From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed tax-free savings account (“TFSA”) and her taxable trading account (“CDN”) at TD Waterhouse Discount Brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The TDW policy was to permit a transfer to occur at any price between the high and low trading prices for the day. Accordingly, the transfers were made near the close of trading for the day, and at the high price if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value (“FMV”) of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that there had been “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
Lamarre ACJ found that the swaps constituted a series of transactions to which the 2009 increase in FMV was attributable, and “that benefiting from the exemption from tax under Part I was one of the Appellant’s main purposes in completing the series of transactions” (para. 37) and that (para. 41) the requirement set out in s. (b)(i)(B) of the “advantage” definition was met as:
The taxpayer must have intended to benefit from a tax-free distribution from her TFSA as opposed to a taxable withdrawal from her RRSP or a taxable gain within her CDN. Otherwise, I cannot see any advantage to transferring the shares between those accounts.
In finding that the test in s. (b)(i)(A) also was satisfied, Lamarre ACJ further found (at para. 45):
If there is a second-by-second market price, the FMV is the price at the second the swaps occur, not a price selected within a bracket of prices.
Furthermore, the swaps were not transactions between persons dealing at arm’s length, as the taxpayer “was the single mind directing all the swap transactions” (para. 55) and “the parties in control of the RRSP and CDN acted in concert without separate interests” (para. 56).
In addition, “all the swap transactions were carried out in such a way as to favour the TFSA to the detriment of the RRSP and CDN” (para. 57). Accordingly, “the series of swap transactions would not have occurred if the parties had been dealing at arm’s length and were acting prudently, knowledgeably and willingly.”
However, Lamarre concluded that none of the increase in FMV in 2010 and 2012 was attributable to the swap transactions, finding (at paras 78, 80-82):
The broad scope of “directly or indirectly” is limited by the reasonableness requirement also present in paragraph (b). In this case, the circumstances that it is reasonable to consider in deciding whether the 2010 and 2012 increases are attributable to the 2009 swaps include the fact that, unlike in 2009, in the 2010 and 2012 taxation years the Appellant was no longer engaging in swap transactions and the account was subject purely to market forces.
…[I]t is reasonable in the circumstances to attribute the 2010 and 2012 increases to the post-2008 financial recovery. …
Justice Woods’ concerns in Garron about the ambiguity inherent in the phrase “directly or indirectly” may perhaps not be entirely appropriate in the context of the transfer of property … [which] has a defined end point, although a circuitous route may be taken to get there. Here there is no easily defined or delineated end point … regarding the length of time during which an increase may still be attributed to an impugned transaction.
A more restrictive interpretation of paragraph (b) … avoids these difficulties.