Beyond Tax: How Grenon harms Canadian Capital Markets and impacts our understanding of Securities Laws

A recent decision of the Canadian Federal Court of Appeal (FCA), which had its roots in a relatively straightforward tax dispute, may have highly problematic implications and far-reaching unintended consequences for the regulation of capital markets (and exempt distributions in particular) in Canada.  

In The RRSP of James T. Grenon (552-53721) by its Trustee CIBC Trust Corporation v Canada, 2025 FCA 129 (the FCA Decision), the FCA provided a novel interpretation of several securities law concepts to determine, among other things, whether certain investments were qualified under the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) (ITA) and the Income Tax Regulations, C.R.C., c. 945 (ITR). While the FCA Decision arose in a tax context, its scope, and in particular the extent to which it provided original interpretations of a number of important securities laws concepts, raises significant concerns around the broader and unintended implications for Canadian securities laws and capital markets, which could have lasting negative consequences for how market participants structure exempt offerings, issuers access private capital, and provincial securities regulators supervise capital markets and coordinate oversight across Canada.

Select Grenon facts – Securities law matters

Grenon concerns a dispute over whether certain trusts qualified as “mutual fund trusts” (MFTs) under the ITA and ITR. Specifically, the FCA and the Tax Court of Canada (the TCC, and together with the FCA, the “Courts”) in Grenon v The Queen, 2021 TCC 30 (the TCC Decision and, together with the FCA Decision, Grenon or the Decisions) determined that exempt market distributions of MFT units (the Units) to certain investors were “unlawful distributions” under securities laws, and therefore could not be counted towards requirements of the ITA. The Court decided these distributions were unlawful because they did not comply with the offering memorandum (OM) prospectus exemption (OM Exemption) provided in National Instrument 45-106 (NI 45-106). In analysing the various requirements attaching to the OM Exemption, the Courts invented and applied a number of novel principles, many of which will have impacts on securities law practitioners and exempt market participants, as discussed below.

Impact on securities laws and exempt market transactions

While Grenon’s implications could ripple well beyond securities law and capital markets — touching basic contracts principles such as agency and thereby having implications for many commercial enterprises — we will not try to boil the ocean here. For present purposes, we focus only on the implications of Grenon on Canadian securities laws.

Impact #1: Grenon renders the materiality threshold no longer conclusive and expands OM Exemption requirements

“Materiality” has been a longstanding threshold applied to statements in offering documents by issuers, regulators, and investors to determine if a fact or change would “move the market” or impact the value of a security or an issuer. For the purposes of determining whether the distribution was lawful under securities laws, Grenon replaces the materiality standard for disclosure with a new standard of “strict compliance” with the provisions of, or lack of “deviations” in, documentation utilized in connection with the applicable prospectus exemption. This includes any subscription agreement referenced in an OM, and the report of exempt distribution (RED) filed following the distribution of securities under applicable prospectus exemptions.

The Courts appear to have based their reasoning on a misunderstanding of applicable securities law. The case-law cited underscores the importance of strict compliance with the “closed system” (i.e., the prospectus regime). In other words, the court in R. v. Boyle, 2001 ABPC 152 (Boyle et al.) correctly asserts that there can be no deviation from the closed system — either there is prospectus or a valid exemption. While the Courts in Grenon did not find that every deviation from prospectus requirements or exemptions is fatal, the Courts conflate the position in Boyle et al. with a requirement that, where used in connection with a prospectus exemption, documentation must generally be free of “deviation”.

As a result, and as discussed below, a broad range of items which previously would have been acceptable under securities laws may now render a distribution “unlawful”. For example, errors in the name or title of subscribers set forth in a RED, immaterial inaccuracies in a subscriber’s representations in a subscription agreement, and not reaching a minimum number of subscribers (rather than capital raised) referenced in an OM, may render a distribution unlawful even though these deviations may have no impact on the value of the Units or the issuer’s ability to execute the business plan set out in the OM (i.e., they would not be a “material change”).

As the Courts did not define what constitutes “strict compliance”, it is reasonable to assume that this term would be applied without regard to the concept of materiality and without reference to the expectations of a reasonable investor. As a result, issuers will now want to consider the wisdom of including any non-material information in offering documents. They will also want to consider whether, on discovery of an immaterial error, offering documents need to be updated (or in the case of a subscription agreement, revised and re-executed). Alternatively, issuers may re-evaluate whether it makes sense to use other less burdensome prospectus exemptions instead of the OM Exemption. However, offering documents used in connection with other prospectus exemptions under NI 45-106 (e.g., a confidential information memorandum (CIM) delivered to accredited investors), may be subject to the same “strict compliance” threshold, given the Courts applied the threshold based, at least in part, on public policy concerns that presumably apply across all prospectus exemptions.

Impact #2: Grenon has reshaped how issuers may view diligence requirements and the application of standard forms of subscription agreements

The Decisions conflate basic commercial terms, such as investor representations in a subscription agreement, with the requirements of satisfying the OM Exemption. Specifically, the Courts provide that the requirements under applicable securities laws for the OM Exemption must be “strictly” complied with; however, the Decisions go a step further by determining that the subscription agreement (and investor representations made therein) becomes a “quasi-statutory” document when referenced by the issuer in the OM, and therefore part of the issuer's requirements to satisfy the OM Exemption (and again, at the new threshold of “strict compliance”). It appears that the Decisions were based on the idea that there is a nexus between investor protection policy concerns and the accuracy of key commercial representations made by investors in a subscription agreement.

While Grenon does not apply a specific definition of “quasi-statutory”, the Courts provide that documents that are attached to an OM form are “indivisible” from the OM for the purposes of complying with their expanded interpretation of the OM Exemption requirements. Consequently, it is the role of the issuer to ensure such documents do not contain deviations (material or not) from their terms, notwithstanding that any such deviations might be caused by inaccuracies of representations unrelated to an investor’s eligibility under a prospectus exemption made in the issuer’s favour. For example, where an inaccuracy in a representation in an investor’s subscription agreement that is immaterial or irrelevant to the OM Exemption is discovered, the issuer would be at risk if it closes the transaction despite the inaccuracy, unless the subscription documentation clearly indicates representations may be waived without notice and provided the inaccuracy is not significant. Otherwise, the inaccuracy must be acknowledged and corrected in writing including, where applicable, through written waiver — even where no waiver is sought.

In addition to ensuring the representations of an investor are completely accurate, the Courts provide that a prospectus exemption may be unavailable where an issuer fails to: (i) verify that the funds paid in respect of an investor’s share purchase come from the investor’s account (see below); (ii) verify the legal terms of an agency relationship; or (iii) correct any error in the information provided by an investor that then is required to be included in a RED.  Even though the Courts are not necessarily requiring perfection, as a practical matter, Grenon raises real concerns that minor inaccuracies in subscription agreements, risk acknowledgements, or post-closing filings call into question the lawfulness of an exempt distribution. Issuers may therefore need to spend additional (and in certain cases unnecessary) time and resources to help ensure compliance with the Courts’ rigorous standards. 

Impact #3: Does Grenon preclude investors from investing through agents?

The OM Exemption (and other prospectus exemptions) require an investor to purchase “as principal.” The Decisions misinterpret the purpose and intent of securities law, and of the case law concerning this subject, including Cartaway Resources Corp (Re), 2000 BCSECCOM 88 (“Cartaway”). The result of the Decisions is that a distribution under a prospectus exemption may not be lawful in the event an investor appoints an agent (such as an investment manager or broker) to complete their subscription documentation. This is inconsistent with standard industry practice, being that when an agent is appointed, it is the agent that signs the subscription agreement and the associated forms attached thereto, such as the Risk Acknowledgment Form, on behalf of the investor (commonly referred to as a “Disclosed Beneficial Purchaser”) receiving the shares. Most practitioners would also typically assume that a person (whether they are a child or a spouse) is investing as principal as long as they bear the risks and receive the benefits associated with applicable securities being purchased.

The purpose of the determination in Cartaway and related decisions was not to prevent a parent or duly appointed agent from purchasing for a child or a client. Rather, Cartaway dealt with obvious manipulation of prospectus exemptions. For example, where persons, who were not by virtue of their net worth deemed sufficiently sophisticated, purchased shares under an exemption designed for sophisticated parties.

The Courts, however, took the British Columbia Securities Commission’s reasons in Cartaway to mean that each investor has to sign their own subscription agreement and cut their own cheque (or issue a wire from their own account).  Moreover, the Decisions state that it is up to the issuer to verify that the funds are in fact coming from the account of the investor. This means that, for example, a high net worth investor who qualifies as an accredited investor cannot have an agent make payment on their behalf, unless the parties provide sufficient evidence to the issuer of their legal relationship.

Similarly, if an issuer accepts a wire from someone other than the investor, the distribution may be deemed unlawful by virtue of the Courts’ hardline interpretation of the requirements for principals. As a result of this interpretation, issuers may now be required take steps to ensure that the account from which funds flow is the same account as the person named as a subscriber in the subscription agreement, in order to ensure that any such distribution is deemed “lawful”.

Similarly, practitioners must ask themselves whether the standard “Disclosed Beneficial Purchaser” language in their subscription agreement still works. For a clearly compliant subscription, an issuer will want to ensure the subscriber fills out the agreement themselves, for themselves, and with a cheque or wire from a bank account matching the subscriber’s full legal name as set forth in the subscription agreement.

Impact #4 – File your OM and RED at closing

As discussed above, the Courts determined that the OM Exemption fails where the issuer does not file an accurate (i.e., strict compliance, no immaterial errors) RED or fails to file the OM with the securities commissions by the applicable deadline. These filings are effectively no longer independent requirements of the issuer post-closing. As a result, no distribution of securities will be lawful until a RED is filed. To mitigate against the risks of closing a distribution prior to the prospectus exemption being valid, issuers may want to file their REDs concurrently with closing. In the event the accelerated filling timeline results in an error in the RED, issuers will want to correct such errors as soon as possible, as the exemption relied upon will no longer be available as a result of such error.

Impact #5 – Your close friend might be “the public”

The Courts have added a confusing element to established caselaw used to interpret what constitutes a distribution of securities “to the public.” Specifically, the Courts indicated that a distribution in compliance with the “Family, Friends and Business Associates” under NI 45-106 (the FFBA Exemption) can be a distribution to the public. We note that the FFBA Exemption is dichotomous to “the public” in that a person is distinctly “not the public” by virtue of their reliance on the FFBA Exemption.

Impact #6: Only one kick at the can – your first exemption sticks

The Courts have indicated that once an issuer chooses an exemption under NI 45-106, it cannot (and assumedly by extension, the investor and the securities regulator cannot), post closing, then determine another exemption was available at the time of distribution. In coming to this conclusion, the Courts misinterpreted Boyle et al., which indicated that multiple exemptions cannot be cobbled together and an exemption must be fully complied with on its own. As some capital markets participants may be aware, issuers make mistakes, including mistaken reliance on the wrong exemption.

For example, in the past an issuer that mistakenly relied on the FFBA Exemption could point to the fact that the investor was also an accredited investor at the time of distribution, thereby cleansing the deficiency. Problem solved. Now, it is uncertain what steps need to be taken under these circumstances. Does the issuer unwind the transaction and reissue the securities? What we do know is that, because the RED would have been filed with an error, the entire offering (to all investors) may be deemed unlawful until a revised RED is filed.

Impact #7: ID required: This market is 18+

The Decisions conclude that the OM Exemption was not available for many distributions of Units and that the issue of those Units was therefore unlawful. As noted earlier, the Courts’ reasons include: (i) immaterial representations (of subscribers) unrelated to a subscriber’s eligibility under a prospectus exemption in applicable subscription agreements being inaccurate; (ii) REDs delivered to the applicable securities commission being inaccurate; (iii) the OM containing inaccuracies; (iv) failure of the subscriber to purchase “as principal”; and (v) breach of public policy. While all of these rationales appear to have been applied to some degree in determining that distributions to minors failed to comply with the OM Exemption, of particular concern is the manner in which the Courts applied public policy reasons to find the distribution of securities to minors to be unlawful.

The Decisions provide that, because the OM Exemption is premised on the broad public policy objective of “investor protection,” minors cannot hold shares that were issued under the OM Exemption, as this would be contrary to such policy objective. The Courts state that the Alberta Securities Commission would agree that, because a minor has no ability to appreciate the risks associated with the offering, distribution of securities to a minor breaches public policy and enforcement would be warranted.

Notably, in the majority of the Unit distributions deemed by the Courts to be offside public policy, the issued Units were paid for by a parent, guardian, or other adult, which person also signed the risk acknowledgment form. The minor was named as subscriber in the Subscription Agreement for the purpose of issuing and registering the Units in that minor’s name. The purpose of the risk acknowledgment is to ensure that the purchaser of the securities represents and acknowledges that they understand the risks to the capital they invested. In the Courts’ apparent view, securities law policy considerations apply to prevent the acquisition of securities by parties who have not effectively acknowledged that their securities may drop in value. The issue being the “inherit risks of owning securities”. Moreover, because all prospectus exemptions exist to further investor protection policy considerations, the Decisions call into question whether, for example, a child of an accredited investor (who themselves is not an accredited investor) can be gifted a security purchased under that exemption or can purchase with funds provided by their parent. Similarly, it is unclear whether any gift of a security to a party that would not have been exempt themselves is now a breach of public policy (and of applicable securities laws). 

We further note that the legislators have not included an age requirement in any prospectus exemption under NI 45-106 (or under securities law more generally), nor would such a requirement further any public policy objectives.

Where do we go from here?

It is disappointing that a case of national importance having a significant impact on securities law practice in Canada, on the use of prospectus exemptions under NI 45-106, and on capital markets generally, arose out of a decision in the tax courts that was apparently made without due consideration of the wide-ranging effects of the decisions on those areas. In order to conclude that Grenon’s trusts were not “MFTs’” under the ITA, the Courts have created problematic issues where none previously existed and have significantly undermined the efforts of securities regulators to simplify, streamline, and reduce costs associated with accessing the exempt capital markets. We concur with Bryce C Tingle KC, “A Mugging on Bay Street” (17 October 2025), which raises similar concerns to those outlined here, that the Decisions will cause real problems in securities practice, if permitted to stand. 

Through the “one-two” punch of lowering the threshold of materiality in offering documents and providing that immaterial investor misrepresentations can render a distribution unlawful, the Courts have accomplished a remarkable reversal in the role of exempt market paper. Documents that, pre-Grenon, were deemed to protect the issuer (i.e., subscription agreements and offering documents) are now a liability to the issuer. As a result, issuers may determine to remove non-material information from offering documents and exclude representations unrelated to a subscriber’s eligibility under a prospectus exemption from subscription agreements, thereby reducing the quality of information provided to investors and eliminating key issuer protections.

The Decisions also call into question the validity of standard practices, both past and future, such as purchasing of securities through an agent, sourcing funds from other than one’s own bank account, permitting minors to purchase securities and gifting securities to minors and others. Issuers may also be pushed towards more cumbersome closing practices, which could increase costs that are ultimately borne by shareholders. 

Ultimately, Grenon provides significant practical constraints on the use of the OM Exemption and other prospectus exemptions and raises questions about: (i) the appropriate balance between strict compliance and investor protection; (ii) the relevance of commercial terms to exempt market status; (iii) materiality versus procedural compliance; and (iv) the deference that is generally owed to securities regulators in defining compliance standards.