Docket: 2010-3524(IT)G

BETWEEN:

CINDY STEWART,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent;

Docket: 2010-3525(IT)G

AND BETWEEN:

ALAN STEWART,

Appellant,

and

HER MAJESTY THE QUEEN,

Appeals heard on common evidence on April 25 and 26, 2018

at Calgary, Alberta

Before: The Honourable Justice Steven K. D'Arcy

Appearances:

 

Counsel for the Appellants:	Douglas E. Roberts
Counsel for the Respondent:	Ron D.F. Wilhelm

JUDGMENT

  In accordance with the attached Reasons for Judgment:

1.  The appeals with respect to reassessments made under the Income Tax Act for the 2000 taxation year of each of the Appellants’ are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no amount should be included in either appellant’s income in respect of the investments made by their respective RRSPs in the Zowtra Mortgage;

2.  The gross negligence penalty levied against each of the appellants is vacated; and

3.  Costs are awarded to the appellants.

  Signed at Ottawa, Canada, this 22nd day of January 2019.

“S. D’Arcy”

 

Citation: 2019 TCC 22

Date: 20190122

Docket: 2010-3524(IT)G

BETWEEN:

CINDY STEWART,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent;

Docket: 2010-3525(IT)G

AND BETWEEN:

ALAN STEWART,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

D'Arcy J.

[1]  In 2000, the appellant Cindy Stewart’s self-directed registered retirement savings plan (“RRSP”) purportedly acquired an interest in a mortgage (the “Zowtra Mortgage”) for a consideration of $42,500. At the same time, the appellant Alan Stewart’s self‑directed registered retirement savings plan purportedly acquired an interest in the Zowtra Mortgage for a consideration of $37,000. The Minister subsequently reassessed Mrs. Stewart and Mr. Stewart to include $42,500 and $37,000 respectively in their taxable income for the 2000 taxation year. The Minister also levied a gross negligence penalty under subsection 163(2) of the Income Tax Act against each of the appellants.

[2]  The appellants appealed these reassessments to the Court. The Court heard the two appeals together on common evidence.

[3]  During the hearing, I heard from two witnesses: the two appellants. Each of the appellants was a credible witness. I accept that they had a difficult time remembering certain details of events that occurred 18 years ago.

[4]  The respondent filed a document entitled Admitted Facts (the “Admitted Facts”), which sets out the facts admitted by the appellants in response to the respondent’s Request to Admit. The Admitted Facts document is attached as Appendix A to these reasons for judgment.

I. Summary of Facts

[5]  The appellants are married to each other and each has a high school education. During the relevant period, Mr. Stewart worked as a welder in Northern British Columbia. In addition, Mr. Stewart, together with Mrs. Stewart, owned and operated restaurant businesses in Prophet River and Dawson Creek, British Columbia.

[6]  They acquired the Prophet River business from Mr. Stewart’s father. Mr. Stewart described the Prophet River business as a restaurant-service station and a 100-man camp.

[7]  It is clear from their testimony that Mr. and Mrs. Stewart are not sophisticated investors. My conclusion is consistent with paragraph 9 of the Admitted Facts, which states that their entire investment history up to the point of filing their 2000 income tax returns involved the restaurants they owned and operated, investments made through their RRSPs in mutual funds and the investments in the Zowtra Mortgage.

[8]  In early 2000, the appellants learned, through acquaintances, of a presentation in Fort Nelson (the “Fort Nelson Seminar”) during which certain individuals would provide information on an investment opportunity. The appellants, as well as a number of area residents, attended the Fort Nelson Seminar.

[9]  The appellants understood the investment opportunity to be an investment that a self-directed RRSP could make in what was described as a “third party mortgage”. During the presentation, the organizers of the seminar provided the appellants with the document attached as Tab 1 to Exhibit R-1.

[10]  On page 1 of the document the third party mortgage program is described as follows:

In this program, a development company is utilized that has a large registered mortgage registered on land that it is developing. The mortgage company that holds the mortgage sells off and transfers undivided parts of the mortgage to interested investors. Since this is a qualified investment for RRSPs and RRIFs, the investor can invest these funds into this investment.

[11]  Page 4 of the document contains a description of the actual investment, namely the development of a campground/trailer park on property located near Edmonton, Alberta (the “Development Project”). The document notes that Zowtra Investments Inc. (“Zowtra”) has acquired suitable land for the Development Project and has prepared a development budget of $4.8 million. The $4.8 million would be raised in a series of three mortgages, which would be registered on the property consecutively after each mortgage subscription was completed.

[12]  The document also states that an Edmonton finance company which specializes in marketing mortgages, U-Have Credit (Canada) Corporation (“U‑Have”), will be used to effect the financing. It notes that U-Have will initially acquire the mortgage security and then market undivided interests in the real estate mortgages in $1,000 increments.

[13]  Each appellant believed her/his RRSP would invest in a mortgage that paid 12% interest.

[14]  The appellants thought this was a good investment because of the significant oil and gas development in the area. On the basis of his experience from working in the area, Mr. Stewart thought that there would be a large number of construction workers who would require a place to stay while working on oil and gas construction projects in that area. Mrs. Stewart testified that they knew the area from “the ground up”; they lived in the oil patch and had constant contact with the construction workers staying at their small campground.

[15]  Mr. Stewart also noted that at that point in time his RRSP investments were not realizing significant returns. He thought it would be better to make 12% per year rather than incur the negative return he was receiving on his RRSP. Mrs. Stewart testified that the 12% return was better than the return she was realizing on her then current investments, but was not outrageous and was based on a tangible asset, the future “resort” trailer park.

[16]  The appellants testified that, prior to making the investment in the Zowtra Mortgage, they discussed the investment with an Edmonton lawyer, David Knight, and an official at the Canadian Western Trust Company (“Canadian Western”). Mr. Stewart noted that Mr. Knight informed the appellants that it was a good investment that was a qualified investment for their RRSPs. Mr. Stewart testified that he would not have made the investment without the lawyer’s advice.

[17]  I heard conflicting evidence on when the meeting occurred. However, I accept the evidence of the appellants that the meeting occurred after the Fort Nelson seminar and prior to each of their RRSPs making the investment in the Zowtra Mortgage.

[18]  The creation of the Zowtra Mortgage and the appellants’ investment in the Zowtra Mortgage occurred as follows:

• - On December 16, 1999, Zowtra acquired 9.96 acres of land (the “Zowtra Land”) in Lamont County, Alberta for $5,000. ^[1]

• - On January 5, 2000, a purported $1.8 million mortgage executed on December 15, 1999 in favour of U-Have Credit was registered at the Alberta Government Services Land Titles Office (the “Land Titles Office”) against the Zowtra Land. The mortgage required interest to be paid at a rate of 12% per annum. ^[2]

• - On June 14, 2000, each of the appellants applied to open a self-directed RRSP account (“the self-directed RRSP”) with Canadian Western. ^[3]

• - On June 15, 2000, the appellants directed their then RRSP trustee, CI Mutual Funds, to transfer their RRSP funds to Canadian Western. ^[4]

• - On October 6, 2000, the appellants signed incomplete documents respecting their RRSP transactions and then faxed the documents to Academy Financial Planners & Consultants Inc. (“Academy”). ^[5]

• - On October 17, 2000, a transfer of mortgage document indicating that a 37/1,800 interest in the Zowtra Mortgage was transferred by U-Have to Mr. Stewart’s self-directed RRSP was registered at the Land Titles Office “in exchange for $37,000”. ^[6]

• - Mr. Stewart’s self-directed RRSP acquired a 37/1,800 interest in the rights provided by the Zowtra Mortgage document registered against the Zowtra Land. ^[7]

• - On October 17, 2000, a transfer of mortgage document indicating that a 42.5/1,800 interest in the Zowtra Mortgage was transferred by U-Have to Mrs. Stewart’s self-directed RRSP was registered at the Land Titles Office “in exchange for $42,500”. ^[8]

• - Mrs. Stewart’s self-directed RRSP acquired a 42.5/1,800 interest in the rights provided by the Zowtra Mortgage document registered against the Zowtra Land. [9]

[19]  Exhibit A-1 contains two letters sent to Canadian Western by David D. Knight, who at the time was an Edmonton, Alberta barrister and solicitor.

[20]  The first letter, dated October 10, 2000, i.e., a week before the transfer of mortgage interests to the appellants was registered with the Land Titles Office, has the subject line “Funding of Mortgage - Your client: Stewart Alan, Plan Number 11818 $37,000”. The letter contains the following statements:

• - “I act as the solicitor for Alan Stewart only in this matter. . . .

• - “It is my legal opinion, based on the declaration of the above mentioned which is enclosed, that he is dealing with the borrower “at arm’s length” as defined by the Income Tax Act.”

• - “It is also my legal opinion that this is a qualified investment for a self‑directed RRSP.” [10]

[21]  The second letter, dated November 22, 2000, is also in respect of Mr. Stewart’s $37,000 investment in the Zowtra Mortgage. The letter indicates that Mr. Knight has attached a number of documents relating to that investment, including his instructions to pay funds in respect of the investment and a transfer of mortgage document. He also provides the opinion that the mortgage is valid and enforceable and properly secured by the land.

[22]  The appellants were not the only individuals to invest in the Zowtra Mortgage. The Admitted Facts show that, in total, 35 individuals purchased interests in the Zowtra Mortgage through their self-directed RRSPs for a consideration of $1,799,800. In addition, 34 individuals purchased interests in a second mortgage on the Zowtra Land through their self-directed RRSPs for a consideration of $2,400,100, and 50 individuals purchased interests in a third mortgage on the Zowtra Land through their self-directed RRSPs for a consideration of $2,795,000. ^[11]

[23]  In summary, 119 individuals paid, through their self-directed RRSPs, a total consideration of $6,994,900 (the “RRSP funds”) for interests in the three mortgages on the Zowtra Land.

[24]  I have concluded that Mr. Knight acted as the appellants’ lawyer when they purchased their interest in the Zowtra Mortgage.

[25]  When assessing the appellants, the Minister assumed that Zowtra received the monies paid by the appellants as consideration for the interests in the Zowtra Mortgage. Further, the Minister assumed that Zowtra received all of the RRSP funds paid by the 119 individuals who purchased interests in the three mortgages on the Zowtra Land.

[26]  When assessing the appellants, the Minister further assumed that Zowtra, after receiving the RRSP funds from the 119 individuals, distributed the funds as follows:

• - it transferred 86.6% of the RRSP funds to financial institutions located outside of Canada;

• - it paid 11.5% of the funds to various corporations as commissions for promoting investment in the Zowtra mortgages and to other persons through payment of the cash portion of their investment in a film partnership;

• - it paid 1.5% to Mr. Orest Rusnak and/or Sherry Corthell; and

• - it used the remaining funds to pay expenses it incurred for services.

[27]  The appellants did not provide any evidence to rebut the Minister’s assumptions. In fact the appellants stated that they had no idea what Zowtra did with the funds, other than they did not use the funds for their intended purpose of developing a campground/trailer park on the Zowtra Land. They both stated that the money they invested in the Zowtra Mortgage was stolen from them.

II. Relevant Law and the Position of the Parties

[28]  The relevant sections of the Income Tax Act for the purposes of these appeals are subsections 146(8), 146(9) and 146(10).  During the relevant period these subsections read as follows:

146(8) Benefits taxable – There shall be included in computing a taxpayer’s income for a taxation year the total of all amounts received by the taxpayer in the year as benefits out of or under registered retirement saving plans . . . .

146(9) Where disposition of property by trust – Where in a taxation year a trust governed by a registered retirement savings plan

(a)  disposes of property for consideration less than the fair market value of the property at the time the disposition, or for no consideration, or

(b)  acquires property for a consideration greater than the fair market value of the property at the time of the acquisition,

the difference between the fair market value and the consideration, if any, shall be included in computing the income for the taxation year of the annuitant under the plan.

 

146(10) Where acquisition of non-qualified investment by trust – Where at any time in a taxation year a trust governed by a registered retirement savings plan

(a)  acquires a non-qualified investment, or

(b)  uses or permits to be used any property of the trust as security for a loan,

the fair market value of

(c)  the non-qualified investment at the time it was acquired by the trust, or

(d)  the property used as security at the time it commenced to be so used,

as the case may be, shall be included in computing the income for the year of the taxpayer who is the annuitant under the plan at that time.

[29]  Subsection 146(8) includes in a taxpayer’s income any amounts that the taxpayer received from her/his RRSP trust.

[30]  The respondent argues, in the first instance, that the amounts the appellants transferred from their self-directed RRSPs to Zowtra should be included in the appellants’ income under subsection 146(8). She states that this is the result since the appellants received the benefit, within the meaning of subsection 146(8), of the amounts transferred when they directed the transfer of the $37,000 and $42,500 from their self-directed RRSPs to Zowtra.

[31]  In her written argument, the respondent argues that the appellants participated in an RRSP scheme to obtain tax-free access to their RRSP funds. In her Reply, the respondent states that the appellants participated in the RRSP scheme to obtain tax-free access to their RRSP funds through a collateral arrangement that included an investment source of income from which they would receive funds.

[32]  The appellants argue that they did not receive such a benefit. They did not participate in any collateral arrangement. The monies were transferred to allow the self-directed RRSPs to acquire interests in the Zowtra Mortgage.

[33]  The relevant portion of subsection 146(9) for the purposes of these appeals, is paragraph 146(9)(b). Paragraph 146(9)(b) applies when the RRSP trust acquires property for a consideration greater than the fair market value of the property at the time of the acquisition. The difference between the consideration paid and the fair market value is included in the income of the taxpayer who is the annuitant under the plan.

[34]  It is the respondent’s position that paragraph 146(9)(b) applies because each appellant’s self-directed RRSP acquired an interest in the Zowtra Mortgage for an amount that was greater that the fair market value of that interest. The appellants disagree; they argue that their RRSPs paid consideration equal to the fair market value of the interests in the Zowtra Mortgage.

[35]   Subsection 146(10) applies, in part, when an RRSP trust acquires a non‑qualified investment. In such a situation, the fair market value of the non‑qualified investment at the time it was acquired by the trust is included in the income of the taxpayer who is the annuitant under the plan.

[36]  For the purposes of these appeals, the relevant provisions relating to the definition of the term non-qualified investment as used in subsection 146(10) are contained in subsection 146(1) and read as follows:

146(1) Definitions – In this section,

. . .

“non-qualified investment”, in relation to a trust governed by a registered retirement savings plan, means property acquired by the trust after 1971 that is not a qualified investment for the trust;

. . .

“qualified investment” for a trust governed by a registered retirement savings plan means

. . .

(d) such other investments as may be prescribed by regulations of the Governor in Council made on the recommendation of the Minister of Finance;

. . .

[37]  The relevant regulation is subsection 4900(4) of the Income Tax Act Regulations, which is set out below:

Income Tax Act Regulations, section 4900

(4)[Mortgage] – For the purposes of subparagraphs 146(1)(g)(iv) [146(1) “qualified investment”(d)] and 146.3(1)(d)(iii) [146.3(1) “qualified investment” (c)] of the Act, a mortgage secured by real property situated in Canada, or an interest therein, is a qualified investment for a registered retirement savings plan or a registered retirement income fund unless the mortgagor is the annuitant under the plan or fund, as the case may be, or is a person with whom the annuitant does not deal at arm’s length.

[38]  The effect of these provisions is that the Zowtra Mortgage will constitute a “qualified investment” if it is a mortgage secured by real property situated in Canada, or an interest therein, unless the mortgagor is the annuitant under the RRSP or is a person with whom the annuitant does not deal at arm’s length.

[39]  The respondent argues that subsection 146(10) applies to the appellants because the interests in the Zowtra Mortgage were not a qualified investment under the RRSP regime. She argues that the “rights provided by the Zowtra Mortgage . . . document registered in the land title office against the Zowtra Land” did not constitute a mortgage. The appellants disagree. They argue that the Zowtra Mortgage was clearly a mortgage as that term is defined in the Land Titles Act (Alberta).

[40]  In his closing argument, counsel for the respondent stated that if I were to find that each appellant’s self-directed RRSP actually acquired a valid mortgage for a fair market value equal to the amount paid for the mortgage, then I should allow the appeal. I assume counsel was referring to the RRSPs acquiring an interest in a valid mortgage.

III. Disposition of Appeal

[41]  I will first address the issue of whether the appellants participated in a collateral arrangement. The respondent’s Reply in each of the appeals states that when assessing each of the appellants the Minister assumed the following:

The acquisition by the RRSP trusts of the undivided interests in Zowtra Mortgage #1 [the Zowtra Mortgage], Zowtra Mortgage #2 and Zowtra Mortgage #3 were part of the arrangement to provide the annuitant with direct or indirect access and/or control of the funds in their RRSP.

The acquisition by the RRSP trusts of undivided interests in Zowtra Mortgage #1 [the Zowtra Mortgage], Zowtra Mortgage #2 and Zowtra Mortgage #3 for amounts in excess of FMV was an integral part of an arrangement where funds would be made available, either directly or indirectly, to the annuitant of the RRSP.

All parties involved in the RRSP Plan acted in concert and not at arm’s length.

[42]  Through their testimony, the appellants destroyed each of these assumptions.

[43]  When assessing the appellants, the Minister assumed that Mr. Rusnak controlled Zowtra, U-Have and Academy. The appellants did not provide any evidence with respect to these assumptions. Therefore, the Court must accept the assumptions. Further, the assumptions are consistent with the Admitted Facts and the documentary evidence before the Court.

[44]  Mr. Rusnak was the lead promoter of the sale of the mortgage interests.

[45]  The appellants are not related to Mr. Rusnak either by blood relationship or by adoption. Since the appellants and Mr. Rusnak are not related persons under the Income Tax Act, it is a question of fact whether they were dealing with each other at arm’s length.

[46]  I have concluded on the evidence before me, particularly the testimony of the appellants, that, as a matter of fact, the appellants dealt at arm’s length with Mr. Rusnak and the three companies involved in the sale of the interests in the Zowtra Mortgage. The appellants themselves made the decision to invest in the Zowtra Mortgage. They did not make this decision in concert with Mr. Rusnak or any of his companies.

[47]  The appellants testified that they first met Mr. Rusnak in early 2000 at the Fort Nelson Seminar. Their only contact with him was in the context of deciding whether to invest in the Zowtra Mortgage.

[48]  They viewed the investment in the Zowtra Mortgage as a long-term investment that would help fund their retirement. It was an investment in the development of a $5 million campground/trailer park in the oil patch. As I discussed earlier in these reasons for judgment, they felt it was a good investment because of the significant oil and gas development in the area.

[49]  It is also clear from their testimony that they relied upon the advice of their lawyer, Mr. Knight, who told them that it was a good investment that was a qualified investment for their RRSPs.

[50]  The appellants do not know what the persons behind Zowtra and U-Have did with their money, other than the fact that they stole it from them.

[51]  The appellants testified that they did not have access to the monies they invested in the Zowtra Mortgage.

[52]  The Respondent did not provide the Court with any objective or documentary evidence to rebut the appellants’ testimony. She did not provide me with any evidence that would lead me to conclude that the appellants participated in an RRSP scheme to obtain tax-free access to their RRSP funds.

[53]  I accept the appellants’ testimony that the persons behind Zowtra and U‑Have stole their money. They did not enter into any agreement with Mr. Rusnak or anyone else to recover their loss in whole or in part by way of a collateral agreement. They were innocent victims in what was in effect a con.

[54]  I will now address the question of whether or not the interest in the Zowtra Mortgage was a non-qualified investment for the purposes of subsection 146(10). The interest in the Zowtra Mortgage will be a qualified investment if it is an interest in a mortgage secured by real property situated in Canada.

[55]  The term mortgage is not defined in the Income Tax Act. During the relevant period, the Alberta Land Titles Act defined mortgage as meaning “a charge on land created merely for securing a debt or loan”.

[56]  The investment in the Zowtra Mortgage occurred as follows:

• - First, Zowtra granted a mortgage on the Zowtra Land in the amount of $1.8 million to U-Have. Tab 6 of Exhibit R-1 contains a copy of the mortgage as registered with the Alberta Government Services Land Titles Office.

• - U-Have then sold undivided interests in this mortgage to 35 individuals (through their self-directed RRSPs) for a consideration of $1,799,800. Tabs 27 and 28 of Exhibit R-1 contain copies of the transfer of the undivided interests in the Zowtra Mortgage to each appellant’s RRSP. These documents were registered with the Alberta Government Services Land Titles Office.

• - Zowtra received the $1,799,800 paid by the 35 individuals through their self-directed RRSP’s.

[57]  The result of these two transactions is that collectively the RRSPs of 35 individuals made to Zowtra a $1,799,800 loan secured by a mortgage on the Zowtra Land. In my view, when the appellants’ RRSPs acquired the undivided interests in the Zowtra Mortgage the relevant RRSPs acquired an interest in a mortgage, that is an interest in “a charge on land created . . . for securing a debt or loan”. As a result, the investment by the RRSPs in the Zowtra Mortgage was a qualified investment.

[58]  The final issue I must address is the application of paragraph 146(9)(b). That paragraph will apply if the appellants’ self-directed RRSPs acquired interests in the Zowtra Mortgage for amounts greater than the fair market value of those interests.

[59]  Cindy Stewart’s self-directed RRSP invested $42,500 for an interest in the Zowtra Mortgage. Alan Stewart’s self-directed RRSP invested $37,000 for an interest in the same mortgage. This resulted in Zowtra owing Cindy Stewart’s RRSP and Alan Stewart’s RRSP $42,500 and $37,000 respectively.

[60]  The money invested by the appellants’ RRSPs, together with the money invested by the RRSPs of the other 33 individuals, was paid to Zowtra. As a result, at that point in time, Zowtra’s assets were comprised of the Zowtra Land and the $1,799,800 received from the sale of the interests in the Zowtra Mortgage to the 35 individuals’ RRSPs (which include the appellants’ RRSPs). In other words, at that point in time, Zowtra had the ability to repay all of the loans, including the amounts owed to the appellants’ RRSPs.

[61]  Further, the appellants believed that, as a result of the Development Project, the $1,799,800 would be invested in the Zowtra Land to increase the land’s value and thus maintain the value of their interest in the Zowtra Mortgage.

[62]  In Henderson ^[12] , Justice Cattanach defines fair market value as follows:

The statute does not define the expression “fair market value”, but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. . . .That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. . . . These definitions are equally applicable to “fair market value” and “market value” and it is doubtful if the use of the word “fair” adds anything to the words “market value”.

[Emphasis added.]

[63]  I have already found that the appellants dealt at arm’s length with Mr. Rusnak and the companies he controlled, including Zowtra and U-Have. In fact, the evidence before me is that the appellants’ only involvement with either company was through the purchase by their self-directed RRSPs of the interests in the Zowtra Mortgage.

[64]  On the evidence before me, particularly the testimony of the appellants, I have concluded that the appellants purchased those interests as willing buyers from an arm’s length seller and that neither the appellants nor the seller (U-Have) were under any compulsion to buy or sell. The appellants were two of a number of arm’s length buyers who purchased interests in the Zowtra Mortgage. Further, as I discussed previously, the Court is not aware of any collateral agreement that influenced the appellants’ purchase of the interests in the Zowtra Mortgage.

[65]  The evidence before me is that the sales by U-Have to the appellants’ sel‑directed RRSPs of the interests in the Zowtra Mortgage occurred in the ordinary course of Mr. Rusnak’s and his companies’ business of selling interests in mortgages. In addition to their sales to the appellants, Mr. Rusnak and his companies sold interests in three separate mortgages on the Zowtra Land to 117 other individuals.

[66]  The appellants and others attended the Fort Nelson Seminar where Mr. Rusnak and his associates marketed the interests in the Zowtra Mortgage. The appellants then decided, on the basis of their knowledge of the area, that investing in the Development Project through an interest in the Zowtra Mortgage was a good investment.

[67]  Further, as one would expect, they obtained legal advice which was that the investment in the Zowtra Mortgage was a good investment that was a qualified investment for their RRSPs.

[68]  In summary, they paid fair market value for the interests in the Zowtra Mortgage. They paid a price negotiated with an arm’s length vendor, namely Mr. Rusnak and his companies. The fact that they paid a price similar to the price paid by 117 other individuals evidences that they negotiated the price in “a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length”.

[69]  The fact that the money was subsequently stolen is, in my view, irrelevant. The key point in time for the purpose of determining the fair market value of the interests in the Zowtra Mortgage is the time of the sale, not some subsequent point in time. As I previously noted, at the time they purchased the interests in the Zowtra Mortgage, the appellants believed that the amounts their RRSPs paid for the interests in the Zowtra Mortgage represented a fair market value consideration. Their belief is consistent with my previous finding that, at that point in time, Zowtra had the ability to repay the mortgages.

[70]  What the appellants did not foresee was that at some point in time in the future someone would, in effect, steal the funds they invested in Zowtra. In my view, paragraph 146(9)(b) does not apply in a situation where a taxpayer directs his/her RRSP to make an investment with an arm’s length party for what the taxpayer believes is a fair market value consideration and the investment turns out to be a poor investment.

[71]  My finding is consistent with the conclusion of Justice Sharlow in her concurring reasons in St. Arnaud v. Canada. [13] In her reasons, Justice Sharlow accepted the appellant’s argument with respect to the purpose of subsection 146(9). She summarized this argument as follows (at paragraph 64):

. . . They argue that it is reasonable to infer that Parliament assumed that if an RRSP or a RRIF is authorized to dispose of property for proceeds known to be less than its fair market value, or to acquire property at a cost known to be greater than its fair market value, the reason must be that the annuitant or someone connected to the annuitant has arranged to recover the resulting loss in whole or in part through a collateral arrangement. On that basis, they argue that the interpretation of these provisions is subject, by necessary implication, to the existence of such a collateral arrangement that is intended to avoid the tax that would have been imposed if the annuitant had simply withdrawn funds from the RRSP or the RRIF.

[72]  Justice Sharlow then concluded that paragraph 146(9)(b) did not apply to the case before her since there was no collateral arrangement. I have previously concluded that the appellants here did not enter into any collateral agreement that would have allowed them to recover their loss in whole or in part.

[73]  For the foregoing reasons, the appeals are allowed with costs to the appellants. The reassessments for each appellant are referred back to the Minister for reconsideration and reassessment on the basis that no amount should be included in either appellant’s income in respect of the investments made by their respective RRSPs in the Zowtra Mortgage.

[74]  The gross negligence penalty levied against each of the appellants is vacated.

  Signed at Ottawa, Canada, this 22nd day of January 2019.

“S. D’Arcy”

 

APPENDIX A

 

CITATION:	2019 TCC 22
COURT FILE NOS.:	2010-3524(IT)G 2010-3525(IT)G
STYLE OF CAUSE:	CINDY STEWART v. HER MAJESTY THE QUEEN ALAN STEWART v. HER MAJESTY THE QUEEN
PLACE OF HEARING:	Calgary, Alberta
DATE OF HEARING:	April 25 and 26, 2018
REASONS FOR JUDGMENT BY:	The Honourable Justice Steven K. D'Arcy
DATE OF JUDGMENT:	January 22, 2019

APPEARANCES:

 

Counsel for the Appellant:	Douglas E. Roberts
Counsel for the Respondent:	Ron D. F. Wilhelm

 

COUNSEL OF RECORD:

For the Appellant:

Name:	Douglas E. Roberts
Firm:	Douglas E. Roberts, Legal Counsel Calgary, Alberta
For the Respondent:	Nathalie G. Drouin Deputy Attorney General of Canada Ottawa, Canada