP trustees are generally required to file with the CRA for all their RRSPs under the same specimen plan.
5 Grenon v. Canada, 2011 FCA 147; Grenon v. Canada, 2016 FCA 4, leave to appeal to the SCC ref'd; Grenon v Canada Revenue Agency, 2017 ABCA 96, leave to appeal to the SCC ref'd; Grenon v. Canada (National Revenue), 2017 FCA 167; Magren Holdings Ltd. v. Canada, 2024 FCA 202, leave to appeal to the SCC ref'd.
6 As explained in Grenon (RRSP), ¶37-40 and 47, each fund initially raised $128,250, generally from 171 investors each subscribing for 100 units at a price of $7.50 per unit. Mr. Grenon's RRSP then subscribed for additional units in the funds, paying over $310 million in the aggregate.
7 As defined at subsection 132(6) of the ITA, which incorporates, by reference, Regulation 4801.
8 As defined at subsection 146(1) of the ITA
9 Grenon (RRSP) ¶114-166.
10 Grenon (RRSP) ¶133, 137, 286 ("No doubt the minimum beneficiary condition may be satisfied through a lawful distribution to the public, but the text of Regulation 4801(b) does not require that be so. As the Tax Court itself recognized, it may be satisfied through a lawful distribution to the public and another lawful distribution: [... The minimum beneficiary condition might also be satisfied through a unitholder transferring units to others.")
11 Grenon (RRSP) ¶188-214.
12 Grenon (RRSP) ¶215-223, 285.
13 Grenon (RRSP) ¶224-281.
14 Grenon (RRSP) ¶229.
15 Grenon (RRSP) ¶513 (TCC decision).
16 ITA, subsections 152(3.1) and (4).
17 Grenon (RRSP) ¶313. The Court's analysis of this issue is not discussed in this Bulletin, given that the Part XI.1 tax was repealed in 2011.
18 Section 245 of the ITA.
19 Grenon (RRSP) ¶10, 86.
20 Grenon (RRSP) ¶169. However, as the Court also noted, nothing turned on this point, given that the definition of "qualified for distribution to the public" at Regulation 4802(2) also entails that there have been, at some point, a "lawful distribution to the public".
21 Grenon (RRSP)¶133.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
